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PRODUCTION SHARING CONTRACT



GARMIAN BLOCK

KURDISTAN REGION

BETWEEN



THE KURDISTAN REGIONAL GOVERNMENT OF IRAQ



AND



WESTERNZAGROS LIMITED



TABLE OF CONTENTS

PREAMBLE

Article 1



DEFINITIONS



Article 2



SCOPE OF THE CONTRACT



Article 3



CONTRACT AREA



Article 4



GOVERNMENT PARTICIPATION AND THIRD PARTY INTEREST



Article 5



OPERATOR



Article 6



TERM OF THE CONTRACT



Article 7



RELINQUISHMENTS



Article 8



MANAGEMENT COMMITTEE



Article 9



GUARANTEES



Article 10



MINIMUM EXPLORATION WORK OBLIGATIONS



Article 11



EXPLORATION WORK PROGRAMS AND BUDGETS



Article 12



DISCOVERY AND DEVELOPMENT



Article 13



DEVELOPMENT AND PRODUCTION WORK PROGRAMS AND

BUDGETS



Article 14



NATURAL GAS



Article 15



ACCOUNTING AND AUDITS



Article 16



CONTRACTOR’S RIGHTS AND OBLIGATIONS



Article 17



USE OF LAND AND EXISTING INFRASTRUCTURE



Article 18



ASSISTANCE FROM THE GOVERNMENT



Article 19



EQUIPMENT AND MATERIALS



Article 20



TITLE TO THE ASSETS



Article 21



USE OF THE ASSETS



Article 22



SUBCONTRACTING



Article 23



PERSONNEL TRAINING AND TECHNOLOGICAL ASSISTANCE



Article 24



ROYALTY



Article 25



RECOVERY OF PETROLEUM COSTS



Article 26



SHARING OF PROFIT PETROLEUM



Article 27



VALUATION AND METERING OF CRUDE OIL AND NATURAL GAS



Article 28



SALE OF GOVERNMENT SHARE



Article 29



FINANCIAL PROVISIONS



Article 30



CUSTOMS PROVISIONS



Article 31



TAX PROVISIONS



Article 32



BONUSES AND CAPACITY BUILDING PAYMENTS



Article 33



PIPELINES



Article 34



UNITISATION



Article 35



LIABILITY AND INSURANCE



Article 36



INFORMATION AND CONFIDENTIALITY



Article 37



ENVIRONMENTAL PROVISIONS



Article 38



DECOMMISSIONING



Article 39



ASSIGNMENT AND CHANGE OF CONTROL



Article 40



FORCE MAJEURE



Article 41



WAIVER OF SOVEREIGN IMMUNITY



Article 42



ARBITRATION AND EXPERT DETERMINATION



Article 43



GOVERNING



LAW,



FISCAL STABILITY,



AMENDMENTS



VALIDITY

Article 44



NOTICES



Article 45



TERMINATION



Article 46



COUNTERPARTS; EFFECTIVE DATE



Annex A



CONTRACT AREA MAP AND LIST OF COORDINATES



Annex B



ACCOUNTING PROCEDURE



Annex C



STIPULATED SUNK BLOCK COSTS PRIOR TO EFFECTIVE DATE



Annex D



FORM OF PAYMENT GUARANTEE



AND



PRODUCTION SHARING CONTRACT

BETWEEN

The KURDISTAN REGIONAL GOVERNMENT OF IRAQ (the “GOVERNMENT”);

AND

WESTERNZAGROS LIMITED a company established and existing under the laws of the

Republic of Cyprus, whose office is Suite 600, 440 Second Avenue SW, Calgary, Alberta,

Canada (“WesternZagros Limited”)



WHEREAS

(A)



The GOVERNMENT wishes to develop the petroleum wealth of the Kurdistan

Region (as defined in this Contract) in a way that achieves the highest benefit to the

people of the Kurdistan Region and all of Iraq, using the most advanced techniques of

market principles and encouraging investment, consistent with the Constitution of

Iraq including Article 112 thereof.



(B)



In accordance with the Constitution of Iraq, the prevailing law of the Kurdistan

Region is the Kurdistan Region Law (as defined in this Contract), except with regard

to a matter wholly within the exclusive jurisdiction of the Government of Iraq.



(C)



The object of this Contract is to (i) carry out Exploration, Development and

Production of Petroleum in the Contract Area; and (ii) define the respective rights and

obligations of the Parties in respect of the conduct of Petroleum Operations in the

Contract Area. The Parties affirm their ongoing commitment and adherence to the

Principles and Criteria of the Extractive Industries Transparency Initiative (EITI).



(D)



The Contract Area consists of an area formerly part of the Kalar-Bawanoor Contract

(as defined in this Contract), but divided from the Kalar-Bawanoor Contract so as to

permit WesternZagros Limited (but not Talisman (Block K44) B.V.) to perform

continued Petroleum Operations on the Contract Area pursuant to this Contract, and



the Parties have agreed that certain petroleum costs solely incurred by

WesternZagros Limited under the Kalar-Bawanoor Contract in the Contract Area

are recoverable as Stipulated Sunk Block Costs under this Contract.

(E)



The GOVERNMENT intends to present to the National Assembly of the Kurdistan

Region a law or laws to authorise the GOVERNMENT, by contract or other

authorisation, to exempt investors in long term projects relating to the conduct of

petroleum operations in the Kurdistan Region from Kurdistan Region taxation, to

indemnify such holders against liability to pay such taxation, and/or to guarantee the

stability of the applicable legal, fiscal and economic conditions of such projects.



(F)



The CONTRACTOR has:

(i)



in a letter of representations and warranties to the GOVERNMENT, dated

concurrently herewith (the “Letter of Representations”), represented that it

has the financial capability, and the technical knowledge and technical ability,

to carry out Petroleum Operations in the Contract Area (as defined in this

Contract) under the terms of this Contract;



(ii)



in the Letter of Representations, represented that it has a record of compliance

with the principles of good corporate citizenship; and



(iii)



a willingness to cooperate with the GOVERNMENT by entering into this

Contract, thereby assisting the GOVERNMENT to develop the Kurdistan

Region petroleum industry, thereby promoting the economic development of

the Kurdistan Region and Iraq and the social welfare of its people.



(G)



WesternZagros Limited and WesternZagros Resources Ltd. have provided the Letter

of Representations as an inducement for the GOVERNMENT to enter into Contract,

and upon which the GOVERNMENT is in entering this Contract. Concurrently with

signing this Contract, WesternZagros Resources Ltd. has also delivered a guarantee in

favour of the GOVERNMENT, in reliance upon which the GOVERNMENT is

entering into this Contract.



NOW, THEREFORE, THE PARTIES HAVE AGREED AS FOLLOWS



ARTICLE 1 – DEFINITIONS

1.1



Capitalised terms and expressions in this Contract shall have the following meaning,

unless otherwise specified:

Abroad means outside of the Kurdistan Region and other parts of Iraq.

Access Authorisation is defined in Article 17.9.

Accounts is defined in Article 15.1.

Accounting Procedure means the Accounting Procedure attached to this Contract as

Annex B and constituting an integral part of this Contract.

Act of Insolvency means, in respect of any Party:

(a)



that it is unable, or will be unable, to timely satisfy all of its financial



obligations under the Contract and to other Parties in relation to the Contract; or

(b)



the insolvency, winding-up, dissolution, administration or liquidation of that



Party, the making by it of any arrangement or composition with its creditors or the

taking of possession by an encumbracer of, or the appointment of a receiver or

administrative receiver over, the whole or any substantial part of its property or assets

or its ceasing or threatening to cease to carry on business and any equivalent or

analogous procedures by whatsoever name known and in whatsoever jurisdiction.

The "winding-up" of a Party also includes the amalgamation, reconstruction,

reorganization (by way of voluntary arrangement, scheme of arrangement or

otherwise), administration, dissolution, liquidation, merger or consolidation of that

Party and any equivalent or analogous procedures under the law of any jurisidiction in



which the Party is incorporated, domiciled, or resident or carries on business or has

assets.

Adjacent Contract Area is defined in Article 34.1.

Adjustment Date is defined in Article 27.6.

Affiliated Company or Affiliate means, as regards any of the companies or entities

constituting the CONTRACTOR, a company or other legal entity which:

(a)



controls a CONTRACTOR Entity; or



(b)



is controlled by a CONTRACTOR Entity; or



(c)



controls or is controlled by a company or entity which controls a

CONTRACTOR Entity,



but shall not include the GOVERNMENT in respect of a Public Company. For the

purpose of this definition, “control” means direct or indirect ownership or control of

the majority of the voting rights of the applicable entity at its shareholders’ meetings

or their equivalent.

Agreed Terms is defined in Article 14.10(a).

Applicable Law means, as of any time of determination, Kurdistan Region Law and

federal Laws of Iraq recognised by the Government as applicable in the Kurdistan

Region.

Appraisal Area means the area defined in Article 12.2.

Appraisal Work Program and Budget is defined in Article 12.2.

Appraisal Report is defined in Article 12.4.

Appraisal Well means a well drilled for the purpose of evaluating the commercial

potential of a geological feature or a geological structure in which Petroleum has been

discovered.



Arm's-Length Sales means sales of Petroleum in freely convertible currencies

between sellers and buyers having no direct or indirect relationship or common

interest whatsoever with each other that could reasonably influence the sales price.

Such Arm's- Length Sales shall exclude:

(a)



sales between or among any of the CONTRACTOR Entities and their

respective Affiliates;



(b)



sales involving the GOVERNMENT or the Government of Iraq; and



(c)



sales involving exchanges and any transactions not relating to normal

commercial practices.



Assets means all land, platforms, pipelines, plant, equipment, machinery, wells,

facilities and all other installations and structures and all Materials and Equipment.

Associated Natural Gas means (i) any Natural Gas dissolved in Crude Oil under

reservoir conditions and (ii) any residue gas remaining after the extraction of Crude

Oil from a reservoir.

Audit Request Period is defined in Article 15.3(a).

Available Associated Natural Gas is defined in Article 25.1.

Available Crude Oil is defined in Article 25.1.

Available Non-Associated Natural Gas is defined in Article 25.1.

Available Petroleum is defined in Article 25.1.

Barrel means a quantity of forty-two (42) US gallons as a unit to measure liquids, at a

temperature of sixty degrees (60°) Fahrenheit and pressure of fourteen point seven

(14.7) psi.

Budgets means any budgets prepared by, or on behalf of, the CONTRACTOR

pursuant to this Contract and forming part of an Exploration Work Program and

Budget and/or an Appraisal Work Program and Budget and/or a Gas Marketing Work



Program and Budget and/or a Development Work Program and Budget and/or a

Production Work Program and Budget.

Calendar Year means a period of twelve (12) consecutive Months, commencing 1

January and ending on 31 December of the same year.

Capacity Building Account means a segregated bank account with a reputable bank

in the name of, and maintained by, the GOVERNMENT, the sole purpose of which

is to support and finance certain infrastructure and capacity building projects to be

identified by the GOVERNMENT in its sole discretion in the Kurdistan Region.

Capacity Building Bonus is defined in Article 32.2.

Capacity Building Payment means the obligation of a Charged Interest Holder

pursuant to Article 32.6, to pay an amount equal to the Capacity Building Value.

Capacity Building Payment Instalments means each obligation of a Charged

Interest Holder to pay an amount equal to the Capacity Building Value as provided by

Articles 32.6.

Capacity Building Value means, in respect of any period of determination: for each

Charged Interest Holder, an amount in Dollars equal to the value, established in

accordance with Article 27, of twenty-five per cent (25%) of the Profit Petroleum

attributed to such Charged Interest Holder pursuant to this Contract as at any time and

period of determination.

Chairman is defined in Article 8.1.

Charged Interest means all or any part of the participation interest in the Contract

following any assignment of all or part of the Third Party Interest pursuant to Article

4.29 as of the Effective Date; but in no event shall include: (a) the Government

Interest; or (b) the Third Party Interest assigned pursuant to a nomination and

assignment in accordance with Articles 4.20through 4.24.

Charged Interest Holder means the holder or holders of a Charged Interest; and any

permitted successor or assignee of a holder or holders of a Charged Interest pursuant

to Article 39.



Charged Interest Holders Monthly Statement is defined in Article 32.6.2(a).

Commercial Discovery means a Discovery which is potentially commercial when

taking into account all technical, operational, commercial and financial data collected

when carrying out appraisal works or similar operations, including recoverable

reserves of Petroleum, sustainable regular production levels and other material

technical, operational, commercial and financial parameters, all in accordance with

prudent international petroleum industry practice.

Commercial Production means the production of Petroleum from the Production

Area in accordance with an annual Production Work Program and Budget.

Constitution of Iraq means the permanent constitution of Iraq approved by the

people of Iraq in the general referendum of 15 October 2005.

Contract means this production sharing contract, including its Annexes A, B, C and

D that are an integral part hereof, as well as any extension, renewal, substitution or

amendment of this production sharing contract that may be agreed in writing by the

Parties in accordance with Article 43.7.

Contract Area means the area described and defined in Annex A attached to this

Contract and constituting an integral part of this Contract, and any modifications

made to that Annex in accordance with the provisions of this Contract, through

amendments, surrender, withdrawal, extension or otherwise.

Contract Year means a period of twelve (12) consecutive Months starting from the

Effective Date or any anniversary of the said Effective Date.

CONTRACTOR means, individually and jointly, each CONTRACTOR Entity.

CONTRACTOR Entity means, as at any time of determination, a Party to this

Contract other than the GOVERNMENT. A holder of the Government Interest is

never a CONTRACTOR Entity. At any time when there is only one entity

constituting the CONTRACTOR, any reference to “the entities constituting the

CONTRACTOR” or the “CONTRACTOR Entities” or similar reference, shall be

construed as “the entity constituting the CONTRACTOR”. As of the Effective Date,



WesternZagros Limited is the only CONTRACTOR Entity and owns an undivided

interest in the Petroleum Operations in respect of the entire Contract Area in the

following percentage:



WesternZagros Limited



40%



The balance of the interest in Petroleum Operations in respect of the entire Contract

Area, being sixty per cent (60%), is the Government Interest of twenty per cent (20%)

as defined in Article 4.1 and the Third Party Interest of forty per cent (40%) as

defined in Article 4.13.

Contractor’s Statement of Estimated Petroleum Costs is defined in Article 4.22.

Corrupt Practices Laws means, assuming the following are applicable to each

CONTRACTOR Entity, whether or not actually applicable or in effect:



(a)



the Kurdistan Region Laws and of the Laws of Iraq in respect of

bribery, kickbacks, and corrupt business practices;



(b)



the Foreign Corrupt Practices Act of 1997 of the United States of

America (Pub. L. No. 95-213 §§ 101-104 et seq), as amended;



(c)



the Corruption of Foreign Public Officials Act of Canada;



(d)



the OECD Convention on combating Bribery of Foreign Public

Officials in International Business Transactions, signed in Paris on 17

December 1997, which entered into force on 15 February 1999, and

the Convention's Commentaries;



(e)



the Bribery Act 2010; and



(f)



any other Law of general applicability relating to bribery, kickbacks,

and corrupt business practices.



Crude Oil means all liquid hydrocarbons in their unprocessed state or obtained from

Natural Gas by condensation or any other means of extraction.

Cumulative Costs is defined in Article 26.4.

Cumulative Revenues is defined in Article 26.4.

Decommissioning Costs means all the costs and expenditures incurred by the

CONTRACTOR when carrying out Decommissioning Operations, including those

defined in the Accounting Procedure.

Decommissioning Operations means any works, together with all related and

auxiliary activities, for decommissioning and/or removal and/or abandonment and

making safe all of the Assets and site restoration and remediation related thereto in

relation to any Production Area.

Decommissioning Plan is defined in Article 38.7.

Decommissioning Reserve Fund is defined in Article 38.1 and includes all

contributions paid into such fund and all interest accumulated such fund.

Deductible Amount is defined in Article 35.10.

Delivery Point means the point after extraction, specified in the approved

Development Plan for a Production Area, at which the Crude Oil, Associated Natural

Gas and/or Non-Associated Natural Gas is metered for the purposes of Article 27.5,

valued for the purposes of Article 27.1 and ready to be taken and disposed of,

consistent with prudent international petroleum industry practice, and at which a Party

may acquire title to its share of Petroleum under this Contract or such other point

which may be agreed by the Parties.

Development Costs means all the costs and expenditures incurred by the

CONTRACTOR when carrying out Development Operations, including those

defined in the Accounting Procedure.

Development Operations means all development operations or works conducted in

accordance with a Development Plan up to the Delivery Point with a view to



developing a Production Area, including: drilling of wells; primary and subsequent

recovery projects and pressure maintenance; survey, engineering, building and

erecting or laying of production plants and facilities (including: separators;

compressors; generators; pumps and tankage; gathering lines; pipelines and all

facilities required to be installed for production, pressure maintenance, and treatment,

storage and transportation of Petroleum); obtaining of such materials, equipment,

machinery, items and supplies as may be required or expedient for the foregoing

activities; and all auxiliary operations and activities required or expedient for the

production of Petroleum from the Production Area.

Development Period is defined in Article 6.

Development Plan means a plan for development defined in Article 12.8.

Development Well means any well drilled after the date of approval of the

Development Plan for the purpose of producing Petroleum, increasing or accelerating

production of Petroleum, including injection wells and dry holes. Any well drilled

within a Production Area shall be deemed a Development Well.

Development Work Program and Budget means the development work program

and budget prepared pursuant to Article 13.2.

Discovery means a discovery of Petroleum within the limits of the Contract Area

resulting from Petroleum Operations carried out under this Contract, provided such

Petroleum is recoverable at the surface with a measurable flow utilising techniques

used in prudent international petroleum industry practice.

Dispute is defined in Article 42.1.

Dollar (US$) means the legal currency (dollar) of the United States of America

(USA).

Effective Date is defined in Article 46.

Environment Fund is defined in Article 23.9.

Equipment and Materials is defined in Article 19.1.



Exploration Costs means all the costs and expenditure incurred by the

CONTRACTOR when carrying out Exploration Operations, including those defined

in the Accounting Procedure.

Exploration Operations means any and all operations conducted with a view to

discovering Petroleum, including: any activities necessary to commence operations;

any topographical, hydrographical, geological, geophysical, aerial and other surveys

and activities (including interpretations, analyses and related studies) to investigate

the subsurface for the location of Petroleum; drilling of shot holes, core holes and

stratigraphic test holes; spud, drilling, testing, coring, logging and equipping of

Exploration Wells or Appraisal Wells; procurement of such services, material,

equipment, machinery, items and supplies as may be required or expedient for the

foregoing activities; and all auxiliary operations and activities required or expedient

for the conduct of the foregoing activities.

Exploration Period is defined in Article 6.

Exploration Rental is defined in Article 6.3.

Exploration Well means any well drilled for the purpose of confirming a geological

structure or stratigraphic unit in which no Discovery has previously been made by the

CONTRACTOR.

Exploration Work Program and Budget means the exploration work program and

budget prepared pursuant to Article 11.1.

Export Crude Oil is defined in Article 24.2.

Export Non-Associated Natural Gas is defined in Article 24.2.

Export Petroleum is defined in Article 24.2.

First Exploration Well is defined in Article 10.2(a).

First Exploration Well Drilling Completion Date means the date of rig release of

the First Exploration Well, provided that it can be reasonably demonstrated that the



drilling and testing has been completed by the CONTRACTOR in accordance with a

drilling plan approved by the GOVERNMENT.

First Production means the moment when Commercial Production of Crude Oil or

Non-Associated Natural Gas (as the case may be) first commences, by flowing at the

rate forecast in the Development Plan without interruption for a minimum of forty

eight (48) hours.

First Sub-Period is defined in Article 6.2(a).

Force Majeure is defined in Article 40.2.

Garmian Block means the area described in Annex A, which was formerly part

Contract Area under the of the Kalar-Bawanoor Contract, but has been divided from

the Kalar-Bawanoor Contract so as to permit the CONTRACTOR to conduct further

Petroleum Operations thereon pursuant to this Contract.

Gas Development is defined in Article 14.10.

Gas Marketing Costs means all costs and expenditure incurred by the

CONTRACTOR when carrying out Gas Marketing Operations, including those

defined in the Accounting Procedure.

Gas Marketing Operations means any and all of the activities and operations

contemplated by Article 14.6.

Gas Marketing Work Program and Budget means the marketing work program

and budget prepared pursuant to Article 14.8.

Government Interest is defined in Article 4.1.

Government of Iraq means the Federal Government of the Republic of Iraq, which

holds office under the Constitution of Iraq and any minister, ministry, department,

sub-division, agency, authority, council, committee, or other constituent element

thereof and includes any corporation owned or controlled by any of the foregoing.

International Market Price is defined in Article 27.2.



Iraq means the entirety of the Republic of Iraq, including the Kurdistan Region.

Joint



Operating



Agreement



means



any



agreement



executed



by



the



CONTRACTOR Entities at any time for the purpose of regulating between such

entities the terms under which the Petroleum Operations will be conducted, which

agreement shall be: (a) consistent with prudent international petroleum industry

practice; (b) as between such entities, supplementary to this Contract; and (c)

consistent with the provisions of the Contract.

Kalar-Bawanoor Block is the area, as at any time of determination, covered by the

Kalar-Bawanoor Contract.

Kalar-Bawanoor Contract means the Production Sharing Contract dated 28

February 2008 by and among the GOVERNMENT, WesternZagros Limited and

Talisman (Block K44) B.V., a company established and existing under the laws of the

Netherlands (as amended by the Amendment Agreement dated 25 July 2011, and

effective 31 December, 2010, such Amendment Agreement renaming the KalarBawanoor Contract the “Kurdamir Contract”).

Kurdistan Region means the Federal Region of Kurdistan recognised by the

Constitution of Iraq and having the same meaning as ‘Region’ in the Kurdistan

Region Oil and Gas Law.

Kurdistan Region Law means all statutes, decrees, edicts, codes, orders, rules,

ordinances and regulations of the GOVERNMENT or of any other local, municipal,

territorial, provincial, or any other duly constituted governmental authority or agency

in the Kurdistan Region.

Kurdistan Region Oil and Gas Law means the Oil and Gas Law of the Kurdistan

Region – Iraq (Law No. 22 of 2007) as the same may be amended.

Law means all applicable laws including the following: constitutional law, civil law,

common law, international law, equity, treaties, statutes, decrees, edicts, codes,

orders, judgements, rules, ordinances and regulations of any local, municipal,

territorial, provincial, federated, national or any other duly constituted governmental

authority or agency.



LCIA is defined in Article 42.1(b).

Letter of Representations is defined in the recitals.

LIBOR means the London Inter-Bank Offered Rate at which Dollar deposits for one

(1) Month are offered in the inter-bank market in London, as quoted in the Financial

Times of London for the day in question. In the event that such rate is not published

in the Financial Times, it shall mean the London Inter-bank Offered Rate at which

Dollar deposits for one (1) Month are offered for the nearest day as quoted by

National Westminster Bank plc.

Loss or Expense is defined in Article 32.6.8(c).

Management Committee is defined in Article 8.

Maximum Efficient Rate (“MER”) is defined in Article 16.12.

Minimum Exploration Obligations is defined in Article 10.1.

Minimum Financial Commitment means:

(a)



in respect of the First Sub-Period, the amount set out in Articles 10.2(c); and



(b)



in respect of the Second Sub-Period, the amount set out in Article 10.3(c).



Month means a calendar month according to the Gregorian calendar.

Natural Gas means all gaseous Petroleum and inerts.

Non-Associated Natural Gas means any Natural Gas which is not any Associated

Natural Gas.

Notice of Dispute is defined in Article 42.1.

Notice of Intended TPI Assignment is defined in Article 4.21(a).

Operator means the entity designated by the CONTRACTOR and approved by the

GOVERNMENT pursuant to Article 5 which, in the name and on behalf of the

CONTRACTOR, shall carry out all Petroleum Operations. If at any time there exists



more than one (1) Operator under this Contract, any reference herein to the term

'Operator' shall be to each Operator with respect to the parts of the Contract Area in

which such Operator conducts Petroleum Operations.

Operatorship Exclusivity End Date is defined in Article 5.1.1.

Option of Third Party Participation is defined in Article 4.20.

Parties means the GOVERNMENT and each CONTRACTOR Entity, and “Party”

means any of the Parties.

Permits means all licences, permits, consents, authorisations or other permissions, as

the context requires.

Person shall include natural and juristic persons (including corporations, Public

Companies, and governmental agencies).

Petroleum means:

(a)



any naturally occurring hydrocarbon in a gaseous or liquid state;



(b)



any mixture of naturally occurring hydrocarbons in a gaseous or liquid state;

or



(c)



any Petroleum (as defined in paragraphs (a) and (b) above) that has been

returned to a Reservoir.



Petroleum Costs means:

(a)



all costs and expenditure incurred by the CONTRACTOR for the Petroleum

Operations, and which the CONTRACTOR is entitled to recover under this

Contract and its Accounting Procedure, including Decommissioning Costs,

Development Costs, Exploration Costs, Gas Marketing Costs and Production

Costs; and



(b)



Stipulated Sunk Block Costs,



but excludes all costs and expenditure incurred by WesternZagros Limited in the

exploration and development of the Kalar-Bawanoor Block (whether prior to or after

the Effective Date), except for Stipulated Sunk Block Costs.

Petroleum Field means a Reservoir or group of Reservoirs within a common

geological structure or stratigraphic unit, which may become part of a Production

Area pursuant to a Development Plan.

Petroleum Operations means all Exploration Operations, Gas Marketing Operations,

Development Operations, Production Operations and Decommissioning Operations,

as well as any other activities or operations directly or indirectly related or connected

with the said operations (including health, safety and environmental operations and

activities) and authorised or contemplated by, or performed in accordance with, this

Contract.

Pipeline Costs is defined in Article 33.5.

Production Area means such areas within the Contract Area designated as a

production area in an approved Development Plan prepared pursuant to Article 12.

For the avoidance of doubt, all superjacent or subjacent strata of the Reservoir in

which a Commercial Discovery is located are automatically included in the relevant

Production Area.

Production Bonus means any bonus due pursuant to Article 32.3 or 32.4.

Production Costs means all the costs and expenditure incurred by the

CONTRACTOR in carrying out the Production Operations from the Effective Date,

including those defined in the Accounting Procedure.

Production Operations means any works, together with all related and auxiliary

activities, for the production of Petroleum from the start of Commercial Production,

including: extraction, injection, stimulation, pumping, treatment, storage, engineering,

operating, servicing, repairing, and maintaining any wells, plants, equipment,

pipelines, terminals and any other installations and facilities, and any related

operations and auxiliary operations, and storage and transportation of Petroleum from

the Production Area to the Delivery Point.



Production Rental is defined in Article 13.10.

Production Work Program and Budget shall mean the production work program

and budget prepared pursuant to Article 13.6.

Profit Crude Oil is defined in Article 26.1(b).

Profit Natural Gas is defined in Article 26.1(c).

Profit Petroleum is defined in Article 26.1(a).

Proposed Contract is defined in Article 14.10(a).

Public Company means a public company established by the Kurdistan Region Oil

and Gas Law, including the Kurdistan Exploration and Production Company.

Public Officer means a civil servant, including a member or employee of a public

entity, a member of the Kurdistan National Assembly or a member of the

GOVERNMENT.

Quarter means a period of three (3) consecutive Months starting on the first day of

January, April, July or October respectively.

“R” Factor is defined in Article 26.4.

Reservoir means a subsurface rock formation containing an individual and separate

natural accumulation of producible Petroleum characterised by a single natural

pressure system.

Revenues is defined in Article 26.4.

Rights Sale means a sale, assignment, or other disposal of the GOVERNMENT’s

rights to receive Capacity Building Payment Instalments from the Charged Interest

Holder, whether for a lump sum payment or in instalment payments, and whether the

purchaser assumes all payment risk and all risk as to the amount of Capacity Building

Payment Instalments, or otherwise.

Royalty is defined in Article 24.1.



Second Exploration Well is defined in Article 10.3(b).

Second Sub-Period is defined in Article 6.2(b).

Semester means a period of six (6) consecutive Months starting from the first day of

January or July respectively.

Senior Representatives is defined in Article 42.1(a).

Signature Bonus is defined in Article 32.1.

Spud Date means the date on which there is initial penetration of the ground at the

start of the drilling operation of the First Exploration Well.

Stipulated Sunk Block Costs means costs and expenses detailed in Annex C in the

total amount of eighty million dollars (US$80,000,000) which were solely incurred by

WesternZagros Limited in conducting Petroleum Operations related to the Contract

Area prior to the Effective Date pursuant to the Kalar-Bawanoor Contract.

Subcontractor means any entity of any contracting tier providing services and/or

undertaking works relating to the Petroleum Operations directly or indirectly on

behalf of, the CONTRACTOR or any CONTRACTOR Entity.

Sub-Period and Sub-Periods are defined in Article 6.2.

Tax or Taxes means all current or future levies, duties, payments, charges,

impositions, imposts, withholdings, fees, taxes (including value added tax or other

sales or transaction based tax, corporation tax, income tax, capital gains tax, stamp

duty, land tax, registration tax, capital and wealth tax, profit tax, dividend tax or

withholdings, transfer tax, customs duties, branch or permanent establishment tax or

withholdings, tax on income from movable capital and fixed tax on transfers) or

contributions payable to or imposed by the GOVERNMENT.

Third Party Interest is defined in Article 4.13.

Third Party Interest Holder is defined in Article 4.14.

TPI Assignment Confirmation Notice is defined in Article 4.21(b).



TPI Conversion Date is defined in Article 4.27.

VAT is defined in Article 31.10.

Vice-Chairman is defined in Article 8.1.

WesternZagros Interest means all or any part of the participating interest hereunder

deemed held by WesternZagros Limited as of the Effective Date.

WesternZagros Interest Holder means a CONTRACTOR Entity to the extent it is

a holder of a WesternZagros Interest. As of the Effective Date, WesternZagros

Limited is the only WesternZagros Interest Holder.

WesternZagros Limited is defined in the preamble.

Work Program means any work program prepared by, or on behalf of, the

CONTRACTOR pursuant to this Contract and forming part of an Exploration Work

Program and Budget and/or an Appraisal Work Program and Budget and/or a Gas

Marketing Work Program and Budget and/or a Development Work Program and

Budget and/or a Production Work Program and Budget.

1.2



In this Contract, unless the context otherwise requires or is specifically otherwise

stated:

(a)



headings are to be ignored;



(b)



“including” and similar words do not imply any limitations;



(c)



singular includes plural and vice versa; and



(d)



reference to an “Article” is to an article of this Contract and to a “Paragraph”

is to a paragraph in the Accounting Procedure.



ARTICLE 2 – SCOPE OF THE CONTRACT

2.1



This Contract is a production-sharing arrangement with respect to the Contract Area,

whereby the GOVERNMENT has the right, pursuant to the Constitution of Iraq, to

regulate and oversee Petroleum Operations within the Contract Area.

The purpose of this Contract is to define the respective rights and obligations of the

Parties and the terms and conditions under which the CONTRACTOR shall carry

out all the Petroleum Operations.

By entering into this Contract, the GOVERNMENT grants to the CONTRACTOR

the exclusive right and authority to conduct all Petroleum Operations in the Contract

Area as detailed in Article 3. The Contract Area consists of an area formerly part of

the Kalar-Bawanoor Contract, but divided from the Kalar-Bawanoor Contract so as to

permit the CONTRACTOR to perform continued Petroleum Operations thereon

pursuant to this Contract, and the Parties have agreed that certain petroleum costs

solely incurred by WesternZagros Limited under the Kalar-Bawanoor Contract in

the Contract Area are recoverable as Stipulated Sunk Block Costs under this Contract.



2.2



Upon the CONTRACTOR’s request, the GOVERNMENT shall provide or procure

the provision of all Permits relating to the Petroleum Operations required by the

CONTRACTOR to fulfil its obligations under this Contract, including those relating

to any extension and renewal periods and including those required by the Government

of Iraq. The GOVERNMENT (i) represents and warrants to the CONTRACTOR

that it has not done and has not omitted to do anything that would cause the

cancellation or suspension of this Contract or any Permit granted under this Article

2.2 or pursuant to this Contract; and (ii) covenants that it will not do, or omit to do,

anything that would cause the cancellation or suspension of this Contract or any

Permit granted under this Article 2.2 or pursuant to this Contract. For the avoidance

of doubt, nothing in this Article shall affect the rights and obligations of the Parties

pursuant to Article 43.



2.3



The CONTRACTOR shall conduct all Petroleum Operations within the Contract

Area at its sole cost, risk and peril on behalf of the GOVERNMENT, pursuant to this

Contract, including the following operations:



(a)



Technical Services

Implementation of all technical, human and material resources reasonably

required for execution of the Petroleum Operations, in accordance with

prudent international petroleum industry practice.



(b)



Financial Services

The responsibility for funding the Exploration Operations and, in the event of

a Commercial Discovery, Development, Production and Decommissioning

Operations, pursuant to this Contract.

For the funding of Petroleum Operations, each CONTRACTOR Entity shall

be entitled to have recourse to external financing from either its Affiliated

Companies or from any third parties.



(c)



Administrative Services

Implementation of all appropriate management and administration techniques

for execution of the Petroleum Operations under this Contract, in accordance

with prudent international petroleum industry practice.



2.4



During the term of this Contract, the CONTRACTOR shall be responsible to the

GOVERNMENT for the conduct of Petroleum Operations within the Contract Area

pursuant to the terms of this Contract.



2.5



Natural resources other than Petroleum shall be excluded from the scope of this

Contract, even if the CONTRACTOR discovers any such resources when executing

its obligations pursuant to this Contract.



2.6



The CONTRACTOR shall only be entitled to recover Petroleum Costs incurred

under this Contract in the event of a Commercial Discovery. Recovery of Petroleum

Costs shall occur within the limits provided under Article 25.



2.7



During the term of this Contract, Profit Crude Oil and/or Profit Natural Gas produced

from Petroleum Operations shall be shared between the Parties in accordance with the

provisions of Article 26.



2.8



For the execution of Petroleum Operations under this Contract, the CONTRACTOR

shall have the right to:

(a)



freely access and operate within the Contract Area, as well as any facilities

associated with the Petroleum Operations, wherever they may be located;



(b)



freely use access roads located within the Contract Area and outside the

Contract Area for the construction, installation, maintenance, operation and

removal of pipelines and other facilities required for the Petroleum

Operations;



(c)



freely use sand, water, electricity and any other natural resources located

inside or outside the Contract Area for the Petroleum Operations;



(d)



use any qualified foreign and local personnel and/or Subcontractors required

for the conduct of Petroleum Operations in accordance with Articles 22 and

23. Any foreign personnel working in the Kurdistan Region shall require prior

authorisation of the GOVERNMENT (such authorisation not to be

unreasonably delayed or withheld) and the GOVERNMENT shall obtain any

authorisation required by the Government of Iraq;



(e)



import any goods, materials, equipment and/or services required for the

Petroleum Operations in accordance with Articles 19, 22 and 30; and



(f)



freely use land or property belonging to the Kurdistan Region, and the

GOVERNMENT will assist the CONTRACTOR with facilitating the use by

the CONTRACTOR of any private property in the Kurdistan Region.



2.9



Each CONTRACTOR Entity shall at all times comply, and procure that each

Subcontractor complies, with the Kurdistan Region Oil and Gas Law and

all other Applicable Law. No provision of this Contract will: (a) excuse the

CONTRACTOR or a CONTRACTOR Entity or any Subcontractor from

compliance with Applicable Law, or (b) impair any right or privilege of the

GOVERNMENT under Applicable Law.



ARTICLE 3 – CONTRACT AREA

The initial Contract Area covers the Garmian Block and extends over an area of one thousand

seven hundred eighty square kilometers (1780 km2), as detailed and indicated on the map

attached in Annex A and is delimited by the following coordinates:

Point



Easting



Northing



Longitude



Latitude



A



534031.75



3832686.29



45.37130



34.63551



B



492441.35



3850381.01



44.91737



34.79561



C



495219.19



3868916.11



44.94763



34.96277



D



502353.68



3870875.46



45.02579



34.98045



a



514750.00



3880500.00



45.16177



35.06713



b



518926.57



3877080.68



45.20750



35.03623



c



524040.00



3875760.00



45.26352



35.02421



d



526720.00



3873930.00



45.29284



35.00764



e



536640.00



3871380.00



45.40145



34.98434



f



553441.19



3859637.79



45.58477



34.87771



G



547673.04



3851704.89



45.52121



34.80646



H



541352.78



3834401.17



45.45126



34.65070



The GOVERNMENT, by execution of this Contract, validates and approves the foregoing

co-ordinates of the Contract Area.

The total area of the Contract Area may be reduced only in accordance with the provisions of

this Contract.



