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Exploration and Production Sharing Agreement








4lh May 2006











- between -








Kurdistan Regional Government - Iraq/Sulaimany


Administration








- and -








WesternZagros Limited





South Sulaymaniyah Area


 TABLE OF CONTENTS








p««*





ARTICLE I INTERPRETATION


---2


1.1 ---2


u


--- 9


1.3 -9


14 --- 9


1J Operator 10


ARTICLE 2 SCOPE AND TERMINATION.


2.1 SCOPC ................ •••• »---••••--- --- WMMHMMWOW --- 10


10


12 Conditions Precedent.................................... II


2-3 Effective Date and T.


2.4 Grounds for Tenninat II


2.5 Surviving Obligations 11


ARTICLE 3 MANAGEMENT OF OPERATIONS. 12





---12


3.1


--- 12


3 2


--- 13


ARTICLE 4 WORK PROGRAMS AND BUDGET -15


4.1 Commitment in First Exploration Period...------------------------------ -15


4.2 Exploration Wells during First Exploration Period.................. -IS


4.3 Testing of Selected Structures .............................. -16


4.4 AppMSal Program........................................._..... .... 16


4.5 Factors Affecting Schedule of Exploration and Appraisal Activities ir





4.6 First Exploration -.....-........--- ______ IS


Commitment in Second Exploration Period------------ -19


4.7 Commitment in Third .19


4.1 -19


49 20


4.10 21


4.11


-21





4.12 Exploration--------------..... -21


4.13 Discovery and Appraisal .22


4.14 Commercial Discovery.. .22


4.15 Development Plan......... .23


4.16 Development Work .25


4.17 EHS .25


4. IS .26


ARTICLES DUCT OF WORK 26





5.1 --- 26


52 to Contract Area -B4





 TABLE OF CONTENTS


(continued)


P*«c








5.3 Goods, Services, Training and Secondment .............28


5.4 Flaring of Natural Gas------------------- ..............30


5.5 ()perator and its Sub-Contractors........ ................30


ARTICLE 6 SHARING OF PETROLEUM............. ................30





Option A


6.1 Allocation of Petroleum under Option A...................... ................30


6 2 Option D ..........-.36


Allocation of Petroleum under Option B......................


6.3


Interpretation of Article 6................ ...41


64 Adjustment of Price Categories---------- ...41


65 Option of Government....................... ...42


6.6 Lifting ••••••••••••••••••••••••••••••••••••••»•••••« tminlliHMi 42


6.7 Title and Risk........................................ ...............43


6.8 Downstream Delivery........................................................................... ..............43


6.9 Payment termM....................................................................................... -............44


6.10 Sharing on a Tax Paid Basis.................................................................. 41


•••••••••••at* ^ »


ARTICLE 7 SUPPLY OF CRUDE OIL TO KURDISTAN REGION !X)MESTTC





MARKET


7.1


Domestic Market Obligation------------------------------- --- 44


7 2 --- 44


7J Swap of Regional Supply V for Export Volumes. --- 45





ARTICLE 8 VALUATION AND MEASUREMENT OF PETROU-UM________ -------46


8.1 Point of Valuation..... --------46


8.2 Value ofCradc Oil- ---------46


8.3 Natural Gas Markets. -----47





84 ------47


ARTICLE 9 SIGNATURE BONUS AND PAYMENTS------


48


9.1


9 2 Payment -48


-48


9J Late Payment --- 48


ARTICLE 10 RELINQUISHMENT OF CONTRACT AREA...


.....49


10.1 Periodic Relinquishment of Exploration Area -.....................


10.2 Final Relinquishment of Exploration Area™.................. .49


10.3 Relinquishment of Development Area........................ .49


10.4 Termination of Agreement in respect of Relinquished Area. -49


10.5 Gas Retention Area--------- .... SO


106 Oil I ...50


 TABLE OF CONTENTS


(continued)





P«*c








ARTICLE II OBLIGATIONS OF GOVERNMENT- --- 51


11.1 ...SI


11.2 Stability.................. ...53


11.3 Foreign Exchange... .54


ARTICLE 12 RECOVERABLE COSTS................................................. --- 55





12.1 Generally................................................................... -55


12.2 Recoverable Coats...................................................--- -56


12.3 Recoverable Costs Allocation------------------.....-............... ...56





ARTICLE 13 TITLE TO EQUIPMENT... 56


13.1 Property... 56


ARTICLE 14 EXISTING CONDmONS .57





14.1 Base Line Study .57


14.2 .57


14.3 .51


ARTICLE 15 CONSULTATION AND ARBITRATION .51


15.1 -51


15.2 _59


I5J Arbitration-- .59


15.4 Expert IX*termination. .60


15.5 Waiver of Sovereign Immunity------------------------ -61


ARTICLE 16 FINANCIAL AND TECHNICAL DATA. RECORDS AND REPORTS .. .61





16.1 Ownership................---.......................................................................... .61


16.2 Records. Storage. Retrieval and Submission..................................................... .62


16.3 Reports .62


16.4 Export of Data and Information......................................................................... .62


16.5 11 sc of Data and Information.............................................................................. .63