ARTICLE 4 – GOVERNMENT PARTICIPATION; THIRD PARTY INTEREST

Government Interest

4.1



The GOVERNMENT has a participating interest of twenty per cent (20%) in

Petroleum Operations and all other rights, duties, and obligations of the

CONTRACTOR (except as provided in this clause 4), carried by the

CONTRACTOR (the “Government Interest”).



4.2



The GOVERNMENT or any other holder of all or any part of the Government

Interest is not, in such capacity, a CONTRACTOR Entity. The GOVERNMENT or

any other holder of the Government Interest, whether in whole or in part, has no

obligation or liability to the CONTRACTOR to contribute any share of Petroleum

Costs or any other liability or obligation of a CONTRACTOR Entity or to the

CONTRACTOR or any CONTRACTOR Entity, all of which are carried by the

CONTRACTOR.



4.3



Subject to Article 4.4, a holder of all or any part of the Government Interest is not, if

that is its only capacity under this Contract, entitled to any notices under this Contract

or entitled to provide any consents, except as specifically provided otherwise, but has

rights and obligations under Article 42.



4.4



Any term of this Contract may be waived or amended without the consent of a holder

of a Government Interest (in such capacity), unless such waiver or amendment would

change any right or obligation of a holder of a Government Interest.



4.5



Persons, other than the GOVERNMENT or a Public Company, that are holders of all

or part of the Government Interest, are jointly and severally obligated to pay the

Production Bonuses in accordance with Articles 32.3(b) and 32.4(b). If the

GOVERNMENT or a Public Company, as a holder of the Government Interest, fails

to pay all or any part of such Production Bonuses: (i) the failure will not constitute a

default by the CONTRACTOR, (ii) the GOVERNMENT will have no remedies

against



the



CONTRACTOR



as



a



consequence



thereof,



and



(iii)



the



GOVERNMENT will not be entitled to terminate this Contract or any

CONTRACTOR Entity’s interests hereunder.



The capacity of a holder of the Government Interest, as it may arise pursuant to the

provisions of this Contract, shall in no event impair the rights of the

CONTRACTOR to seek to settle a dispute or to refer such dispute to arbitration or

expert determination in accordance with the provisions of Article 42.

4.6



The provisions of Article 39 do not apply with respect to any assignment by any

holder of a Government Interest of all or any part of its Government Interest. The

assignment of the Government Interest is governed by this Article 4. A permitted

assignee of a holder of the Government Interest will have, in respect of the assigned

Government Interest, the same rights and obligations as the holder of the Government

Interest prior to the assignment.



4.7



The GOVERNMENT may at any time designate a Public Company as the holder of

all or any part of the Government Interest without the consent of, or prior notice to,

any other Party. The Public Company will be deemed a Party to this Contract only in

respect of its Government Interest, but will not be required to sign any formal

assignment or accession agreement except as required by the GOVERNMENT. The

GOVERNMENT and the Public Company will provide the CONTRACTOR with a

notice notifying the CONTRACTOR of such designation by the GOVERNMENT

to a Public Company, and the Contractor shall be entitled to rely on such notice for all

purposes under this Contract. A Public Company as holder of the Government Interest

will be individually liable (and not jointly and severally liable with the

CONTRACTOR) for any obligations to the GOVERNMENT under this Contract.



4.8



Only for the purposes of Article 37 of the Kurdistan Region Oil and Gas Law,

whenever and to the extent the Government Interest is held by a Public Company, the

Government Interest shall be deemed held by the GOVERNMENT. The

GOVERNMENT incurs no liabilities or obligations (directly, indirectly, or

implicitly) to any other Party as a consequence of such deemed ownership, and the

GOVERNMENT will not be deemed to guarantee any obligation of the Public

Company or any holder of all any part of the Government Interest.



4.9



Subject to Article 4.12, the GOVERNMENT may at any time assign all or part of its

Government Interest to a Person that is not a Public Company without the consent of



any other Party. Such assignee will be deemed a Party to this Contract only in respect

of its Government Interest, but will not be required to sign any formal assignment or

accession agreement unless otherwise required by the GOVERNMENT. The

GOVERNMENT and the Public Company will provide the CONTRACTOR with

such a notice, jointly signed by each, notifying the CONTRACTOR of such

assignment by the GOVERNMENT, and the Contractor shall be entitled to rely on

such notice for all purposes under this Contract.

4.10



Subject to Article 4.12, a Public Company may assign part or all of its Government

Interest to another Public Company, to the GOVERNMENT, or to any other Person

without the consent of, or notice to, the CONTRACTOR or any CONTRACTOR

Entity, but may not make any assignments without the prior consent of the

GOVERNMENT and in accordance with any assignment and novation or other

agreements and conditions required by the GOVERNMENT. Any assignment by a

Public Company of all or part of all or any part of its Government Interest to another

Public Company or any other Person without the prior consent of the

GOVERNMENT or in accordance with the requirements of the GOVERNMENT

will be void. The Public Company or the GOVERNMENT shall promptly notify the

CONTRACTOR of any assignments of the Government Interest held by such Public

Company, and the Contractor will be entitled to rely on such notice for all purposes

under this Contract.



4.11



Subject to Article 4.12, a holder of all or part of the Government Interest which is not

the GOVERNMENT or a Public Company may assign part or all of its Government

Interest to any other Person without the consent of, or prior notice to, the

CONTRACTOR or any CONTRACTOR Entity. Such holder shall not make any

assignments without the prior notice to and consent of the GOVERNMENT and in

accordance with any assignment and novation or other agreements and conditions

required by the GOVERNMENT. Any assignment by such holder without the prior

consent of the GOVERNMENT or in accordance with the requirements of the

GOVERNMENT will be void. The assignor and the assignee shall jointly and

promptly notify the CONTRACTOR of any assignments of the Government Interest

pursuant to this Article 4.11, and the CONTRACTOR will be entitled to rely on such

notice for all purposes under this Contract.



4.12



Nothing under this Contract prohibits a CONTRACTOR Entity at any time from

offering to acquire or acquiring all or any part of the Government Interest from any

Person that is a holder of such Government Interest. If at any time any holder of all or

any part of the Government Interest (including the GOVERNMENT and a Public

Company) intends to offer to sell all or part of its Government Interest to any Person

that is not a Public Company or the GOVERNMENT, the applicable holder of the

Government Interest shall timely notify the CONTRACTOR of the availability of

the Government Interest. No CONTRACTOR Entity has any preemption or similar

priority rights in respect of the Government Interest, and the holder is not required to

sell and assign to a CONTRACTOR Entity.



Third Party Interest

4.13



The “Third Party Interest” is an undivided interest of forty per cent (40%) under

this Contract with all of the rights, obligations, and liabilities of a CONTRACTOR

Entity, except as provided in Articles 4.13 through 4.26.



4.14



A holder of all or any part of the Third Party Interest is a “Third Party Interest

Holder”.



4.15



The initial Third Party Interest Holder is the GOVERNMENT.



4.16



To the extent the GOVERNMENT is a Third Party Interest Holder, the

GOVERNMENT will have no liabilities or obligations as a Third Party Interest

Holder arising under or related to this Contract (including any implied liabilities or

obligations), except as specifically provided in Article 4.18. The CONTRACTOR

shall undertake all work required by this Contract and will be entitled to recover

Petroleum Costs with respect thereto in accordance with this Contract. In addition to

the rights and limitations of liabilities set forth in Articles 4.13 through 4.26, the

GOVERNMENT, as a Third Party Interest Holder, will have all of the rights of a

CONTRACTOR Entity to the extent of its Third Party Interest, including a right to

recover



amounts



paid



as



Petroleum



Costs



and



its



entitlement



to



the



CONTRACTOR’s share of Profit Petroleum in proportion to its Third Party Interest,

but the GOVERNMENT is not a CONTRACTOR Entity.



4.17



The GOVERNMENT, as a Third Party Interest Holder, has no obligation to pay or

contribute to Petroleum Costs incurred before the Spud Date, including Stipulated

Sunk Block Costs.



4.18



The GOVERNMENT, as a Third Party Interest Holder: (i) must pay and contribute,

to the extent of its Third Party Interest, for Petroleum Costs incurred after the Spud

Date, and (ii) will be entitled to recover such Petroleum Costs, to the extent paid, in

proportion to its Third Party Interest in accordance with Article 25, after the

CONTRACTOR has recovered, pursuant to Article 25, the Stipulated Sunk Block

Costs. The GOVERNMENT is only obligated to pay Petroleum Costs in accordance

with this Article 4.18 within thirty (30) days following the GOVERNMENT’s

receipt of an invoice for such Petroleum Costs and the GOVERNMENT has not

disputed such Petroleum Costs. The CONTRACTOR is not entitled to send an

invoice under this Article 4.18 until not less than one hundred and fifty (150) days

following the Effective Date.



4.19



A failure of the GOVERNMENT to contribute all or any part of its share of such

Petroleum Costs in accordance with Article 4.18, or a failure of an assignee to pay

any amount pursuant to Article 4.22, will not: (i) constitute a material breach of this

Contract by the GOVERNMENT, (ii) be considered a default of the

CONTRACTOR, (iii) entitle the CONTRACTOR to claim any extension for the

performance of any of its obligations hereunder, (iv) constitute a defence to the

performance of any obligations of the CONTRACTOR or any CONTRACTOR

Entity hereunder, or (v) constitute Force Majeure. Any amounts not paid by the

GOVERNMENT in accordance with this Article 4.19 will be subject to interest as

provided in Article 29.3, and the CONTRACTOR’s offset rights under Article 29.1.



4.20



Until the Government TPI Conversion Date (as defined in Article 4.27), the

GOVERNMENT may assign and novate all or any part of the Third Party Interest to

one or more Persons without the prior consent of any other Party, provided that no

assignee may have, after giving effect to the assignment together with any other

interests its holds as a CONTRACTOR Entity, less than a five percent (5%) interest

(such rights being the "Option of Third Party Participation"). Each Party assigns to

the GOVERNMENT all of its rights to provide any consents to such assignment and



novation, and each Party is deemed to have consented to each nomination and

assignment by the GOVERNMENT in accordance with Article 4.19 and Articles

4.21 through 4.26 to the extent required under Applicable Law to effect the

GOVERNMENT’s assignment and novation. The provisions of Articles 39.1, 39.2

and 39.3 do not apply to an assignment by the GOVERNMENT of all or any part of

its Third Party Interest.

4.21



The GOVERNMENT may assign and novate all or part of its Third Party Interest

only by providing the CONTRACTOR with:

(a)



a notice (each such notice a “Notice of Intended TPI Assignment”) to the

CONTRACTOR



which



specifies:



(i)



each



Person



to



whom



the



GOVERNMENT intends to assign and novate all or part of the

GOVERNMENT’s Third Party Interest, and (ii) the amount of the

GOVERNMENT’s Third Party Interest to be assigned to each such Person;

and

(b)



not less than thirty (30) days after the date of the Notice of Intended TPI

Assignment, a notice (each such notice a “TPI Assignment Confirmation

Notice”), signed by each proposed assignee and the GOVERNMENT,

confirming: (i) the assignment and novation as set forth in the Notice of

Intended TPI Assignment, (ii) each assignee’s acceptance of its assignment

and novation, including the amount of the Government’s Third Party Interest

assigned to it, (iii) each assignee’s undertaking to perform its obligations as a

CONTRACTOR Entity in accordance with this Contract, (iv) each assignee’s

payment obligations under Article 4.24(c), and (v) each assignee’s acceptance

of a direct right of action against it by the other CONTRACTOR Entities for

breach of its payment obligations under the arbitration agreement set forth in

this Contract.



4.22



Upon receipt of a Notice of Intended TPI Assignment, the CONTRACTOR shall, as

soon as practical, provide the GOVERNMENT and each of the nominated assignees

with the CONTRACTOR’s statement of estimated Petroleum Costs (including

Stipulated Sunk Block Costs) [refence to information redacted in 4.22(c) below has



been redacted here] (each a “Contractor’s Statement of Estimated Petroleum

Costs”) incurred as of a cost determination date established by the CONTRACTOR,

which date must be as near as practicable (with regard to securing accurate and

complete accounting information) to the date of the Notice of Intended TPI

Assignment. The Contractor’s Statement of Estimated Petroleum Costs will be subject

to the audit rights of the Parties, including the proposed assignees, and to equitable

adjustment. Each Contractor’s Statement of Estimated Petroleum Costs must set

forth: (i) the total Petroleum Costs as of the cost estimation date, (ii) the Petroleum

Costs that would be allocable to each proposed assignee based on the Third Party

Interest to be assigned to it, (iii) Petroleum Costs incurred after the Spud Date, (iv) the

amount of such Petroleum Costs incurred after the Spud Date which is attributable to

the Third Party Interest, (v) the amount of such Petroleum Costs incurred after the

Spud Date which has been paid by the GOVERNMENT or other Parties, and (vi) the

amount such Petroleum Costs incurred after the Spud Date that have not been paid by

the GOVERNMENT or other Parties (whether or not then due and owing) and the

proportion of such amount that would be allocable and payable by each proposed

assignee based on the Third Party Interest to be assigned to it. Each CONTRACTOR

Entity shall also provide its wire instructions for the purpose of receiving payments

pursuant to Article 4.24(c).

4.23



If the CONTRACTOR is unable to provide such a Contractor’s Statement of

Estimated Petroleum Costs within twenty (20) days after receipt of a Notice of TPI

Assignment, or such later date as the GOVERNMENT may agree, then the

CONTRACTOR Entities will not be entitled to payment as provided in Article

4.24(c), without prejudice to the assignee’s general obligations to pay its share of

Petroleum Costs under any Joint Operating Agreement.



4.24



As of the date of TPI Assignment Confirmation Notice:

(a)



the GOVERNMENT’s Third Party Interest will be deemed automatically

assigned and novated to each assignee in accordance with TPI Assignment

Confirmation Notice;



(b)



each assignee of the GOVERNMENT’s Third Party Interest identified in the

TPI Assignment Confirmation Notice will: (i) be a Party to this Contract and

(ii) have all the rights and obligations of a CONTRACTOR Entity as of the

Effective Date (which for certainty includes the rights and obligations of a

CONTRACTOR Entity in connection with the Sarqala-1 well drilling in the

Contract Area by WesternZagros Limited prior to the Effective Date) to the

extent of its assigned Third Party Interest;



(c)



each assignee will be obligated to pay:

(i)



the GOVERNMENT, within thirty (30) days following the date of the

TPI Assignment Confirmation Notice, an amount equal to the

proportion of Petroleum Costs incurred after the Spud Date attributable

to the assignee’s Third Party Interest which have been paid by the

GOVERNMENT as set forth in the Contractor’s Statement of

Estimated Petroleum Costs; and



(ii)



to each CONTRACTOR Entity, by way of cleared funds to the bank

accounts nominated by the CONTRACTOR Entities, an amount equal

to the sum of:

(x)



Petroleum Costs (including Stipulated Sunk Block Costs)

incurred by the CONTRACTOR prior to the Spud Date which

are allocable to such assignee’s assigned Third Party Interest

and payable to each CONTRCTOR Entity as set forth in the

Statement of Estimated Petroleum Costs; and



(y)



any unpaid amounts owed to the CONTRACTOR by the

GOVERNMENT in respect of the assigned Third Party

Interest (if any) and allocable to the Third Party Interest (and

assume all of the GOVERNMENT’s obligations and liabilities

with respect thereto) and to such CONTRACTOR Entity as

set forth in the Statement of Estimated Petroleum Costs, which

payment and assumption will be in full discharge of the

GOVERNMENT’s obligation with respect thereto; and



[additional amounts which may be payable by an assignee have

been redacted here]

(d)



where a Joint Operating Agreement exists which has been approved by the

GOVERNMENT, the Third Party Interest Holder is obligated to accede to

such Joint Operating Agreement within thirty (30) days following the date of

the TPI Assignment Confirmation Notice without any material changes to the

terms thereof not agreed by the other CONTRACTOR Entities party thereto.



4.25



Each CONTRACTOR Entity shall promptly take all actions requested by the

GOVERNMENT to give effect to the assignment and novations of the

GOVERNMENT’s Third Party Interest as set forth in a TPI Assignment

Confirmation Notice. If the GOVERNMENT determines, or an assignee requires,

that an agreement or other documentation signed by the GOVERNMENT and each

CONTRACTOR



Entity



or



other



Party



is



desirable



to



evidence



the



GOVERNMENT’s assignment and novation, each such Party shall promptly execute

such documentation within ten (10) days of receipt thereof. If a Party fails to deliver

such signed agreement or other documentation in the form required by the

GOVERNMENT within ten (10) days of receipt thereof, then such Party irrevocably

constitutes and appoints the GOVERNMENT (or any other Person which at any time

during the term of the Contract may be nominated by the GOVERNMENT) to act

alone, and with full power of substitution, as to such Party’s true and lawful attorney

and agent, with full power and authority in its name, place and stead to execute, file

and record when as and where required, any and all of such documentation and

hereby ratifies such execution, recording and filing. The power of attorney granted by

this Article 4.25 is irrevocable and will survive the insolvency, dissolution, windingup or bankruptcy of such Party and extends to bind such Party’s trustees,

administrators, successors and assigns. Each such Party waives any and all defences

which may be available to contest, negate or disaffirm the action of the

GOVERNMENT taken under such power of attorney, provided that the terms of any

such documentation do not increase or change any right or obligation of such Party

under this Contract, except as required to reflect the additional interests of the Third

Party Interest Holder. Each CONTRACTOR Entity shall ensure that the authorising

resolutions of its board or shareholders, as applicable, specifically authorises the



provision of the power of attorney set forth in this Article 4.25, and shall provide a

certified copy of such resolutions on or before the date such CONTRACTOR Entity

becomes a Party.

4.26



Except as provided in the next sentence, the payment obligations of the

GOVERNMENT and each assignee of the Third Party Interest, and the Contractor’s

Statement of Estimated Petroleum Costs, will be subject to applicable audit rights and

equitable adjustment based on the results of such audits. Stipulated Sunk Block Costs

are not subject to audit.



If an assignee fails to make any payments to the



GOVERNMENT or a CONTRACTOR Entity as contemplated by this Article 4 in

connection with an assignment of a Third Party Interest, or if such assignee fails to

accede to a Joint Operating Agreement as provided herein, the GOVERNMENT will

be entitled, on not less than thirty (30) days’ prior notice, to cancel the assignment of

the Third Party Interest to such assignee, with effect from the date of the TPI

Confirmation Notice, and such assignee waives and releases and indemnifies the

GOVERNMENT and each other Party from any claims, losses, demands, or

expenses with respect thereto. [refence to information redacted in 4.22(c) above has

been redacted here]

Government TPI Conversion

4.27



The provisions of Articles 4.27 through 4.31 only apply if the GOVERNMENT is a

Third Party Interest Holder at 12.01 am (Erbil time) on the date which is one hundred

and eighty one (181) days after the Effective Date (the “TPI Conversion Date”), and

only apply in respect of the Third Party Interest which is not identified in a TPI

Assignment Confirmation Notice and is held by the GOVERNMENT as of the TPI

Conversion Date.



4.28



The right of the GOVERNMENT to assign its Third Party Interest will expire on the

TPI Conversion Date.



4.29



The GOVERNMENT’s Third Party Interest as of the TPI Conversion Date is

deemed automatically assigned in its entirety, pro rata, as of the TPI Conversion

Date, to each of the CONTRACTOR Entities on the TPI Conversion Date (but not

including any assignees of the GOVERNMENT’s Third Party Interest in accordance



with Articles 4.1 through 4.25). As of the TPI Conversion Date, each such

CONTRACTOR Entity will hold such Third Party Interest with all the rights, duties,

obligations and liabilities under this Contract in respect of such Third Party Interest

from the Effective Date.

4.30



The provisions of Articles 39.1, 39.2 and 39.3 do not apply to the deemed

assignments as set forth in Article 4.29. The GOVERNMENT and each

CONTRACTOR Entity is deemed to have: (i) consented to the assignment and

novation of the GOVERNMENT’s Third Party Interest to the extent required under

Applicable Law to effect the automatic assignment and novation contemplated by

Article 4.29, and (ii) agreed to the assumption of all rights, liabilities, and obligations

associated therewith.



4.31



As of the TPI Conversion Date, the GOVERNMENT is discharged from any

obligation to pay or contribute its share of Petroleum Costs as provided in Article

4.18, and the obligation of the GOVERNMENT is assumed by the CONTRACTOR

without any right of contribution by a CONTRACTOR Entity that is an assignee of a

Third Party Interest prior to the TPI Conversion Date.



Charged Interest Conversion

4.32



Each CONTRACTOR Entity that has been assigned an interest pursuant to Article

4.29 is a Charged Interest Holder. As of the TPI Conversion Date, the whole of the

interest held by a Charged Interest Holder is a Charged Interest.



4.33



The provisions of Article 32.6, and other provisions of this Contract related to the

Charged Interest, apply to the whole of the Charged Interest.



4.34



Notwithstanding any other provision of this Contract, the Charged Interest Holder

will be responsible for seventy-five percent (75%) of any Production Bonus that

would, but for this Article 4.34, be attributable to the Charged Interest Holder in

accordance with Articles 32.3(a) and 32.4(a).



Joint Operating Agreement

4.35



The CONTRACTOR Entities, or any of them, shall not enter into any Joint

Operating Agreement in respect of this Contract except if the terms of such Joint

Operating Agreement have been approved by the GOVERNMENT, are in

compliance with Applicable Laws of the Kurdistan Region as of the date of the

approval by the GOVERNMENT, and does not require the affirmative vote of more

than fifty-one per cent (51%) of participating interests of the CONTRACTOR

Entities for any decision of any operating committee established under such Joint

Operating Agreement.



ARTICLE 5 – OPERATOR

5.1



5.1.1



The CONTRACTOR hereby designates, and the GOVERNMENT approves,

WesternZagros Limited to act as the Operator on behalf of the

CONTRACTOR for the execution of the Petroleum Operations until the

earlier of:

(a) the First Exploration Well Drilling Completion Date;

(b) 31 December 2011; and

(c) the date which is thirty (30) days after the day on which the

GOVERNMENT notifies the CONTRACTOR in writing that there has been

an Act of Insolvency in respect of WesternZagros Limited;

(such date the “Operatorship Exclusivity End Date”) .



5.1.2



On and from the Operatorship Exclusivity End Date, the GOVERNMENT

may, at any time, nominate a CONTRACTOR Entity other than

WesternZagros Limited to be the Operator.



If the GOVERNMENT



nominates a CONTRACTOR Entity to be the Operator in accordance with

this Article 5.1.2, the CONTRACTOR shall designate that CONTRACTOR

Entity as the Operator.



The GOVERNMENT may exercise its right to



nominate an Operator in accordance with this Article 5.1.2 any number of

times.



5.1.3



On and from the Operatorship Exclusivity End Date, if the Government has

not nominated a CONTRACTOR Entity to be the Operator in accordance

with Article 5.1.2, the CONTRACTOR shall at any time have the right to

designate a CONTRACTOR Entity other than WesternZagros Limited as

the Operator, upon giving the GOVERNMENT not less than thirty (30) days

prior written notice of such appointment.



5.2



The CONTRACTOR shall submit to the GOVERNMENT for approval any

agreement to amend any Joint Operating Agreement regarding or regulating the

Operator's appointment and its conduct of Petroleum Operations on behalf of the

CONTRACTOR pursuant to this Contract prior to execution of such agreement.



5.3



In the event of the occurrence of either of the following at any time, and

notwithstanding the provisions of Article 5.1, the GOVERNMENT may require the

CONTRACTOR to appoint another entity as Operator as soon as is reasonably

practicable:

(a)



if an order has been passed in court declaring the bankruptcy, liquidation, or

dissolution of the Operator; or



(b)



if the the CONTRACTOR fails to fulfil its obligations under this Contract.



ARTICLE 6 – TERM OF THE CONTRACT

6.1



This Contract comprises an Exploration Period and a Development Period, as defined

below:



Exploration Period

6.2



The Exploration Period shall be for an initial term from the Effective Date until 31

December 2013, extendable (as provided in Articles 6.5 and 6.6) up to a maximum

period to 31 December 2014. The initial term shall be subdivided in two (2) subperiods as follows:

(a)



an initial sub-period until 31 December 2011 (“First Sub-Period”); and



(b)



a second sub-period of two (2) Contract Years (“Second Sub-Period”) until

31 December 2013,



each a “Sub-Period” and collectively “Sub-Periods”.

It is understood that the right of the CONTRACTOR to accede to the next SubPeriod or any extension thereof pursuant to Article 6.6 shall be subject to fulfilment of

the Minimum Exploration Obligations or minimum work obligations applicable to the

previous Sub-Period or extension thereof pursuant to Article 6.6 (as the case may be).

6.3



During



the



Exploration



Period,



the



CONTRACTOR



shall



pay to



the



GOVERNMENT, in arrears, an annual surface rental for the Contract Area, as may

be reduced by relinquishment from time to time pursuant to Article 7, of ten Dollars

(US$10) per square kilometre per calendar year (“Exploration Rental”). Such

Exploration Rental shall be considered as a Petroleum Cost and shall be recoverable

by the CONTRACTOR in accordance with the provisions of Articles 1 and 25.

6.4



If the CONTRACTOR decides not to enter into the Second Sub-Period, it shall

notify the GOVERNMENT at least thirty (30) days prior to the expiry of the First

Sub-Period and, provided that the data from the First Exploration Well demonstrates

that there is no reasonable technical case for drilling the Second Exploration Well in

the Contract Area, the Exploration Period shall expire at the end of the First SubPeriod, unless the First Sub-Period has been extended pursuant to Article 6.5 and/or

Article 6.6.



6.5



If the CONTRACTOR has fulfilled its Minimum Exploration Obligations for the

Second Sub-Period of the Exploration Period but considers that additional work is

required prior:

(a)



to deciding to submit an Appraisal Work Program and Budget as provided

under Article 12.2 in respect of a Discovery, or



(b)



to deciding to declare a Discovery as a Commercial Discovery in accordance

with Article 12.6(a) or 14.5(a), which additional work may include the

preparation and/or execution of an Appraisal Work Program and Budget as

provided under Article 12.2 and/or Gas Marketing Operations,



the CONTRACTOR will be entitled to one extension of one (1) Contract Year of the

Second Sub-Period, up to the end of the maximum Exploration Period on 31

December 2014 (as provided in Article 6.2), provided the CONTRACTOR drills an

additional exploration well during such extension period. The CONTRACTOR’s

notification of its intention to exercise such extension and its duration shall be

submitted in writing to the GOVERNMENT at least thirty (30) days prior to the end

of the Second Sub-Period.

6.6



Without prejudice to Article 6.5, upon expiry of the Exploration Period, if the

CONTRACTOR considers it has not completed its exploration evaluation of the

Contract Area, the CONTRACTOR will be entitled to an extension of the Second

Sub-Period, provided, at least thirty (30) days prior to the end of such Sub–Period, the

CONTRACTOR has notified the GOVERNMENT thereof and provided the

CONTRACTOR’s proposal for a minimum work obligation for such extension. Any

such extension shall not exceed one (1) Contract Year. The right of the

CONTRACTOR to receive the extension will be subject to fulfilment of the

preceding minimum work obligations.



6.7



Subject to Article 6.4, at any time during the Exploration Period, upon thirty (30) days

prior notice to the GOVERNMENT, the CONTRACTOR shall have the right to

withdraw from this Contract, provided that the outstanding Minimum Exploration

Obligations relating to the then current Sub-Period have been completed in

accordance with the Contract, or it has paid to the GOVERNMENT the amounts

specified in Article 10.2 or Article 10.3, whichever is applicable, to the then current

Sub-Period.



6.8



If no Commercial Discovery has been made at the end of the Exploration Period

(including any extensions thereof) this Contract will automatically terminate.



6.9



If a Discovery is made within the maximum Exploration Period until 31 December

2014 (as provided in Article 6.2), and if the CONTRACTOR considers it has not

had time to complete sufficient Gas Marketing Operations to declare the Discovery a

Commercial Discovery pursuant to Article 12.6(a) or 14.5(a), the CONTRACTOR

will be entitled to request an extension of the Exploration Period (notwithstanding the



maximum period provided in Article 6.2), provided, not less than thirty (30) days

prior to the end of the maximum Exploration Period, the CONTRACTOR so

requests the GOVERNMENT and provides the CONTRACTOR’s proposal for Gas

Marketing Operations to be undertaken during such extension. If granted by the

GOVERNMENT, any such extension shall not exceed two (2) Contract Years. Upon

the expiry of such extension, if it considers the CONTRACTOR has still not

completed its Gas Marketing Operations relating to such Discovery, the

CONTRACTOR will be entitled to request a further extension of two (2) Contract

Years, provided that, not less than thirty (30) days prior to the end of the original

extension, the CONTRACTOR so requests the GOVERNMENT and provides the

CONTRACTOR’s proposal for Gas Marketing Operations to be undertaken during

such extension.

Development Period

6.10



If the CONTRACTOR considers that a Discovery of Crude Oil and any Associated

Natural Gas is a Commercial Discovery, the CONTRACTOR shall have the

exclusive right to develop and produce such Commercial Discovery, pursuant to the

terms of this Contract.



The Development Period for a Commercial Discovery of



Crude Oil and any Associated Natural Gas shall be twenty (20) years commencing on

the declaration of such Commercial Discovery by CONTRACTOR, in accordance

with Article 12.6(a), with an automatic right to a five (5) year extension.

6.11



If the CONTRACTOR considers that a Discovery of Non-Associated Natural Gas is

a Commercial Discovery, the CONTRACTOR shall have the exclusive right to

develop and produce such Commercial Discovery, pursuant to the terms of this

Contract. The Development Period for a Commercial Discovery of Non-Associated

Natural Gas shall be twenty (20) years, commencing on the declaration of such

Commercial Discovery by CONTRACTOR, in accordance with Article 12.6(a) or

Article 14.5(a), with an automatic right to a five (5) year extension.



6.12



If Commercial Production from a Production Area is still possible at the end of its

Development Period as defined in Articles 6.10 or 6.11 then, upon its request, the

CONTRACTOR shall be entitled to an extension of such Development Period under



the same terms as those provided in this Contract. Such request shall be made in

writing by the CONTRACTOR at least six (6) Months before the end of the said

Development Period.

The term of any such extension of the Development Period shall be:



6.13



(a)



five (5) Years for Crude Oil and any Associated Natural Gas, and/or



(b)



five (5) Years for Non-Associated Natural Gas.



The CONTRACTOR shall have the right to terminate Production Operations for any

Production Area at any time during the term of this Contract, subject to giving

notice to the GOVERNMENT of at least ninety (90) days. This Contract shall

terminate on the expiry date of the last Production Area or when Production

Operations for all Production Areas have terminated.



ARTICLE 7 – RELINQUISHMENTS

7.1



Subject to the provisions of Articles 7.2 and 7.3, the CONTRACTOR shall surrender

portions of the Contract Area as follows:

(a)



at the end of the initial term of the Exploration Period referred to in Article

6.2, twenty five per cent (25%) of the net area determined by subtracting the

Production Areas from the initial Contract Area;



(b)



at the end of any extension period entered into under this Contract after the

end of the initial term of the Exploration Period referred to in Article 6.2, an

additional twenty five per cent (25%) of the net area determined by

subtracting the Production Areas from the remaining part of the Contract

Area; and



(c)



at the end of the Exploration Period (including all extensions thereof), all of

the remaining area that is not in a Production Area.



7.2



For the application of Article 7.1:



(a)



any areas already relinquished pursuant to Article 7.4 shall be deducted from

areas to be surrendered; and



(b)



the CONTRACTOR shall have the right to determine the area, shape and

location of the Contract Area to be kept, provided that such surrendered

portions of the Contract Area shall be in contiguous blocks.



7.3



If the relinquishment referred to in Article 7.1 can only be achieved by including part

of an Appraisal Area, then these percentages shall be reduced to exclude such

Appraisal Area.



7.4



During the Exploration Period, the CONTRACTOR may at the end of each Contract

Year surrender all or any part of the Contract Area by written notice sent to the

GOVERNMENT at least thirty (30) days in advance of the proposed date of

surrender, subject to the provisions of this Article 7.4. Such voluntary surrenders

during the Exploration Period shall be deemed equal to the obligatory relinquishments

referred to under Article 7.1. This Contract shall terminate in the event of the

surrender of the entire Contract Area.



7.5



No surrender provided under Article 7.4 shall exempt the CONTRACTOR from its

outstanding obligations under this Contract. In the event the CONTRACTOR elects

to surrender the entire Contract Area without having fulfilled the Minimum

Exploration Obligations relating to the then current Sub-Period as provided in Article

10.2 or Article 10.3, the CONTRACTOR shall pay to the GOVERNMENT the

relevant outstanding amount as detailed in Article 10.2 or Article 10.3, as the case

may be.



7.6



The boundaries of the portion of the Contract Area to be relinquished by the

CONTRACTOR shall be communicated to the GOVERNMENT by written notice

at least thirty (30) days in advance of the relevant date for relinquishment, pursuant to

Article 7.1.



ARTICLE 8 – MANAGEMENT COMMITTEE



8.1



A Management Committee shall be established within thirty (30) days following the

Effective Date for the purpose of providing orderly direction of all matters pertaining

to the Petroleum Operations and the Work Programs. Within such period, each of the

GOVERNMENT and the CONTRACTOR shall by written notice nominate its

respective members of the Management Committee and their deputies.

The Management Committee shall comprise two (2) members designated by the

GOVERNMENT and two (2) members designated by the CONTRACTOR.

Upon ten (10) days notice, each of the GOVERNMENT and the CONTRACTOR

may substitute any of its members of the Management Committee. The chairman of

the Management Committee shall be one of the members designated by the

GOVERNMENT (the “Chairman”).



The vice-chairman of the Management



Committee shall be one of the members designated by the CONTRACTOR (the

“Vice-Chairman”). In the absence of the Chairman, the Vice-Chairman shall chair

the meeting.

Each Party shall have the right to invite a reasonable number of observers as deemed

necessary to attend the meetings of the Management Committee in a non-voting

capacity.

8.2



The Management Committee shall review, deliberate, decide and give advice,

suggestions and recommendations to the Parties regarding the following subject

matters:

(a)



Work Programs and Budgets;



(b)



the CONTRACTOR’s activity reports;



(c)



production levels submitted by the CONTRACTOR, based on prudent

international petroleum industry practice;



(d)



Accounts of Petroleum Costs;



(e)



procurement procedures for potential Subcontractors, with an estimated subcontract value in excess of one million Dollars (US$1,000,000), submitted by

the CONTRACTOR in accordance with Article 19.3;



(f)



Development Plan and Budget for each Production Area;



(g)



any matter having a material adverse affect on Petroleum Operations;



(h)



any other subject matter of a material nature that the Parties are willing to

consider.



8.3



Each of the GOVERNMENT and the CONTRACTOR shall have one (1) vote in

the Management Committee. The Management Committee cannot validly deliberate

unless each of the GOVERNMENT and the CONTRACTOR is represented by at

least one (1) of its members or its deputy.

The Management Committee shall attempt to reach unanimous agreement on any

subject matter being submitted. In the event the Management Committee cannot

reach unanimous agreement, a second meeting shall be held within fourteen (14) days

to discuss the same subject matter and attempt to reach a unanimous decision.

Except as provided for in Article 8.4 and Article 8.5, in the event that no agreement is

reached at the second meeting, the Chairman shall have the tie-breaking vote.



8.4



In the event that, during the Exploration Period, no agreement is reached at the second

meeting of the Management Committee, as provided for in Article 8.3, or unanimous

approval is not obtained, as required pursuant to Article 8.5; then the proposal made

by the CONTRACTOR shall be deemed adopted by the Management Committee.



8.5



Notwithstanding the provisions of Article 8.3, and subject to Article 8.4, unanimous

approval of the Management Committee shall be required for:

(a)



approval of, and any material revision to, any Exploration Work Program and

Budget prepared after the first Commercial Discovery in the Production Area

relating to such Commercial Discovery;



(b)



approval of, and any material revision to, the Development Plan, the

production schedule, lifting schedule and Development and Production Work

Programs and Budgets;



(c)



establishment of rules of procedure for the Management Committee;



(d)



any insurance issues over which the Management Committee has authority;



(e)



approval of, and any material revision to, procurement procedures for goods

and/or services, submitted by the CONTRACTOR in accordance with Article

19.3 (unless such procedures have been deemed approved by the Management

Committee in accordance with Article 19.3);



(f)



approval of, and any material revision to, any proposed pipeline project,

submitted by CONTRACTOR in accordance with Article 33.3;



(g)



approval of a first rate bank in which to place the Decommissioning Reserve

Fund, in accordance with Article 38.1;



(h)



approval of, and any material revision to, any proposed Decommissioning

Plan submitted pursuant to Article 38.7 on any Decommissioning Work

Program and Budget or Gas Marketing Work Program and Budget;



(i)



any Terms of Reference which are required to be prepared and agreed for the

purposes of expert determination, pursuant to Article 42.2;



8.6



(j)



approval of any costs in excess of ten per cent (10%) above any Budget; and



(k)



any matter having a material adverse effect on Petroleum Operations.