16.6 Confidentiality of Data and Information............................................................ .63





16.7 Trade Secrets................................................................................. ••••I........ .65


16.8 Public Announcement.................................................................... 65


ARTICLE 17 AUDIT........................................................................................... 66





17.1 Independent Audit...............................-................-.......-.........-....................... 66


171 Government Audit------------------------- 66


17.3 Exceptions..........---......-................... 66


17.4 Contractor to Assist--------------------------- 66


17.5 Affiliates ------.........---------- ----------- -“'s











EPSA 20064541 -111-


 TABLE OF CONTENTS











ARTICIB III INDEMNITY AND INSURANCE --67


III __67


l«J _67


AR PU LE 19 FORCE MAJEURE - -67


19.1 Force Majeure Relief. «*mM***t«MM ----67


19.2 --61


19.1 -61


194


19.5 of Tic 69


ARTICLE 20 RESTRICTIONS ON ASSIGNMENT. 69


69





70


ARTICLE 21 OTHER PROVISIONS. 70


21.1 70


2U 70


21J --71


21.4 Ratification of Agreement as Aprlicable Law.. _71


21.5 Enuranenl and Third Part)- Rights............... _________71


21.6 Amcndmcnts/Modi ficatlon --71


21.7 OECD Convention ............ --------71


21.1 Severability....................... ______72


21.9 lintirc Agreement................ •••••••••••••••••••••••••••••••••ms*** 72


21.10 Relationship of Parties ....... 72


21.11





ANNEX A- CONTRACT AREA





ANNEX B • ACCOUNTING PROCEDURE


ANNEX C- ILLUSTRATIVE DRILLINO PLAN





ANNBXD- SAMPLE TABLES AND EXAMPLES OP ROYALTY OIL. COST


RECOVERY OIL. PROFIT OIL AND LOCAL COMMUNITY


ANNEXR- BENEFIT





DRAFT LA














-iv-


 EXPLORATION AND PRODUCTION SHARING AGREEMENT


Tkb F.iploration and Production Sharing Agreement is entered into this fourth day of May


2006


BETWEEN:





Kurdistan Regional Government -


IRAQ/SULAIMANY ADMINISTRATION, represented in this


Agreement by His Excellency Mr. Omar Fatah Hussein, in his


official capacity as Prime Minuter of the Kurdistan Regional


Government Iraq - Sulaimanv Administration (Che


"Government*)





- and -


WeSTEKNZaGROS LIMITED, a wholly owned subsidiary of





Western Oil Sands Inc., represented in this Agreement by Mr.


John Frangos. in his official capacity as a Director


('Contractor'’)


(each referred to individually as a "party* or collectively as the "parties").





RECITALS:





A Ihc development of Petroleum to bring the greatest benefit for the people is a strategic


policy of the Government, using the most modem techniques of market principles;


B. The Government wishes to encourage investment in Petroleum in the Territory, and has


the power to enter into Petroleum contracts within the Tciritory;


C. The area referred to as the "South Suiaymamyah Area* (more specifically defined below


as the Contract Area) contains no “current fields* within the meaning of the Constitution


of the Republic of Iraq:


D. The Government has the power to administer Petroleum Operations within the Contract


Area;


E. The Government wishes to promote Petroleum Operations in the Contract Area and


Contractor desires to join and assist the Government in exploring for, developing and


producing, transporting, processing, marketing and exporting Petroleum from the


Contract Area;


F. Pursuant to a Memorandum of Understanding between Contractor and the Government


dated November 24. 2004. and a Memorandum of Understanding between Contractor and


the Ministry of OU. Baghdad dated March 23. 2005. Contractor has been providing /


training programs in support of the Government, and conducting geological, geochemical^ 3











trSA70*4i4l


 2





and geophysical surveys in support of cxplornlion in the Contract Area, in anticipation of


providing survey results to the Government, and in the expectation of the issuance of this





H. Contractor, as a wholly-owned subsidiary of Western Oil Sands Inc. that has executed oil





projects in Canada, has the financial and management capability, and the technical


knowledge and technical ability, to carry out the Petroleum Operations in a manner


wholly consistent with this Agreement.


I. In view of the difficult history of suffering that the people of the Federal Region of


Kurdistan have endured and in recognition of the urgent need of the population of the


Federal Region of Kurdistan to improve their standard of living, the parties agree to use


their best efforts, in accordance with Good Oil Field Practice, to explore for. appraise,


develop, produce and export Commercial Discoveries of Petroleum in order to commence


commercial production at the earliest possible date; and


J. The work program laid out in Article 4 for the First Exploration Period is planned on the


basis of this urgent need of the disadvantaged people of the Federal Region of Kurdistan


in order to alleviate their suffering in the most timely manner.





NOW. THEREFORE, it is agreed:





ARTICLE I


INTERPRETATION





l.l Definitions





In this Agreement and any Annex, except where the context shall not permit





Accounting Records' has die meaning given in Clause 1.2 of Annex B;





•Affiliate* means, in respect of a corporation, a corporation that controls, is controlled by. or is


under common control with, that corporation, and far the purposes of this definition, "coocrol*


menu the ownership directly or indirectly of a sufficient number of the shares or vooig rights in


a corporation lo be able to elect its board of directors;





•Agreement" means this Exploration and Production Sharing Agreement;


"Applicable I.aw" has the meaning given in Section 2.1.1;





’Appraisal" meins any appraisal activities, including appraisal wells, the purpose of which at





Petroleum reserves and the volume of recoverable oil contained in a Discovery, and all related


activities;





'Appraisal Costs' has the meaning given in Clause 2.2 of Annex B

















cm J006 M 01


"AMociuied (|UM means Natural Gas, commonly known ns gas-cap gas. which overlies and is .3 .3


contact witli rignificani quantities of Crude Oil in u Reservoir, and solution gas dissolved


Crude Oil in a Reservoir,


'Available ( rude OiT means Crude Oil produced from the Contract Area, excluding that


portion of such Crude Oil which is utilized in conducting Petroleum < >perations;


"Available Natural Gas" means Natural Gas produced from the Contract Area, excluding that





portion of such Natural Qaa which is utilized in conducting Petroleum Operations;


'Basiues* Day" means a day which is not a weekend or official public holiday in the Federal


Region of Kurdistan or the Republic of Iraq and on which hanks are open for business in


Calgary, Alberta, Canada and in New York City;


"Calendar Year" means a period of twelve (12) months commencing with January I tuid ending


on the following December 31 according to the Gregorian calendar,





"Capital Expenditures” means expenditures of a capital nature in accordance with generally


accepted accounting principles and standards of the international petroleum industry;





■Commercial Discovery" means a discovery of Petroleum that has been declared commercial in


accordance with the provisions of this- Agreement;





•Commercial Production" occurs on the first day of the first period of thirty (30) consecutive


days of regular production according to the Development Plan;





"Coatract Area" means the area specified in Annex A which is in part of the Territory, but not


any part of it which has been relinquished under Article 10. and which has been exclusively


allocated by the Government to the Contractor,





"Contractor" means Wcstcm/agros Limited, a wholly owned subsidiary of Western Oil Sands


Inc, subject to assignment pursuant to Section 20.1;





"Contract Year" means a period of twelve (12) t 12:01 am. on January 1


and ending at 12:01 am. on the following January I according to the Gregorian calendar,


provided that the first Contract Year commences at 1201 the Effective Date, and ends at


12:01 am on the January 1 of the first Gregorian calendar year to


I to the Effective Date;





"Control* means, in rciatioo to a corporation, the power of another corporation to secure


(a) by means of the bolding of share, or the possession of voting power in or in


relation to the first corporation or any other corporation; or


(b) by virtue of any power conferred by the articles of association of, or any othrr





document regulating, the first corporation or any ocher corporation,^^ ,


(hat the allairs of the first corporation arc conducted in accordance with the wishes or directions


of that other corporation;


•Cost Recovery Cat* has the meaning given in (as appropriate) Section 6.1.42 or Section


6242;


■Cost Recovery Oil" has the meaning given in (as appropriate) Section 6.1.4.1 or Section


62.4.1;


"Cost Recovery Statement" has die meaning given in Clause 7 of Annex B;


■('rude OH" means crude mineral oil and all liquid hydrocarbons in their natural state or


obtained from Natural Gas by condensation or extraction; and shall include all other substances


produced in association with crude mineral oil and liquid hydrocarbons;


'Crude Oil Field" means:


(a) a single Reservoir; or


(b) multiple Reservoirs all grouped on, or related to, the same geological structure, or


stratigraphic trap, und includes all Reservoirs that may be located above or


beneath the geological structure or stratigraphic trap,


from which Crude Oil and Associated Gas may be produced;


’Delivery Poinl" means the point at which Crude Oil produced from the Contract Area is


delivered into the regional or federal transportation system, in order to permit its ultimate


delivery to on Iraqi Export Point;


'Development' means any development, including design, construction, installation, dnlling


and supporting operations and all related activities;


‘Development Costs" has the meaning given in Clause 2.3 of Annex B;


'Development Work Program and Budget" has the meaning in Section 4.16;


"Development Area’ has the meaning given in Section 4.14;