Ordinary meetings of the Management Committee shall take place in the Kurdistan

Region, alternately at the offices of the GOVERNMENT and those of the

CONTRACTOR, or at any other location agreed between Parties, at least twice a

Contract Year prior to the date of the first Commercial Discovery and three times a

Contract Year thereafter.



8.7



Either the GOVERNMENT or the CONTRACTOR may call an extraordinary

meeting of the Management Committee to discuss important issues or developments

related to Petroleum Operations, subject to giving reasonable prior notice, specifying

the matters to be discussed at the meeting, to the other Party. The Management

Committee may from time to time make decisions by correspondence provided all the

members have indicated their approval of such decisions in such correspondence.



8.8



Unless at least one (1) member or its deputy of each of the GOVERNMENT and the

CONTRACTOR is present, the Management Committee shall be adjourned for a

period not to exceed eight (8) days. The Party being present shall then notify the other

Party of the new date, time and location for the meeting.



8.9



The agenda for meetings of the Management Committee shall be prepared by the

CONTRACTOR in accordance with instructions of the Chairman and communicated

to the Parties at least fifteen (15) days prior to the date of the meeting. The agenda

shall include any subject matter proposed by either the GOVERNMENT or the

CONTRACTOR. Decisions of the Management Committee will be made at the

meetings.



The CONTRACTOR shall be responsible for preparing and keeping



minutes of the decisions made at the meetings. Copies of such minutes shall be

forwarded to each Party for review and approval.



Each Party shall review and



approve such minutes within ten (10) days of receipt of the draft minutes. A Party

who fails to notify in writing its approval or disapproval of such minutes within such

ten (10) days shall be deemed to have approved the minutes.

8.10



If required, the Management Committee may request the creation of a technical subcommittee or any other sub-committee to assist it. Any such sub-committee shall be

composed of a reasonable number of experts from the GOVERNMENT and the

CONTRACTOR. After each meeting, the technical sub-committee or any other subcommittee shall deliver a written report to the Management Committee.



8.11



Any costs and expenditure incurred by the CONTRACTOR for meetings of the

Management Committee or any technical sub-committee or any other sub-committee

shall be considered as Petroleum Costs and shall be recoverable by the

CONTRACTOR in accordance with the provisions of Articles 1 and 25.



ARTICLE 9 – GUARANTEES

9.1



Concurrently with the signing of this Contract, WesternZagros Limited shall deliver

to the GOVERNMENT a payment guarantee of a parent company or ultimate parent

company acceptable to the GOVERNMENT. Such guarantee will be (i) in form and



content acceptable to the GOVERNMENT and (ii) in respect of WesternZagros

Limited’s payment obligations pursuant to Article 10.2(c).

9.2



Not later than sixty (60) days after the commencement of the Second Sub-Period, the

CONTRACTOR Entities shall provide the GOVERNMENT, unless the

GOVERNMENT waives this clause 9.2 pursuant to notice received by each

CONTRACTOR Entity within 30 days following start of the Second Sub-Period,

with a joint and several guarantee of such parent company or ultimate parent company

of each CONTRACTOR Entity as is acceptable to the GOVERNMENT with

respect to the obligations of the CONTRACTOR under Article 10.3(c).



Such



guarantee shall be in the form and content as set forth in Annex D.

9.3



In the event of the exercise by the GOVERNMENT of the Option of Third Party

Participation or an assignment by a CONTRACTOR Entity in accordance with

Article 39, a parent company or ultimate parent company of each Third Party Interest

Holder or third party assignee acceptable to the GOVERNMENT must accede to the

applicable guarantee effective as of the effective date of the assignment, as a

condition precedent to the approval of the assignment by the GOVERNMENT.



ARTICLE 10 – MINIMUM EXPLORATION WORK OBLIGATIONS

10.1



The CONTRACTOR shall start Exploration Operations within thirty (30) days of the

Management Committee’s approval of the Exploration Work Program and Budget in

accordance with Article 8. The CONTRACTOR shall perform geological,

geophysical and/or drilling works as provided under Articles 10.2 to 10.3 (the

“Minimum Exploration Obligations”). If applicable, the said Minimum Exploration

Obligations shall be performed during each Sub-Period in accordance with prudent

international petroleum industry practice.



10.2



During the First Sub-Period, the CONTRACTOR shall:

(a)



drill one (1) Exploration Well at a location near to the village of Mil Qasim,

to a depth of 2400m to evaluate the Upper Fars formation, including testing of

this formation if technically justified (the “First Exploration Well”);



(b)



perform field work comprising structural, stratigraphic and lithologic mapping

and sampling required in support of the First Exploration Well; and



(c)



commit twenty-five million Dollars (US$25,000,000) in performing the work

described in Articles 10.2(a) and 10.2(b).



10.3



During the Second Sub-Period, the CONTRACTOR shall:

(a)



acquire, process and interpret further seismic data (being either two

dimensional or three dimensional), if the CONTRACTOR considers that the

results from the First Exploration Well justify the acquisition of further

seismic data;



(b)



drill one (1) Exploration Well (the “Second Exploration Well”), including

testing as appropriate unless the data from the First Exploration Well

demonstrates that there is not a reasonable technical case for drilling the

Second Exploration Well in the Contract Area; and



(c)



commit twenty-five (US$25,000,000) in performing the work described in

Articles 10.3(a) and 10.3(b).



10.4



Notwithstanding the provisions in Articles 10.2 to 10.3, for the execution of the

Minimum Exploration Obligations under Articles 10.2 to 10.3, it is agreed as follows:

(a)



Minimum Exploration Obligations in the Second Sub-Period shall only apply

in the event the CONTRACTOR has not elected to notify the

GOVERNMENT that it will not enter into the Second Sub-Period, in

accordance with and subject to Article 6.4.



(b)



Subject to Article 10.4(a), the CONTRACTOR shall be required to meet its

Minimum Exploration Obligations for the applicable Sub-Period, even if this

entails exceeding the Minimum Financial Commitment for such Sub-Period.

If the CONTRACTOR has satisfied its Minimum Exploration Obligations

without having spent the total Minimum Financial Commitment for such SubPeriod, it shall be deemed to have satisfied its Minimum Exploration

Obligations for such Sub-Period.



(c)



Each Exploration Well shall be drilled to the depth agreed by the Management

Committee unless:

(i)



the formation is encountered at a lesser depth than originally

anticipated;



(ii)



basement is encountered at a lesser depth than originally anticipated;



(iii)



in the CONTRACTOR’s sole opinion continued drilling of the

relevant Exploration Well presents a hazard due to the presence of

abnormal or unforeseen conditions;



(iv)



insurmountable technical problems are encountered rendering it

impractical to continue drilling with standard equipment; or



(v)



petroleum formations are encountered whose penetration requires

laying protective casing that does not enable the depth agreed by the

Management Committee to be reached.



If drilling is stopped for any of the foregoing reasons, the Exploration Well

shall be deemed to have been drilled to the depth agreed by the Management

Committee and the CONTRACTOR shall be deemed to have satisfied its

Minimum Exploration Obligations in respect of the Exploration Well.

(d)



Any geological or geophysical work carried out or any seismic data acquired,

processed or interpreted or any Exploration Well drilled or any other work

performed in excess of the Minimum Exploration Obligations and/or any

amounts spent in excess of the total Minimum Financial Commitment in any

given Sub-Period, shall be carried forward to the next Sub-Period or any

extension period and shall be taken into account to satisfy the Minimum

Exploration Obligations and/or the total Minimum Financial Commitment for

such subsequent Sub-Period or extension period.



(e)



For the avoidance of doubt, if: (i) in the First Sub-Period, the

CONTRACTOR performs any of the Minimum Exploration Obligations

prescribed for the Second Sub-Period in Article 10.3; and (ii) the



CONTRACTOR has not elected to notify the GOVERNMENT that it will

not enter into the Second Sub-Period (in accordance with and subject to

Article 6.4), the performance of such Minimum Exploration Obligations shall

be deemed to satisfy the same Minimum Exploration Obligations for the

Second Sub-Period.



ARTICLE 11 – EXPLORATION WORK PROGRAMS AND BUDGETS

11.1



Within forty-five (45) days following the Effective Date, the CONTRACTOR shall

prepare and submit to the Management Committee a proposed work program and

budget relating to Exploration Operations (the “Exploration Work Program and

Budget”) for the remainder of the Calendar Year. Thereafter, no later than 1 October

in each Calendar Year, the CONTRACTOR shall submit a proposed Exploration

Work Program and Budget to the Management Committee for the following Calendar

Year.



11.2



Each Exploration Work Program and Budget shall include details of, but not be

limited to, the following:

(a)



work to be undertaken;



(b)



materials, goods and equipment to be acquired;



(c)



cost estimate of services to be provided, including services by third parties

and/or Affiliated Companies of any CONTRACTOR Entity; and



(d)



estimated expenditures, broken down by cost centre in accordance with the

Accounting Procedure.



11.3



The Management Committee shall meet within sixty (60) days following its receipt of

CONTRACTOR’s proposal to examine and approve the Exploration Work Program

and Budget. For the purposes of permitting the CONTRACTOR to commence

operations as soon as possible after the Effective Date, the drilling of the Mil Qasim

well, to a depth of 2400m to evaluate the Upper Fars formation, is deemed to have

been approved by the Management Committee and is approved by the



GOVERNMENT.

11.4



If the GOVERNMENT requests any modification to the Exploration Work Program

and Budget, the Management Committee shall meet to discuss the Exploration Work

Program and Budget and proposed modifications thereto within the sixty (60) day

period referred to in Article 11.3.



The CONTRACTOR shall communicate its



comments on any such requested modifications to the GOVERNMENT at the

meeting of the Management Committee or in writing prior to such meeting.

11.5



The CONTRACTOR shall be authorised to make expenditures not budgeted in an

approved Exploration Work Program and Budget provided that the aggregate amount

of such expenditures shall not exceed ten per cent (10%) of the approved Exploration

Work Program and Budget in any Calendar Year and provided further that such

excess expenditures shall be reported as soon as is reasonably practicable to the

Management Committee. For the avoidance of doubt all excess expenditures shall be

recoverable by the CONTRACTOR in accordance with the provisions of Articles 1

and 25, provided that any excess expenditures above the ten per cent (10%) limit shall

only be recoverable with the unanimous approval of the Management Committee.



11.6



In cases of emergency, the CONTRACTOR may incur such additional expenditures

as it deems necessary to protect life, environment or property. Such additional

expenditures shall be reported promptly to the Management Committee. For the

avoidance of doubt, such additional expenditure shall be considered Petroleum Costs

and shall be recoverable by the CONTRACTOR in accordance with the provisions

of Articles 1 and 25.



ARTICLE 12 – DISCOVERY AND DEVELOPMENT

12.1



If the drilling of an Exploration Well results in a Discovery, the CONTRACTOR

shall notify the GOVERNMENT within forty-eight (48) hours of completing tests

confirming the presumed existence of such Discovery or within such longer period as

the CONTRACTOR reasonably requires to determine whether or not there is a

Discovery. Within thirty (30) days following notification of the said Discovery, the

CONTRACTOR shall present to the Management Committee all technical data then



available together with its opinion on the commercial potential of the said Discovery

(the “Discovery Report”). The CONTRACTOR shall provide in a timely manner

such other information relating to the Discovery as the GOVERNMENT may

reasonably request.

Appraisal Work Program and Budget

12.2



If, pursuant to Article 12.1, the CONTRACTOR considers that the Discovery has

commercial potential it shall, within ninety (90) days following notification to the

GOVERNMENT of the Discovery, submit an appraisal program in respect of the

Discovery (the “Appraisal Work Program and Budget”) to the Management

Committee. The Management Committee shall examine the Appraisal Work Program

and Budget within thirty (30) days of its receipt. If the GOVERNMENT requests any

modification to the Appraisal Work Program and Budget, the Management

Committee shall meet to discuss the Appraisal Work Program and Budget and the

requested modifications thereto within sixty (60) days from its receipt of the proposed

Appraisal Work Program and Budget. The CONTRACTOR shall communicate its

comments on any such requested modifications to the GOVERNMENT at the

meeting of the Management Committee or in writing prior to such meeting.

The Appraisal Work Program and Budget shall include the following:

(a)



an appraisal works program and budget, in accordance with prudent

international petroleum industry practice;



(b)



an estimated time-frame for completion of appraisal works; and



(c)



the delimitation of the area to be evaluated, the surface of which shall not

exceed twice (2 x) the surface of the geological structure or prospect to be

appraised (the “Appraisal Area”).



12.3



If, following a Discovery, a rig acceptable to the CONTRACTOR is available to drill

a well, the CONTRACTOR may drill any additional Exploration Well or any

Appraisal Well deemed necessary by the CONTRACTOR before or during the

Management Committee’s review of the Discovery Report provided in accordance

with Article 12.1 or its review of the Appraisal Work Program and Budget.



The CONTRACTOR shall be authorised to incur expenditures not budgeted in an

approved Appraisal Work Program and Budget provided that the aggregate amount of

such expenditures shall not exceed ten per cent (10%) of the approved Appraisal

Work Program and Budget in any Calendar Year and provided further that such

excess expenditures shall be reported as soon as is reasonably practicable to the

Management Committee. For the avoidance of doubt, all excess expenditures shall be

recoverable by the CONTRACTOR in accordance with the provisions of Articles 1

and 25, provided that any excess expenditure above the ten per cent (10%) limit shall

only be recoverable with the unanimous approval of the Management Committee.



Appraisal Report

12.4



The CONTRACTOR shall submit a detailed report relating to the Discovery (the

“Appraisal Report”) to the Management Committee within ninety (90) days

following completion of the Appraisal Work Program and Budget.



12.5



The Appraisal Report shall include the following:

(a)



geological conditions;



(b)



physical properties of any liquids;



(c)



sulphur, sediment and water content;



(d)



type of substances obtained;



(e)



Natural Gas composition;



(f)



production forecast per well; and



(g)



a preliminary estimate of recoverable reserves.



Declaration of Commercial Discovery

12.6



Together with its Appraisal Report, the CONTRACTOR shall submit a written

statement to the Management Committee specifying that:



(a)



the CONTRACTOR has determined that the Discovery is a Commercial

Discovery;



(b)



the CONTRACTOR has determined that the Discovery is not a Commercial

Discovery;



(c)



the CONTRACTOR has determined that the Discovery is a significant

Discovery, which may become a Commercial Discovery subject to additional

exploration and/or appraisal works within or outside of the Appraisal Area; or



(d)



the CONTRACTOR has determined that the Discovery is a significant

Discovery of Non-Associated Natural Gas, which may become a Commercial

Discovery subject to Gas Marketing Operations, in accordance with

Article 14.5.



12.7



In case the statement of the CONTRACTOR corresponds to Article 12.6(c), the

CONTRACTOR shall submit a Work Program and Budget to the Management

Committee within thirty (30) days following such statement. Any well drilled to

evaluate the said significant Discovery shall be considered an Exploration Well.



Development Plan

12.8



If the Discovery has been declared a Commercial Discovery by the CONTRACTOR

pursuant to Article 12.6(a) or Article 14.5(a), the CONTRACTOR shall submit a

proposed Development Plan to the Management Committee within one hundred

eighty (180) days following such declaration. The Development Plan shall be in

accordance with prudent international petroleum industry practice. Except with the

consent of the GOVERNMENT, such Development Plan shall include details of the

following as applicable:

(a)



the delimitation of the Production Area, taking into account the results of the

Appraisal Report regarding the importance of the Petroleum Field within the

Appraisal Area;



(b)



drilling and completion of Development Wells;



(c)



drilling and completion of water or Natural Gas injection wells;



(d)



laying of gathering pipelines;



(e)



installation of separators, tanks, pumps and any other associated production

and injection facilities for the production;



(f)



treatment and transportation of Petroleum to the processing and storage

facilities onshore or offshore;



(g)



laying of export pipelines inside or outside the Contract Area to the storage

facility or Delivery Point;



(h)



construction of storage facilities for Petroleum;



(i)



plan for the utilisation of Associated Natural Gas;



(j)



training commitment in accordance with Article 23;



(k)



a preliminary decommissioning and site restoration plan;



(l)



all contracts and arrangements made or to be made by the CONTRACTOR

for the sale of Natural Gas;



(m)



to the extent available, all contracts and arrangements made or to be made by

Persons in respect of that Natural Gas downstream of the point at which it is to

be sold by the CONTRACTOR and which are relevant to the price at which

(and other terms on which) it is to be sold by the CONTRACTOR or are

otherwise relevant to the determination of the value of it for the purposes of

this Contract, but not beyond the point at which it is first disposed of in an

Arm’s Length Sale;



(n)



each CONTRACTOR Entity’s plans for financing its interest, if any; and



(o)



any other operations not expressly provided for in this Contract but reasonably

necessary for Development Operations, Production Operations and delivery of

Petroleum produced, in accordance with prudent international petroleum

industry practice.



12.9



The Management Committee shall use its best efforts to approve the Development

Plan within sixty (60) days after its receipt of such plan. The Development Period for

each Commercial Discovery within a Development Plan shall be extended for the

number of days in excess of such sixty (60) day period that it takes for the

Management Committee to approve the Development Plan. The Development Plan

shall be considered approved by the GOVERNMENT if the GOVERNMENT,

through its representatives on the Management Committee, indicates its approval in

writing.



12.10 If the GOVERNMENT requests any modifications to the Development Plan, then

the Management Committee shall meet within sixty (60) days of receipt by the

CONTRACTOR of the GOVERNMENT’s written notification of requested

modifications accompanied by all the documents justifying such request, and shall

discuss such request. The CONTRACTOR shall communicate its comments on any

such requested modifications to the GOVERNMENT at such meeting or in writing

prior to such meeting. Any modification approved by the Management Committee at

such meeting or within a further period of thirty (30) days from the date of such

meeting shall be incorporated into the Development Plan which shall then be deemed

approved and adopted.

12.11 If the CONTRACTOR makes several Commercial Discoveries within the Contract

Area each such Commercial Discovery will have a separate Production Area. The

CONTRACTOR shall be entitled to develop and to produce each Commercial

Discovery and the GOVERNMENT shall provide the appropriate Permits covering

each Production Area.



ARTICLE 13 - DEVELOPMENT AND PRODUCTION WORK PROGRAMS AND

BUDGET

13.1



Upon the approval of the Development Plan by the Management Committee, the

CONTRACTOR shall start the Development Operations for the Commercial

Discovery in accordance with the Development Plan and prudent international

petroleum industry practice.



Approval of Development Works Program and Budget

13.2



Within ninety (90) days following approval of the Development Plan by the

Management Committee, the CONTRACTOR shall prepare and submit to the

Management Committee a proposed work program and budget for Development

Operations (the “Development Work Program and Budget”) to be carried out in the

Production Area for the duration of the Development Operations. Thereafter, no later

than 1 October in each Calendar Year, the CONTRACTOR shall submit to the

Management Committee updates in respect of its Development Work Program and

Budget.



To enable the Management Committee to forecast expenditures, each



Development Work Program and Budget shall include details of the following:

(a)



works to be carried out;



(b)



material and equipment to be acquired by main categories;



(c)



type of services to be provided, distinguishing between third parties and

Affiliated Companies of any CONTRACTOR Entity; and



(d)

13.3



categories of general and administrative expenditure.



If any modification to the Development Work Program and Budget is requested by

the GOVERNMENT, the Management Committee shall meet to discuss the

Development Work Program and Budget and proposed modifications thereto within

sixty (60) days from its receipt of the proposed Development Work Program and

Budget. The CONTRACTOR shall communicate its comments on any such

requested modifications to the GOVERNMENT at the meeting of the Management

Committee or in writing prior to such meeting.



13.4



The CONTRACTOR shall be authorised to incur expenditures not budgeted in an

approved Development Work Program and Budget provided that the aggregate

amount of such expenditures shall not exceed ten per cent (10%) of the approved

Development Work Program and Budget in any Calendar Year and provided further

that such excess expenditures shall be reported as soon as is reasonably practicable to

the Management Committee. For the avoidance of doubt, all excess expenditures

shall be recoverable by the CONTRACTOR in accordance with the provisions of



Articles 1 and 25, provided that any excess expenditure above the ten per cent (10%)

limit shall only be recoverable with the unanimous approval of the Management

Committee.

13.5



In cases of emergency, the CONTRACTOR may incur such additional expenditures

as it deems necessary to protect life, environment or property. Such additional

expenditures shall be reported promptly to the Management Committee. For the

avoidance of doubt, such additional expenditure shall be considered Petroleum Costs

and shall be recoverable by the CONTRACTOR in accordance with the provisions

of Articles 1 and 25.



Approval of Annual Production Works Programs and Budget

13.6



No later than 1 October of the Calendar Year preceding the estimated commencement

of production pursuant to an approved Development Plan and thereafter no later than

1 October in each Calendar Year, the CONTRACTOR shall prepare and submit to

the Management Committee a proposed work program and budget for Production

Operations (the “Production Work Program and Budget”) for the following

Calendar Year. To enable the Management Committee to forecast expenditures, the

Production Work Program and Budget shall include details of the following:

(a)



works to be carried out;



(b)



material and equipment to be acquired by main categories;



(c)



type of services to be provided, distinguishing between third parties and

Affiliated Companies of any CONTRACTOR Entity; and



(d)

13.7



categories of general and administrative expenditure.



If any modification to the Production Work Program and Budget is requested by the

GOVERNMENT, the Management Committee shall meet to discuss the Production

Work Program and Budget and proposed modifications thereto within sixty (60) days

from its receipt of the proposed Production Work Program and Budget. The

CONTRACTOR shall communicate its comments on any such requested



modifications to the GOVERNMENT at the meeting of the Management Committee

or in writing prior to such meeting.

13.8



The CONTRACTOR shall be authorised to incur expenditures not budgeted in an

approved Production Work Program and Budget provided that the aggregate amount

of such expenditures shall not exceed ten per cent (10%) of the approved Production

Work Program and Budget in any Calendar Year and provided further that such

excess expenditures shall be reported as soon as reasonably practicable to the

Management Committee. For the avoidance of doubt, all excess expenditures shall be

recoverable by the CONTRACTOR in accordance with the provisions of Articles 1

and 25, provided that any excess expenditure above the ten per cent (10%) limit shall

only be recoverable with the unanimous approval of the Management Committee.



13.9



In cases of emergency, the CONTRACTOR may incur such additional expenditure

as it deems necessary to protect life, environment or property. Such additional

expenditures shall be reported promptly to the Management Committee. For the

avoidance of doubt, such additional expenditure shall be considered Petroleum Costs

and shall be recoverable by the CONTRACTOR in accordance with the provisions

of Articles 1 and 25.



13.10 After the commencement of Commercial Production the CONTRACTOR shall pay

to the GOVERNMENT, in arrears, an annual surface rental for the Production Area,

of one hundred Dollars (US$100) per square kilometre per Contract Year

(“Production Rental”). Such Production Rental shall be considered as a Petroleum

Cost and shall be recoverable by the CONTRACTOR in accordance with the

provisions of Articles 1 and 25.



ARTICLE 14 – NATURAL GAS

Use for the Petroleum Operations

14.1



To take account of specific conditions relating to Natural Gas and to promote its

development in the Kurdistan Region, the GOVERNMENT will grant specific

benefits to the CONTRACTOR on principles materially similar to those contained in

this Contract, including, consistent with the Kurdistan Region Oil and Gas Law, more



generous provisions in respect of the recovery of Petroleum Costs and the sharing of

Profit Petroleum than in respect of Crude Oil.

14.2



The CONTRACTOR may freely use any Natural Gas required for the Petroleum

Operations. If technically and economically justified, the CONTRACTOR shall in

priority use any Natural Gas for the purpose of enhancing recovery of Crude Oil in

accordance with prudent international petroleum industry practice as follows.



Associated Natural Gas

14.3



Any excess Associated Natural Gas produced that is neither used in the Petroleum

Operations nor developed and sold by the CONTRACTOR shall, upon the

GOVERNMENT’s written request, be transferred at the first practicable delivery

point as agreed between the Parties, free of charge to the GOVERNMENT. In such

case, the GOVERNMENT shall be solely responsible for collecting, treating,

compressing and transporting such Natural Gas from such agreed delivery point and

shall be solely liable for any additional direct and indirect costs associated therewith.

The construction and operation of required facilities as well as the offtake of such

excess Associated Natural Gas by the GOVERNMENT shall occur in accordance

with prudent international petroleum industry practice and shall not interfere with the

production, lifting and transportation of the Crude Oil by the CONTRACTOR. For

the avoidance of doubt, all expenditure incurred by the CONTRACTOR up to such

agreed delivery point shall be considered Petroleum Costs and shall be recoverable by

the CONTRACTOR in accordance with the provisions of Articles 1 and 25.

In the event the GOVERNMENT finds a market for Associated Natural Gas, it shall

promptly give written notice to the CONTRACTOR, and the CONTRACTOR may

elect to participate in supplying such Associated Natural Gas within ninety (90) days

following notification thereof by the GOVERNMENT. If the CONTRACTOR

elects to participate in supplying Associated Natural Gas to such market, all

expenditures associated with any necessary facilities shall be paid for by the

CONTRACTOR. For the avoidance of doubt, such expenditure incurred shall be

considered Petroleum Costs and shall be recoverable by the CONTRACTOR in

accordance with the provisions of Articles 1 and 25.



Non Associated Natural Gas

14.4



Until an approved Natural Gas sales contract is executed in respect of all volumes of

Natural Gas expected to be produced, the CONTRACTOR shall be entitled during

the Exploration Period and the Development Period to carry out Gas Marketing

Operations.



14.5



If, pursuant to Article 12.6(d), the CONTRACTOR has determined that the

Discovery is a significant Discovery of Non-Associated Natural Gas, which may

become a Commercial Discovery subject to Gas Marketing Operations, it shall carry

out Gas Marketing Operations, at the end of which it shall submit a written statement

to the Management Committee specifying that:

(a)



the CONTRACTOR has determined that the Discovery is a Commercial

Discovery; or



(b)



the CONTRACTOR has determined that the Discovery is not a Commercial

Discovery.



14.6



For the purpose of this Contract, “Gas Marketing Operations” means any activity

under this Contract relating to the marketing of Non-Associated Natural Gas,

including any evaluation to find a commercial market for such Non-Associated

Natural Gas and/or to find a commercially viable technical means of extraction of

such Non-Associated Natural Gas and may include activities related to evaluating the

quantities of Non-Associated Natural Gas to be sold, its quality, the geographic

location of potential markets to be supplied as well as evaluating the costs of

production, transportation and distribution of the Non-Associated Natural Gas from

the Delivery Point to the relevant market.



14.7



All costs and expenditure incurred by the CONTRACTOR in the performance of the

activities in relation to the Gas Marketing Operations shall be considered Petroleum

Costs.



14.8



No later than 1 October of the Calendar Year preceding the Calendar Year in which

any Gas Marketing Operations are due to occur, the CONTRACTOR shall prepare

and submit to the Management Committee its Gas Marketing Work Program and



Budget for the following Calendar Year. To enable the Management Committee to

forecast expenditures, the Gas Marketing Work Program and Budget shall include the

following:

(a)



works to be carried out;



(b)



type of services to be provided, distinguishing between third parties and

Affiliated companies of any CONTRACTOR Entity; and



(c)



categories of general and administrative expenditure.



If any modification to the Gas Marketing Work Program and Budget is requested by

the GOVERNMENT, the Management Committee shall meet to discuss the Gas

Marketing Work Program and Budget and proposed modifications thereto within

sixty (60) days from its receipt of the proposed Gas Marketing Work Program and

Budget. The CONTRACTOR shall communicate its comments on any such

requested modifications to the GOVERNMENT at the meeting of the Management

Committee or in writing prior to such meeting.

14.9



The CONTRACTOR shall be authorised to incur expenditures not budgeted in an

approved Gas Marketing Work Program and Budget provided that the aggregate

amount of such expenditure shall not exceed ten per cent (10%) of the approved Gas

Marketing Work Program and Budget in any Calendar Year and provided further that

such excess expenditures shall be reported as soon as reasonably practicable to the

Management Committee. For the avoidance of doubt, all excess expenditures shall be

recoverable by the CONTRACTOR in accordance with the provisions of Articles 1

and 25, provided that any excess expenditure above the ten per cent (10%) limit shall

only be recoverable with the unanimous approval of the Management Committee.



14.10 If any Non-Associated Natural Gas is discovered within the Contract Area, and the

CONTRACTOR reasonably considers that the Non-Associated Natural Gas

Discovery will only be a Commercial Discovery if certain terms of this Contract are

amended, it shall be entitled to request amendments to this Contract, with its reasons.

The GOVERNMENT shall in good faith give reasonable consideration to the

CONTRACTOR’s proposed amendment and reasons and the Parties shall in good



faith attempt to agree on the necessary amendments to the Contract. If the Parties are

unable to agree on such amendments, and the Exploration Period expires without the

CONTRACTOR having declared such Discovery to be a Commercial Discovery in

accordance with Article 12.6(a) or Article 14.5(a), and subsequently within a period

of eight (8) years from the end of such Exploration Period, the GOVERNMENT

reaches agreement with any third party to develop such Discovery (the “Gas

Development”), then the following provisions shall apply:

(a)



either before or upon agreement in relation to the Gas Development having

been reached (and whether or not such agreement is recorded in a fully termed

production sharing and/or operating or other like agreement), but before such

agreement is signed (the “Proposed Contract”) (subject only to the rights of

each CONTRACTOR Entity to pre-empt such Proposed Contract pursuant to

Article 14.10(b) and such conditions as may be applicable), the

GOVERNMENT shall, as soon as reasonably practicable after the occurrence

of such circumstances, serve on each of the CONTRACTOR Entities, a

notice to that effect and shall with such notice provide such information and

main terms of such agreement as the CONTRACTOR Entities may

reasonably request to determine if they will exercise their rights (the “Agreed

Terms”), including:

(i)



the identity of such third party;



(ii)



the effective date of the Proposed Contract;



(iii)



the applicable commercial terms, including bonuses, royalties, cost

recovery, profit sharing, taxation and any other similar terms; and



(iv)



all and any material conditions to which the Proposed Contract is

subject.



(b)



Upon a request from any CONTRACTOR Entity, the GOVERNMENT will

provide all the CONTRACTOR Entities with such further information and

terms as may be reasonably requested by any CONTRACTOR Entity.

Within one hundred and eighty days (180) days after receipt of a notice and



any further information under Article 14.10(a) in relation to a Proposed

Contract each of the CONTRACTOR Entities shall elect either:

(i)



to enter into the Proposed Contract on the same or substantially similar

terms to the Agreed Terms, with the right to cost recover all Petroleum

Costs incurred under this Contract against all Petroleum revenues

received under the Proposed Contract, up to any cost recovery limits

set out therein; or



(ii)



to waive the aforesaid right of pre-emption in relation to the Proposed

Contract;



and shall serve notice accordingly upon the GOVERNMENT and all the

CONTRACTOR Entities and in default of receipt by the GOVERNMENT

of any such notice within such period of one hundred and eighty (180) days

such CONTRACTOR Entity shall be deemed conclusively to have served a

notice electing to waive its aforesaid right of pre-emption in relation to the

Proposed Contract.

(c)



In the event that more than one of the CONTRACTOR Entities exercises its

rights under Article 14.10(b)(i) in relation to the Proposed Contract, then the

GOVERNMENT shall transfer or grant each such CONTRACTOR Entity

an interest in the Proposed Contract upon the Agreed Terms (in accordance

with Article 14.10(b)(i)) in the proportions in which their respective

percentage interests bear to the aggregate of their respective percentage

interests under the relevant Joint Operating Agreement (as it applied at the end

of the Exploration Period) or in such other proportions as such

CONTRACTOR Entities shall agree between them.



(d)



In the event that one of the CONTRACTOR Entities exercises its rights

under Article 14.10(b)(i) in relation to the Proposed Contract then the

GOVERNMENT shall transfer or grant the whole of the interest in the

Proposed Contract upon the Agreed Terms (in accordance with 14.10(b)(i)) to

such CONTRACTOR Entity.



(e)



In the event that none of the CONTRACTOR Entities exercises its rights

under Article 14.10(b)(i) then the GOVERNMENT may enter into the

Proposed Contract on terms no more favourable to its counterparty than the

Agreed Terms and, in such case, the aforesaid rights of pre-emption shall

thereupon cease to apply in relation to the Proposed Contract.



14.11 If the pre-emption rights in Article 14.10 are not exercised and the GOVERNMENT

enters into the Proposed Contract with the third party concerned, the

GOVERNMENT will use its best endeavours to avoid any effect which may hamper

the Petroleum Operations of the CONTRACTOR while producing Petroleum.



Flaring

14.12 Flaring of Natural Gas in the course of activities provided for under this Contract, is

prohibited except (i) short-term flaring up to twelve (12) Months necessary for testing

or other operational reasons in accordance with prudent international petroleum

industry practice (which shall include the flaring of Associated Natural Gas to the

extent the CONTRACTOR considers that re-injecting Associated Natural Gas is not

justified technically and economically and provided the GOVERNMENT decides

not to take such Associated Natural Gas), or (ii) with the prior authorisation of the

GOVERNMENT, such authorisation not to be unreasonably withheld or delayed.

The CONTRACTOR shall submit such request to the GOVERNMENT, which shall

include an evaluation of reasonable alternatives to flaring that have been considered

along with information on the amount and quality of Natural Gas involved and the

duration of the requested flaring.



ARTICLE 15 – ACCOUNTING AND AUDITS

15.1



The CONTRACTOR shall keep in its offices in the Kurdistan Region copies of all

books and accounts of all revenues relating to the Petroleum Operations and all

Petroleum Costs (the “Accounts”), except during the Exploration Period, when the

CONTRACTOR shall be entitled to keep the Accounts at its headquarters Abroad.

The Accounts shall reflect in detail expenditure incurred as a function of the



quantities and value of Petroleum produced, and shall be kept for a period of five (5)

years. All Accounts which are made available to the GOVERNMENT in accordance

with the provisions of this Contract shall be prepared in the English language. The

Accounts shall be kept in accordance with prudent international petroleum industry

practice and in accordance with the provisions of the Accounting Procedure. The

Accounts shall be kept in Dollars, which shall be the reference currency for the

purposes of this Contract.

15.2



Within ninety (90) days following the end of each Calendar Year, the

CONTRACTOR shall submit to the GOVERNMENT a summary statement of all

Petroleum Costs incurred during the said Calendar Year. The summary statement

shall also include a profit calculation pursuant to the provisions of Article 26.



15.3



The GOVERNMENT shall have the right:

(a)



to request an audit of the Accounts with respect to each Calendar Year within

a period of five (5) Calendar Years following the end of such Calendar Year

(the “Audit Request Period”); and



(b)



to retain an auditor of international standing familiar with international

petroleum industry accounting practice to undertake or assist the

GOVERNMENT to undertake the audit.



Notwithstanding paragraphs (a) and (b) of this Article 15.3, the GOVERNMENT

shall have the right to audit the Accounts with respect to each Calendar Year at any

time in the case of manifest error or fraud. Stipulated Sunk Block Costs are not

subject to audit.

15.4



The reasonable cost of retaining an auditor pursuant to Article 15.3 shall be borne by

the CONTRACTOR and treated as a Petroleum Cost for the purpose of cost recovery

under Articles 1 and 25.



15.5



During the Audit Request Period for any Calendar Year but not thereafter, the

GOVERNMENT, acting reasonably and in accordance with prudent international

petroleum industry practice, may request in writing all reasonably available

information and justifications for its audit of Petroleum Costs.



15.6



Should the GOVERNMENT consider, on the basis of data and information available,

that the CONTRACTOR made a material mistake or there is any irregularity in

respect of the Accounts and considers that any corrections, adjustments or

amendments should be made, the GOVERNMENT shall make any audit exceptions

in writing and notified to the CONTRACTOR within six (6) Months of the date of

request referred to in Article 15.3, and failure to give such written exception within

such time shall be deemed to be an acknowledgement of the correctness of the

CONTRACTOR’s Accounts.



15.7



In respect of any audit exception made by the GOVERNMENT in accordance with

Article 15.6, the CONTRACTOR shall then have sixty (60) days to make necessary

corrections, adjustments or amendments or to present its comments in writing or

request a meeting with the GOVERNMENT. The GOVERNMENT shall within

thirty (30) days of the CONTRACTOR’s response, notify the CONTRACTOR in

writing of its position on the corrections, adjustments, amendments or comments. If

thereafter there still exists a disagreement between the GOVERNMENT and the

CONTRACTOR, the dispute will be settled in accordance with Article 15.9.