Development Plan' has the meaning given in Section 4.15;


"Discovery" means a discovery of Petroleum in a Reservoir, structure or stratigraphic trap in


which Petroleum has not previously been found that is recoverable at the surface in a flow


measurable by conventional petroleum industry testing methods;


‘Dollars’ or "USS" mean the lawful currency of the United States of America;


' Effective Date" has the meaning given in Section














etsa :oom>s«i


 5





-EHN PUn” mean* the environment health and safety plan proposed by Contractor and


^pnned by the Management Committee in accordance with Section 4.17;


"Exploration' means any exploration activities including geological, geophysical, geochemical


and oilier surveys, investigation* and tests, and the drilling of shot holes, core lioles, stratigraphic


tests, exploration wells and other drilling nnd testing operations for the purpose of niuking a


Discovery, and all rclnted activities;


"Exploration Costs" hat the meaning given in Clause 2.1 of Annex B;


"Exploration Phase* means a period of up to ten Contract Years, comprised of the First


Exploration Period, the Second Exploration Period and the Ihird Exploration Period.


"Exploration Wall" Is any well drilled on a previously undrillcd structure or stratigraphic trap


with no existing proven, probable oi possible reserves; a well drilled on a previously drilled


structure to evaluate deeper or by-passed shallow reservoir hydrocurbon potential; or any well


drilled further than 5 kilometres from an existing wellbore;


"Exploration Work Program and Budget" has the meaning given in Sections 4.1,4.6 and 4.7;


"Kirld" means a Gas Field or a Crude Oil Field from which Petroleum may be produced;


'Field Export Point" means the point within the Contract Area at which Petroleum produced


pursuant to this Agreement, having gone through field level separation, is made ready for sale.


Author processing or transportation or such other point as designated in an approved


Development Plan;


'Field Price' has the meaning given in Section 8.1;


'First Exploration Period* means a period beginning at the Effective Date and continues op


to. but no longer than, the end of the fourth Contract Year.


"f.o.b." means “free on board";


"Force Majeure" has the meaning given in Article 19;


"Foreign Exchange" means US$ and/or other freely convertible foreign currency generally


aocepted in the international hunking community;


*Ga« Field" means:


(a) a single Reservoir; or


(b) multiple Reservoirs grouped on, or related to, the some geological structure, or


stratigraphic trap, and includes all Reservoirs that may he located above or


beneath the geological structure or stratigraphic trap,





from which Non-Associated Gas may be produced;


 "Gm Retention Area" has the meaning given in Section 10.5;











to those experienced in connection with the relevant aspect or aspects of the Petroleum


Operations, including, without limitation. API. ASTM, IADC. ISO. IAD and ADI standards and


practices. a» applicable, and other standards and practices as approved by the Management


Committee, principally aimed at ensuring:


adequate methods and processes to maximize the recovery percentage


*8,3,





hydrocarbons in a technically and economically sustainable manner, and


minimize losses at the surface;


(b) operational safety, which entails the use of methods and processes that promote


occupational health and the prevention of accidents, aad includes making


facilities and personnel secure from threats and actions of hostile interests,


(c) environmental protection, that calls for the adoption of methods and processes





which minimise the impact of the Petroleum Operations on the environment, and





(d) decommissioning of equipment and property the end of production, which


entails efforts to abandon, decommission, transfer, remove and/or dispose of


structures, facilities, installations, equipment and other property, and other works.


used in Petroleum Operations in the area, to make the area safe and to protect the


environment, und to remediate and reclaim the area such that the ability of the


nren to support various land uses after the remediation and reclamation is similar


to the ability that existed prior to the Petroleum Operations being conducted on


the urea;





"Government” means the Kurdistan Regional Governxncnt-lraq'Sutaiuny Administration,


responsible (inter alia) for the administration of Petroleum activities in the Territory any *dy


constituted successor body thereto; and It shall include any minister, ministry, agency,


department or other duly constituted organ thereof;





'Ineligible Costs' has the meaning given in Clause 2.7 of Annex B;


'Iraqi Export Point" means cither the point at the inlet flange of the receiving tank ship at the





loading terminal In the eastern Mediterranean or the point at the inlet flange of the receiving tank


ship at the loading terminal in the Arabian Gulf;





'Joint Operating Agreement- means, if there is more than one corporation comprising


Contractor, any or contract among all of such corporations with


respective rights or obligations under the Agreement, as such agreement or contract may be


amended or supplemented from time to time.


*KRG' means the unified government of the Federal Region of Kurdistan to be coomfixed and


appointed subject to and pursuant to the Unification Agreement of 23 January 2006;^g





 7





“LIBOR* means the London Interbank Offer Rate for Dollar deposits, as puWished in London


by the Financial Times or, if not so published, then as published in New York by The Wall Street


Journal;


“Loan FacUlty" means any overdraft, loon or other financial facility or accommodation


(including any acceptance credit, bond, note, bill of exchange or commercial paper, finance


leaie, hire purchase agreement, trade bill, forward sale or purchase agreement, or conditional


having the commercial effect of a borrowing);


given in Section 3.1;





given in Clause 2.6 of Annex B;





'Natural Gas* means all gaseous hydrocarbons, including wet mineral gas, dry


head gas and residue gas remaining after the extraction of liquid hydrocarbons from wet


but not Crude Oil; and shall include all other substances produced in





“Net Available Crude OH" for a Development Area means Available Crude Oil produced from


l Area less the quantity of Royalty Oil determined for that Development Area;


Gns;


‘Neo-Associated Gas


"Oil Retention Am" has the meaning given in Section 10.6;


“Operating Costs’ has the meaning given in Clause 2.4 of Annex B;





’’Operator" means Contractor, or where there is more than one corporation comprising


Contractor, the corporation appointed from time to time to organize and supervise Petroleum


Operations,


’’Ordnance" has the meaning given in Section 11.1.8;





’Petroleum" means:


(a) any naturally occurring hydrocarbon, whether in a gaseous, liquid, or solid state;


(b)


any mixture of naturally occurring hydrocarbons, whether in a gaseous, liquid or


solid state; or


any mixture of one or more naturally occurring hydrocarbons, whether in a


(c)


gaseous, liquid or solid state, as well as other substances produced in association


with such hydrocarbons,


■Petroleum Operation." means any activity authorised by the





includes:


 s





and S^rtmg*Penotam'prwSoS^frwi the Contract Ana. and


exporting from the Republic of Iraq; and














but not Development.





"Production Statement has the meaning given in Clause 5.1 of Annex B;





"Profit Gas' has the meaning given in (as appropriate) Section 6 I .* or Section 6-2.1;





"Profit Oil" has the meann^ given in (as appropriate) Section 6.1.7 or Section 6.2.7;


'Quarter" means a period of three months beginning on January I, Apnl I. July 1 or October I


of each Gregorian Calendar Year.


'Recoverable Coats' has the meaning given in Article 12,


■Reservoir" means a porous and permeable underground formation containing an individual and


separate natural accumulation of producible h>drocarboos (Crude Oil or Natural Gas or both)


that is confined by impermeable rock and/or water barriers and is characterized by an initial


single natural pressure system:


"Royalty Oil' has the meaning given in (as appropriate) Section 6 1.3 or Section 6.2 3;


"Sccuad Exploration Period" means a period beginning on the first day of the fifth Contract


Year and continuing up to, but no longer than, the cod of the seventh Contract Year,


"Seconder" means an employee of the Government who is sccoodcd to Contractor pursuant to


Section 5.3.4 to provide services under a secondment agreement to be negotiated and entered


into between Contractor and the Government;


"Territory ' means, for purposes of this Agreement, the area of the Federal Region of Kurdistan


at the date hereof administered by the Government;


Third Exploration Period" means a period beginning on the first day of the eighth Contract


Year and continuing up to, but no longer than, the end of the tenth Contract Year.


T1A. ( on*umer Price Index* means the consumer price index published by the US Bweaa of


Labor Statistics;


•Value of Production and Pricing Statement' has the meaning given in Clause 6.1 of


B; and


 9





"Work Program and Hudgct" means a work program for Petroleum Operations and budget


therefor approved in accordance with this Agreement.


12 Heading*


As used herein, heudings are for convenience and do not form a part of; and shall not affect the


interpretation of, this Agreement


1.3 Further Interpretation


In this Agreement, unless tire context otherwise requires:


13.1 the words ’including" and ‘in particular" shall be construed as being by way of


illustration or emphasis only, and shall not be construed as. nor shall they take effect as.


limiting (lie generality of any preceding words;


1-3.2 a reference to an Article, Section, or to an Annex, is to an Article, Section, of or to an


Annex to. this Agreement;


1.3.3 u reference to an agreement (including this Agreement) or instrument, is to the same as


amended, varied, novated, modified or replaced from time to time, according to this


Agreement and as approved by the parties;


1.3.4 the singular includes the plural, and vice versa;


I -3.5 any gender includes the other;


1.3.6 an agreement includes an arrangement, whether or not having the fare* of law.


1.3.7 a reference to the consent or approval of the Government means the consent or approval


in writing, of the Government and in accordance with the conditions of that consent or


approval;


13.8 "contiguous area" means a geographic area, or a number of areas each having a point in


common with another such area, and


13.9 where a word or expression is defined, cognate words and expressions shall te construed


and this Agreement shall enure to the benefit and burden of the parties, their respective


successors and permitted assigns





1.4 Annexes


If there is a conflict, the main body of this Agreement prevails over an Annex.^/g


 10





,5 Operator


1.5.1 Ifre Contractor is appointed us the Operator. If ot some future time there is more than


ooc corporation comprising Contractor, then one of them shall be appointed as the


Operator. The change or an Operator by Contractor shall require the agreement of both


parties, and neither party shall unreasonably withhold or delay its approval of such an


agreement.