15.8



In addition to the annual statements of Petroleum Costs as provided in Article 15.2,

the CONTRACTOR shall provide the GOVERNMENT with such production

statements and reports, as required pursuant to Article 16.3.



15.9



Any dispute between the Parties under this Article 15 that cannot be settled amicably

within sixty (60) days of the GOVERNMENT’s final notice under Article 15.7, may

be submitted to an expert on the request of either the GOVERNMENT or the

CONTRACTOR in accordance with the provisions of Article 42.2. Notwithstanding

the provisions of Article 42, in this specific instance the decision of the expert shall

not necessarily be final and either Party may decide to submit the matter to arbitration

in accordance with the provisions of Article 42.1.



ARTICLE 16 – CONTRACTOR’S RIGHTS AND OBLIGATIONS

Permanent Representative



16.1



If not done already, within ninety (90) days following the Effective Date, each

CONTRACTOR Entity shall open an office and appoint a permanent representative

in the Kurdistan Region, who may be contacted by the GOVERNMENT with regard

to any matter relating to this Contract and will be entitled to receive any

correspondence addressed to such CONTRACTOR Entity.



Conduct of Petroleum Operations

16.2



The CONTRACTOR shall carry out all Petroleum Operations in accordance with the

provisions of this Contract, prudent international petroleum industry practice and

applicable Kurdistan Region Law.

The CONTRACTOR shall be responsible for the conduct, management, control and

administration of Petroleum Operations and shall be entitled to conduct Petroleum

Operations in accordance with the provisions of this Contract. In conducting its

Petroleum Operations, the CONTRACTOR shall have the right to use any Affiliate

of each CONTRACTOR Entity, its and their Subcontractors, and the employees,

consultants, and agents of each of the foregoing. The CONTRACTOR and all such

Persons shall at all times have free access to the Contract Area and any Production

Areas for the purpose of carrying out Petroleum Operations.



Information and Reports

16.3



The CONTRACTOR shall provide the GOVERNMENT with periodic data and

activity reports relating to Petroleum Operations. Said reports shall include details of

the following:

(a)



information and data regarding all Exploration Operations, Development

Operations and Production Operations (as applicable) performed during the

Calendar Year, including any quantities of Petroleum produced and sold;



(b)



data and information regarding any transportation facilities built and operated

by the CONTRACTOR;



(c)



a statement specifying the number of personnel, their title, their nationality as

well as a report on any medical services and equipment made available to such

personnel; and



(d)



a descriptive statement of all capital assets acquired for the Petroleum

Operations, indicating the date and price or cost of their acquisition.



Requirement for Petroleum Operations

16.4



The CONTRACTOR may freely use any Petroleum produced within the Contract

Area for the Petroleum Operations.



Supervision by the GOVERNMENT

16.5



The CONTRACTOR shall at all times provide reasonable assistance as may

reasonably be requested by the GOVERNMENT during its review and verification

of records and of any other information relating to Petroleum Operations at the

offices, worksites or any other facilities of the CONTRACTOR.

Upon giving reasonable prior notice to the CONTRACTOR, the GOVERNMENT

may send a reasonable number of representatives to the work-sites or any other

facilities of the CONTRACTOR in the Kurdistan Region to perform such reviews

and verifications. The representatives of the GOVERNMENT shall at all times

comply with any safety regulations imposed by the CONTRACTOR and such

reviews and verifications shall not hinder the smooth progress of the Petroleum

Operations.



Access to Facilities

16.6



For the performance of the Petroleum Operations, the CONTRACTOR, any Affiliate

of each CONTRACTOR Entity, its and their Subcontractors and the employees,

consultants and agents of each of the foregoing shall at all times be granted free

access to the Contract Area and to any facilities for the Petroleum Operations located

within or outside of the Contract Area or within or outside the Production Area, for

the purpose of carrying out the Petroleum Operations.



Use of Facilities



16.7



Upon notice from the GOVERNMENT, the CONTRACTOR shall make available

to a reasonable number of representatives of the GOVERNMENT those of the

CONTRACTOR’s facilities which are necessary to enable such representatives to

perform their tasks related to this Contract and the Kurdistan Region Oil and Gas Law

including, in case of works to be performed on work sites, transportation,

accommodation and board, under the same conditions as those provided by the

CONTRACTOR for its own personnel.

Notwithstanding Article 16.8, the GOVERNMENT shall indemnify and hold

harmless each CONTRACTOR Entity against all losses, damages and liability

arising under any claim, demand, action or proceeding brought or initiated against any

CONTRACTOR Entity by any representative of the GOVERNMENT in connection

with the access to or use of the facilities by such representatives.



Loss or Damage

16.8



The CONTRACTOR shall be responsible for any loss or damage caused to third

parties by its or its Subcontractors personnel solely and directly resulting from their

negligence, errors or omissions in accordance with applicable Kurdistan Region Law.



Intellectual Property Rights

16.9



In its Petroleum Operations, the CONTRACTOR shall respect any intellectual

property belonging to third parties.



Litigation

16.10 The CONTRACTOR shall as soon as reasonably practicable inform the

GOVERNMENT of any material litigation relating to this Contract.

Safety

16.11 The CONTRACTOR shall implement a health, safety and environment program and

take necessary measures to ensure hygiene, health and safety of its personnel carrying

out Petroleum Operations in accordance with prudent international petroleum industry

practice.



Said measures shall include the following:

(a)



supplying first aid and safety equipment for each work area and maintaining a

healthy environment for personnel;



(b)



reporting to the GOVERNMENT within seventy-two (72) hours of such

accident, any accident where personnel has been injured while engaged in

Petroleum Operations and resulting in such personnel being unable to return to

work;



(c)



implementing a permit-to-work procedure around hazardous equipment and

installations;



(d)



providing safe storage areas for explosives, detonators and any other

dangerous products used in the operations;



(e)



supplying fire-extinguishing equipment in each work area;



(f)



for the purpose of taking control of any blow out or fire which could damage

the environment or Petroleum Field, in accordance with prudent international

petroleum industry practice; and



(g)



for the purpose of preventing any involuntary injection of fluids in petroleum

formations and production of Crude Oil and Natural Gas at rates that do not

conform to prudent international petroleum industry practice.



Production Rates

16.12 Subject to Article 43.2, in the event the production rate of the individual wells and

Reservoir of a Petroleum Field is to be set below the Maximum Efficient Rate

(“MER”) for the Reservoir, as provided for in the Development Plan, as a

consequence of a decision by the GOVERNMENT or any federal or international

regulatory body, the GOVERNMENT undertakes to allocate any such reduction

fairly and equitably among the various operators (including the GOVERNMENT)

then producing in the Kurdistan Region, pro rata their respective production rates. In

such event, the GOVERNMENT shall grant an extension of the Development Period

of any Production Area so affected for a reasonable period of time in order to produce



the Petroleum which would otherwise have already been produced, had the MER for

the individual wells and Reservoir of the Petroleum Field been maintained.



Legal Status

16.13 The respective rights, duties, obligations and liabilities of the CONTRACTOR and

the GOVERNMENT under this Contract are to be understood as being separate and

individual and not joint and several.



The Parties agree that this Contract shall not



create and shall not be deemed to have created a partnership or other form of

association between them.



Lifting

16.14 The



GOVERNMENT



and, subject



to



Articles



32.6.6(a)



and



(b),



each



CONTRACTOR Entity, shall have the right and the obligation to take in kind and

separately sell or otherwise dispose of their respective shares of Petroleum in

accordance with Articles 25, 26 and 27. Upon approval of the Development Plan, the

Parties shall meet as soon as practicable to reach a detailed agreement governing the

lifting of Petroleum by each such CONTRACTOR Entity. Such lifting agreement

shall include the following:

(a)



the obligation of the GOVERNMENT and each CONTRACTOR Entity to

lift, regularly throughout each Calendar Year, their share of Petroleum

produced from the Production Area;



(b)



notification procedures by the Operator to the GOVERNMENT and each

CONTRACTOR Entity regarding entitlements and availability of Petroleum

for lifting by each Party during each lifting period and nominations by each

Party; and



(c)



the right of the Parties to lift any Available Petroleum not scheduled for lifting

and/or not lifted by the other Party during each such lifting period.



Kurdistan Region Consumption Requirements

16.15 The CONTRACTOR Entities shall sell and transfer to the GOVERNMENT, upon

written request of the GOVERNMENT, any amounts of Crude Oil that the

GOVERNMENT shall deem necessary to meet Kurdistan Region internal

consumption requirements. The sales price of such Crude Oil shall be the

International



Market



Price.



The



GOVERNMENT



shall



provide



the



CONTRACTOR Entities with not less than six (6) Months' advance written notice of

its intention to buy such Crude Oil.

Payments shall be made in Dollars and otherwise on terms consistent with prudent

international petroleum industry practice. The CONTRACTOR Entities’ obligation

to sell Crude Oil to the GOVERNMENT shall be, with the other operators (including

the GOVERNMENT) then producing in the Kurdistan Region, pro rata to their

respective production rates.

The provisions of this Article 16.15 shall not apply to Non-Associated Natural Gas.



ARTICLE 17 – USE OF LAND AND EXISTING INFRASTRUCTURE

17.1



The GOVERNMENT shall make available to the CONTRACTOR any land or

property in the Kurdistan Region required for the Petroleum Operations; provided,

however, the CONTRACTOR shall not request to use any such land unless there is a

real need for it. The CONTRACTOR shall have the right to build and maintain,

above and below ground, any facilities required for the Petroleum Operations.



17.2



If it becomes necessary for conduct of the Petroleum Operations to occupy and use

any land or property in the Kurdistan Region belonging to third parties, the

CONTRACTOR shall endeavour to reach amicable agreement with the owners of

such land. If such amicable agreement cannot be reached, the CONTRACTOR shall

notify the GOVERNMENT. On receipt of such notification:

(a)



the GOVERNMENT shall determine the amount of compensation to be paid

by the CONTRACTOR to the owner, if occupation will be for a short

duration; or



(b)



the GOVERNMENT shall expropriate the land or property in accordance

with applicable Kurdistan Region Law, if such occupation will be long lasting

or makes it henceforth impossible to resume original usage of such land or

property. Any property rights shall be acquired by and recorded in the name

of the GOVERNMENT, but the CONTRACTOR shall be entitled free use

of the land or property for the Petroleum Operations for the entire duration of

this Contract.



The amount of the compensation in Article 17.2(a) shall be fair and reasonable, in

accordance with Article 29 of the Kurdistan Region Oil and Gas Law, and shall take

into account the rights of the owner and any effective use of the land or property by

its owner at the time of occupation by the CONTRACTOR. All reasonable costs,

expenditures and fair and reasonable compensation (as required pursuant to Article 29

of the Kurdistan Region Oil and Gas Law) which results from such expropriation

shall be borne by the CONTRACTOR. For the avoidance of doubt, such costs,

expenses and compensation incurred by the CONTRACTOR shall be considered

Petroleum Costs and shall be recoverable by the CONTRACTOR in accordance with

the provisions of Articles 1 and 25.

17.3



For its Petroleum Operations, the CONTRACTOR shall have the right in the

Kurdistan Region to use, subject to Applicable Law, any railway, tramway, road,

airport, landing field, canal, river, bridge or waterway, any telecommunications

network and any existing pipelines or transportation infrastructure, on terms no less

favourable than those offered to other entities and, unless generally in force, to be

mutually agreed.



17.4



Under national emergencies due to environmental catastrophe or disaster, or internal

or external war, the GOVERNMENT shall have the right to request to use any

transportation and communication facilities installed by the CONTRACTOR. In

such cases, the request shall originate from the Minister of Natural Resources. For the

avoidance of doubt, such costs, expenses or liabilities incurred by the

CONTRACTOR hereunder shall be considered Petroleum Costs and shall be

recoverable by the CONTRACTOR in accordance with the provisions of Articles 1

and 25.



17.5



For its Petroleum Operations, the CONTRACTOR shall have the right in the

Kurdistan Region to clear land, excavate, drill, bore, construct, erect, place, procure,

operate, emit and discharge, manage and maintain ditches, tanks, wells, trenches,

access roads, excavations, dams, canals, water mains, plants, reservoirs, basins,

storage and disposal facilities, primary distillation units, extraction and processing

units, separation units, sulphur plants and any other facilities or installations for the

Petroleum Operations, in addition to pipelines, pumping stations, generators, power

plants, high voltage lines, telephone, radio and any other telecommunications

systems, as well as warehouses, offices, sheds, houses for personnel, hospitals,

schools, premises, dikes, vehicles, railways, roads, bridges, airlines, airports and any

other transportation facilities, garages, hangars, workshops, foundries, repair shops

and any other auxiliary facilities for the Petroleum Operations and, generally,

everything which is required for its performance of the Petroleum Operations. The

CONTRACTOR shall have the right to select the location for these facilities.



17.6



For its Petroleum Operations, the CONTRACTOR shall have the right in the

Kurdistan Region, subject to compliance with applicable Kurdistan Region Law, to

remove and use the topsoil, fully-grown timber, clay, sand, lime, gypsum, stones

(other than precious stones) and other similar substances as required for its Petroleum

Operations.

The CONTRACTOR shall have the right in the Kurdistan Region to take or use any

water necessary for the Petroleum Operations provided it does not damage any

existing irrigation or navigation systems and that land, houses or watering points

belonging to third parties are not deprived of their use.



17.7



The GOVERNMENT shall have the right in the Kurdistan Region to build, operate

and maintain roads, railways, airports, landing strips, canals, bridges, protection dams,

police stations, military installations, pipelines and telecommunications networks in

the Contract Area, provided this does not increase the costs, or compromise or have a

material adverse effect on the performance of the Petroleum Operations. If the

construction, operation and maintenance of such facilities by the GOVERNMENT

results in increased cost or expense for the CONTRACTOR then, for the avoidance

of doubt, such cost and expense shall be considered Petroleum Costs and shall be



recoverable by the CONTRACTOR in accordance with the provisions of Articles 1

and 25.

17.8



Upon request of the CONTRACTOR, the GOVERNMENT shall prohibit the

construction of residential or commercial buildings in the vicinity of facilities used for

the Petroleum Operations that may be declared dangerous due to the Petroleum

Operations and to prohibit any interference with the use of any facilities required for

the Petroleum Operations.



17.9



Access to the Contract Area may be granted pursuant to an Access Authorisation, as

shall be defined in, and consistent with, the Kurdistan Region Oil and Gas Law, to

authorised third parties on reasonable terms and conditions (including coordination),

including Persons authorised to construct, install and operate structures, facilities and

installations, and to carry out other works, provided that nothing in the Access

Authorisation or in this Article 17.9 authorises the holder to drill a Well or to perform

any Petroleum Operations in Contract Area.

The GOVERNMENT shall give the CONTRACTOR adequate advance notice of

any Access Authorisation in respect of the Contract Area and shall not grant any

Access Authorisation in respect of the Contract Area until it has taken into account

any submissions made by the CONTRACTOR nor in such a way that there is undue

interference with or hindrance of the rights and activities of the CONTRACTOR.



ARTICLE 18 – ASSISTANCE FROM THE GOVERNMENT

18.1



To the extent allowed by Applicable Law, and only at the specific request of the

CONTRACTOR, the GOVERNMENT shall take all necessary steps to assist the

CONTRACTOR Entities in, but not limited to, the following areas:

(a)



securing any necessary Permits for the use and installation of means of

transportation and communications;



(b)



securing regulatory Permits in matters of customs or import/export;



(c)



securing entry and exit visas, work and residence permits as well as any other

administrative Permits for each CONTRACTOR Entity’s, its Affiliate’s and



its Subcontractors’ foreign personnel (including their family members)

working in the Kurdistan Region and any other part of Iraq during the

implementation of this Contract;

(d)



securing any necessary Permits to send Abroad documents, data or samples

for analysis or processing for the Petroleum Operations;



(e)



relations with federal and local authorities and administrations, including for

the purposes of the remainder of this Article 18.1;



(f)



securing any necessary environmental Permits;



(g)



obtaining any other Permits requested by any CONTRACTOR Entity for the

Petroleum Operations;



(h)



access to any existing data and information, including data and information

relating to the Contract Area held by previous operators or contractors; and



(i)

18.2



providing all necessary security for Petroleum Operations.



Within the scope of services to be provided under this Article 18, reasonable and duly

justified expenses incurred by the GOVERNMENT or paid to third parties shall be

charged to the CONTRACTOR and shall be considered Petroleum Costs and shall

be recoverable by the CONTRACTOR as Petroleum Costs in accordance with the

provisions of Articles 1 and 25.



ARTICLE 19 – EQUIPMENT AND MATERIALS

19.1



The CONTRACTOR shall supply, or procure the supply of, all materials, equipment,

machinery, tools, spare parts and any other items or goods required for the Petroleum

Operations (“Equipment and Materials”).



19.2



Said Equipment and Materials shall be provided by the CONTRACTOR in

accordance with the relevant Work Programs and Budgets.



19.3



As soon as possible after the Effective Date, the CONTRACTOR shall provide the

Management Committee with a copy of its procedures for procurement of Equipment



and Materials and/or services for the Petroleum Operations as required by the

provisions of Article 8.2(e), including the criteria for tender evaluation, which

procedures and criteria shall be in accordance with prudent international petroleum

industry practice. If the Management Committee does not request any modifications

to the procurement procedures within thirty (30) days after receiving such procedures,

the procedures shall be deemed approved by the Management Committee.

19.4



The CONTRACTOR shall give priority to Equipment and Materials that are readily

available in the Kurdistan Region and other parts of Iraq to the extent their price,

grade, quality, quantity, specifications, purchase, delivery and other commercial and

technical terms are comparable in all material respects with those generally available

in the international petroleum industry.



ARTICLE 20 – TITLE TO ASSETS

20.1



During the Exploration Period, any Assets acquired by the CONTRACTOR for the

Petroleum Operations shall remain the property of the CONTRACTOR, the

CONTRACTOR Entities, their Affiliates or their Subcontractors, as the case may be.



20.2



During the Development Period, subject to Article 21, all Assets acquired by the

CONTRACTOR for the Petroleum Operations shall become the property of the

GOVERNMENT upon the completion of the recovery of the costs of all such assets

by the CONTRACTOR, or the end of the Contract, whichever is the earlier.



20.3



The provisions of Article 20.2 shall not apply to any Assets leased by the

CONTRACTOR or belonging to an Affiliated Company of a CONTRACTOR

Entity or belonging to its or their Subcontractors or its or their employees.



ARTICLE 21 – USE OF THE ASSETS

21.1



The CONTRACTOR shall have the exclusive right to use, free of any charge, all

Assets described in Article 20, both before and after recovery of the cost of the same,

for the Petroleum Operations, as well as for any petroleum operations under other

agreements in the Kurdistan Region to which it or any of its Affiliates is a party,

provided that the Petroleum Operations take priority. The GOVERNMENT agrees



not to transfer or otherwise dispose of any of such Assets without the

CONTRACTOR’s prior written approval.

21.2



The CONTRACTOR may freely move to the Contract Area any Assets from any

relinquished portion of the Contract Area, or from any other area in the Kurdistan

Region.



ARTICLE 22 – SUBCONTRACTING

22.1



The CONTRACTOR shall ensure that any Subcontractors it engages have all the

requisite experience and qualifications.



22.2



The CONTRACTOR shall give priority to Subcontractors from the Kurdistan

Region and other parts of Iraq to the extent their competence, rates, experience,

reputation, qualifications, specialties, credit rating and terms of availability, delivery

and other commercial terms are, in the CONTRACTOR’s sole opinion, comparable

in all material respects with those provided by foreign companies operating in the

international petroleum industry. Such Subcontractors must be bona fide Kurdistan

Region companies not related to any Public Officer, directly or indirectly, and must

have all necessary resources and capacity.



22.3



Selection of Subcontractors shall take place in accordance with the procurement

procedures submitted by the CONTRACTOR to the Management Committee in

accordance with Article 19.3 and approved by the Management Committee.



22.4



The CONTRACTOR shall provide the GOVERNMENT with copies of agreements

entered into with Subcontractors, where their amount exceeds the limit set by the

Management Committee from time to time.



ARTICLE 23 – PERSONNEL, TRAINING, AND TECHNOLOGICAL ASSISTANCE

Personnel

23.1



For the Petroleum Operations, the CONTRACTOR shall give, and shall require its

Subcontractors to give, preference to personnel from the Kurdistan Region and other



parts of Iraq to the extent such personnel have the technical capability, qualifications,

competence and experience required to perform the work.

23.2



The CONTRACTOR shall give due consideration to the secondment of

GOVERNMENT personnel to the CONTRACTOR and of the CONTRACTOR’s

personnel to the GOVERNMENT during the various phases of the Petroleum

Operations. Terms and conditions for such secondment shall be mutually agreed by

the Parties, and any costs associated therewith shall be considered Petroleum Costs

and shall be recoverable by the CONTRACTOR in accordance with the provisions

of Articles 1 and 25.



23.3



Each CONTRACTOR Entity and its Affiliates and Subcontractors shall have the

right to hire foreign personnel whenever the personnel from the Kurdistan Region and

other parts of Iraq do not have the requisite technical capability, qualifications or

experience for positions to be filled as required pursuant to Article 23.1. In the event

any such foreign personnel and/or a member of their family engage in activities or

commit acts which breach Kurdistan Region Law, the CONTRACTOR shall, at the

request of the Management Committee, take the necessary steps to repatriate such

individual(s).



23.4



For the first five (5) Contract Years following 31 December 2011, the

CONTRACTOR shall provide two hundred and fifty thousand Dollars

(US$250,000) in advance each Contract Year to the GOVERNMENT for the

recruitment or secondment of personnel, whether from the Kurdistan Region other

parts of Iraq or Abroad, to the Ministry of Natural Resources. The selection of such

personnel shall be at the discretion of the Minister of Natural Resources. Such costs

shall be considered as Petroleum Costs and shall be recoverable in accordance with the

provisions of Articles 1 and 25.



Training

23.5



In a planned way, in accordance with the provisions of this Article 23.5 and Articles

23.6 and 23.7, the CONTRACTOR shall train all its personnel from the Kurdistan

Region and other parts of Iraq directly or indirectly involved in the Petroleum

Operations for the purpose of improving their knowledge and professional



qualifications in order that such personnel gradually reach the level of knowledge and

professional qualification held by the CONTRACTOR Entities’ foreign workers

with an equivalent résumé. Such training shall also include the transfer of knowledge

of petroleum technology and the necessary management experience so as to enable

the personnel from the Kurdistan Region and other parts of Iraq to apply advanced

and appropriate technology in the Petroleum Operations, to the extent permitted by

Applicable Law and agreements with third parties, and subject to appropriate

confidentiality agreements.

23.6



In addition to the requirements of Article 23.1, the recruitment, integration and

training of the CONTRACTOR Entities’ personnel from the Kurdistan Region and

other parts of Iraq shall be planned, which plans shall be submitted to the

Management Committee for its approval. The training plan shall take into

consideration the requirements of Article 23.5 and may include training for the

GOVERNMENT’s personnel, depending on the extent to which the amount

allocated to the training plan, as prescribed by Article 23.7, is available after taking

into consideration the training of the CONTRACTOR Entities’ Kurdistan Region

and other Iraqi personnel.

Within ninety (90) days of the Effective Date, the CONTRACTOR shall submit to

the Management Committee a proposed training plan for the remainder of the

Calendar Year. Thereafter, no later than 1 October in each Calendar Year, the

CONTRACTOR shall submit a proposed training plan to the Management

Committee for the following Calendar Year.



23.7



The training plan referred to in Article 23.6 shall provide for the allocation to the

GOVERNMENT of the amount of one hundred and fifty thousand Dollars

(US$150,000) in advance for each Contract Year during the Exploration Period following

31 December 2011 and three hundred thousand Dollars (US$300,000) in advance for each

Contract Year during the Development Period.



23.8



Each CONTRACTOR Entity shall be responsible for the training costs which it may

incur in respect of the personnel it employs from the Kurdistan Region and other parts

of Iraq. All such reasonable costs shall be considered as Petroleum Costs and shall be



recoverable in accordance with the provisions of Articles 1 and 25. Costs incurred by

the CONTRACTOR for training programs for the GOVERNMENT’s personnel

shall be borne by the CONTRACTOR only to the extent that they are included in the

CONTRACTOR’s training plan, pursuant to Article 23.6 and shall also be

considered as Petroleum Costs and shall be recoverable in accordance with the

provisions of Articles 1 and 25. The cost of all other training programs for the

GOVERNMENT’s personnel shall be the GOVERNMENT’s responsibility.

The Environment Fund

23.9



The CONTRACTOR shall contribute the amount of one hundred and fifty thousand

Dollars (US$150,000) in advance each Contract Year during the Exploration Period

following 31 December 2011 and three hundred thousand Dollars (US$300,000) in

advance for each Contract Year during the Development Period into the environment

fund established by the GOVERNMENT for the benefit of the natural environment

of the Kurdistan Region, pursuant to the Kurdistan Region Oil and Gas Law (the

“Environment Fund”). Such amounts shall be deemed to be Petroleum Costs and

shall be recoverable in accordance with Articles 1 and 25.



23.10 Any expenditure incurred by the CONTRACTOR under this Article 23 shall be

considered Petroleum Costs and shall be recoverable in accordance with Articles 1

and 25.

Technological and Logistical Assistance

23.11 Before the end of the first Contract Year, the CONTRACTOR shall provide to the

GOVERNMENT such technological and logistical assistance to the Kurdistan

Region petroleum sector, including geological computing hardware and software and

such other equipment as the Minister of Natural Resources may request, up to the

value of two hundred and fifty thousand Dollars (US$250,000). The form of such

assistance shall be mutually agreed by the Parties, any costs associated therewith shall

be considered Petroleum Costs, and such Petroleum Costs shall be recoverable by the

CONTRACTOR in accordance with the provisions of Articles 1 and 25.



ARTICLE 24 – ROYALTY

24.1



The CONTRACTOR shall pay to the GOVERNMENT a portion of Petroleum

produced and saved from the Contract Area, as provided in this Article 24 (the

“Royalty”).



24.2



The Royalty shall be applied on all Petroleum produced and saved from the Contract

Area which is Crude Oil or Non-Associated Natural Gas, except for Petroleum used

in Petroleum Operations, re-injected in a Petroleum Field, lost, flared or for Petroleum

that cannot be used or sold and such Crude Oil and Non-Associated Natural Gas

(excluding the excepted Petroleum) shall be referred to collectively as “Export

Petroleum” and separately and respectively as “Export Crude Oil” and “Export

Non-Associated Natural Gas”.



24.3



If payable in cash, the amount of the Royalty calculated by applying the Royalty rates

provided under Article 24.4 shall be paid by the CONTRACTOR as directed by the

GOVERNMENT, in accordance with Article 24.7.

If payable in kind, the quantity of Export Petroleum corresponding to the Royalty and

calculated by applying the Royalty rates provided under Article 24.4 shall be

delivered in kind by the CONTRACTOR to the GOVERNMENT at the Delivery

Point. Title and risk of loss of the Royalty paid in kind shall be transferred at the

Delivery Point.

Unless the GOVERNMENT requires the Royalty to be paid in kind, by giving the

CONTRACTOR not less than ninety (90) days prior written notice prior to the

commencement of the relevant Quarter, the GOVERNMENT shall be deemed to

have elected to receive the Royalty in full and in cash for the relevant Quarter.



24.4



The Royalty due on any Export Petroleum produced and saved in the Contract Area

shall be determined daily by applying the following relevant Royalty rate, to the

Export Crude Oil or to the Export Non-Associated Natural Gas (as the case may be)

produced and saved on that day:

(a)



For Export Crude Oil:



the Royalty rate for Export Crude Oil shall be ten per cent (10%), which, for

the avoidance of doubt, shall apply regardless of the gravity of the oil; and

(b)



For Export Non-Associated Natural Gas:

the Royalty rate for Export Non-Associated Natural Gas shall be ten per cent

(10%).



24.5



Associated Natural Gas and any other Petroleum shall be exempt from any Royalty.



24.6



If, pursuant to Article 24.3, the GOVERNMENT receives the Royalty in kind, and

pursuant to Article 28, the GOVERNMENT requests assistance for the sale of all or

part of the Royalty received in kind, each CONTRACTOR Entity shall assist the

GOVERNMENT in selling all or part of such Royalty received in kind (belonging to

the GOVERNMENT) in consideration of a commission per Barrel payable to such

CONTRACTOR Entity, in accordance with Article 28.



24.7



If, pursuant to Article 24.3, the GOVERNMENT receives the Royalty in cash:

(a)



any Export Crude Oil shall be valued at the International Market Price

obtained at the Delivery Point, as defined in Article 27.2;



(b)



any Export Non-Associated Natural Gas shall be valued at the actual price

obtained at the Delivery Point under an approved contract, as provided in

Article 27.3;



(c)



the CONTRACTOR shall pay such Royalty each Quarter, in arrears, within

thirty (30) days of the end of each Quarter, and shall calculate the payment

due for the relevant Quarter by reference to the price for the Export Petroleum

at the Delivery Point, determined in accordance with paragraphs (a) and (b)

above, and the Royalty due on the Export Petroleum, determined in

accordance with Article 24.4, for the said Quarter; and



(d)



the CONTRACTOR Entities shall be entitled to export freely the volume of

Export Petroleum corresponding to the Royalty determined in accordance with

Article 24.4 for the purpose of paying the Royalty in cash.



ARTICLE 25 – RECOVERY OF PETROLEUM COSTS

25.1



All Export Crude Oil produced and saved from the Contract Area shall, after

deduction of any quantities of Export Crude Oil due for Royalty pursuant to Article

24, be considered as “Available Crude Oil”.

All Associated Natural Gas produced and saved from the Contract Area, except for

Associated Natural Gas which is used in Petroleum Operations, re-injected in a

Petroleum Field, lost, flared or cannot be used or sold, shall be considered as

“Available Associated Natural Gas”.

All Export Non-Associated Natural Gas produced and saved from the Contract Area

shall, after deduction of any quantities of Export Non-Associated Natural Gas due for

Royalty pursuant to Article 24, be considered as “Available Non-Associated Natural

Gas”.

“Available Petroleum” means Available Crude Oil, Available Associated Natural

Gas and Available Non-Associated Natural Gas.



25.2



For the purpose of this Article 25:

(a)



any Available Crude Oil shall be valued at the International Market Price

obtained at the Delivery Point, as defined in Article 27.2; and



(b)



any Available Associated Natural Gas and any Available Non-Associated

Natural Gas shall be valued at the actual price obtained at the Delivery Point

under an approved contract, as provided in Article 27.3.



25.3



Subject to the provisions of this Contract, from the First Production in the Contract

Area, the CONTRACTOR shall at all times be entitled to recover all Petroleum

Costs incurred under this Contract, of up to forty-five per cent (45%) of Available

Crude Oil (which, for the avoidance of doubt, shall apply regardless of the gravity of

the oil) and Available Associated Natural Gas, produced and saved within any

Calendar Year. Available Crude Oil above this percentage or otherwise not used for

the recovery of Petroleum Costs shall be Profit Crude Oil.



25.4



Subject to the provisions of this Contract, from First Production in the Contract Area,

the CONTRACTOR shall at all times be entitled to recover all Petroleum Costs

incurred under this Contract of up to fifty-five per cent (55%) of Available NonAssociated Natural Gas produced and saved within any Calendar Year. Available

Non-Associated Natural Gas above this percentage or otherwise not used for the

recovery of Petroleum Costs shall be Profit Natural Gas.



25.5



For the application of Article 25.3 and 25.4, the CONTRACTOR shall keep a

detailed account of Petroleum Costs in accordance with the provisions detailed in the

Accounting Procedure. Recovery of Petroleum Costs shall occur in the following

order:

(a)



Production Costs;



(b)



Exploration Costs (including appraisal costs and further exploration within the

Contract Area);



25.6



(c)



Gas Marketing Costs;



(d)



Development Costs; and



(e)



Decommissioning Costs.



Total recovery of Petroleum Costs during any Calendar Year, expressed in quantities

of Petroleum, shall not exceed the relevant percentages indicated in Articles 25.3 and

25.4. If in any Calendar Year, the Available Crude Oil and/or Available NonAssociated Natural Gas do not allow the CONTRACTOR to recover all its

Petroleum Costs pursuant to this Article 25, the amount of un-recovered Petroleum

Costs in such Calendar Year shall be carried forward indefinitely to the subsequent

Calendar Years until all Petroleum Costs are fully recovered, but, save as provided in

Articles 14.10 and 38.4, in no other case after the termination of the Contract.



25.7



The provisions of Articles 27.5 and 27.6 shall be applied to determine the quantities

of Available Crude Oil and/or Available Non-Associated Natural Gas due to the

CONTRACTOR for the recovery of its Petroleum Costs.



25.8



The quantities of Petroleum corresponding to the share of Available Petroleum due to

the CONTRACTOR for the recovery of its Petroleum Costs shall be delivered to the

CONTRACTOR at the Delivery Point. Title and risk of loss of such Available

Petroleum shall be transferred at the Delivery Point.



25.9



Each CONTRACTOR Entity shall be entitled to receive, take in kind and to export

freely all Available Petroleum to which it is entitled for recovery of its Petroleum

Costs in accordance with the provisions of this Contract and to retain Abroad any

proceeds from the sale of all such Available Petroleum. Petroleum Costs in each

Production Area shall be recoverable from Available Petroleum from that Production

Area.



25.10 Subject to Article 38.4, for the avoidance of doubt, Petroleum Costs under this

Contract are not recoverable against other contract areas held by the

CONTRACTOR.



ARTICLE 26 – SHARING OF PROFIT PETROLEUM

26.1



Under this Contract,

(a)



“Profit Petroleum” means Profit Crude Oil and Profit Natural Gas;



(b)



“Profit Crude Oil” means the quantities of Available Crude Oil and

Available Associated Natural Gas produced from the Production Area, after

the recovery of Petroleum Costs, in accordance with Articles 1 and 25; and



(c)



“Profit Natural Gas” means the quantities of Available Non-Associated

Natural Gas produced from the Production Area, after the recovery of

Petroleum Costs in accordance with Articles 1 and 25.



26.2



From First Production and as and when Petroleum is being produced, the

CONTRACTOR shall be entitled to take a percentage share of Profit Crude Oil

and/or Profit Natural Gas, in consideration for its investment in the Petroleum

Operations, which percentage share shall be determined in accordance with Article

26.5. The GOVERNMENT or any other holder of all or any part of the Government



Interest is entitled to be attributed and allocated a percentage share of Profit

Petroleum in accordance with the participating interest of the Government Interest.

26.3



To determine the percentage share of Profit Crude Oil and/or Profit Natural Gas to

which the CONTRACTOR and the GOVERNMENT or any other holder of all or

any part of the Government Interest is entitled, the “R” Factor shall be calculated in

accordance with Article 26.4. The calculation of the R Factor will apply to all

Production Areas in the Contract Area for until a new R Factor calculation has been

made in accordance with clause 26.4.



26.4



The “R” Factor shall be calculated as follows:

R = X/Y

where:

X:



is equal to Cumulative Revenues actually received by the CONTRACTOR;



Y:



is equal to Cumulative Costs actually incurred by the CONTRACTOR.



For the purpose of this Article 26.4:

“Cumulative Revenues” means total Revenues, as defined below, received by the

CONTRACTOR until the end of the relevant Semester, determined in accordance

with Article 26.7.

“Revenues” means the total amount actually received by the CONTRACTOR for

recovery of its Petroleum Costs and its share of Profit Petroleum in the Contract Area.

“Cumulative Costs” means all Petroleum Costs in the Contract Area, actually

incurred by the CONTRACTOR until the end of the relevant Semester, determined

in accordance with Article 26.7.

Notwithstanding the foregoing provisions of this Article 26.4, for the period from

First Production until the end of the Calendar Year in which First Production occurs,

the “R” Factor shall be deemed to be less than one (1).



26.5



The share of Profit Petroleum to which the CONTRACTOR shall be entitled from

First Production is:

(a)



for Profit Crude Oil, equal to the quantities of Petroleum resulting from the

application of the relevant percentage as indicated below to the daily volume

of production of Profit Crude Oil within the Contract Area at the

corresponding Delivery Point:

“R” Factor



CONTRACTOR’s % Share of Profit Crude Oil



R < or = 1



35%



1 < R< or = 2



35 – (35 – 16) * (R - 1) / (2 - 1)



R>2



16%



and

(b)



for Profit Natural Gas, equal to the quantities of Non-Associated Natural Gas

resulting from the application of the relevant percentage as indicated below to

the daily volume of production of Profit Natural Gas within the Contract Area

at the corresponding Delivery Point:

“R” Factor



CONTRACTOR’s % Share of Profit Natural Gas



R < or = 1



40%



1 < R < o r =2 . 7 5



40 – (40 – 20) * (R-1) / (2.75-1)



R >2.75



20%



26.5.1 Profit Petroleum which is attributed and allocated neither to the CONTRACTOR or

GOVERNMENT as holder of the Government Interest, or any other holder of the

Government Interest in accordance with clause 26.5 is to be attributed and allocated

to the GOVERNMENT.