1.5.2 For all purposes of this Agreement, the Operator shall represent Contractor, and the


Government may deal with, and rely on. the Operator. The obligations, liabilities, acts


and omissions of the Operator are. additionally, the obligations, liabilities, acts and


omissions of Contractor.


I


|


1.5.3 The Operator shall operate under this Agreement from un office located in the Territory.


ARTICLE 2


SCOPE AND TERMINATION


2.1 Scope


2.1.1 Ihe law applicable to this Agreement is the Law of the Republic of Iraq as applied and


administered in the Federal Region of Kurdistan, to the extent consistent with


international law, as defined in Article 38 of the Statute of the International Court of


Justice ("Applicable Law"). Contractor shall, ut all times and in regard to all Petroleum


Operations, comply with its obligations under Applicable Lnw


2.1.2 Subject to this Agreement, Contractor shall:


2.1.2.1 have the exclusive right to carry on Petroleum Operations in the Contract Area


at its sole coat, risk and expense according to an approved Work Program and


Budget;


2.1.2.2 provide all human, financial and technical resources for Petroleum


Operations; and


2.1.2.3 share in Petroleum from the Contract Area


2.1.3 Contractor is not authorised to carry on Petroleum Operations in any port of Territory


outside the Contract Aren, except to the extent that such Petroleum Operations or other


activities are necessary or desirable for the exploration, development, processing,


transportation, marketing or export of Petroleum produced from the Contract Area.


2.1.4 It is acknowledged that Contractor's activities under Section 2.1.3 are to be included in


Work Programs and Budgets approved pursuant to Article 3^^*




















I’m 20064)$-61


 22 < o*dmo-» Precedent





•mplcmcntariun of the provisions of this Agreement is coodibocal ipoo the following:


2_*. 1 ratification according to a law which will be issued for this purpose by the KRG pursuant





with ten set out in Annex E; and


2.2 2 approval and ratification within fourteen (14) days of the date of this Agreement by the





board of directors of the Contractor of the terms and conditions of this Agreement.


2.3 Khedive Date and Termination


2.3.1 fbc effective date of this Agreement is the date on which the conditions precedent set out





m Section 2.2 has been satisfied (’Effective Dale’)








2.3.2.1 all of the Contract Area being relinquished pursuant to Article 10;


2.3JJ the parties so agreeing; or





2 3.2J termination pursuant to Section 2.4.


2.4 Grounds for Termination





The Government may terminate this Agreement











2.4.1.1 Contractor is insolvent, is adjudged bankrupt or makes any assignment for the


benefit of its creditors, ot is adjudged to be unable to pay its debts as tltc same


fall due;





2.4.1.2 a petition is filed in a court having jurisdiction or an order is made, or an


effective resolution is passed, for the dissolution, liquidation or winding up of


Contractor,





2.4.1.3 a receiver is appointed or an encumbrancer takes possession of a majority of


the assets or undertaking of Contractor; or


2.4.1.4 Contractor ceases or threatens to cease to carry on its business or execution is





forced against all or a majority of Contractor's property and is not discharged


within fourteen (14) days.


•re is more than one corporation comprising Contractor, and only one of those


rations is bankrupt or otherwise affected as in Section 2.4 1. then this Agreement


not terminate if the other corporation(s) composing Contractor provide a written





2,4.1.5 £irv\^Ynahr' -fOa-TU -fo ow\»'vev\.ce





•H-o &cplooa£;0r\ Work. fro^ra^v\


ff3AM0H»«l itva ofXgr ~c •











 12





commitment that they will assume and be liable lor tlw obligations of the bankrupt or


otlierwisc affected corporation;





14.2 on thirty (30) day* written notice to Contractor if Contractor is in material default under


this Agreement in respect of a nutter involving deliberate and intentional default by


Contractor and where Contractor's performance is not affected by circumstances beyond


its control, and Contractor does not, within dial thirty (30) days, commence steps to


remedy the default, and proceed continuously to remedy the default; provided that if


Contractor gives written notice to the Government during that thirty (30) day period that


it will require an additional thirty (30) day* in order to commence to remedy the default,


together with justification for this additional period, then the Government has the light to


grant an extension to sixty (60) duy* from the date of written notice, which extension


shall not be unreasonably withheld by the Government, The time period for remedy of a


default shall be suspended during periods of Force Majeure, and during any period when


Contractor is disputing the occurrence of the default and such dispute is being dealt with


pursuant to Article 15; and


2.4.3 on sixty (60) days written notice to Contractor if Contractor is in material default under





this Agreement and docs not. within that sixty (60) days, commenco steps to remedy the


default, and proceed continuously to remedy the default to the satisfaction of the


Government; provided that if Contractor gives written notice to the Government during


that sixty (60) day period that it will require an additional thirty (30) days in order to


commence to remedy the default, together with justification for this additional period,


then the Government has the right to grant an extension to ninety (90) days from the date


of written notice, which extension shall not be unreasonably withheld by the


Government. The time period for remedy of a default shall be suspended during periods


of Force Majeure, and during any period when Contractor is disputing the occurrence of


the default and such dispute is bring dealt with pursuant to Article 15.