26.6



The CONTRACTOR’s accounting shall account separately for all components for

the calculation of “X” and “Y” values in the formula provided in Article 26.4.



26.7



For each Semester, starting from the 1st of January of the Calendar Year following the

Calendar Year in which First Production occurs, the CONTRACTOR shall calculate

the “R” Factor applicable to the relevant Semester within thirty (30) days of the

beginning of such Semester. The “R” Factor to be applied during a Semester shall be

that determined by applying the Cumulative Revenues actually received and the

Cumulative Costs actually incurred up to and including the last day of the preceding

Semester.

If the CONTRACTOR is unable to calculate the “R” Factor for the relevant

Semester before an allocation of Profit Petroleum for such Semester must be made,

then the allocation of Profit Petroleum for the previous Semester shall be used for the

relevant Semester. Upon the calculation of the “R” Factor for the relevant Semester:

(a)



if the allocation of Profit Petroleum in the previous Semester and the relevant

Semester is the same, then no adjustment shall be made; and



(b)



if the allocation of the Profit Petroleum in the two Semesters is different, then

the CONTRACTOR shall make any adjustments to the Parties’ respective

shares of Profit Petroleum to restore them to the position that they would have

been in had the “R” Factor for the relevant Semester been available from the

start of such Semester.



26.8



If at any time an error occurs in the calculation of the “R” Factor, resulting in a

change in the CONTRACTOR’s percentage share of Profit Crude Oil and/or Profit

Natural Gas, the necessary correction shall be made and any adjustments shall apply

from the Semester in which the error occurred. The Party having benefited from a

surplus of Profit Petroleum shall surrender such surplus to the other Party, beginning

from the first day of the Semester following the Semester in which the error was

recognised. However, each lifting of Petroleum relating to such error by the Party

receiving the surplus shall not exceed twenty-five per cent (25%) of the share of

Profit Petroleum to which such surrendering Party is entitled. For the avoidance of

doubt, if at any time an error occurs in the calculation of the “R” Factor, which does

not result in a change in the CONTRACTOR’s percentage share of Profit Crude Oil

and/or Profit Natural Gas, no correction shall be made.



26.9



The CONTRACTOR shall deliver the quantities of Profit Petroleum to which the

GOVERNMENT and each CONTRACTOR Entity are entitled at the Delivery

Point.

The quantity of Profit Petroleum to which the GOVERNMENT is entitled is:

(a)



the share of Profit Petroleum to which the GOVERNMENT is entitled in any

Calendar Year in accordance with Article 26.5; and



(b)



(notwithstanding any other provision of this Contract, any lifting agreement,

any sales or marketing agreement, or any other agreement), three per cent

(3%) of the share of Profit Petroleum attributable to the WesternZagros

Interest; so that the WesternZagros Interest Holders are only entitled to ninetyseven per cent (97%) of the share of Profit Petroleum attributable to the

WesternZagros Interest.



The CONTRACTOR shall ensure that all agreements in respect of the lifting or sale

of Petroleum reflect the GOVERNMENT’s rights as set forth in this Article 26.9.

Notwithstanding the other provisions of this Article 26.9, where a Charged Interest

Holder is in breach of any of its obligations in respect of the payment of Capacity

Building Payment Instalments under Article 32.6, the GOVERNMENT will have the

rights set forth in Articles 32.6.6 through 32.6.8.

26.10 Title and risk of loss of Profit Petroleum pass to the GOVERNMENT and the

CONTRACTOR Entities at the Delivery Point. The GOVERNMENT and each

CONTRACTOR Entity will be entitled to receive, take in kind and to export freely

its share of Profit Petroleum in accordance with the provisions of this Contract and to

retain Abroad any proceeds from the sale of all such Profit Petroleum.

26.11 The share of the Profit Petroleum to which the GOVERNMENT is entitled in any

Calendar Year in accordance with Article 26.5 will be deemed to include a portion

representing the corporate income tax imposed upon and due by each

CONTRACTOR Entity, and which will be paid directly by the GOVERNMENT on

behalf of each such entity representing the CONTRACTOR to the appropriate tax

authorities in accordance with Article 31.2. The GOVERNMENT shall provide the



CONTRACTOR Entities with all written documentation and evidence reasonably

required by the CONTRACTOR Entities to confirm that such corporate income tax

has been paid by the GOVERNMENT.

26.12 At least twenty-one (21) days prior to CONTRACTOR’s estimated date of First

Production and, subsequently, thirty (30) days prior to the beginning of each

Semester, the CONTRACTOR shall prepare and deliver to the GOVERNMENT a

production program comprising the production forecast for the next Semester and the

forecast of the quantities of Crude Oil and Natural Gas to which each Party shall be

entitled during the said Semester.

26.13 Within ninety (90) days following the end of each Calendar Year, the

CONTRACTOR shall prepare and deliver an annual production report to the

GOVERNMENT, stating the quantities of Crude Oil and Natural Gas to which each

Party is entitled, the quantities of Crude Oil and Natural Gas lifted by each Party and

the resulting over-lift or under-lift position of each Party, pursuant to the lifting

agreement entered into pursuant to Article 16.14.

26.14 Any costs or expenditure incurred by the CONTRACTOR, its Subcontractors or

suppliers relating to the lifting of the GOVERNMENT’s share of Petroleum by the

CONTRACTOR shall not be considered Petroleum Costs and shall be charged to the

GOVERNMENT according to terms to be mutually agreed between the

CONTRACTOR and the GOVERNMENT.



ARTICLE 27 – VALUATION AND METERING OF CRUDE OIL AND NATURAL

GAS

Valuation

27.1



For the purpose of this Contract, any Crude Oil produced in the Contract Area shall

be valued at the end of each Quarter (and, where there is a Charged Interest Holder,

each Month) at the Delivery Point based on the International Market Price, as defined

in Article 27.2.



27.2



The “International Market Price” referred to in Article 27.1 shall be the weighted

average price per Barrel, expressed in Dollars, obtained by the CONTRACTOR at

the Delivery Point, by netback if necessary, during the Quarter (and where there is a

Charged Interest Holder, the Month) ending on the date of valuation for Arm's Length

Sales of Crude Oil.

The CONTRACTOR shall provide evidence to the GOVERNMENT that the sales

of Crude Oil referred to in Article 27.2 are Arm’s Length Sales.



If the



GOVERNMENT considers that any such sale of Crude Oil is not on the basis of an

Arm’s Length Sale then the GOVERNMENT has the right to refer the matter to an

expert pursuant to Article 42.2.

In the event that there is no lifting of Crude Oil in the relevant Quarter (and where

there is a Charged Interest Holder the relevant Month), or no Arm’s Length Sales, the

applicable “International Market Price” for such Quarter shall be the weighted

average price per Barrel obtained during that Quarter and Month from Arm’s Length

Sales of Crude Oil of the same or similar gravity and quality from other production

areas sold in markets competing with Crude Oil produced from the Contract Area,

taking into account gravity and quality differences and transportation and other post

Delivery Point costs.

To determine such price, the Parties shall, prior to the commencement of Production,

agree on a basket of Crude Oil comparable to those produced in the Contract Area and

sold in the international market. Prices obtained shall be adjusted to account for any

variations such as quality, specific gravity, sulphur content, transportation costs,

product yield, seasonal variations in price and demand, general market trends and

other terms of sale.

27.3



The price of Natural Gas shall be the actual price obtained at the Delivery Point,

(which may take into account quantities to be sold, quality, geographic location of

markets to be supplied as well as costs of production, transportation and distribution

of Natural Gas from the Delivery Point to the relevant market, in accordance with

standard international petroleum industry practice). The GOVERNMENT shall have

the right to review and approve Natural Gas sales contracts.



Accounting Statement

27.4



By the tenth (10th) day of each Month, the CONTRACTOR shall provide a statement

to the GOVERNMENT showing the CONTRACTOR’s calculations of the value of

Petroleum produced and sold from the Contract Area for the previous Month. Such

statement shall include the following information:

(a)



quantities of Crude Oil sold by the CONTRACTOR Entities during the

preceding Month constituting Arm’s Length Sales together with corresponding

sale prices;



(b)



quantities of Crude Oil sold by the CONTRACTOR Entities during the

preceding Month that do not fall in the category referred to in paragraph (a)

above, together with sale prices applied during such Month;



(c)



inventory in storage belonging to the CONTRACTOR Entities at the beginning

and at the end of the Month; and



(d)



quantities of Natural Gas sold by the CONTRACTOR Entities and the

GOVERNMENT together with sale prices realised.



Where there is a Charged Interest Holder, the CONTRACTOR shall deliver,

concurrently with the delivery of the monthly statement, the Charged Interest Holders

Monthly Statement to the GOVERNMENT as provided in Article 32.6.2(a).

Metering

27.5



All Export Petroleum shall be metered at the Delivery Point in accordance with

prudent international petroleum industry practice and such meters shall be to fiscal

meter standards. All metering equipment shall be installed and operated by the

CONTRACTOR. The GOVERNMENT shall, on receipt by the CONTRACTOR

of reasonable prior written notice, have the right to inspect any such metering

equipment installed by the CONTRACTOR, as well as all relevant documents and

supporting information reasonably necessary to validate the accuracy of such

metering. All metering equipment shall be subject to periodic technical inspections in

accordance with prudent international petroleum industry practice.



27.6



If any metering equipment is defective, the CONTRACTOR shall use all reasonable

endeavours to repair it within fifteen (15) days or, if deemed necessary by the

CONTRACTOR, replace it as soon as reasonably practicable from the date the

defect became known.



The “Adjustment Date” shall be the last date that the



metering equipment was known or agreed to have been measuring correctly, or if not

known or agreed, the date that is midway between the date the defect was discovered

and the last date the equipment was known to have measured correctly. The results

from the defective equipment shall be disregarded for the period from the Adjustment

Date until the date the defective equipment is repaired or replaced and the

measurement for such period shall be estimated:

(a)



if check measuring equipment is installed and registering accurately, then by

using the measurements recorded by such check measuring equipment;



(b)



if check measuring equipment is not installed or not registering accurately,

then by correcting the error if the percentage of error is ascertainable by

verification, calibration or mathematical calculation; or



(c)



if neither method is feasible, then by estimating the volume and/or quantity

delivered based on deliveries during the preceding comparable period of time

when the metering equipment was registered accurately.



27.7



Any disputes arising under this Article 27 shall be settled by expert determination in

accordance with the provisions of Article 42.2.



ARTICLE 28 – SALE OF GOVERNMENT SHARE

Upon the GOVERNMENT’s prior written notice of at least ninety (90) days, each

CONTRACTOR Entity shall provide all reasonably necessary assistance to the

GOVERNMENT for the sale of all or part of the quantities of Crude Oil to which the

GOVERNMENT is entitled, in consideration of a sales commission per Barrel to be

established with reference to prudent international petroleum practice and to be mutually

agreed upon between the Parties.



ARTICLE 29 – FINANCIAL PROVISIONS

29.1



A Party making a payment to the GOVERNMENT: shall: (i) make such payment in

Dollars in cleared funds by wire transfer from a reputable bank in accordance with

wire instructions provided by the GOVERNMENT, on the date when due; and (ii)

not offset against such payment any outstanding and undisputed payments due from

the GOVERNMENT to such Party, except with the prior written consent of the

GOVERNMENT.



29.2



The GOVERNMENT may, at its sole discretion, direct the CONTRACTOR

Entities to pay any or all of the following:

(a)



any Royalty in cash due to the GOVERNMENT pursuant to the provisions of

Article 24;



(b)



any proceeds from the sale undertaken by a CONTRACTOR Entity on behalf

of the GOVERNMENT pursuant to Article 28 of any Crude Oil to which the

GOVERNMENT is entitled pursuant to Article 25; and



(c)



any Production Bonus,



to a fund for revenue sharing, which may in due course be established by legislation

consistent with the Constitution of Iraq, between the Government of Iraq and other

regions (including the Kurdistan Region) and governorates of Iraq. Nothing in this

Article 29.2 shall be understood as implying any contractual relationship or other

relationship between the CONTRACTOR and/or any CONTRACTOR Entity and

the Government of Iraq and/or the regions of Iraq (other than the Kurdistan Region)

and/or and governorates of Iraq.

29.3



Any payment due by the GOVERNMENT to a CONTRACTOR Entity may be

offset against future payments due by such CONTRACTOR Entity to the

GOVERNMENT, or paid in Dollars to the bank account designated by the

CONTRACTOR Entity in writing and shall be paid within thirty (30) days of the

date of invoice, after which interest compounded monthly at the rate of LIBOR plus

two (2) percentage points shall be applied.



29.4



Any currency conversion to be made under this Contract shall be at the exchange rate

of the Central Bank of Iraq, provided such exchange rate applied to the

CONTRACTOR Entities shall not be less favourable than the rate offered by other

private, commercial or industrial banks in the international market. In the absence of

the Central Bank of Iraq or in the event that the Central Bank of Iraq is unable to

provide the relevant exchange rate, any currency conversion to be made under this

Contract shall be at the exchange rate of a reputable commercial bank carrying on

business in the international market and approved by the Parties.



29.5



The CONTRACTOR shall not realise any gain or loss due to exchange rate

fluctuations and, consequently, any gain or loss resulting from the exchange of

currency shall be either considered as revenue and credited to the Accounts or shall be

considered as a Petroleum Cost and shall be recoverable by the CONTRACTOR in

accordance with Articles 1 and 25, as the case may be.



29.6



Each CONTRACTOR Entity shall at all times be entitled to freely convert into

Dollars or any other foreign currency any Iraqi dinars received in the framework of

the Petroleum Operations and to freely transfer the same Abroad. The conversion rate

shall be as provided under Article 29.4.



29.7



Each CONTRACTOR Entity shall have the right to be paid, receive, keep, transfer

and use Abroad, without any restrictions, all proceeds of its share of Petroleum.



29.8



Each CONTRACTOR Entity and its Subcontractors shall have the right to freely

open and maintain bank accounts for Petroleum Operations within or outside the

Kurdistan Region and other parts of Iraq.



29.9



Each CONTRACTOR Entity shall have the right to pay in any freely convertible

currency all its financial requirements for the Petroleum Operations and to convert

these currencies to Iraqi dinars in any bank in the Kurdistan Region or other parts of

Iraq, at the same exchange rate as provided under Article 29.4.



29.10 Each CONTRACTOR Entity shall have the right, without any restrictions, to freely

repatriate Abroad and to freely dispose of:



(a)



any proceeds received in the Kurdistan Region or other parts of Iraq from the

sale of Petroleum;



(b)



any proceeds received from other operations and activities carried out under

this Contract in the Kurdistan Region or other parts of Iraq.



29.11 Each CONTRACTOR Entity shall have the right to pay in any foreign currency its

Subcontractors and its expatriate personnel, either in the Kurdistan Region, other parts

of Iraq, or Abroad. Said Subcontractors and expatriate personnel shall be obliged to

transfer to the Kurdistan Region the amount of foreign currency required for their

local needs and they shall have the right to repatriate the proceeds of the sale of their

belongings in accordance with the regulations in force in the Kurdistan Region.

29.12 Each CONTRACTOR Entity’s Affiliates, Subcontractors and their respective

personnel shall equally benefit from the same rights as such CONTRACTOR Entity

and its personnel as regards this Article 29.

29.13 For the financing of Petroleum Operations, each CONTRACTOR Entity shall have

the right to have recourse to external financing from third parties or from its Affiliated

Companies on an arm’s length basis.



ARTICLE 30 – CUSTOMS PROVISIONS

30.1



All services, material, equipment, goods, consumables and products imported into the

Kurdistan Region and other parts of Iraq by the CONTRACTOR, any

CONTRACTOR Entity, its Affiliates, any Subcontractor or any agent of any of the

foregoing, for use or consumption in the Petroleum Operations shall be admitted free

and exempt from any and all Taxes on import. The CONTRACTOR, any

CONTRACTOR Entity, its Affiliates, any Subcontractor or any agent of any of the

foregoing shall have the right to re-export from the Kurdistan Region and other parts

of Iraq free from all Taxes on export any material, equipment, goods, consumables

and products that are no longer required for the Petroleum Operations, except where

title has passed to the GOVERNMENT in accordance with Article 20, in which case

re-export shall be approved by the Management Committee.



30.2



The CONTRACTOR, any CONTRACTOR Entity, its Affiliates, any Subcontractor

or any agent of any of the foregoing, and their personnel (including their family

members) shall have the right to freely import into the Kurdistan Region and other

parts of Iraq and re-export from the Kurdistan Region and other parts of Iraq any

personal belongings and furniture free and exempt from any Taxes on import or

export. The sale in the Kurdistan Region and other parts of Iraq of personal

belongings and furniture of expatriate personnel shall comply with Kurdistan Region

Law.



30.3



Each CONTRACTOR Entity and its Affiliates shall be entitled to freely export from

the Kurdistan Region and other parts of Iraq, free of any Taxes, any Petroleum to

which it is entitled pursuant to the provisions of this Contract.



30.4



The GOVERNMENT shall indemnify the CONTRACTOR, any CONTRACTOR

Entity, its Affiliates, any Subcontractor or any agent of any of the foregoing, and their

personnel (including their family members) for any import or export Taxes referred to

in Articles 30.1, 30.2 or 30.3.



ARTICLE 31 – TAX PROVISIONS

31.1



Except as expressly provided in this Article 31, and without prejudice to the

exemptions expressly provided for in Article 30 and in this Article 31, each

CONTRACTOR Entity, its Affiliates and any Subcontractor shall, for the entire

duration of this Contract, be exempt from all Taxes as a result of its income, assets

and activities under this Contract.



The GOVERNMENT shall indemnify each



CONTRACTOR Entity upon demand against any liability to pay any Taxes assessed

or imposed upon such entity which relate to any of the exemptions granted by the

GOVERNMENT under this Article 31.1, and under Articles 31.4 to 31.11.

31.2



Each CONTRACTOR Entity shall be subject to corporate income tax on its income

from Petroleum Operations as provided in Article 31.3, which shall be deemed to be

inclusive and in full and total discharge of any Tax on income, receipts, revenues,

gains or profits of each such entity. Payment of the said corporate income tax shall be

made for the entire duration of this Contract directly to the official Kurdistan Region



tax authorities by the GOVERNMENT, for the account of each CONTRACTOR

Entity, from the GOVERNMENT’s share of the Profit Petroleum received pursuant

to Article 26.

Each CONTRACTOR Entity shall, within sixty (60) days after the end of each tax

year, provide a statement to the appropriate Kurdistan Region tax authorities of its

profits which are subject to corporate income tax, together with a calculation of the

amount of corporate income tax due on those profits.

The GOVERNMENT shall, within ninety (90) days after the end of each tax year,

provide to each CONTRACTOR Entity (i) the appropriate official tax receipts from

the appropriate Kurdistan Region tax authorities or other relevant authority certifying

the payment of its corporate income tax, as determined in the said statement, and that

such entity has met all its Tax obligations in the preceding tax year, and (ii) a copy of

any return or other filing made by the GOVERNMENT in respect of its payment of

corporate income tax on behalf of such CONTRACTOR Entity.

31.3



For the purposes of Article 31.2:

(a)



The rate of corporate income tax to be applied to each CONTRACTOR

Entity shall be the generally applicable rate prescribed in the Law of Taxation

(Law No. 5 of 1999), passed by the National Assembly of the Kurdistan

Region, as may be amended from time to time or substituted in respect of

Petroleum Operations (as defined under the Kurdistan Region Oil and Gas

Law) by a petroleum operations taxation Law for the Kurdistan Region, but in

no event in excess of forty per cent (40%). The Parties acknowledge and agree

that at the Effective Date of this Contract, the corporate income tax rate is

forty per cent (40%) for all net taxable profits in excess of nine million Iraqi

dinars.



(b)



The GOVERNMENT and the CONTRACTOR agree that corporate income

tax shall be calculated for each CONTRACTOR Entity on its net taxable

profits under the Contract, as calculated in accordance with the provisions

relating thereto in the Accounting Procedure.



31.4



Each CONTRACTOR Entity, its Affiliates as well as any Subcontractors shall be

exempt from any withholding tax applicable on any payments made to them or by

them to or from Affiliates or third parties, whether inside or outside the Kurdistan

Region and/or Iraq, for the entire duration of this Contract.



31.5



Each CONTRACTOR Entity and its Affiliates shall be exempt from Additional

Profits Tax, as referred to in Article 40 of the Kurdistan Region Oil and Gas Law or

any successor Tax.



31.6



Each CONTRACTOR Entity and its Affiliates shall be exempt from Surface Tax, as

referred to in Article 40 of the Kurdistan Region Oil and Gas Law or any successor

Tax.



31.7



Each CONTRACTOR Entity and its Affiliates shall be exempt from Windfall Profits

Taxes, as referred to in Article 40 of the Kurdistan Region Oil and Gas Law or any

successor Tax.



31.8



Each CONTRACTOR Entity and any Subcontractor shall be subject to the payment

or withholding of the personal income tax and social security contributions for which

such entity or Subcontractor is liable to pay or withhold in respect of its employees

who are Iraqi nationals, pursuant to the Law of Taxation (Law No. 5 of 1999) passed

by the National Assembly of the Kurdistan Region, as may be amended from time to

time, in the same manner as the same shall be generally applied to all other industries,

except that a CONTRACTOR Entity or Subcontractor shall not be liable for such

taxes or contributions with respect to employees of another Person.



31.9



It is acknowledged that double tax treaties will have effect to give relief from taxes to,

but not limited to, the CONTRACTOR, CONTRACTOR Entities, Subcontractors

and employees and other Persons in accordance with the provisions of such double

tax treaties, but shall not impose an additional burden of taxation.



31.10 Any Tax that is a value added tax (“VAT”) and that is not otherwise recoverable by

the CONTRACTOR Entity under applicable VAT Law shall be considered as a

Petroleum Cost and shall be cost recoverable in accordance with the provisions of

Articles 1 and 25.



31.11 Notwithstanding any other provision to the contrary in this Contract, the provisions

of this Article 31 shall apply individually and separately to all CONTRACTOR

Entities under this Contract and there shall be no joint and several liability in respect

of any liability, duty or obligation referred to in this Article 31.



ARTICLE 32 – BONUSES AND CAPACITY BUILDING PAYMENTS

Signature Bonus

32.1



Pursuant to the terms of the Kalar-Bawanoor Contract, WesternZagros Limited paid

a signature bonus of five million Dollars (US$5,000,000) (“Signature Bonus”) to the

GOVERNMENT, receipt of which is confirmed by the GOVERNMENT. No

additional Signature Bonus payable in respect of this Contract.



Capacity Building Bonus

32.2



Pursuant to the terms of the Kalar-Bawanoor Contract, WesternZagros Limited paid

a capacity building bonus of forty million Dollars (US$40,000,000) (“Capacity

Building Bonus”) to the GOVERNMENT, receipt of which is confirmed by the

GOVERNMENT. No additional Capacity Building Bonus is payable in respect of

this Contract.



Production Bonuses

32.3



In the event of a Crude Oil Commercial Discovery, and subject to Article 4.34:

(a)



the CONTRACTOR shall pay the following relevant Crude Oil Production

Bonus to the GOVERNMENT within thirty (30) days of the following

relevant occurrence:

(1)



Two million Dollars (US$2,000,000) when First Production of Crude

Oil from the Contract Area commences;



(2)



Four million Dollars (US$4,000,000) when production of Crude Oil

from the Contract Area reaches a cumulative amount of ten million

(10,000,000) Barrels of Crude Oil and Natural Gas BOE;



(3)



Eight million Dollars (US$8,000,000) when production of Crude Oil

from the Contract Area reaches a cumulative amount of twenty five

million (25,000,000) Barrels of Crude Oil and Natural Gas BOE; and



(4)



Sixteen million Dollars (US$16,000,000) when production of Crude

Oil from the Contract Area reaches a cumulative amount of fifty

million (50,000,000) Barrels of Crude Oil and Natural Gas BOE.



(b)



each holder of a Government Interest, other than the GOVERNMENT or a

Public Company, shall pay, pro rata the percentage of the Government Interest

held such holder to the total Government Interest held by Persons other than

the GOVERNMENT or a Public Company, the following Crude Oil

Production Bonuses to the GOVERNMENT within thirty (30) days of the

following relevant occurrences:

(1)



five hundred thousand Dollars (US$500,000) when First Production of

Crude Oil from the Contract Area commences;



(2)



one million Dollars (US$1,000,000) when production of Crude Oil and

Natural Gas from the Contract Area reaches a cumulative amount of

ten million (10,000,000) Barrels of Crude Oil and Natural Gas BOE;



(3)



two million Dollars (US$2,000,000) when production of Crude Oil

from the Contract Area reaches a cumulative amount of twenty five

million (25,000,000) Barrels of Crude Oil and Natural Gas BOE; and



(4)



four million Dollars (US$4,000,000) when production of Crude Oil

from the Contract Area reaches a cumulative amount of fifty million

(50,000,000) Barrels of Crude Oil and Natural Gas BOE.



32.4



In the event of a Non-Associated Natural Gas Commercial Discovery, and subject to

Article 4.34:



(a)



the CONTRACTOR shall pay the following relevant Non-Associated Natural

Gas Production Bonus to the GOVERNMENT within thirty (30) days of the

following relevant occurrence:

(1)



Two million Dollars (US$2,000,000) when First Production of NonAssociated Natural Gas from the Contract Area commences;



(2)



Four million Dollars (US$4,000,000) when production of NonAssociated Natural Gas from the Contract Area reaches a cumulative

amount of ten million (10,000,000)Natural Gas BOE;



(3)



Eight million Dollars (US$8,000,000) when production of NonAssociated Natural Gas from the Contract Area reaches a cumulative

amount of twenty five million (25,000,000) Natural Gas BOE; and



(4)



Sixteen million Dollars (US$16,000,000) when production of NonAssociated Natural Gas from the Contract Area reaches a cumulative

amount of fifty million (50,000,000) Natural Gas BOE.



(b)



each holder of a Government Interest, other than the GOVERNMENT or a

Public Company, shall pay, pro rata the percentage of the Government Interest

held such holder to the total Government Interest held by Persons other than

the GOVERNMENT or a Public Company, the following Natural Gas

Production Bonuses to the GOVERNMENT within thirty (30) days of the

following relevant occurrence:

(1)



five hundred thousand Dollars (US$500,000) when First Production of

Non-Associated Natural Gas from the Contract Area commences;



(2)



one million Dollars (US$1,000,000) when production of NonAssociated Natural Gas from the Contract Area reaches a cumulative

amount of ten million (10,000,000) of Natural Gas BOE;



(3)



two million Dollars (US$2,000,000) when production of Crude Oil

from the Contract Area reaches a cumulative amount of twenty five

million (25,000,000) Barrels of Natural Gas BOE; and



(4)



four million Dollars (US$4,000,000) when production of Crude Oil

from the Contract Area reaches a cumulative amount of fifty million

(50,000,000) Barrels of Natural Gas BOE.



32.5



The CONTRACTOR shall declare a Commercial Discovery to be either a Crude Oil

Commercial Discovery or a Non-Associated Gas Commercial Discovery. Under no

circumstances shall a Production Bonus be due in respect of both Crude Oil and NonAssociated Natural Gas for the same Commercial Discovery.



Capacity Building Payments

32.6



The provisions of this Article 32.6 are not triggered and do not apply unless, on the

TPI Conversion Date, the GOVERNMENT is a Third Party Interest Holder, and the

assignments contemplated by Article 4.29 occur. If the provisions of this Article 32.6

have been triggered and are applicable, each Charged Interest Holder is bound by the

provisions of this Article 32.6.

32.6.1



The obligations of a CONTRACTOR Entity, to the extent it is a Charged

Interest Holder, as set forth in this Article 32.6, attach to, and may not be

severed from, the Charged Interest.



32.6.2



In respect of the Capacity Building Payment Instalments:

(a)



on or before the tenth (10th) day of each Month in the Development

Period, the CONTRACTOR shall provide to the GOVERNMENT,

together with the monthly production statement prepared by the

CONTRACTOR in accordance with Article 27.4 and Paragraph 6.1,

and the monthly valuation statement in accordance with Article 25 and

Paragraph 7.1, a statement (the “Charged Interest Holders Monthly

Statement”) setting out the CONTRACTOR’s calculation of the

Capacity Building Value attributable to each Charged Interest Holder

for the preceding Month. In each Charged Interest Holders Monthly

Statement, the CONTRACTOR shall detail each item taken into

account in making its calculation of the amounts due from each

Charged Interest Holder, the quantities of Profit Petroleum produced



during the Month covered by such Charged Interest Holders Monthly

Statement, the volumes of such production sold, the Capacity Building

Value attributed to such sales, and the Capacity Building Payment

Instalments required to be paid with respect thereto by each Charged

Interest Holder;

(b)



on the same date on which the CONTRACTOR provides the Charged

Interest Holders Monthly Statement to the GOVERNMENT in

accordance with Article 32.6.2(a), each Charged Interest Holder shall

pay (except as provided in the next sentence) the Capacity Building

Payment Instalment as shown as owed by such Charged Interest

Holder in the Charged Interest Holders Monthly Statement. If:

(1)



a Charged Interest Holder has sold its Profit Petroleum to (i) the

GOVERNMENT or a Public Company (or a company or an

entity owned and controlled, directly or indirectly, by a Public

Company or the GOVERNMENT), (ii) the State Oil Marketing

Organisation (SOMO) or any entity owned and controlled by the

Government of Iraq; and if



(2)



any such counterparty as identified in (1) has not paid the

Charged Interest Holder for the Petroleum lifted by such entity,

then:



(3)



the Charged Interest Holder is only obligated to pay the Capacity

Building Payment when, if, and to the extent the Charged

Interest Holder has received payment by such counterparty. The

preceding sentence does not apply with respect to, and to the

extent of, sales of a Charged Interest Holder’s Profit Petroleum

to any other counterparties;



(c)



within thirty (30) calendar days following the date on which the

CONTRACTOR delivered the Final End-of-Year Statement to the

GOVERNMENT for each Calendar Year in accordance with Article

26.13 and Paragraph 10, and based on the information in such Final



End-of-Year Statement, the CONTRACTOR shall provide to the

GOVERNMENT, in respect of each Charged Interest Holder, a

written reconciliation of the aggregate amount of the Capacity

Building Value and the aggregate payments of the Capacity Building

Payment Instalments during such Calendar Year period (the “Annual

Reconciliation Statement”);

(d)



if the results of an Annual Reconciliation Statement show that a

Charged Interest Holder has, in the aggregate over the Calendar Year

period covered by the Annual Reconciliation Statement, made

Capacity Building Payment Instalments in an amount less than the

aggregate Capacity Building Value attributed to such Charged Interest

Holder during such Calendar Year period, such Charged Interest

Holder shall pay (subject to the same exception as provided in the

second and third sentences of Article 32.6.2(b)) the amount of the

underpayment as shown in the Annual Reconciliation Statement within

thirty (30) calendar days following the same date the CONTRACTOR

delivered



the



Annual



Reconciliation



Statement



to



the



GOVERNMENT;

(e)



if the results of an Annual Reconciliation Statement show that a

Charged Interest Holder has, in the aggregate over the Calendar Year

period covered by the Annual Reconciliation Statement, made

Capacity Building Payment Instalments in excess of the Capacity

Building Value attributed to it during such Calendar Year period, and

if and to the extent the GOVERNMENT has agreed with the

CONTRACTOR and the affected Charged Interest Holder in respect

of the amount of such overpayment, such Charged Interest Holder may

deduct such overpayment to the extent that the GOVERNMENT has

agreed with the amount of such overpayment from the next following

payments of Capacity Building Payment Instalments. In no event will

a Charged Interest Holder be entitled to deduct more than fifteen per

cent (15%) of the amount otherwise payable from the next following

payments of Capacity Building Payment Instalments. The right of set-



off against Capacity Building Payment Instalments will be a Charged

Interest Holder’s only remedy in respect of any overpayment, and the

GOVERNMENT will have no obligation to make any reimbursement

or other compensating payments to the Charged Interest Holder;

(f)



if a Charged Interest Holder fails to pay all or part of a Capacity

Building Payment when due, the Charged Interest Holder shall pay

interest on the unpaid amount at an annual rate of LIBOR plus two per

cent (2%) compounded monthly from and including the date the

payment was due to, but not including, the date paid; and



(g)



if any Capacity Building Payment is due to be paid to the

GOVERNMENT on a day that is either not a banking day in either

the place where the Capacity Building Account is maintained, or the

location of the financial institution through which a Charged Interest

Holder will make such payment, then the Capacity Building Payment

will be due on the next following banking day. A “banking day” is a

day (other than a Saturday, Sunday, or public holiday) on which banks

are open for general business in the specified locations.



Capacity Building Account

32.6.3



The GOVERNMENT shall:

(a)



establish and maintain the Capacity Building Account; and



(b)



deposit



all



Capacity



Building



Payments



received



by



the



GOVERNMENT into the Capacity Building Account.

Rights Sale

32.6.4



The GOVERNMENT may enter into a Rights Sale without the consent of

the CONTRACTOR or any CONTRACTOR Entity.



Separate Liability



32.6.5



Each Charged Interest Holder is separately liable (and not jointly and

severally liable with any other Charged Interest Holder) to the

GOVERNMENT for its obligations, duties and liabilities under this Article

32.6. A CONTRACTOR Entity that is not a Charged Interest Holder will

have no liability to the GOVERNMENT for any claim by the

GOVERNMENT arising out of or related to the breach of any Charged

Interest Holder’s obligations under this Article 32.6.



Breach; Indemnity

32.6.6



(a)



If a Charged Interest Holder fails to pay a Capacity Building Payment

in full when due, the GOVERNMENT will, notwithstanding any

other provision of this Contract, any lifting agreement, any sales or

marketing agreement, or any other agreement, automatically be

entitled, on not less than sixty (60) days prior notice to the defaulting

Charged Interest Holder and the CONTRACTOR in the case of the

first default, and not less than thirty (30) days in the case of any

subsequent default, to:

(1)



lift, at the Delivery Point or at such other point as the

GOVERNMENT may decide, up to twenty-five per cent

(25%) of such defaulting Charged Interest Holder’s Profit

Petroleum; and



(2)



continue to lift up to twenty-five per cent (25%) of such

defaulting Charged Interest Holder’s Profit Petroleum for the

remainder of the Development Period.



(b)



A defaulting Charged Interest Holder will have a single cure period of

thirty (30) days only in respect of its first default. If the defaulting

Charged Interest Holder pays the defaulted Capacity Building

Payments in full plus interest in accordance with Article 32.6.2(f) in

such thirty (30) day period, the GOVERNMENT shall not exercise its

lifting rights under this Article 32.6.6 in respect of such defaulting

Charged Interest Holder. In the case of any subsequent default, the



GOVERNMENT may exercise its right to lift whether or not the

defaulting Charged Interest Holder cures its default in the thirty (30)

day notice period.

32.6.7



The lifting rights of the GOVERNMENT pursuant to Article 32.6.6 are

exercisable by way of set-off, without first resort to legal process, and

without any liability or claims of the defaulting Charged Interest Holder, the

CONTRACTOR, the Operator, or any other Person, and regardless of any

provisions of any lifting agreement or provision of a joint operating

agreement or any other agreement to which the CONTRACTOR or a

defaulting Charged Interest Holder is a party. The CONTRACTOR shall

ensure that all agreements in respect of the lifting or sale of Petroleum

reflect the GOVERNMENT’s priority rights as set forth in Article 32.6.6

and this Article 32.6.7.



32.6.8



(a)



A



defaulting



Charged



Interest



Holder



shall



indemnify



the



GOVERNMENT from any Loss or Expense (as defined in Article

32.6.8(c), below) that may in any way arise from the exercise by the

GOVERNMENT of its rights in respect of such defaulting Charged

Interest Holder under Articles 32.6.6 and 32.6.7.

(b)



The GOVERNMENT will retain control over the defence of, and any

resolution or settlement relating to, such Loss or Expense. A defaulting

Charged Interest Holder shall cooperate with the GOVERNMENT

and provide reasonable assistance in defending any claims against the

GOVERNMENT.



(c)



“Loss or Expense” means any liability, loss, claim, settlement

payment, cost and expense, interest, award, judgment, damages

(including punitive damages), diminution in value, fees or other charge

and, to the extent permitted by Applicable Law, any court filing fee,

court cost, arbitration fee or cost, witness fee, and each other fee and

cost of investigating and defending or asserting a claim for

indemnification, including attorneys’ fees, other professionals’ fees,



and disbursements; but does not include consequential damages. A

claim set forth in a notice from the GOVERNMENT to a defaulting

Charged Interest Holder will be conclusively deemed a Loss or

Expense if the Charged Interest Holder fails to dispute the

GOVERNMENT’s liability by the end of a thirty (30) day period

following the effective date of the notice from the GOVERNMENT.

The Charged Interest Holder shall promptly pay the deemed Loss or

Expense on demand.

32.6.9



The GOVERNMENT’s rights under Articles 32.6.6 through 32.6.8 are not

exclusive and are without prejudice to the GOVERNMENT’s termination

rights under Article 45.



Payments; No Set-off or Deduction

32.6.10 Except as provided in Article 32.6.2(e) and notwithstanding any provision in

this Contract to the contrary, each Charged Interest Holder shall pay all

Capacity Building Payments without (and free and clear of any deduction

for) set-off or counterclaim.

32.6.11 Each Charged Interest Holder acknowledges and accepts that a fundamental

principle of this Article 32.6 is that such Charged Interest Holder must pay

the Capacity Building Payments owed by it as and when required.

Accordingly, in respect of its obligations under this Article 32.6 only and

except as provided in Article 32.6.2(e), each Charged Interest Holder hereby

waives any right to raise by way of set off or invoke as a defence to its

obligations to pay Capacity Building Payments pursuant to this Article 32.6,

whether in law or equity, any failure by the GOVERNMENT or any

CONTRACTOR Entity to pay amounts due and owing under the Contract

or any alleged claim that such Charged Interest Holder may have against the

GOVERNMENT, Operator, other CONTRACTOR Entity, or any other

Person, whether such claim arises under or relates to this Contract or

otherwise.



32.6.12 Each Charged Interest Holder shall make Capacity Building Payments to the

GOVERNMENT by wire transfer of immediately available funds in

Dollars



in



accordance



with



wire



instructions



provided



by



the



GOVERNMENT. The making of any payments by a Charged Interest

Holder under this Article 32.6, or the acceptance or use of any payments by

the GOVERNMENT, does not impair the rights of such Charged Interest

Holder or the GOVERNMENT under Article 15. Any dispute between the

GOVERNMENT and a Charged Interest Holder in respect of the

calculation of each of the Capacity Building Value and the Capacity

Building Payment due with respect thereto is subject to Article 15.9.

Assignment, Reversion

32.6.13 (a)



If a Charged Interest Holder assigns and novates all or any part of its

Charged Interest, the assignee will be a Charged Interest Holder to the

extent of such assignment and novation.



(b)



If (i) a Charged Interest Holder withdraws as a CONTRACTOR

Entity, or (ii) the GOVERNMENT terminates a Charged Interest

Holder as a CONTRACTOR Entity; and if in the cases of clauses (i)

or (ii) all or part of the Charged Interest of the Charged Interest Holder

is either assigned and novated or reverts to the remaining

CONTRACTOR Entities as provided in Article 45, then, in either

such case, such assignee or each remaining CONTRACTOR Entity,

as the case may be, will be a Charged Interest Holder to the extent of

such assignment and novation or reversion, as applicable, provided that

the withdrawing or terminating Charged Interest Holder will be solely

liable for any unpaid Capacity Building Payments attributable to its

Charged Interest prior to the date of withdrawal or termination.



Bonus Recovery and Payment

32.7



No bonus or other payment pursuant to this Article 32 will be recoverable as a

Petroleum Cost.



32.8



Payment by the CONTRACTOR of any bonus or payment due pursuant to this

Article 32 shall be made in Dollars by wire transfer to a specified bank account of the

GOVERNMENT.



ARTICLE 33 – PIPELINES

33.1



The GOVERNMENT shall obtain any required Permits for the transportation of

Petroleum in the Kurdistan Region and in Iraq, as well as any necessary Permits and

easement rights for the construction of any pipelines and related facilities required for

the Petroleum Operations, as provided in Article 33.2.



33.2



The GOVERNMENT undertakes to transfer to the CONTRACTOR its rights for

transportation of Petroleum by pipeline. The CONTRACTOR shall have the right to

design, construct, operate and maintain pipelines and any related facilities for the

transportation of Petroleum produced under this Contract.



33.3



Prior to the construction of any pipeline and related facilities as provided in Article

33.2, the CONTRACTOR shall submit following information to the Management

Committee:

(a)



proposed pipeline route and related facilities;



(b)



forecasted pipeline flow rate and capacity;



(c)



estimate of financial investment and operating costs of the pipeline and related

facilities;



(d)



proposed financing schedule;



(e)



construction schedule;



(f)



general technical description of the pipeline and related facilities;



(g)



construction plans and tests;



(h)



preventive measures for damage to the environment and third parties; and



(i)



any other information relating to the pipeline project.



The Management Committee shall examine all the above information and shall within

ninety (90) days, approve the proposed pipeline project in accordance with the

provisions of Article 8.5.

33.4



Subject to spare capacity being available and to their Petroleum being compatible,

third parties shall be entitled to transport their Petroleum through any pipeline

constructed by the CONTRACTOR in accordance with this Article 33 on terms to be

agreed between the CONTRACTOR and such third party. Those terms shall be

reasonable commercial terms and shall not discriminate among third party users. The

CONTRACTOR shall always have priority of access to such pipelines.



33.5



To the extent that they are incurred upstream of the Delivery Point, any costs

associated with the design, construction, operation and maintenance of the pipelines

and related facilities by CONTRACTOR under this Article 33 (“Pipeline Costs”)

shall be considered Petroleum Costs and shall be recoverable by the

CONTRACTOR in accordance with the provisions of Articles 1 and 25.



33.6



The CONTRACTOR shall have the absolute right, without any exceptions and for

the entire duration of this Contract, to use, free of charge, any pipeline and related

facilities constructed by CONTRACTOR under this Article 33 and to transport

Petroleum produced from any Production Area and to operate and maintain any

pipeline and its related facilities, freely and without any additional costs.



33.7



To the extent related to transportation upstream of the Delivery Point, any tariffs

received from third parties for use of any pipeline and related facilities by

CONTRACTOR under this Article 33 shall be applied to the recovery of Petroleum

Costs until all Pipeline Costs have been fully recovered by the CONTRACTOR

pursuant to the provisions of Articles 1 and 25 and shall not be included in income for

corporate income tax purposes. The GOVERNMENT shall be entitled to receive

any such tariffs from third parties for their use of such pipeline and related facilities

when the said Pipeline Costs have been fully recovered by the CONTRACTOR.

The costs associated with providing such transportation services for third parties up to

the Delivery Point shall be considered Pipeline Costs and therefore Petroleum Costs



and shall be recoverable by the CONTRACTOR in accordance with the provisions

of Articles 1 and 25.

33.8



Upon recovery by the CONTRACTOR of all the Pipeline Costs, the operating and

maintenance costs of any pipeline and its related facilities shall be borne by the

CONTRACTOR and shall be considered Petroleum Costs and shall be recoverable

by the CONTRACTOR in accordance with the provisions of Articles 1 and 25.



33.9



The GOVERNMENT shall have the same rights as the CONTRACTOR for use,

free of charge, of any pipeline and related facilities constructed by CONTRACTOR

under this Article 33 for the transportation of the share of Petroleum to which the

GOVERNMENT is entitled under this Contract up to the Delivery Point.



33.10 The CONTRACTOR shall bear the cost of operation and maintenance of any

pipeline and related facilities constructed by CONTRACTOR under this Article 33

and all risks of accidental loss or damage to such pipeline and related facilities while

they are required for Petroleum Operations.



ARTICLE 34 – UNITISATION

34.1



In the event a Reservoir extends beyond the Contract Area into an adjacent area

which is the subject of another Petroleum Contract (as defined by the Kurdistan

Region Oil and Gas Law) (an “Adjacent Contract Area”), or in the event a

Reservoir of an Adjacent Contract Area extends into the Contract Area, the provisions

of Article 47, Paragraph Second of the Kurdistan Region Oil and Gas Law shall apply

and the GOVERNMENT shall require the CONTRACTOR and the contractor of

the Adjacent Contract Area to agree upon a schedule for reaching agreement of the

terms of the unitisation of the Reservoir, which terms shall be based on reliable

technical, operational and economical parameters, all in accordance with prudent

international petroleum industry practice. In the event that the Minister of Natural

Resources decides the unitisation pursuant to Article 47, Paragraph Third of the

Kurdistan Region Oil and Gas Law, and if the CONTRACTOR does not agree with

the decision of the Minister of Natural Resources, the CONTRACTOR shall be

entitled to arbitration pursuant to the provisions of Article 42.1.



ARTICLE 35 – LIABILITY AND INSURANCE

Liability

35.1



Subject to the other provisions of this Contract, the CONTRACTOR, in its capacity

as the entity responsible for the execution of the Petroleum Operations within the

Contract Area, shall be liable to third parties to the extent provided under Applicable

Law for any losses and damage it may cause to them in conducting the Petroleum

Operations, and shall indemnify the GOVERNMENT with respect to all claims for

such loss or damage where a claim is made against the GOVERNMENT. The

GOVERNMENT will retain control over the defence of, and any resolution or

settlement relating to, such loss or damage. The CONTRACTOR shall cooperate with

the GOVERNMENT and provide reasonable assistance in defending any claims

against the GOVERNMENT.



35.2



Notwithstanding the other provisions of this Contract, the CONTRACTOR will not

be liable to the GOVERNMENT or the Public Company or other government

agencies, authorities or bodies, courts or political subdivisions for any damage or loss

or claims of any kind resulting from the CONTRACTOR’s conduct of the Petroleum

Operations (other than personal injuries, industrial illness, or death), unless such

damage or loss is the result of wilful misconduct or a material failure to conduct

Petroleum Operations in accordance with the terms of this Contract.



35.3



The CONTRACTOR shall indemnify the GOVERNMENT against all losses,

damages and liability arising under any loss, expense, claim, demand, action or

proceeding brought or instituted against the GOVERNMENT:

(i)



by any employee of the CONTRACTOR or of any Subcontractor or

by any dependent thereof, for personal injuries, industrial illness, death

or damage to personal property sustained in connection with, related to

or arising out of the performance or non-performance of this Contract

regardless of the fault or negligence in whole or in party of any entity

or individual; and



(ii)



with respect to all claims for loss or damage made by third parties

arising out of or related to Petroleum Operations.



The GOVERNMENT will retain control over the defence of, and any

resolution or settlement relating to, such loss or damage. The CONTRACTOR

shall cooperate with the GOVERNMENT and provide reasonable assistance in

defending any claims against the GOVERNMENT. A claim set forth in a

notice from the GOVERNMENT to the CONTRACTOR will be conclusively

deemed an indemnifiable loss, damage, or expense. if the CONTRACTOR

fails to dispute the GOVERNMENT’s liability by the end of a thirty (30) - day

period following receipt of the notice from the GOVERNMENT. The

CONTRACTOR shall promptly pay the deemed Loss or Expense on demand.

35.4



The CONTRACTOR shall take all necessary steps to respond to, and shall promptly

notify the GOVERNMENT of, all emergency and other events (including personal

injuries, explosions, leaks and spills), occurring in relation to the Petroleum

Operations which are causing or likely to cause material environmental damage or

material risk to health and safety. Such notice shall include a summary description of

the circumstances and steps taken and planned by the CONTRACTOR to control

and remedy the situation. The CONTRACTOR shall provide such additional reports

to the GOVERNMENT as are reasonably necessary in respect of the effects of such

events and the course of all actions taken to prevent further loss and to mitigate

deleterious effects.



35.5



In the event of emergency situations as set out in Article 35.4, at the request of the

CONTRACTOR, the GOVERNMENT, without prejudice and in addition to any

indemnification obligations the GOVERNMENT may have, shall assist the

CONTRACTOR, to the extent possible, in any emergency response, remedial or

repair effort by making available any labour, materials and equipment in reasonable

quantities requested by the CONTRACTOR which are not otherwise readily

available to the CONTRACTOR and by facilitating the measures taken by the

CONTRACTOR to bring into the Kurdistan Region personnel, materials and

equipment to be used in any such emergency response or remedial or repair effort.

The CONTRACTOR shall reimburse the GOVERNMENT's reasonable and



necessary costs incurred in such efforts, which reimbursed amounts shall be

considered Petroleum Costs and shall be recoverable by the CONTRACTOR in

accordance with the provisions of Articles 1 and 25.

Insurance

35.6



In accordance with prudent international petroleum industry practice, the

CONTRACTOR shall obtain and maintain any insurance required by applicable

Kurdistan Region Law, as well as any insurance approved by the Management

Committee.

Such insurance policies may cover:

(a)



loss of and damage to material and equipment used in the Petroleum

Operations; and



(b)



personal injury, damage to third parties and risks of pollution associated with

Petroleum Operations for reasonable amounts, within the limits approved by

the Management Committee.



35.7



Any insurance policy relating to this Contract shall name the GOVERNMENT as an

additional insured party and shall include a waiver of subrogation protecting the

GOVERNMENT against any claim, loss and damage resulting from any Petroleum

Operation conducted by or on behalf of the CONTRACTOR under this Contract, to

the extent that the CONTRACTOR is liable for such claim, loss or damage under

this Contract. The CONTRACTOR shall not be liable for and shall not purchase

insurance cover for any claims arising from negligence or wilful misconduct of the

GOVERNMENT or of any Public Company or of any of their respective

subcontractors or personnel.



35.8



Upon its written request, the GOVERNMENT shall be provided with insurance

certificates, including necessary details, for any insurance policy maintained by the

CONTRACTOR which relates to this Contract.



35.9



Each CONTRACTOR Entity shall be responsible for the filing of all claims made

under any insurance policy maintained by such CONTRACTOR Entity which relates



to this Contract. Any premiums and payments relating to such insurance policies

(other than political risk insurance) shall be considered Petroleum Costs and shall be

recoverable by the CONTRACTOR in accordance with the provisions of Articles 1

and 25.

35.10 In any insurance policy maintained by a CONTRACTOR Entity which relates to this

Contract, the amount for which the CONTRACTOR itself is liable (the “Deductible

Amount”) shall be reasonably determined between the CONTRACTOR Entity and

the insurer and such Deductible Amount shall in the event of any insurance claim be

considered a Petroleum Cost and shall be recoverable by the CONTRACTOR in

accordance with the provisions of Articles 1 and 25.



ARTICLE 36 – INFORMATION AND CONFIDENTIALITY

36.1



The CONTRACTOR shall keep all records, data and information relating to the

Petroleum Operations in accordance with the Kurdistan Region Oil and Gas Law and

prudent international petroleum industry practice. In addition, it shall provide the

GOVERNMENT with such information and data as it is obliged to provide under

this Contract.



36.2



Upon the GOVERNMENT's written request, the CONTRACTOR shall provide the

GOVERNMENT with samples of any rocks or any other items extracted during the

Petroleum Operations.



36.3



The GOVERNMENT shall have title to all data and information, whether raw,

derived, processed, interpreted or analysed, obtained pursuant to this Contract.



36.4



Each CONTRACTOR Entity shall have the right, without any limitation, to send

Abroad copies of all reports and technical data, magnetic tapes and other data relating

to the Petroleum Operations. Magnetic tapes or other data, the original of which must

be analysed and processed Abroad, may be transported out of the Kurdistan Region.



36.5



Any representatives authorised by the GOVERNMENT and notified to the

CONTRACTOR shall, upon reasonable prior written notice, have reasonable access



to any information and data relating to the Contract Area in the possession of the

CONTRACTOR which the CONTRACTOR is obliged to provide to the

GOVERNMENT pursuant to this Contract. It is understood that, when exercising

such right, the GOVERNMENT shall ensure it does not unduly interfere with or

hinder the CONTRACTOR’s rights and activities.

36.6



The



CONTRACTOR



shall



provide



the



GOVERNMENT



upon



the



GOVERNMENT’s written request any analysis information, reports, tapes or other

data (geological, geophysical, logs, interpretations, drilling reports, etc.) related to the

Petroleum Operations in the possession of the CONTRACTOR. All available

originals of such data shall be transferred to the GOVERNMENT at the end of this

Contract.

36.7



Apart from the exceptions stated in this Article 36, the Parties undertake to keep all

data and information relating to this Contract and the Petroleum Operations

confidential during the entire term of this Contract and not to divulge or disclose such

data or information to third parties without the specific consent of the other Parties,

such consent not to be unreasonably withheld or delayed. The foregoing

confidentiality obligation shall not apply to information or data which:

(a)



is or, through no fault of any Party, becomes part of the public domain;



(b)



is known to the recipient at the date of disclosure;



(c)



is required to be furnished in compliance with any applicable Law, by a

government agency having jurisdiction over a CONTRACTOR Entity, by a

court order or any other legal proceedings; or



(d)



is required to be disclosed pursuant to the rules or regulations of any

government or recognised stock exchange having jurisdiction over a

CONTRACTOR Entity.



36.8



Notwithstanding the foregoing in Article 36.7, in accordance with prudent

international petroleum industry practice, such data and information may be disclosed

to:



(a)



Affiliates of each CONTRACTOR Entity;



(b)



employees, officers and directors of each CONTRACTOR Entity and their

respective Affiliated Companies for the purpose of the Petroleum Operations,

subject to each such entity taking customary precautions to ensure such

information is kept confidential;



(c)



consultants or agents retained by any CONTRACTOR Entity or its Affiliates

for the purpose of analysing or evaluating information or data;



(d)



banks or financial institutions retained by any CONTRACTOR Entity or its

Affiliates with a view to financing Petroleum Operations, including any

professional consultants retained by such bank or financial institution;



(e)



bona fide prospective assignees of a participating interest under this Contract

(including any entity with whom a CONTRACTOR Entity and/or its

Affiliates are conducting bona fide negotiations directed towards a merger,

consolidation or the sale of a material portion of its or an Affiliates shares or

any prospective acquiror of the Government Interest or Third Party Interest);



(f)



prospective or actual Subcontractors and suppliers engaged by a Party where

disclosure of such information is essential to such Subcontractor’s or

supplier’s work for such Party; and



(g)



any other Person or entity, upon the prior written approval of the nondisclosing Parties,



provided that disclosure shall not be made pursuant to paragraphs (c), (d), (e) and (f),

unless such third party has entered into a confidentiality undertaking.

36.9



Any data and information relating to relinquished or surrendered areas under this

Contract shall become the exclusive property of the GOVERNMENT, who shall

have the right to use same for any purpose, in particular for the purpose of promoting

said areas. Each CONTRACTOR Entity shall be entitled to keep copies of such data

and information and to use such data and information for any purpose.



36.10 Subject to the provisions of this Article 36, the CONTRACTOR may not sell nor

exchange any data related to the Petroleum Operations without the approval of the

GOVERNMENT, which approval shall not be unreasonably withheld or delayed

where, in the CONTRACTOR’s reasonable opinion, such sale or exchange would

benefit the Petroleum Operations.



ARTICLE 37 – ENVIRONMENTAL PROVISIONS

37.1



During the performance of the Petroleum Operations, the CONTRACTOR shall take

reasonable measures to ensure that it, the Operator, its Subcontractors and agents

attend to the protection of the environment and prevention of pollution, in accordance

with prudent international petroleum industry practice in similar physical and

ecological environments and any then applicable Kurdistan Region Law.



37.2



Prior to surrendering a portion of the Contract Area, the CONTRACTOR shall take

reasonable measures to abandon the area to be surrendered in accordance with

prudent international petroleum industry practice in similar physical and ecological

environments. Such measures shall include removal or closure in place of facilities,

material and equipment together with reasonable measures necessary for the

preservation of fauna, flora and ecosystems, all in accordance with prudent

international petroleum industry practice in similar physical and ecological

environments. The CONTRACTOR shall only be responsible for site restoration or

environmental damage to the extent the same pertains solely and directly to Petroleum

Operations conducted pursuant to this Contract.



37.3



The CONTRACTOR shall take reasonable precautions and measures in accordance

with prudent international petroleum industry practice in similar physical and

ecological environments to prevent any pollution which may arise directly as a result

of the Petroleum Operations and to protect the environment (fauna and flora), water

sources and any other natural resources when carrying out Petroleum Operations.



37.4



The CONTRACTOR shall, in accordance with prudent international petroleum

industry practice in similar physical and ecological environments, respect the



preservation of property, agricultural areas, and fisheries, when carrying out

Petroleum Operations.

37.5



The GOVERNMENT acknowledges that the CONTRACTOR has conducted and

submitted to the GOVERNMENT an environmental baseline study in respect of the

Contract Area (when it formed part of the Kalar-Bawanoor Contract). The

CONTRACTOR will conduct and submit to the GOVERNMENT an environmental

impact assessment in respect of the First Exploration Well within six (6) months after

the Effective Date.



National Parks and Nature Reserve Areas

37.6



The CONTRACTOR shall take reasonable measures to minimise any adverse

material impact on national parks and nature reserves which may arise directly as a

result of the Petroleum Operations, in accordance with prudent international

petroleum industry practice in similar physical and ecological environments.



37.7



The GOVERNMENT: (i) represents and warrants that, on the Effective Date, there

are no national parks, nature reserves or other protected areas located in whole or in

part within the Contract Area where the CONTRACTOR shall not be entitled to

carry out Petroleum Operations and (ii) covenants that during the term of this

Contract will not designate or create or permit the creation of any national parks,

nature reserves or other protected areas, located in whole or in part within the

Contract Area.



Expenditures

37.8



Any reasonable expenditure incurred by the CONTRACTOR in relation with this

Article 37 shall be deemed Petroleum Costs and shall be recoverable by the

CONTRACTOR in accordance with the provisions of Articles 1 and 25.



Pre-existing Conditions

37.9



The CONTRACTOR is not responsible for any pre-existing environmental

conditions or any acts of unrelated third parties.



ARTICLE 38 – DECOMMISSIONING

38.1



To enable the CONTRACTOR to recover the costs associated with future Contract

Area Decommissioning Operations under this Contract, the CONTRACTOR shall

have the right to establish a reserve fund for future decommissioning and site

restoration (a “Decommissioning Reserve Fund”). The Decommissioning Reserve

Fund may be established at any time during the final ten (10) Calendar Years of the

term of the Production Operations of a Production Area but, upon the reasonable

request



by the



CONTRACTOR,



the



GOVERNMENT



shall



allow



the



CONTRACTOR to establish such fund over a longer period. Once established, the

CONTRACTOR shall make regular contributions to the Decommissioning Reserve

Fund based upon estimated Petroleum Field decommissioning and site restoration

costs in accordance with prudent international petroleum industry practice, and taking

into account interest received and future interest expected to be earned on the

Decommissioning Reserve Fund. Any contributions by the CONTRACTOR to the

Decommissioning Reserve Fund shall be made in Dollars and shall be deemed

Petroleum Costs when paid into the reserve fund, and shall be recoverable by the

CONTRACTOR in accordance with the provisions of Articles 1 and 25.

Contributions to the Decommissioning Reserve Fund shall be placed with a first rate

bank approved by the Management Committee in accordance with Article 8.5.

38.2



If, at the end of the term of the Production Operations of the Production Area, the

GOVERNMENT decides to take over production operations in the Production Area:

(a)



the GOVERNMENT shall become liable for its future Decommissioning

Operations;



(b)



the contributions and any interest accumulated in the Decommissioning

Reserve Fund, to the extent that such contributions have been recovered as

Petroleum Costs, shall be paid to the GOVERNMENT; and



(c)



the



GOVERNMENT



shall



release



the



CONTRACTOR



and



the



CONTRACTOR Entities from any obligations relating to Decommissioning

Operations



and



shall



indemnify



the



CONTRACTOR



and



the



CONTRACTOR Entities for any costs, liabilities, expenses, claims or

obligations associated therewith.

38.3



If the CONTRACTOR undertakes the Production Area Decommissioning

Operations, the contributions and any interest accumulated in the Decommissioning

Reserve Fund shall be paid to the CONTRACTOR and shall be used for the

Decommissioning Operations. The CONTRACTOR shall undertake any such

Decommissioning Operations in accordance with prudent international petroleum

industry practice in similar physical and ecological environments.



38.4



If the Decommissioning Reserve Fund is paid to the CONTRACTOR and the

Decommissioning Reserve Fund is not sufficient to cover all Decommissioning Costs

for the Contract Area, the balance shall be paid by the CONTRACTOR and may be

recovered, if applicable, by the CONTRACTOR Entities or any of their Affiliates

from any other area which is the subject of another Petroleum Contract (as defined by

the Kurdistan Region Oil and Gas Law) anywhere in the Kurdistan Region and, to the

extent the balance is not recoverable as aforesaid, such remaining balance shall be

paid by the GOVERNMENT to the CONTRACTOR.



38.5



If the Decommissioning Reserve Fund is paid to the CONTRACTOR and the

Decommissioning Reserve Fund exceeds all Decommissioning Costs for the Contract

Area, the balance shall be transferred to the GOVERNMENT.



38.6



Any expenditure incurred by the CONTRACTOR in relation with this Article 38,

including any contributions to the Decommissioning Reserve Fund, shall be deemed

Petroleum Costs and shall be recoverable by the CONTRACTOR in accordance with

the provisions of Articles 1 and 25.



38.7



The CONTRACTOR shall submit to the Management Committee for approval in

accordance with Article 8.5 a detailed plan for decommissioning the Contract Area

facilities and site restoration (the “Decommissioning Plan”), such Decommissioning

Plan to be submitted no later than twenty four (24) Months prior to the date estimated

by the CONTRACTOR for the end of Commercial Production from the Contract

Area.



The Management Committee shall provide comments, if any, on the



Decommissioning Plan within ninety (90) days after receipt. The CONTRACTOR’s



completion of the Decommissioning Operations in accordance, in all material

respects, with the Decommissioning Plan for a Production Area approved by the

Management Committee shall satisfy all of the CONTRACTOR’s obligations with

respect to the performance of Decommissioning Operations for such Production Area.

In the event the GOVERNMENT does not agree that Decommissioning Operations

for a Production Area were carried out in accordance with the approved

Decommissioning Plan, it must advise the CONTRACTOR within six (6) months of

CONTRACTOR’s completion of such operations.



ARTICLE 39 – ASSIGNMENT AND CHANGE OF CONTROL

Assignment to Affiliates

39.1



Each CONTRACTOR Entity shall be free to sell, assign, transfer or otherwise

dispose of all or part of its rights, obligations and interests under this Contract to an

Affiliated Company or to another CONTRACTOR Entity with the prior consent of

the GOVERNMENT, which consent shall not be unreasonably delayed or withheld.



Assignment to Third Parties

39.2



Articles 39.2 through 39.6 do not apply to the extent provided in Articles 4.6 through

4.11, Article 32.6, and Article 45.6. Except as provided in those Articles, each

CONTRACTOR Entity shall have the right to sell, assign, transfer or otherwise

dispose of all or part of its rights and interests under this Contract to any Person (other

than an Affiliated Company or another CONTRACTOR Entity) only with the prior

consent of GOVERNMENT, and each CONTRACTOR Entity (if any), which

consent shall not be unreasonably delayed or withheld. Any CONTRACTOR Entity

proposing to sell, assign, transfer or otherwise dispose of all or part of its rights and

interests under this Contract which requires the consent of the GOVERNMENT shall

request such consent in writing and provide reasonable evidence of the technical and

financial capability of the proposed assignee.



39.3



In order for any deed of sale, assignment, transfer or other disposal as provided under

Articles 39.1 or 39.2 to be effective, the Parties (other than a Public Company as a

holder of a Government Interest) and the relevant assignee, shall enter into a binding



and enforceable instrument of assignment and novation governed by English Law,

which shall include an undertaking by the assignee to fulfil the obligations under this

Contract which correspond to the assigned interest.

39.4



By way of clarification, and not in limitation of the foregoing provisions of this

Article 39, the GOVERNMENT shall not be considered to be acting unreasonably in

withholding consent to any such assignment if the assignment to such proposed

assignee is deemed contrary to the GOVERNMENT's interests, as evidenced in

writing to that effect signed by the duly authorised representative of the

GOVERNMENT below.



39.5



In the event a CONTRACTOR Entity assigns or in any other way transfers its rights

and interests under this Contract, including through the exercise of the Option of

Third Party Participation, whether in whole or in part, such assignment or transfer

shall not give rise to any Tax, including on the consideration paid or received or on

the income or gain therefrom.



39.6



The GOVERNMENT may not transfer any or all its rights and obligations under this

Contract to any Person, including to a Public Company or any other company or

entity, except in accordance with Article 4 and Article 32.6.



Change of Control

39.7



“Change of Control” for the purpose of this Article 39.7 means any direct or indirect

change of the identity to the Person who Controls a CONTRACTOR Entity (whether

through merger, sale of shares or of other equity interests, or otherwise) through a

single transaction or series of transactions, from one or more transferors to one or

more transferees, in which the market value of such entity’s participating interest

(which shall be as specified in the Joint Operating Agreement relating to this

Contract) or where there is only one CONTRACTOR Entity, one hundred percent

(100%) in this Contract represents more than seventy five per cent (75%) of the

aggregate market value of the assets of such entity and its Affiliates that are subject to

the Change in Control. For the purpose of this definition: “Control” means the direct

or indirect ownership or control of the majority of the voting rights of the applicable

entity at its shareholders’ meetings or their equivalent; and “market value” shall be



determined based upon the amount in cash a willing buyer would pay a willing seller

in an Arm’s Length transaction.

Each CONTRACTOR Entity which is or anticipates with a reasonable degree of

certainty that it will be subject to a Change in Control, other than to an Affiliated

Company or a CONTRACTOR Entity, shall notify the GOVERNMENT as soon as

practicable after it becomes aware of the Change in Control or anticipated Change in

Control and request the consent of GOVERNMENT, which consent shall not be

unreasonably delayed or withheld. For the avoidance of doubt any change in control

of a publicly listed Affiliate of a Contractor Entity shall not constitute a Change of

Control under the terms of this Contract.

A Change in Control shall not give rise to any Tax including on the consideration paid

or received or on the income or gain therefrom.



ARTICLE 40 – FORCE MAJEURE

40.1



No delay, default, breach or omission of the CONTRACTOR in the execution of any

of its obligations under this Contract shall be considered a failure to perform this

Contract or be the subject of a dispute if such delay, default, breach or omission is due

to a case of Force Majeure. In such event the CONTRACTOR shall promptly notify

the GOVERNMENT in writing and take all reasonably appropriate measures to

perform its obligations under this Contract to the extent possible. The time resulting

from any such delay or curtailment in the execution of such obligations, increased by

the time necessary to repair any damage resulting from or occurred during such delay

or curtailment, shall be added to any time period provided under this Contract

(including the Exploration Period and any extension thereto, any Sub-Period and any

extension thereto and any Development Period and any extension thereto). The

Parties shall meet as soon as possible after the notification of Force Majeure with a

view to using reasonable endeavours to mitigate the effects thereof.



40.2



“Force Majeure” means any event that is unforeseeable, insurmountable and

irresistible, not due to any error or omission by the CONTRACTOR but due to



circumstances beyond its control, which prevents or impedes execution of all or part

of its obligations under this Contract. Such events shall include the following:

(a)



war, whether declared or not, civil war, insurrection, riots, civil commotion,

terrorism, any other hostile acts, whether internal or external;



(b)



strikes or other labour conflicts;



(c)



accidents or blowouts;



(d)



quarantine restrictions or epidemics;



(e)



any act, event, happening or occurrence due to natural causes, in particular,

but without limitation, floods, storms, cyclones, fires, lightning, or

earthquakes;



(f)



environmental restrictions, which the GOVERNMENT has not notified to the

CONTRACTOR;



(g)



except in respect of an of the GOVERNMENT or any Public Company

undertaken in a commercial capacity, any acts or orders of the

GOVERNMENT, any minister, ministry, department, sub-division, agency,

authority, council, committee, or other constituent element thereof, any

corporation owned or controlled by the any of the foregoing; and



(h)



any acts or orders of any other government claiming or asserting jurisdiction

over the subject matter of this Contract, any minister, ministry, department,

sub-division, agency, authority, council, committee, or other constituent

element thereof, or any corporation owned and/or controlled by any of the

foregoing.



40.3



The intention of the Parties is that Force Majeure shall receive the interpretation that

complies most with prudent international petroleum industry practice. Force Majeure

affecting a CONTRACTOR Entity or an Affiliated Company of a CONTRACTOR

Entity shall be deemed Force Majeure affecting the CONTRACTOR if the



consequence of such Force Majeure prevents the performance of any of the

CONTRACTOR’s obligations under this Contract.



ARTICLE 41 – WAIVER OF SOVEREIGN IMMUNITY

41.1



Each Party fully and irrevocably waives any claim to immunity for itself or any of its

assets.

This waiver includes any claim to immunity from:

(a)



any expert determination, mediation, or arbitration proceedings commenced

pursuant to Article 42;



(b)



any judicial, administrative or other proceedings to aid the expert

determination, mediation, or arbitration proceedings commenced pursuant to

Article 42; and



(c)



any effort to confirm, enforce or execute any decision, settlement, award,

judgment, service of process, execution order or attachment (excluding prejudgment attachment) that results from an expert determination, mediation,

arbitration or any judicial, administrative or other proceedings commenced

pursuant to this Contract.



41.2



Notwithstanding Article 41.1 above, this Article 41 will not apply to the

GOVERNMENT in respect of any claim or proceeding arising out of or related to

the exercise of rights by the GOVERNMENT as set forth in Articles 32.6.6 and

32.6.7, in respect of which the GOVERNMENT expressly reserves all sovereign

immunities.



ARTICLE 42 – ARBITRATION AND EXPERT DETERMINATION

Negotiation, Mediation and Arbitration

42.1



For the purpose of this Article 42.1, “Dispute” shall mean any dispute, controversy or

claim (of any and every kind or type, whether based on contract, tort, statute,

regulation or otherwise) arising out of, relating to, or connected with this Contract or



the operations carried out under this Contract, including any dispute as the

construction, existence, validity, interpretation, enforceability, breach or termination

of this Contract, which arises between the Parties (or between any one or more

entities constituting the CONTRACTOR and the GOVERNMENT).

This Article 42.1 does not apply to any Dispute arising out of, or relating to, the

obligations of a Party or the exercise of rights by the GOVERNMENT as set forth in:

(a)



Articles 4.24 and 4.25; and



(b)



Article 32.6.6;



which Disputes shall, except only as provided in Article 32.6.12, be subject to the

exclusive jurisdiction of the courts of the Kurdistan Region located in Erbil.

In the event of a Dispute, the parties to the Dispute shall use their reasonable

endeavours to negotiate promptly in good faith a mutually acceptable resolution of

such Dispute.

Subject to the provisions of Article 42.2, a Party who desires to submit a Dispute for

resolution which has not been promptly resolved as aforesaid shall commence the

dispute resolution process by providing the other parties to the Dispute written notice

of the Dispute (“Notice of Dispute”). The Notice of Dispute shall identify the parties

to the Dispute, shall contain a brief statement of the nature of the Dispute and the

relief requested and shall request negotiations among Senior Representatives.

(a)



In the event that any Notice of Dispute is given in accordance with this Article

42.1, the parties to the Dispute shall first seek settlement of the dispute by

negotiation between Senior Representatives. “Senior Representative” means

any individual who has authority to negotiate the settlement of the Dispute for

a party to the Dispute, which for the GOVERNMENT shall mean the

Minister of Natural Resources.



Within thirty (30) days after the date of



delivery of the Notice of Dispute, the Senior Representatives representing the

parties to the Dispute shall meet at a mutually acceptable date, time and place

to exchange relevant information in an attempt to resolve the Dispute. If a

Senior Representative intends to be accompanied at the meeting by a legal



adviser, each other party shall be given written notice of such intention and its

Senior Representative may also be accompanied at the meeting by a legal

adviser.

(b)



If the Dispute cannot be resolved by negotiation in accordance with Article

42.1 (a) within sixty (60) days after the date of the receipt by each party to the

Dispute of the Notice of Dispute or such further period as the parties to the

Dispute may agree in writing, any party to the Dispute may seek settlement of

the dispute by mediation in accordance with the London Court of International

Arbitration (“LCIA”) Mediation Procedure, which Procedure shall be deemed

to be incorporated by reference into this Article, and the parties to such

Dispute shall submit to such mediation procedure.



(c)



If the Dispute is not settled within the earlier of (A) sixty (60) days of the

appointment of the mediator, or such further period as the parties to the

Dispute may otherwise agree in writing under the mediation procedure under

Article 42.1 (b), and (B) one hundred and twenty (120) days after the delivery

of the Dispute Notice, any party to the Dispute may refer the Dispute to, and

seek final resolution by, arbitration under the LCIA Rules, which Rules shall

be deemed to be incorporated by reference into this Article.