2.5 Surviving Obligations





Termination of this Agreement for any reason, in whole or in part, shall be without prejudice to


rights and obligations expressed in this .Agreement to survive termination, or to rights and


obligabons accrued under this Agreement prior to tenninatioc, and ail provisions of this


Agreement reasonably necessary for the full enjoyment and enforcement of those rights and


obligations shall survive termination for the period so necessary. For greater certainty, the


following provisions of this Agreement shall survive termination; Article 9; Article 13; Section


14.1.1, Section 142; Article 15; Section 162; Section 16.5; Section 16.6; Section 16.7; Article


17; and Section 18.1.





ARTICLE 3


MANAGEMENT OF OPERATIONS





3.1 Constitution of Management Committee


For the purpose of this Agreement there will be a committee (foe ’Management Committee') ,





consisting of three representatives from the Government, and dree representatives fivmpf £


 13





Contractor, as nominated by the Government and Contractor, respectively. The representatives


of Contractor shall include at least one person who is an executive officer of Contractor. For


the absence of the representative. The Government shall appoint one of its representatives as the


Chairman of the Management Committee, and Contractor shall appoint one of its representatives


as the Vice-Chairman. If the Chairman is absent at a meeting of the Management Cornminee, the


Vice-Chairman shall sene as chairman for that meeting. The Management Cornminee shall be


formed within thirty (30) days after the Effective Date.


32 Mlrtsp


3 2.1 The Management Committee will meet on a regular basis and at least once every two


months, in secure, reasonably accessible locations as the parties may agree. Any member


of the Management Committee may participate in a meeting by conference telephone


such that all members of the meeting can be heard; provided tha, at least ooe meeting


each Quarter shall occur with all members attending in person. A quorum for a meeting


of the Management Committee shall be two representatives of each party, including at


least ooe of the Chairman and the Vice-Chairman. During the first six months following


the Effective Date, the Management Committee will meet as often as necessary. The


Management Committee's duties are the following


3.2.1.1 examining and approving the Work Programs and Budgets for the following


year which Contractor is required to submit under Article 4;


3.2.12 reviewing and approving any amendments to a Work Program and Budget


proposed or agreed by cither party;


3.2.1.3 reviewing the progress of Petroleum Operations under the current Work


Programs and Budgets,


3.2.1.4 upon application by Contractor, to declare that a Discovery is a Commercial


Discovery;


3.2.1.5 examining and approving any Development Plan suteuned by Contractor


under Article 4. or any amendment to a Development Plan proposed or agreed


by either party;


3.2.1.6 retaining external independent consultants and experts where the parties agree


that independent verification is oecessary,


3.2.1.7 establishing appropriate subcommittees to meet from time to time which will


report to the Management Committee, and reviewing such subcommittees


annually for necessary changes to the procedures and representatives of (he


subcommittees;





3.2.I.8 reviewing Contractor's proposed details of a marketing policy consistent with /


the marketing provisions of Article 6 and Article 7 and all Development £


 14








32.1.9 approving the purchase of any individual item within an approved Work


Program and Budget if its price is higher than Five Hundred Thousand


(US$500,000) Dollars or a group of identical items purchased simultaneously


if the total price is higher than One Million (US$ 1,000,000) Dollars;





3.2.1.10 approving the renting or leasing of any equipment, or any engineering or other


service contract within an Work Program and Budget if its annual price is


higher than Five Hundred Ihousand (US$500,000) Dollurs;





3.2.1.11 establishing the internal policies and procedures of the Management


Committee, and reviewing the policies, procedures and representatives of the


Management Committee for necessary changes;





3-2.1.12 discussing the compliance of die Government und Contractor with their


respective obligations under this Agreement;


32.1.13 reviewing the proposed insurance program of Contractor under Section 18.2;





and





32.1.14 discussing any other matter relating to Petroleum Operations as delegated to


Management Committee under this Agreement





3.22 Contractor or the Government may request a meeting of the Management Committee at


any time by giving written notice to the chairman. Such notice shall include a lull


description of the purpose of the meeting. The chairman shall thereupon call such


meeting by giving fifteen (15) days notice thereof. During the first six months following


the Fflective Dale, this notice period ia reduced to forty-eight (4*) hours for meetings


that are conducted by conference telephone.