(i)



Any arbitration shall be conducted by three (3) arbitrators.



(ii)



If the parties to the Dispute are the GOVERNMENT and all the

CONTRACTOR



Entities,



the



GOVERNMENT



and



the



CONTRACTOR shall each appoint one (1) arbitrator. If the parties to

the Dispute are the GOVERNMENT and more than one, but not all

the CONTRACTOR Entities, the GOVERNMENT shall appoint one

(1) arbitrator and such CONTRACTOR Entities shall appoint one (1)

arbitrator. If the parties to the Dispute are the GOVERNMENT and

one CONTRACTOR Entity, the GOVERNMENT and such

CONTRACTOR Entity shall each appoint one (1) arbitrator.

(iii)



In any event, the two arbitrators so appointed shall, in good faith, use

all reasonable endeavours to agree on the appointment of the third



arbitrator, who will chair the arbitral tribunal. In case of failure to

appoint an arbitrator or to agree on the appointment of the third

arbitrator, Rules of the LCIA shall apply.

(iv)



The seat of the arbitration shall be in London, England. The language

to be used in any prior negotiation, mediation and in the arbitration

shall be English. During the arbitration procedure and until the arbitral

decision, the Parties shall continue to perform their obligations and

take no actions that would impair the Contract. The arbitral award may

be enforced by any court of competent jurisdiction, including in the

Kurdistan Region. Any award shall be expressed in Dollars.



(v)



The Parties agree that the arbitral award shall be final and not subject

to any appeal, including to the Courts of England on issues of Law.



(vi)



With respect to any matter referred to arbitration under Article 43.4,

the arbitral tribunal shall have the authority to amend this Contract to

restore the economic position referred to in Article 43.3.



Expert Determination

42.2



Any disagreement between the Parties relating to Articles 15.9, 27.2 and 27.7, as well

as any disagreement the Parties agree to refer to an expert, shall be submitted to an

expert. The Management Committee shall prepare and agree appropriate terms of

reference relating to a disagreement to be submitted to the expert, in accordance with

Article 8.5 (“Terms of Reference”), as soon as possible after the Effective Date.

(a)



The disagreement shall be submitted to an expert appointed by mutual

agreement of the Parties within thirty (30) days following the date of

preparation and agreement of the Terms of Reference by the Management

Committee. If the Parties cannot agree on the choice of the expert within such

thirty (30) day period, at the request of either Party, the expert shall be

appointed by the President of the Energy Institute in London, England. Any

expert appointed must have the necessary qualifications for reviewing and

deciding on the subject matter of the disagreement.



(b)



The duties of the expert shall be stated in the Terms of Reference prepared and

agreed by the Management Committee. The Management Committee shall

promptly provide the expert with the agreed Terms of Reference relating to

the disagreement. Each Party shall have the right to give to the expert in

writing any information which it considers useful, provided it does so within

forty-five (45) days after the expert’s appointment. Such information shall be

provided to the other Party at the same time and such other Party shall be

entitled to provide comments on such information to the first Party and the

expert within thirty (30) days after receiving such information. The expert

shall have the right to review and verify any information he deems useful to

assist him in his review of the disagreement.



(c)



The expert shall render his decision within forty-five (45) days of his receipt

of the Terms of Reference and the information referred to in Article 42.2.

Subject to the provisions of Article 15.9, any decision of the expert shall be

final and shall not be subject to any appeal, except in the case of manifest

error, fraud or malpractice. Any costs and expenses associated with the expert

determination shall be shared equally between the Parties.



General

42.3



No negotiation, mediation, arbitration or expert determination procedure under this

Article 42 shall exempt the Parties from fulfilling their respective legal and/or

contractual obligations.



ARTICLE 43 – GOVERNING LAW, FISCAL STABILITY, AMENDMENTS AND

VALIDITY

Governing Law

43.1



This Contract, including any dispute arising therefrom, thereunder or in relation

thereto and the agreement to arbitrate in Article 42, shall be governed by English law

(except any rule of English law which would refer the matter to another jurisdiction),

together with any relevant rules, customs and practices of international law, as well as



by principles and practice generally accepted in petroleum producing countries and in

the international petroleum industry.

This Article 43.1 does not apply to any dispute arising out of, or relating to, the

obligations of a Party or the exercise of rights by the GOVERNMENT as set forth in

Articles 4.24 and 4.25, which shall be governed by Kurdistan Region Law.

Fiscal Stability

43.2



The obligations of the CONTRACTOR in respect of this Contract shall not be

changed by the GOVERNMENT and the general and overall equilibrium between

the Parties under this Contract shall not be affected in a substantial and lasting

manner.



43.3



The GOVERNMENT guarantees to the CONTRACTOR, for the entire duration of

this Contract, that it will maintain the stability of the legal, fiscal and economic

conditions of this Contract, as they result from this Contract and as they result from

the Laws of the Kurdistan Region in force on the date of this Contract.



The



CONTRACTOR has entered into this Contract on the basis of the legal, fiscal and

economic framework prevailing at the Effective Date. If, at any time after the

Effective Date, there is any change in the legal, fiscal and/or economic framework

under the Laws of the Kurdistan Region or other Laws applicable in or to the

Kurdistan



Region



which



detrimentally



affects



the



CONTRACTOR,



the



CONTRACTOR Entities or any other Person entitled to benefits under this Contract,

the terms and conditions of the Contract shall be altered so as to restore the

CONTRACTOR, the CONTRACTOR Entities and any other Person entitled to

benefits under this Contract to the same overall economic position (taking into

account home country taxes) as that which such Person would have been in, had no

such change in the legal, fiscal and/or economic framework occurred.

43.4



If the CONTRACTOR believes that its economic position, or the economic position

of a CONTRACTOR Entity or any other Person entitled to benefits under this

Contract, has been detrimentally affected as provided in Article 43.3, upon the

CONTRACTOR’s written request, the Parties shall meet to agree on any necessary

measures or making any appropriate amendments to the terms of this Contract to re-



establishing the equilibrium between the Parties and restoring the CONTRACTOR,

the CONTRACTOR Entities or any other Person entitled to benefits under this

Contract to the position (taking into account home country taxes) it was in prior to the

occurrence of the change having such detrimental effect. Should the Parties be unable

to agree on the merit of amending this Contract and/or on any amendments to be

made to this Contract within ninety (90) days of the CONTRACTOR’s request (or

such other period as may be agreed by the Parties), the CONTRACTOR may refer

the matter in dispute to arbitration as provided in Article 42.1, without the necessity

of first referring the matter to negotiation and mediation.

43.5



Without prejudice to the generality of the foregoing, the CONTRACTOR shall be

entitled to the benefit of any future changes to the petroleum legislation or any other

legislation complementing, amending or replacing it.



43.6



The Parties agree to cooperate in all possible ways with a view to fully achieving the

objectives of this Contract. The GOVERNMENT shall facilitate the performance of

the Petroleum Operations by promptly granting to the CONTRACTOR any

necessary authorisation, permit, licence or access right and making available any

existing facilities and services with a view to the Parties obtaining maximum mutual

benefit from the Contract.



Amendments

43.7



Any amendment to this Contract shall be the subject of a formal amendment, duly

approved in writing by the Parties and subject to the same conditions of validity as

this Contract. Notwithstanding the foregoing, the GOVERNMENT has the right and

authority to waive the application of the provisions of this Contract on a case-by-case

basis without having to fulfil the conditions of validity of this Contract, should the

CONTRACTOR so request.



43.8



This Contract and the Letter of Representations constitute the entire agreement of the

Parties and supersedes any and all prior understandings or agreements in respect of

the subject matter of this Contract.



43.9



Unless otherwise expressly stated elsewhere in this Contract, no failure or delay of

any Party to exercise any right, power or remedy under this Contract shall operate as a

waiver thereof; nor shall any single or partial exercise of any such right, power or

remedy preclude any other or future exercise thereof or the exercise of any other right,

power or remedy.



Validity

43.10 As signatories to this Contract for and on behalf of the GOVERNMENT, the

Ministry of Natural Resources in the Kurdistan Region and the Regional Council for

the Oil and Gas Affairs of the Kurdistan Region - Iraq hereby represent that they

agree and approve this Contract for the purposes of the Kurdistan Region Oil and Gas

Law.



ARTICLE 44 – NOTICES

44.1



All notices, demands, instructions, waivers, consents or other communications to be

provided pursuant to this Contract shall be in writing in English, shall be effective

upon receipt, and shall be sent by receipted hand delivery or by email (followed by

delivery by reputable international air courier company with an establishment in Erbil

in the Kurdistan Region) to the following addresses:

To the GOVERNMENT:

Attention:

His Excellency the Minister of Natural Resources

Address:

Ministry of Natural Resources

Kurdistan Regional Government

Erbil, Kurdistan, Iraq

Email: mnr@krgoil.com



To the CONTRACTOR:

Attention:

WesternZagros Limited



Address:

Suite 600

440 Second Avenue

Calgary

Alberta

Canada T2P 5E9

Email: shatfield@westernzagros.com



A notice delivered by email with receipt acknowledged shall be deemed to have been

delivered upon leaving the gateway of the sender.

44.2



The above address and/or designated representative of any of the Parties may be

changed on giving ten (10) days prior notice to the other Party delivered pursuant to

Article 44.1.



ARTICLE 45 – TERMINATION

Notice

45.1



The GOVERNMENT undertakes to exercise its termination rights under this Article

45 in a reasonable and proportionate manner, having regard for the nature and severity

of the triggering act or event, the identity of the Person at fault, and the relative

significance of any adverse consequences to the CONTRACTOR or a

CONTRACTOR Entity that may arise from the GOVERNMENT’s exercise of its

rights under this Article 45.



45.2



Except as provided in Article 45.6, in any notice of termination given by the

GOVERNMENT under this Article 45, the GOVERNMENT must specify the

grounds for exercising the termination right and the date on which the Contract or the

rights and interests of a CONTACTOR Entity, as applicable, will terminate.



Corrupt Practices Laws

45.3



If a competent authority has reasonably determined (in a proceeding applying due

process):

(a)



that this Contract has been obtained by the CONTRACTOR, or any Person

acting on behalf of the CONTRACTOR, in violation of Corrupt Practices

Laws; or



(b)



that a permit, approval, consent or waiver in connection with this Contract or

Petroleum Operations has been obtained by the CONTRACTOR, or any

Person acting on behalf of the CONTRACTOR, in violation of Corrupt

Practices Laws;



then, on not less than thirty (30) days’ prior notice to the CONTRACTOR, the

GOVERNMENT may terminate this Contract. Any final determination, judgment,

sanction, or conviction (not subject to further appeal on the issue), including under a

consent order in which there is a finding or admission of guilt, of a judicial or

regulatory authority in Iraq, Canada, England, The Netherlands or Cyprus with

jurisdiction over a CONTRACTOR Entity or an Affiliate of such CONTRACTOR

Entity, will be conclusively determinative.



Unless the GOVERNMENT has



cancelled a notice of termination, this Contract will be terminated as of end of such

thirty (30) day notice period.

Force Majeure

45.4



The CONTRACTOR is not entitled to claim Force Majeure as a consequence of the

GOVERNMENT’s exercise of its rights under this Article 45, and no obligation of

the CONTRACTOR will be tolled as a consequence of any Dispute with respect to

the GOVERNMENT’s exercise of its rights under this Article 45.



Other Grounds for Termination



45.5



45.5.1 The GOVERNMENT may terminate this Contract, on not less than ninety

(90) days’ prior notice, if the CONTRACTOR:

(a)



fails to meet a material financial obligation expressly stated in this

Contract; or



(b)



during the First Sub-Period does not carry out drilling and seismic

acquisition, as detailed in Article 10.2 or, during the Second SubPeriod (or earlier), does not carry out drilling and seismic acquisition,

as detailed in Article 10.3; or



(c)



interrupts Production for a period of more than ninety (90) consecutive

days with no cause or justification acceptable in accordance with this

Contract or under prudent international petroleum industry practice, it

being recognised that Force Majeure is an acceptable justification for

such interruptions; or



(d)



intentionally extracts or produces any mineral which is not covered by

the object of this Contract, unless such extraction or production is

expressly authorised or unavoidable as a result of operations carried

out in accordance with prudent international petroleum industry

practice; or



(e)



refuses to abide by negotiation, mediation, arbitration or expert

decision under Article 42.



45.5.2 If, within the ninety (90) day notice period, the CONTRACTOR has either

remedied the default identified in such notice to the satisfaction of the

GOVERNMENT, or the GOVERNMENT has agreed another remedy with

the CONTRACTOR, including compensation, the GOVERNMENT shall

cancel such notice of termination.

45.5.3 If, within such ninety (90) day notice period, the conditions set forth in Article

45.5.2 have not been satisfied, the GOVERNMENT may, on not less than



thirty (30) days’ notice, terminate the Contract, and, unless such notice is

cancelled by the GOVERNMENT before the end of such thirty (30) day

period, this Contract will be terminated as of the termination date set forth in

the notice from the GOVERNMENT.

Act of Insolvency

45.6.1 Where the CONTRACTOR comprises only WesternZagros Limited, the

GOVERNMENT may terminate the Contract on not less than fourteen (14)

days’ notice to WesternZagros Limited if there occurs, in relation to

WesternZagros Limited, an Act of Insolvency, unless, within such fourteen

(14)-day period, the GOVERNMENT cancels its notice. A termination of the

Contract in accordance with this Article 45.6.1 is effective on and from the

date on which WesternZagros Limited obtained knowledge of the Act of

Insolvency. In a notice provided to WesternZagros Limited in accordance

with this Article 45.6.1, the GOVERNMENT is not obliged to specify the

date on which the termination of the Contract is effective.

45.6.2 Where the CONTRACTOR comprises more than one CONTRACTOR

Entity and WesternZagros Limited is one such CONTRACTOR Entity, the

rights and interests of WesternZagros Limited will be automatically assigned

and novated to the GOVERNMENT on not less than fourteen (14) days

notice from the GOVERNMENT to WesternZagros Limited, and for no

consideration, if there occurs, in relation to WesternZagros Limited an Act

of Insolvency, unless, within such fourteen (14) day period, the

GOVERNMENT cancels its notice.

An assignment and novation of the Contract in accordance with this Article

45.6.2 is automatically effective on and from the date on which

WesternZagros Limited obtained knowledge of the Act of Insolvency. In a

notice provided to WesternZagros Limited in accordance with this Article

45.6.2, the GOVERNMENT is not obliged to specify the date on which the

assignment and novation is effective.

Power of Attorney



45.6.3 Each CONTRACTOR Entity shall promptly take all actions requested by the

GOVERNMENT to give effect to:

(a) an automatic termination of the Contract in accordance with Article 45.6.1;

and

(b) an automatic assignment and novation in accordance with Article 45.6.2.

If the GOVERNMENT determines that an agreement or other documentation

signed by the GOVERNMENT and each CONTRACTOR Entity or other

Party is desirable to evidence an assignment and novation to the

GOVERNMENT in accordance with this Article 45.6.3, each such Party shall

promptly execute such documentation within ten (10) days of receipt thereof.

If a Party fails to deliver such signed agreement or other documentation in the

form required by the GOVERNMENT within ten (10) days of receipt thereof,

then such Party irrevocably constitutes and appoints the GOVERNMENT (or

any other Person which at any time during the term of the Contract may be

nominated by the GOVERNMENT) to act alone, and with full power of

substitution, as to such Party’s true and lawful attorney and agent, with full

power and authority in its name, place and stead to execute, file and record

when as and where required, any and all of such documentation and hereby

ratifies such execution, recording and filing. The power of attorney granted by

this Article 45.6.3 is irrevocable and will survive the insolvency, dissolution,

winding-up or bankruptcy of such Party and extends to bind such Party’s

trustees, administrators, successors and assigns. Each such Party waives any

and all defences which may be available to contest, negate or disaffirm the

action of the GOVERNMENT taken under such power of attorney, provided

that the terms of any such documentation do not increase or change any right

or obligation of such Party under this Contract, except as required to effect the

assignment referred to in Article 45.6.2. Each CONTRACTOR Entity shall

ensure that the authorising resolutions of its board or shareholders, as

applicable, specifically authorises the provision of the power of attorney set

forth in this Article 45.6.3, and shall provide a certified copy of such



resolutions on or before the date such CONTRACTOR Entity becomes a

Party.



Change of Control and Assignment, Expiration

45.7



The rights and interests of an individual CONTRACTOR Entity will be

automatically terminated, without prior notice from the GOVERNMENT, if such

CONTRACTOR Entity: (i) is subject to a Change of Control for which the

GOVERNMENT has not given its authorisation in accordance with Article 39.7; or

(ii)



has made an assignment of all or part of its interests hereunder without the



prior consent of the GOVERNMENT in accordance with Article 39 (including under

any provision of a joint operating agreement).

45.8



This Contract will terminate as provided in Article 6 and Article 7.



Consequences of Termination

45.9



Upon termination or expiration of this Contract:

(a)



the CONTRACTOR (and each CONTRACTOR Entity) will no longer have,

as of the effective date of such termination, any further rights and interests

under this Contract;



(b)



all accrued rights and liabilities of the CONTRACTOR and of each

CONTRACTOR Entity will survive.



(c)



the provisions of Articles 14.10, 16.7, 30, 31, 35.1, 35.3, 35.4, 35.7, 36,

38.2(c), 41, 42, 43.1 to 43.6 and 45.6.3 will survive the termination or expiry

of this Contract.



45.10 If the GOVERNMENT terminates the undivided interests of a CONTRACTOR

Entity, but not the Contract, and there are remaining CONTRACTOR Entities:



(a)



such terminated CONTRACTOR Entity will no longer have, as of the

effective date of such termination, any further rights and interests under this

Contract;



(b)



all accrued rights and liabilities of such terminated CONTRACTOR Entity

will survive; and



(c)



as to and in respect of such terminated CONTRACTOR Entity, the

provisions of Articles 14.10, 16.7, 30, 31, 35.1, 35.3, 35.4, 35.7, 36, 38.2(c),

41, 42, 43.1 to 43.6 and 45.6.3 will survive the termination or expiry of this

Contract.



45.11 If the undivided interests of a CONTRACTOR Entity (or of CONTRACTOR

Entities) are terminated, but the Contract is not terminated and there are remaining

CONTRACTOR Entities, the GOVERNMENT may offer, on not less than fifteen

(15) days’ prior notice from the GOVERNMENT to the other CONTRACTOR

Entities, to assign and novate such terminated CONTRACTOR Entity’s participating

interest, or any part thereof, to the remaining CONTRACTOR Entities on such terms

and in such amounts as the GOVERNMENT may determine. The GOVERNMENT

has no obligation to make such allocation and may retain the terminated interest,

provided that the GOVERNMENT will use reasonable endeavours to find a new

buyer for such interests.

45.12 No assignment, novation, transfer, or other disposition of a terminated

CONTRACTOR Entity’s undivided interests to another CONTRACTOR Entity

pursuant to this Article 45 will be a taxable event under Applicable Law as to the

CONTRACTOR Entity receiving the undivided interests of a terminated

CONTRACTOR Entity.

45.13 Neither the GOVERNMENT nor any CONTRACTOR Entity will assume any

liabilites, obligations, or duties of a terminated CONTRACTOR Entity in respect of

the terminated CONTRACTOR Entity’s undivided interest arising or accrued prior

to the latter of (i) the effective date of the termination of such CONTRACTOR

Entity and (ii) in the case of assignment and novation to the remaining

CONTRACTOR Entities, the effective date of the reassignment and redistribution of



the terminated CONTRACTOR Entity’s interests to another CONTRACTOR

Entity. The GOVERNMENT will in no circumstances assume accrued liabilites,

obligations, or duties of a terminated CONTRACTOR Entity in respect of the

terminated CONTRACTOR Entity’s undivided interest, whenever arising or

accrued. All accrued liabilities will remain the sole obligation of the terminated

CONTRACTOR Entity.

45.14 Nothing in this Article 45 limits or impairs a Party’s rights under the Laws governing

this Contract in respect of termination.



ARTICLE 46 – COUNTERPARTS; EFFECTIVE DATE

The Parties may execute this Contract in counterparts, each of which constitutes an original,

and all of which, collectively, constitute only one agreement. The signatures of all of the

Parties need not appear on the same counterpart, and delivery of an executed counterpart

signature page by facsimile or electronic scan is as effective as executing and delivering this

Contract in the presence of the other Parties. This Contract is effective as of the date set forth

on the signature page (the “Effective Date”). In proving this Contract, a Party must produce

or account only for the executed counterpart of the Party to be charged.



[Signature page follows.]



Execution Date: 25 July, 2011

Effective Date: 31 December, 2010



For the KURDISTAN REGIONAL GOVERNMENT



By :



"Barham Salih"



By :



"Ashti Hawrami"



Barham Salih



Ashti Hawrami



Prime Minister



Minister of Natural Resources



Kurdistan Regional Government



Kurdistan Regional Government



On behalf of the Regional Council



On behalf of the Ministry of Natural



for the Oil and Gas Affairs of



Resources in the Kurdistan Region



the Kurdistan Region - Iraq



For WESTERNZAGROS LIMITED as a CONTRACTOR Entity comprising part of the

CONTRACTOR



By "M.. Simon Hatfield"

M. Simon Hatfield

President



ANNEX A

Map showing coordinates of the Garmian Contract Area corner points



Garmian Block

Point

A

B

C

D

a

b

c

d

e

f

G

H



Easting

534031.75

492441.35

495219.19

502353.68

514750.00

518926.57

524040.00

526720.00

536640.00

553441.19

547673.04

541352.78



Northing

Longitude

3832686.29

45.37130

3850381.01

44.91737

3868916.11

44.94763

3870875.46

45.02579

3880500.00

45.16177

3877080.68

45.20750

3875760.00

45.26352

3873930.00

45.29284

3871380.00

45.40145

3859637.79

45.58477

3851704.89

45.52121

3834401.17

45.45126



Latitude

34.63551

34.79561

34.96277

34.98045

35.06713

35.03623

35.02421

35.00764

34.98434

34.87771

34.80646

34.65070



ANNEX B

ACCOUNTING PROCEDURE



PARAGRAPH 1 – GENERAL PROVISIONS

1.1



Purpose

To classify expenditures, define further Petroleum Costs (in addition to those defined

as such in the Articles of the Contract), and prescribe the manner in which the

CONTRACTOR’s Accounts shall be prepared and approved.



1.2



Definitions

Words and phrases to which a meaning has been assigned in Article 1 or other

Articles of the Contract shall have the same meaning when used in this Annex.



1.3



Inconsistency

In the event of any inconsistency or conflict between the provisions of this Annex and

the other provisions of the Contract, then the other provisions of the Contract shall

prevail.



1.4



Accounting Records and Reports



1.4.1



The CONTRACTOR shall maintain the Accounts in accordance with Article 15.1

and in accordance with this Accounting Procedure, including in accordance with the

charts of Accounts agreed under Paragraph 1.4.2.



1.4.2



Within sixty (60) days of the Effective Date, the CONTRACTOR shall submit to

and discuss with the GOVERNMENT a proposed outline of charts of Accounts,

which outline shall be in accordance with generally accepted standards and

recognized accounting systems and consistent with normal petroleum industry

practice and procedures. Within ninety (90) days of receiving the above submission,

the GOVERNMENT shall either provide written notification of its approval of the

proposal or request in writing revisions to the proposal. Within one hundred and

eighty (180) days after the Effective Date, the CONTRACTOR and the

1



GOVERNMENT shall agree on the outline of charts of Accounts which shall

describe the basis of the accounting system and procedures to be developed and used

under this Contract. Following such agreement, the CONTRACTOR shall

expeditiously prepare and provide the GOVERNMENT with formal copies of the

comprehensive charts of Accounts and manuals related to the accounting, recording

and reporting functions, and procedures which are, and shall be, observed under the

Contract.

1.4.3



Notwithstanding the generality of the foregoing, the CONTRACTOR shall make

regular Statements relating to the Petroleum Operations. These Statements are as

shown:



1.4.4



(a)



Production Statement (as indicated in Paragraph 6).



(b)



Value of Production and Pricing Statement (as indicated in Paragraph 7).



(c)



Cost Recovery and Share Account Statement (as indicated in Paragraph 8).



(d)



Statement of Expenditures and Receipts (as indicated in Paragraph 9).



(e)



Final End-of-Year Statement (as indicated in Paragraph 10).



(f)



Budget Statement (as indicated in Paragraph 12).



All reports and statements shall be prepared in accordance with the Contract,

Kurdistan Region Law, and where there are no relevant provisions of either of these,

in accordance with prudent international petroleum industry practice.



1.5



Language and Units of Account

All Accounts shall be maintained and prepared in the English language and shall be

recorded in Dollars. Where necessary for clarification, the CONTRACTOR may

also maintain Accounts in other currencies.



1.6



Audit and Inspection Rights of the GOVERNMENT

In addition to the provisions of Articles 15.3 to 15.7 and 15.9, the following

provisions shall apply to any audit carried out in accordance with Articles 15.3 to

15.7:

2



1.6.1



For purposes of auditing, the GOVERNMENT, acting reasonably and in accordance

with prudent international petroleum industry practice, may examine and verify, at

reasonable times upon reasonable prior written notice to the CONTRACTOR, all

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

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

any other documents, correspondence and records including electronic records

reasonably considered necessary by the GOVERNMENT to audit and verify the

charges and credits, values and treatments.



1.6.2



Furthermore, the auditors shall have the right in connection with such audit, to visit

and inspect at reasonable times, all sites, plants, facilities, warehouses and offices of

the CONTRACTOR directly or indirectly serving the Petroleum Operations and to

question personnel associated with those Petroleum Operations.



1.6.3



Where the GOVERNMENT requires verification of charges made by an Affiliated

Company of the CONTRACTOR, the GOVERNMENT shall have the right to

obtain an audit certificate for such changes from an internationally recognized firm of

public



accountants



acceptable



to



both



the



GOVERNMENT



and



the



CONTRACTOR, which may be the CONTRACTOR’s statutory auditor.

1.6.4



All agreed adjustments resulting from an audit shall be promptly made in the

CONTRACTOR’s Accounts and any consequential adjustments to payments due to

the CONTRACTOR or to the GOVERNMENT, as the case may be, shall be made

promptly.



1.6.4



When issues are outstanding with respect to an audit, the CONTRACTOR shall

maintain the relevant documents and permit inspection thereof until the issue is

resolved.



1.7



Payments

Unless as otherwise provided in Article 24, Article 29 or other Articles of the

Contract:



1.7.1



All payments between the Parties shall, unless otherwise agreed, be in Dollars and be

made through a bank designated in writing by each receiving party; and all sums due



3



under the Contract shall be paid within thirty (30) days following the end of the

Month in which the obligation to make such payment occurred.

1.7.2



All sums due by one party to the other under the Contract shall, for each day such

sums are overdue, bear interest compounded monthly at LIBOR plus two per cent

(2%).



1.8



Currency Exchange Rates

In addition to the provisions of Article 29, the following provisions shall apply to any

exchanges of currency carried out in accordance with Article 29:



1.8.1



Amounts received and Petroleum Costs incurred, shall be converted from other

currencies into Dollars in accordance with the CONTRACTOR’s usual accounting

procedures which shall reflect generally accepted accounting practices in the

international petroleum industry, and with reference to exchange rates obtained in

accordance with Article 29.



1.9



Accrual Basis, Cash Flow Basis and Reports

All books and Accounts shall be prepared on an accrual basis in accordance with

generally accepted accounting principles used in the international petroleum industry.



1.10



Values and Treatments

Values and treatments proposed by the CONTRACTOR relating to all Petroleum

Costs shall be subject to challenge by the GOVERNMENT in the course of audit to

ensure that they are in accordance with the provisions of this Accounting Procedure.



PARAGRAPH 2 – CLASSIFICATION, DEFINITION AND ALLOCATION OF

COSTS AND EXPENSES

2.1



Segregation of Costs and Expenses

Petroleum Costs shall be segregated in accordance with the purposes for which such

Petroleum Costs are made. The purposes which shall qualify are:



4



(a)



those which have been included in the approved Work Program and Budget

for the year in which the Costs and Expenditures are made;



(b)



expenditures incurred in cases of emergency as set out in Articles 11.7, 13.5,

13.9 35.5, 35.6 and any other Articles of the Contract;



(c)



any other purposes agreed in the Articles of the Contract; and



(d)



other items which have been agreed by the Parties from time to time.



All Petroleum Costs recoverable under Paragraph 3 relating to Petroleum Operations

shall be classified, defined and allocated as set out below.

2.2



Exploration Costs

Exploration Costs are all direct and allocated indirect costs and expenditures incurred

in carrying out the Exploration Operations, including all direct and allocated indirect

costs and expenditures incurred in the search for Petroleum in an area which is, or

was at the time when such costs and expenses were incurred, part of the Contract

Area including:



2.2.1



Aerial, geophysical, geochemical, paleontological, geological, topographical and

seismic surveys and studies and their interpretation and purchased geological and

geophysical information.



2.2.2



Stratigraphic test hole drilling and water well drilling.



2.2.3



Labour, materials, supplies, and services used in drilling and formation testing of

wells with the object of finding Petroleum or Appraisal Wells excluding any costs of

the subsequent completion of such wells as producing wells.



2.2.4



Facilities to the extent used in support of the purposes described in Paragraphs 2.2.1,

2.2.2 and 2.2.3, including access roads.



2.2.5



That portion of all service expenditures and that portion of all general and

administrative expenditures directly attributable to Exploration Costs or allocated

thereto on a consistent and equitable basis.



5



2.2.6



Any other expenditures incurred in the search for and appraisal of Petroleum after the

Effective Date and not otherwise covered under this Paragraph 2.2.



2.3



Gas Marketing Costs

Gas Marketing Costs are all direct and allocated indirect costs and expenditures

incurred in carrying out Gas Marketing Operations and include that portion of all

service expenditures and that portion of all general and administrative expenditures

directly attributable to Gas Marketing Costs or allocated thereto on a consistent and

equitable basis.



2.4



Development Costs

Development Costs are all direct and allocated indirect costs and expenditures

incurred in carrying out Development Operations including all direct and allocated

indirect costs and expenditures incurred in:



2.4.1



Drilling wells which are completed as producing wells and drilling wells for purposes

of producing from a Petroleum reservoir, whether these wells are dry or producing

and drilling wells for the injection of water or gas to enhance recovery of Petroleum.



2.4.2



Completing wells by way of installation of casing or equipment or otherwise after a

well has been drilled for the purpose of bringing the well into use as a producing well

or as a well for the injection of water or gas to enhance recovery of Petroleum.



2.4.3



The costs of Petroleum production, transport and storage facilities such as pipelines,

flow lines, production and treatment units, wellhead equipment, subsurface

equipment, enhanced recovery systems, Petroleum storage facilities, and access roads

for production activities.



2.4.4



Engineering and design studies for the wells and facilities referred to in Paragraphs

2.4.1, 2.4.2 and 2.4.3.

And including that portion of all service expenditures and that portion of all general

and administrative expenditures directly attributable to Development Costs or

allocated thereto on a consistent and equitable basis; and any other expenditure



6



incurred in the Development Operations and not otherwise covered under

Paragraph 2.3.

2.5



Production Costs

Production Costs are all direct and allocated indirect costs and expenditures incurred

in carrying out Production Operations, including all direct and allocated indirect costs

and expenses incurred in Petroleum Operations after First Production which are other

than



Exploration



Costs,



Decommissioning Costs.



Gas



Marketing



Costs,



Development



Costs



and



Production Costs include that portion of all service



expenditures and that portion of all general and administrative expenditures directly

attributable to Production Costs or allocated thereto on a consistent and equitable

basis.

2.6



Decommissioning Costs

Decommissioning Costs are all direct and allocated indirect costs and expenditures

incurred in carrying out Decommissioning Operations and include that portion of all

service expenditures and that portion of all general and administrative expenditures

directly attributable to Decommissioning Costs or allocated thereto on a consistent

and equitable basis, and the Decommissioning Reserve Fund shall be determined on

such basis, in advance of incurring such costs, as provided in Article 38 and, for the

purposes of cost recovery, the contributions to the Decommissioning Reserve Fund

shall be recoverable in accordance with Article 38.



2.7



Service Expenditures

Service expenditures are expenditures in support of Petroleum Operations including

warehouses, vehicles, motorized rolling equipment, aircraft, fire and security stations,

workshops, water and sewerage plants, power plants, housing, community and

recreational facilities and furniture, tools and equipment used in these activities.

Service expenditures in any Calendar Year shall include the costs incurred in such

year to purchase and/or construct the said facilities as well as the annual costs of

maintaining and operating the same. All service expenditures shall be regularly

allocated as specified in Paragraphs 2.2.5, 2.3, 2.4, 2.5 and 2.6 to Exploration Costs,

Gas Marketing Costs, Development Costs, Production Costs and Decommissioning



7



Costs respectively and shall be separately shown under each of these categories.

Where service expenditures are made in respect of shared facilities, the basis of

allocation of costs to Petroleum Operations shall be consistent and equitable and shall

be specified.

2.8



General and Administrative Expenditures

General and administrative expenditures are:



2.8.1



All main office, field office and general administrative expenditures in the Kurdistan

Region including supervisory, accounting, procurement and employee relations

services.



2.8.2



Where the CONTRACTOR is an Affiliate of a group of companies whose

headquarters is Abroad (a “Foreign CONTRACTOR”), an annual overhead charge

shall be made for services rendered (excluding the direct expenditures as referred in

Paragraph 3.1.2.(b)) by any Affiliate of the Foreign CONTRACTOR outside the

Kurdistan Region to support and manage Petroleum Operations under the Contract, or

where the CONTRACTOR, not being a Foreign CONTRACTOR draws upon the

services of an Affiliate within the Kurdistan Region, an annual overhead charge shall

be made for services rendered (excluding the direct expenditures as referred in

Paragraphs 3.1.2.(a) and (b)) by such Affiliate to support and manage Petroleum

Operations under the Contract (“Parent Company Overhead”).

Parent Company Overhead will be deemed to cover the actual cost (being salaries,

wages and labour burden, employee benefits, travel, hotel and other normally

reimbursable expenses paid by the Affiliate of a CONTRACTOR in accordance with

its standard personnel policy in force in the relevant period, provision of office

accommodation and provision of services reasonably necessary for operation and

maintaining such staff offices) incurred for services rendered by those functions of

CONTRACTOR’s Affiliate, such as, but not limited to, international production

headquarters, international exploration headquarters, treasury, payroll, taxation,

insurance, legal, communications, computer services, controllers, personnel,

executive administrative management, research and development, central engineering

and process engineering which:



8



(a)



cannot, without unreasonable effort and/or expenditure or without the release

of confidential data proprietary to any of the CONTRACTOR’s Affiliates, be

charged under any other section of this Annex; and



(b)



are properly allocable to Petroleum Operations under the Contract. It is

understood, however, that services performed by the departments listed above

and other corporate departments which directly benefit Petroleum Operations

under the Contract shall be charged as direct costs in accordance with

Paragraph 3.



In respect of the costs of the CONTRACTOR’s Parent Company Overhead, as

described above, the CONTRACTOR shall charge monthly to Petroleum Operations

an amount equal to the total of the following:

2.8.2.1 Exploration Overhead

The CONTRACTOR shall be entitled to an annual charge based on a sliding scale

percentage and charged monthly to Petroleum Operations. The basis for applying this

percentage shall be the total of Exploration Costs and Gas Marketing Costs during

each Calendar Year (exclusive of this Exploration Overhead) or fraction thereof less

expenditures which have been subjected to the two (2) per cent fee, referred to in

Paragraph 3.1.8(b). The sliding scale percentage shall be the following:

For the first four million Dollars (US $4,000,000) four per cent (4%)

For the next four million Dollars (US $4,000,000) three per cent (3%)

Over eight million Dollars (US $8,000,000) two per cent (2%)

The foregoing percentages may be reviewed but not more often than annually, and

any approved appropriate adjustment shall be made, if necessary, prospectively.

2.8.2.2 Development, Production and Decommissioning Operations Overhead

The overhead rates applicable to Development, Production and Decommissioning

Operations shall be agreed between the Parties in due course and shall incorporate the

following guidelines:



9



(a)



The CONTRACTOR’s charges must be charged as direct charges whenever

possible. Overhead charges exist only to compensate the CONTRACTOR’s

Affiliates for costs which are properly allocable to Petroleum Operations

under the Contract but which cannot, without unreasonable effort and/or

release of confidential data proprietary to the CONTRACTOR’s Affiliates,

be charged under any other section.



Overhead costs are billed monthly.



Overhead must be commensurate with services rendered and based on actual

cost studies but may not exceed an amount calculated as a percentage of

certain annual expenditures excluding Exploration Costs and

(b)



That percentage as well as the types of expenditures, which affect overhead

and those, which do not, shall be agreed among the Parties.



(c)



The maximum percentage rates may be revised by mutual agreement not more

often than annually. The initial maximum percentage rates and the types of

expenditures to which they apply shall be agreed as soon as the Parties possess

reasonably reliable cost estimates for the relevant Production Area.



(d)



Overhead charges are not subject to audit by GOVERNMENT.



(e)



The CONTRACTOR shall upon request furnish at the end of each relevant

Calendar Year to the GOVERNMENT a confirmation by its statutory auditor

that the overhead costs actually charged do not duplicate any other charges

and that the method used in allocating overhead to Petroleum Operations

hereunder as opposed to other activities is reasonable and in accordance with

generally accepted accounting practices.



(f)

2.8.3



The CONTRACTOR must budget for overhead charges.



All general and administrative expenditures shall be regularly allocated as specified in

Paragraphs 2.2.5, 2.3, 2.4, 2.5 and 2.6 to Exploration Costs, Gas Marketing Costs,

Development Costs, Production Costs and Decommissioning Costs respectively and

shall be separately shown under each of these categories.



PARAGRAPH 3 – COSTS, EXPENSES, EXPENDITURES AND CREDITS OF THE

CONTRACTOR



10



3.1



Costs Recoverable Without Further Approval of the GOVERNMENT

The following Petroleum Costs incurred by the CONTRACTOR pursuant to the

Contract as classified under the headings referred to in Paragraph 2 shall be

recoverable for the purpose of Article 25 of the Contract (except to the extent

provided in Paragraph 4 or elsewhere in this Annex) without the requirement for

obtaining any further approval of the GOVERNMENT, subject to audit as provided

for in Article 15 and in Paragraph 1.6.



3.1.1



Surface Rights

All direct costs necessary for the acquisition, renewal or relinquishment of surface

rights acquired and maintained in force for the purposes of the Contract.



3.1.2



Labour and Associated Labour Costs

(a)



The CONTRACTOR’s locally recruited employees based in the Kurdistan

Region: Costs of all CONTRACTOR’s locally recruited employees who are

directly engaged in the conduct of Petroleum Operations under the Contract in

the Kurdistan Region. Such costs shall include the costs of salaries, wages,

bonuses, overtime, employee benefits and GOVERNMENT benefits for

employees and levies imposed on the CONTRACTOR as an employer,

transportation and relocation costs within the Kurdistan Region of the

employee and such members of the employee's family (limited to spouse and

dependent children) as required by Applicable Law or customary practice in

the Kurdistan Region. If such employees are engaged in other activities in the

Kurdistan Region, in addition to Petroleum Operations, the cost of such

employees shall be apportioned on a time sheet basis according to sound and

acceptable accounting principles.



(b)



Assigned Personnel: Costs of salaries and wages including bonuses of the

CONTRACTOR’s employees directly engaged in the conduct of the

Petroleum Operations under the Contract, whether temporarily or permanently

assigned, irrespective of the location of such employees, it being understood

that in the case of those personnel only a portion of whose time is wholly

dedicated to Petroleum Operations under the Contract, only that pro-rata



11



portion of applicable salaries, wages, and other costs as delineated in

Paragraphs 3.1.2(c), (d), (e), (f) and (g), shall be charged and the basis of such

pro-rata allocation shall be specified.

(c)



The CONTRACTOR’s costs regarding holiday, vacation, sickness and

disability benefits and living and housing and other customary allowances

applicable to the salaries and wages chargeable under Paragraph 3.1.2(b).



(d)



Expenses or contributions made pursuant to assessments or obligations

imposed



under



Applicable



Law



which



are



applicable



to



the



CONTRACTOR’s cost of salaries and wages chargeable under Paragraph

3.1.2(b).

(e)



The CONTRACTOR’s cost of established plans for employees' group life

insurance, hospitalization, pension, stock purchases, savings, bonus, and other

benefit plans of a like nature customarily granted to the CONTRACTOR’s

employees, provided however that such costs are in accordance with generally

accepted standards in the international petroleum industry, applicable to

salaries



and



wages



chargeable



to



Petroleum



Operations



under



Paragraph 3.1.2(b).

(f)



Actual transportation and travel expenses of employees of CONTRACTOR,

including those made for travel and relocation of the expatriate employees,

including their families and personal effects, assigned to the Kurdistan Region

whose salaries and wages are chargeable to Petroleum Operations under

Paragraph 3.1.2(b).



Actual transportation expenses of expatriate personnel transferred to Petroleum

Operations from their country of origin shall be charged to the Petroleum Operations.

Transportation expenses of personnel transferred from Petroleum Operations to a

country other than the country of their origin shall not be charged to the Petroleum

Operations. Transportation cost as used in this section shall mean the cost of freight

and passenger service, meals, hotels, insurance and other expenditures related to

vacation and transfer travel and authorized under the CONTRACTOR’s standard

personnel policies. The CONTRACTOR shall ensure that all expenditures related to



12



transportation costs are equitably allocated to the activities, which have benefited

from the personnel concerned.

(g)



Reasonable personal expenses of personnel whose salaries and wages are

chargeable to Petroleum Operations under Paragraph 3.1.2(b) and for which

expenses such personnel are reimbursed under the CONTRACTOR’s

standard personnel policies.



In the event such expenses are not wholly



attributable to Petroleum Operations, the Petroleum Operations shall be

charged with only the applicable portion thereof, which shall be determined on

an equitable basis.

3.1.3



Transportation and Employee Relocation Costs

The cost of transportation of employees, equipment, materials and supplies other than

as provided in Paragraph 3.1.2(f) necessary for the conduct of the Petroleum

Operations under the Contract along with other related costs such as, but not limited

to, import duties, customs fees, unloading charges, dock fees, and inland and ocean

freight charges.



3.1.4



Charges for Services

(a)



Third Parties

The actual costs of contract services, services of professional consultants,

utilities, and other services necessary for the conduct of the Petroleum

Operations under the Contract performed by third parties other than an

Affiliate of the CONTRACTOR.



(b)



Affiliates of the CONTRACTOR

(i)



Professional and Administrative Services Expenses: cost of

professional and administrative services provided by any Affiliates of

the CONTRACTOR for the direct benefit of Petroleum Operations,

including services provided by the production, exploration, legal,

procurement, financial, insurance, accounting and computer services

divisions other than those covered by paragraphs 3.1.4 (b) (ii), 3.1.6

and 3.1.8 (b) which CONTRACTOR may use in lieu of having its



13



own employees. Such charges shall reflect the cost of providing their

services. Such charges shall not include any element of profit and shall

be no more or less favourable than similar charges for other operations

carried on by the CONTRACTOR and its Affiliates. The chargeout

rate shall include all costs incurred by Affiliates incidental to the

employment of such personnel including all Labour and Associated

Labour Costs and the cost of maintaining and operating offices and

providing all support services for such personnel. Costs of travel of

such personnel in respect of Petroleum Operations will be directly

charged.



The charges for such services shall not exceed those



prevailing if performed by non-Affiliated third parties, taking into

account the quality and availability of such services. Where the work is

performed outside the home office base of such personnel, the daily

rate shall be charged from the date such personnel leave the home

office base where they usually work up to their return thereto,

including days which are not working days in the location where the

work is performed, excluding any holiday entitlements derived by such

personnel from their employment at their home office base.

(ii)



Scientific or Technical Personnel: cost of scientific or technical

personnel services provided by any Affiliate of the CONTRACTOR

for the direct benefit of Petroleum Operations, which cost shall be

charged on a cost of service basis and shall not include any element of

profit. The chargeout rate shall include all costs incurred by Affiliates

incidental to the employment of such personnel including all Labour

and Associated Labour Costs and the cost of maintaining and operating

offices and providing all support services for such personnel costs of

travel of such personnel in respect of Petroleum Operations will be

directly charged. The charges for such services shall not exceed those

prevailing if performed by non-affiliated third parties, taking into

account the quality and availability of such services. Unless the work

to be done by such personnel is covered by an approved Work

Program and Budget, the CONTRACTOR shall not authorize work

by such personnel without approval of the GOVERNMENT.



14



(iii)



Equipment and facilities: use of equipment and facilities owned and

furnished by the CONTRACTOR’s Affiliates, at rates commensurate

with the cost of ownership and operation; provided, however, that such

rates shall not exceed those currently prevailing for the supply of like

equipment and facilities on comparable terms in the area where the

Petroleum Operations are being conducted and shall be on an arm’s

length basis. On the request of the GOVERNMENT, the

CONTRACTOR shall provide the GOVERNMENT with evidence

of such rates being on an arm’s length basis. (If the GOVERNMENT

considers that any such rate is not on an arm’s length basis then the

GOVERNMENT has the right to refer the matter to an expert

pursuant to Article 42.2 of the Contract). The equipment and facilities

referred to herein shall exclude major investment items such as (but

not limited to) drilling rigs, producing platforms, oil treating facilities,

oil and gas loading and transportation systems, storage and terminal

facilities and other major facilities, rates for which shall be subject to

separate agreement with the GOVERNMENT.



3.1.5



Communications

Cost of acquiring, leasing, installing, operating, repairing and maintaining

communication systems including radio and microwave facilities within and between

the Contract Area and the CONTRACTOR’s nearest base facility.



3.1.6



Office and Miscellaneous Facilities

Net cost to the CONTRACTOR of establishing, maintaining and operating any

office, sub-office, warehouse, housing or other facility directly serving the Petroleum

Operations. If any such facility services more than one contract area the net costs

thereof shall be allocated on an equitable basis in accordance with prudent

international petroleum industry practice.



3.1.7



Ecological and Environment



15



(a)



Costs incurred in the Contract Area as a result of legislation for archaeological

and geophysical surveys relating to identification and protection of cultural

sites or resources;



(b)



Costs incurred in environmental or ecological surveys required by regulatory

authorities, including an environmental impact assessment commissioned

pursuant to Article 37.5 of the Contract and any other costs incurred in

complying with the requirements of Article 37;



(c)



Costs to provide or have available pollution containment and removal

equipment;



(d)



Costs of actual control and cleanup of oil spills, and of such further

responsibilities resulting therefrom as may be required by applicable laws and

regulations;



(e)



Costs of restoration of the operating environment incurred pursuant to an

approved scheme prepared in accordance with Article 38 of the Contract;



(f)



Any costs incurred for the decommissioning of facilities and site restoration,

including any related activity required by the GOVERNMENT or other

competent authority or by the Contract; and



(g)



Any contributions made by the CONTRACTOR to the Decommissioning

Reserve Fund in accordance with Article 38, when such contributions are

made.



3.1.8



Material and Equipment Costs

Costs of materials and supplies, equipment, machines, tools and any other goods of a

similar nature used or consumed in Petroleum Operations subject to the following:

(a)



Acquisition - the CONTRACTOR shall only supply or purchase materials

for use in Petroleum Operations that may be used in the foreseeable future.

The accumulation of surplus stocks and inventory shall be avoided so far as is

reasonably practical and consistent with efficient and economical operations.

Inventory levels shall, however, take into account the time lag for



16



replacement, emergency needs, weather conditions affecting operations and

similar considerations.

(b)



Components of costs, arm's length transactions - except as otherwise

provided in paragraph 3.1.8(d) , material purchased by the CONTRACTOR

in arm's length transactions in the open market for use in the Petroleum

Operations under the Contract shall be valued to include invoice price less

trade and cash discounts (if any), licence fees, purchase and procurement fees

plus freight and forwarding charges between point of supply and point of

shipment, freight to port of destination, insurance, taxes, customs duties,

consular fees, excise taxes, other items chargeable against imported materials

and, where applicable, handling and transportation expenses from point of

importation to warehouse or operating site. Where an Affiliate of the

CONTRACTOR has arranged the purchase, coordinated the forwarding and

expediting effort, its costs should not exceed those currently prevailing in

normal arm’s length transactions on the open market and in any case shall not

exceed a fee equal to two per cent (2%) of the value of the materials added to

the cost of the materials purchased.



(c)



Accounting - such material costs shall be charged to the accounting records

and books in accordance with the “First in, First Out” (FIFO) method;



(d)



Material purchased from or sold to Affiliates of the CONTRACTOR or

transferred from other activities of the CONTRACTOR to or from Petroleum

Operations under this Contract shall be valued and charged or credited at the

prices specified in Paragraphs 3.1.8(d)(i), 3.1.8(d)(ii) and 3.1.8(d)(iii):

(i)



New material, including used new material moved from inventory

(Condition “A”), shall be valued at the current international net price

which shall not exceed the price prevailing in normal arm's length

transactions in the open market.



(ii)



Used material (Conditions “B”, “C” and “D”;

(A)



Material which is in sound and serviceable condition and is

suitable for re-use without reconditioning shall be classified as



17



Condition “B” and priced at seventy five per cent (75%) of the

current price of new material defined in Paragraph 3.1.8(d)(i);

(B)



Material which cannot be classified as Condition “B” but which

after reconditioning will be further serviceable for its original

function shall be classified as Condition “C” and priced at not

more than fifty per cent (50%) of the current price of new

material as defined in Paragraph 3.1.8(d)(i). The cost of

reconditioning shall be charged to the reconditioned material

provided that the value of Condition “C” material plus the cost

of reconditioning do not exceed the value of Condition “B”

material;



(C)



Material which cannot be classified as Condition “B” or

Condition “C” shall be classified as Condition “D” and priced

at a value commensurate with its use by the CONTRACTOR.

If material is not fit for use by the CONTRACTOR it shall be

disposed of as junk.



(iii)



Material involving erection costs shall be charged at the applicable

condition percentage of the current knocked-down price of new

material as defined in Paragraph 3.1.8(d)(i) .



(iv)



When the use of material is temporary and its service to the Petroleum

Operations under the Contract does not justify the reduction in price as

provided for in paragraph 3.1.8.(d)(ii)(b), such material shall be priced

on a basis that will result in a net charge to the accounts under the

Contract consistent with the value of the service rendered.



(v)



Premium prices - whenever material is not readily obtainable at

published or listed prices because of national emergencies, strikes or

other unusual causes over which the CONTRACTOR has no control,

the CONTRACTOR may charge Petroleum Operations for the

required material at the CONTRACTOR’s actual cost incurred in

providing such material, in making it suitable for use, and in moving it

to the Contract Area; provided notice in writing is furnished to the

18



GOVERNMENT of the proposed charge prior to charging Petroleum

Operations for such material and the GOVERNMENT shall have the

right to challenge the transaction on audit.

(vi)



Warranty of material furnished by the CONTRACTOR - the

CONTRACTOR does not warrant the material furnished. In case of

defective material, credit shall not be passed to Petroleum Operations

until adjustment has been received by the CONTRACTOR from the

manufacturers of the material or their agents.



(vii)



Adjustments arising from material inventories conducted in accordance

with Paragraph 5.2.



(e)



Equipment of the CONTRACTOR charged at rates not to exceed the average

commercial rates of non-affiliated third parties for equipment, facilities,

installations and utilities for use in the area where the same are used. On

request, the CONTRACTOR shall furnish a list of rates and the basis of

application. Such rates shall be revised when found to be either excessive or

insufficient, but not more than once every six (6) Months.

Drilling tools and other equipment lost in the hole or damaged beyond repair

may be charged at replacement cost less depreciation plus transportation costs

to deliver like equipment to the location where used.



(f)



Use of leased or hired machinery and/or equipment in the Petroleum

Operations shall be charged at full cost to the CONTRACTOR. This may

include mobilisation and de-mobilisation charges, lease and hire fees, as well

as other contractual costs.



3.1.9



Rentals and Taxes

All rentals of every kind and nature levied by any GOVERNMENT and all Taxes

imposed in connection with the CONTRACTOR’s assets, income or activities under

the Contract and paid directly by the CONTRACTOR or any CONTRACTOR

Entity (save where the contrary is expressly provided in the Contract) with the



19



exception of Taxes (described in Article 31.2), bonus payments, Capacity Building

Payments, and any other payments made under Article 32.

If the CONTRACTOR, any CONTRACTOR Entity or any of its Affiliated

Companies is subject to income or withholding tax as a result of services performed at

cost for the Petroleum Operations under the Contract, its charges for such services

may be increased by the amount required to cover such taxes (grossed up) including

taxes on such gross up.

3.1.10 Insurance and Losses

Insurance premiums and costs incurred for insurance carried for the benefit of the

Petroleum Operations provided that such insurance is customary, affords prudent

protection against risk and is at a premium no higher than that charged on a

competitive basis by insurance companies which are not Affiliated Companies of the

CONTRACTOR. Except in cases of failure to insure where insurance coverage is

required pursuant to the Contract, actual costs and losses incurred shall be recoverable

to the extent not made good by insurance unless such losses result solely from an act

of wilful misconduct by the CONTRACTOR. Such costs may include repair and

replacement of property in the Contract Area resulting from damages or losses

incurred by fire, flood, storm, theft, accident or such other cause.

3.1.11 Legal Expenses

All reasonable costs and expenses resulting from the handling, investigating,

asserting, defending, or settling of any claim or legal action necessary or expedient for

the procuring, perfecting, retention and protection of the Contract Area, and in

defending or prosecuting lawsuits involving the Contract Area or any third party

claim arising out of the Petroleum Operations under the Contract, or sums paid in

respect of legal services necessary for the protection of the joint interest of the

GOVERNMENT and the CONTRACTOR shall be recoverable. Such expenditures

shall include attorney's fees, court costs, arbitration costs, costs of investigation, and

procurement of evidence and amounts paid in settlement or satisfaction of any such

litigation and claims provided such costs are not covered elsewhere in the Annex.

Where legal services are rendered in such matters by salaried or regularly retained

lawyers of the CONTRACTOR or an Affiliated Company of the CONTRACTOR,

20



such compensation shall be included instead under Paragraph 3.1.2 or 3.1.4(b) as

applicable.

3.1.12 Claims

Expenditures made in the settlement or satisfaction of any loss, claim, damage,

judgement or other expense arising out of or relating to Petroleum Operations, except

as may otherwise be covered elsewhere in the Annex.

3.1.13 Training Costs

All costs and expenses incurred by the CONTRACTOR in the training of its

employees engaged in Petroleum Operations under the Contract.

3.1.14 General and Administrative Costs

The costs described in Paragraph 2.8.1 and the charge described in Paragraph 2.8.2.

3.1.15 Banking Charges and Currency Exchange Losses

Charges and fees by the banks for money transfers, payments and foreign exchange

transactions, as well as currency exchange losses incurred by the CONTRACTOR in

connection with the Petroleum Operations.

3.1.16 Other Expenditures

Other reasonable expenditures not covered or dealt with in the foregoing provisions of

Paragraph 3 which are necessarily incurred by the CONTRACTOR for the proper,

economical and efficient conduct of Petroleum Operations.

3.2



Credit Under the Contract

The proceeds, other than the proceeds from the sale of Petroleum received from

Petroleum Operations under the Contract, including the items listed below shall be

credited to the Accounts under the Contract for the purposes of Article 25 of the

Contract:



3.2.1



The proceeds of any insurance or claim or judicial awards in connection with

Petroleum Operations under the Contract or any assets charged to the Accounts under



21



the Contract where such operations or assets have been insured and the premia

charged to the Accounts under the Contract.

3.2.2



Legal costs charged to the accounts under Paragraph 3.1.11 and subsequently

recoverable by the CONTRACTOR.



3.2.3



Revenue received from third parties for the use of property or assets the cost of which

has been charged to the Accounts under the Contract.



3.2.4



Any adjustment received by the CONTRACTOR from the suppliers/manufacturers

or their agents in connection with a defective material the cost of which was

previously charged by the CONTRACTOR to the Accounts under the Contract.



3.2.5



Rentals, refunds, including refunds of taxes paid, or other credits received by the

CONTRACTOR which apply to any charge which has been made to the Accounts

under the Contract, but excluding any award granted to the CONTRACTOR under

arbitration or expert proceedings.



3.2.6



Costs originally charged to the Accounts under the Contract for materials

subsequently exported from the Kurdistan Region or transferred to another Contract

Area within the Kurdistan Region.



3.2.7



Proceeds from the sale or exchange by the CONTRACTOR of plant or facilities used

in Petroleum Operations the acquisition costs of which have been charged to the

Accounts under the Contract.



3.2.8



Proceeds derived from the sale or license of any intellectual property the development

costs of which were incurred pursuant to and are recoverable under the Contract.



3.2.9



Proceeds derived from the sale, exchange, lease, hire, transfer or disposal in any

manner whatsoever of any other item the costs of which have been charged to

Petroleum Operations.



3.2.10 Proceeds of the disposition of any material the cost of which is included in

Stipulated Sunk Block Costs.

Not later than 31 March 2011, the CONTRACTOR shall present a plan to the

Management Committee to detail the disposition of material acquired by

22



WesternZagros Limited exclusively and included in the Stipulated Sunk Block

Costs which are no longer required for future Petroleum Operations.

3.3



Duplication of Charges and Credits

Notwithstanding any provision to the contrary in this Accounting Procedure, there

shall be no duplication of charges or credits to the Accounts under the Contract.



PARAGRAPH 4 – COSTS AND EXPENSES NOT TO BE TREATED AS

RECOVERABLE

The following costs and expenditures shall not be included in the Petroleum Costs

recoverable under Article 25:

4.1



Taxes on income or profit paid to any GOVERNMENT authority except taxes and

duties that may be included in the costs of material and equipment purchased for the

Petroleum Operations;



4.2



Any payment made to the GOVERNMENT by reason of the failure of the

CONTRACTOR to fulfil its Minimum Exploration Obligations in respect of the

relevant Sub-Period under the Contract.



4.3



The cost of any letter of guarantee, if any, required under the Contract;



4.4



The bonuses, Capacity Building Payments, or other payments set out in Article 32 of

the Contract;



4.5



Costs of marketing or transportation of Petroleum beyond the Delivery Point

(excluding Gas Marketing Costs);



4.6



Attorney’s fees and other costs of proceedings in connection with arbitration under

Article 42 of the Contract or internationally recognised independent expert

determination as provided in the Contract or this Accounting Procedure;



4.7



Any interests, fees, costs and expenses paid by the CONTRACTOR for loans and

any other form of financing or advances for the financing of the Petroleum Costs

entered into by the CONTRACTOR with third parties or Affiliated Companies;



23



4.8



Any accounting provision for depreciation and/or amortisation, excluding any

adjustments in value pursuant to Paragraph 3.1.8;



4.9



Dividends, repayment of equity or repayment of intercompany loans;



4.10



Fines and penalties imposed under Law.



PARAGRAPH 5 – RECORDS AND VALUATION OF ASSETS

5.1



Records

The CONTRACTOR shall maintain detailed records of property in use for

Petroleum Operations under the Contract in accordance with prudent international

petroleum industry practice for exploration and production activities.



5.2



Inventories

Inventories of property in use in Petroleum Operations shall be taken at reasonable

intervals but at least once a year with respect to movable assets and once every three

(3) years with respect to immovable assets. The CONTRACTOR shall give the

GOVERNMENT at least thirty (30) days written notice of its intention to take such

inventory and the GOVERNMENT shall have the right to be represented when such

inventory is taken.

Failure of the GOVERNMENT to be represented at an inventory shall bind the

GOVERNMENT to accept the inventory taken by the CONTRACTOR.

The CONTRACTOR shall clearly inform GOVERNMENT about the principles

upon which valuation of the inventory has been based. The CONTRACTOR shall

make every effort to provide to the GOVERNMENT a full report on such inventory

within thirty (30) days of the taking of the inventory. When an assignment of rights

under the Contract takes place the CONTRACTOR may, at the request of the

assignee, take a special inventory provided that the costs of such inventory are borne

by the assignee.



PARAGRAPH 6 – PRODUCTION STATEMENT



24



6.1



Production Information

Without prejudice to the rights and obligations of the Parties under Article 16 of the

Contract, from the date of First Production from the Contract Area the

CONTRACTOR



shall



submit



a



monthly



production



statement



to



the



GOVERNMENT showing the following information separately for each producing

Development Area and in aggregate for the Contract Area:

6.1.1



The quantity of Crude Oil produced and saved.



6.1.2



The quality characteristics of such Crude Oil produced and saved.



6.1.3



The quantity of Natural Gas produced and saved.



6.1.4



The quality characteristics of such Natural Gas produced and saved.



6.1.5



The quantities of Crude Oil and Natural Gas used for the purposes of carrying on

drilling and production operations and pumping to field storage.



6.1.6



The quantities of Crude Oil and Natural Gas unavoidably lost.



6.1.7



The quantities of Natural Gas flared and vented.



6.1.8



The size of Petroleum stocks held at the beginning of the calendar Month in question.



6.1.9



The size of Petroleum stocks held at the end of the calendar Month in question.



6.1.10 The quantities of Natural Gas reinjected into the Reservoir.

6.1.11 In respect of the Contract Area as a whole, the quantities of Petroleum transferred at

the Measurement Point. All quantities shown in this Statement shall be expressed in

both volumetric terms (Barrels of oil and cubic meters of gas) and in weight (metric

tonnes).

6.2



Submission of Production Statement

The Production Statement for each calendar Month shall be submitted to the

GOVERNMENT no later than ten (10) days after the end of such calendar Month.



25



PARAGRAPH 7 – VALUE OF PRODUCTION AND PRICING STATEMENT

7.1



Value of Production and Pricing Statement Information

The CONTRACTOR shall, for the purposes of Article 25 of the Contract, prepare a

statement providing calculations of the value of Crude Oil produced and saved during

each Quarter and (where there is a Charged Interest Holder) each Month.

This “Value of Production and Pricing Statement” shall contain the following

information:



7.1.1



The quantities and prices realised therefor by the CONTRACTOR in respect of sales

of Natural Gas and Crude Oil delivered to third parties made during the Quarter and

Month in question.



7.1.2



The quantities and prices realised therefor by the CONTRACTOR in respect of sales

of Natural Gas and Crude Oil delivered during the Quarter and Month in question,

other than to Third Parties.



7.2



Submission of Value of Production and Pricing Statement

The Value of Production and Pricing Statement for each Quarter and (where there is a

Charged Interest Holder) each Month shall be submitted to the GOVERNMENT not

later than ten (10) days after the end of such Quarter and Month.



PARAGRAPH 8 – COST RECOVERY AND SHARE ACCOUNT STATEMENT

8.1



Cost Recovery Statement

The CONTRACTOR shall prepare with respect to each Quarter and (where there is a

Charged Interest Holder) each Month a Cost Recovery Statement containing the

following information:-



26



8.1.1



Recoverable Petroleum Costs carried forward from the previous Quarter and Month,

if any.



8.1.2



Recoverable Petroleum Costs for the Quarter and Month in question.



8.1.3



Credits under the Contract for the Quarter in question.



8.1.4



Total Recoverable Petroleum Costs for the Quarter and Month in question (Paragraph

8.1.1 plus Paragraph 8.1.2, net of Paragraph 8.1.3).



8.1.5



Quantity and value of Petroleum applied to cost recovery pursuant to Article 25 taken

by the CONTRACTOR for the Quarter and Month in question.



8.1.6



Amount of recoverable Petroleum Costs to be carried forward into the next Quarter

and (where there is a Charged Interest Holder) the next Month (Paragraph 8.1.4 net of

Paragraph 8.1.5).



8.2.



Cumulative Production Statement

The CONTRACTOR shall prepare with respect to each Quarter and (where there is a

Charged Interest Holder) each Month a Cumulative Production Statement containing

the following information:



8.2.1



The cumulative production position at the end of the Quarter preceding the Quarter

and Month in question.



8.2.2



Production of Export Petroleum for the Quarter and Month in question.



8.2.4



The cumulative production position at the end of the Quarter and Month in question.



8.2.5



The amount of Petroleum applied to Royalty pursuant to Article 24, cost recovery

pursuant to Article 25 and Profit Petroleum pursuant to Article 26 taken by the

GOVERNMENT and by the CONTRACTOR, respectively, during the Quarter and

Month in question.



8.2.6



The forecast of production and the share of Petroleum applied to Royalty pursuant to

Article 24, cost recovery pursuant to Article 25 and Profit Oil pursuant to Article 26

due to the GOVERNMENT and to the CONTRACTOR, respectively, for the next

succeeding Quarter and Month.

27



8.3



Preparation and Submission of Cost Recovery and Cumulative Production

Statements



8.3.1



Provisional Cost Recovery and Cumulative Production Statements, containing

estimated information where necessary, shall be submitted by the CONTRACTOR

on the last day of each Quarter and Month for the purposes of Article 25 of the

Contract.



8.3.2



Final quarterly Cost Recovery and Cumulative Production Statements shall be

submitted within thirty (30) days of the end of the Quarter and Month in question.



8.4



Annual Statement

For the purposes of Article 25 of the Contract, an Annual Cost recovery and

Cumulative Production Statement shall be submitted within ninety (90) days of the

end of each Year. The Annual Statement shall contain the categories of information

listed in Paragraphs 8.1 and 8.2 for the Year in question, separated into the Quarters

of the Year in question and showing the cumulative positions at the end of the Year in

question with respect to cumulative unrecovered Petroleum Costs and Cumulative

Production.



PARAGRAPH 9 – STATEMENT OF EXPENDITURE AND RECEIPTS

9.1



The CONTRACTOR shall prepare with respect to each Quarter a Statement of

Expenditure and Receipts under the Contract. The Statement will distinguish between

Exploration Costs, Gas Marketing Costs, Development Costs, Production Costs and

Decommissioning Costs and will identify major items of expenditures within these

categories. The Statement will show the following:



9.1.1



Actual expenditures and receipts for the Quarter in question.



9.1.2



Cumulative expenditure and receipts for the budget Calendar Year in question.



9.1.3



Latest forecast cumulative expenditures at the Calendar Year end.



9.1.4



Variations between budget forecast and latest forecast and explanations thereof.



28



9.2



The Statement of Expenditure and Receipts of each Quarter shall be submitted to the

GOVERNMENT no later than thirty (30) days after the end of such Quarter.



PARAGRAPH 10 – FINAL END-OF-YEAR STATEMENT

The CONTRACTOR will prepare a Final End-of-Year Statement. The Statement will

contain information as provided in the Production Statement, Value of Production and

Pricing Statement, Cost Recovery and Cumulative Production Statements and Statement of

Expenditures and Receipts but will be based on actual quantities of Petroleum produced and

expenses incurred. This Statement will be used to make any adjustments that are necessary to

the payments made by the CONTRACTOR under the Contract. The Final End-of-Year

Statement of each Calendar Year shall be submitted to the GOVERNMENT within ninety

(90) days of the end of such Calendar Year.



PARAGRAPH 11 – AUDITS

Each such report and statement provided for in Paragraph 6 through 10 shall be considered

true and correct, unless the GOVERNMENT raises an exception thereto within the

timeframe and under the process set out in Article 15 of the Contract.



PARAGRAPH 12 – ANNUAL WORK PROGRAM AND BUDGET

11.1



Each annual Work Program and Budget to be prepared in accordance with Articles

11, 12 and 14 of the Contract, in respect of Exploration Costs, Gas Marketing Costs,

Development Costs and Production Costs respectively will show the following:



11.1.1 Forecast expenditures for the budget Calendar Year in question including a quarterly

classification of such expenditures.

11.1.2 Cumulative expenditures to the end of said budget Calendar Year.



29



11.1.3 A schedule showing the most important individual items of Development Costs (if

applicable) for said budget Year.



PARAGRAPH 13 – CONTRACTOR ENTITY INCOME TAX COMPUTATION

13.1



For the purpose of Article 31.3(b) of the Contract, the net taxable profits of each

CONTRACTOR Entity from all the Petroleum Operations carried out under this

Contract, shall be calculated in accordance with this Paragraph.



13.2



Each CONTRACTOR Entity shall maintain for each Calendar Year separate

Accounts with respect to the Petroleum Operations which shall be used, inter alia, to

establish a profit and loss account and a balance sheet which will show the results of

the Petroleum Operations carried out in such Calendar Year as well as the assets and

liabilities assigned or directly related thereto. The profit and loss account will be

maintained under the accrual method of accounting.



13.3



For purposes of determining the net taxable profits of each CONTRACTOR Entity

for corporate income tax purposes:



13.3.1 the profit and loss account of such CONTRACTOR Entity shall be credited with the

following:

(a)



if the Royalty is paid in cash pursuant to Article 24, revenues arising from the

disposal of Royalty volumes as recorded in such entity’s Accounts and

determined in accordance with the provisions of Article 24;



(b)



revenues arising from the disposal of any Available Petroleum to which such

entity is entitled for recovery of its Petroleum Costs as recorded in its

Accounts and determined in accordance with the provisions of Article 25;



(c)



revenues from the disposal of any Profit Petroleum to which such entity is

entitled under Article 26 as is recorded in its Accounts and determined in

accordance with the provisions of Article 26;



(d)



any other revenues or proceeds directly connected to the Petroleum Operations

including those arising from the disposal of related Petroleum substances, or

from the treatment, storage and transportation of products for third parties;

30



(e)



any exchange gains realised or other financial income earned by such entity in

connection with the Petroleum Operations;



13.3.2 the profit and loss account for such CONTRACTOR Entity shall be debited with all

charges incurred for the purposes of the Petroleum Operations whether incurred inside

or outside the Kurdistan Region, which charges shall include the following:

(a)



in addition to the charges specifically set forth below in this Paragraph, all

other Petroleum Costs, including the costs of supplies, personnel and

manpower



expenses,



and



the



cost



of



services



provided



to



the



CONTRACTOR in connection with the Petroleum Costs;

(b)



if the Royalty is paid in cash pursuant to Article 24, Royalty payments made

and as recorded in such entity’s Accounts and determined in accordance with

the provisions of Article 24;



(c)



General and administrative expenditures related to the Petroleum Operations

performed under this Contract;



(d)



depreciation of capital expenditure in accordance with the following

provisions:

(i)



capital expenditures incurred by the CONTRACTOR for the purposes

of the Petroleum Operations shall be depreciated on a reducing balance

basis;



(ii)



the depreciation rates, which shall be applicable from the Calendar

Year during which such capital expenditures are incurred, or from the

Calendar Year during which the assets corresponding to said capital

expenditures are put into normal service, whichever is later, for the

first Calendar Year in question and for each subsequent Calendar Year,

are as follows:



31



Nature of the capital asset to be depreciated



(e)



Annual depreciation Rate



Permanent buildings



10.0%



Temporary buildings



20.0%



Office and home furniture and fixtures



20.0%



Productive wells



20.0%



Production and delivery equipment



20.0%



Drilling equipment



20.0%



Pipelines



20.0%



Automotive equipment



20.0%



Marine and aviation equipment



20.0%



All other capital assets



20.0%



Exploration Costs (which for the avoidance of doubt include appraisal

expenditures) shall be deductible on a reducing balance basis at the rate of

20% per annum.



(f)



interest and fees paid to creditors of the CONTRACTOR, for their actual

amount;



(g)



losses of Assets resulting from destruction or damage, assets which are

renounced or abandoned during the year, assets which are transferred under

Article 20.2, bad debts, indemnities paid to third parties as compensation for

damage;



(h)



any other costs, expenses, losses or charges directly related to the Petroleum

Operations, including exchange losses realised in connection with the



32



Petroleum Operations as well as the bonuses Capacity Building Payments, or

other payments provided in Article 32, the Exploration Rental provided in

Article 6.3, the Production Rental provided in Article 13.10, the allocation to

training, provided in Article 23.7 and the allocation to the Environment Fund

provided in Article 23.9, the costs specified in Articles 23.11, 38.1 and 38.6

and transportation and marketing costs beyond the Delivery Point;

(i)



the amount of non-offset losses relating to the previous Calendar Years, which

shall be carried forward for an indefinite period until full settlement of said

losses or termination of this Contract;



13.3.3. the net profit of such CONTRACTOR Entity shall be equal to the difference

between all the amounts credited and all the amounts debited in the profit and loss

account; and

(a)



if this amount is negative, it shall constitute a loss.



(b)



if the amount is positive, it shall be grossed up to take account of the fact that

such entity’s



corporate income tax



is



being settled



out



of the



GOVERNMENT’s share of the Profit Petroleum in accordance with Article

31.2, by applying the following formula in order to provide such entity’s net

taxable profits for corporate income tax purposes:

Net Taxable

Profits=



13.4



Net Profits/



(100 - Applicable Rate of Corporate Income Tax )

100



For purposes of determining each CONTRACTOR Entity’s liability to corporate

income tax for a tax year in respect of the Petroleum Operations carried out under this

Contract, the net taxable profits (if any) for such tax year shall be multiplied by the

applicable rate of corporate income tax, as provided in Article 31.3(a).



33



ANNEX C

Stipulated Sunk Block Costs Prior to Effective Date



1



ANNEX D

Form of Payment Guarantee



1