32.3 Decisions of the Management Committee shall be made by a single vote cast by the


Government's representatives and a single vote cast by Contractor's representatives. All


decisions of the Management Committee require that both votes be cast in favour. If the


Management Committee foils to approve:


32-3.1 Contractor's request to declare a Discovery to be a Commercial Discovery;


32.32 a Work Program and Budget or a proposed amendment thereto;


32J.3 a Development Plan or a proposed or agreed amendment thereto,


32.3.4 Contractor’s request to approve the purchase of any individual item or a group


of identical items purchased simultaneously pursuant to Section 32.1.9. or


32.3.5 Contractor's request to rent or lease of any equipment, or any engineering or


other service contract pursuant to Section 3.2.1.10.





then cither party shall be entitled to refer the mutter for senior management negotiatio


pursuant to the provisions of Section 15.2.


 t ARTICLE 4


y WORK PROGRAMS AND BUDGET





4.1 Commitment in FliH Exploration Period


During the First Exploration Period. Contractor shall carry out an Exploration Work Program


and Budget which shall include at least the following work:


4.1.1 acquisition of not less than 2000 km of 2D seismic data within two (2) years of the


Effective Date, acquired with a grid of average spacing of three kilometres, or as


determined to be suitable by the Management Committee, and a minimum of 120 trace


recording and record length of not less than six seconds (two way time TWT);


4.1.2 other geological, geophysical (including well velocity surveys) and geochemical studies;


and


4.1.3 the drilling of not less than three Exploration Wells, with the intent of at least one of such


wells penetrating formations of Jurassic age in order to test their commercial


prospectivity.


The intention of this Exploration work program is to make Discoveries as early as possible and


appraise such Discoveries as expeditiously as possible in order to establish Commercial


Discoveries, resulting in early production and export of Petroleum from the Contract Area, as


illustrated in Annex C.


42 Exploration Wells during First Exploration Period


The drilling of Exploration Wells during the First Exploration Penod shall occur in accordance


with the most aggressive schedule allowed by the employment of qualified personnel aod


availability of suitable equipment, and the operating conditions m the Territory and the Contract


.Area Contractor shall comply with the following schedule:


4.2.1 Contractor will commence to identify and mobilise a drilling rig and crew and all


associated supporting equipment and services immediately after the Effective Dale in


order to commence work on the first Exploration Well at the earliest possible date, but


not later than twelve months after the Effective Date;


4 2-2 commence drilling of the second Exploration Well not later than twelve months


following rig release of the first Exploration Well;


423 if the first Exploration Well is not a Discovery. Contractor will commence drilling of the


third Exploration Well at the earliest possible date, but not later than twelve months


following rig release of the second Exploration Well.


42.4 if the third Exploration Well is a Discovery. Contractor will comply with the provisions


of Section 4.4. and advise the Government not later than three months after rig release


from the third Exploration Well whether it intends to conduct the drilling of further


Exploration Wells; on^/


S





I .PSA MM OWI


 16





4 2.5 if the third Exploration Well i* not a Discovery, advise the Government not later than


three months after rig release from the third Exploration Well whether it intends to


conduct the drilling of further Exploration Wells.


4.3 Testing of Selected Structures





If Management Committee determines that there is sufficient technical information supporting


the drilling of Exploration Wells on the Shakal, Kaltr and/or Daquq-Bowanoor structural trends,


then subject to approval of the Exploration Work Program and Budget by the Management


Committee, the Exploratory Wells to be drilled pursuant to Section 4.1 will be performed so as to


result in:





4.3.1 the drilling of one Exploration Well into a structure identified by Contractor in the Shakal


structural trend;





4.3.2 the drilling of one Exploration Well into a structure identified by Contractor in the Kalar


structural trend; and


4.3.3 the drilling of one Exploration Well into a structure identified by Contractor in the


Daquq-Bownnoor structural trend,


all Exploratory Wells targeting these structural trends will be at locations of Contractor’s choice.


4.4 Appraisal Program


If during the First Exploration Period an Exploratory Well results in a Discovery, then subject to


shall commence to appraise the Discovery in accordance with the following schedule:





4 4.1.1 commence to identify immediately after declaration of the Discovery and


contract and mobilize a seismic crew at the earliest possible date, bet no hw


than three months after the declaration of the Discovery; and thereafter


promptly commence such infill 2D or 3D seismic surveys (or both) as


Contractor determines to be appropriate in the circumstances; or





4.4.1.2 commence drilling of the first Appraisal Well of the Discovery at the earliest


possible daze, but no later than the later of:


4.4.1.2.1 two months following rig release from the Exploration WcO


which was declared to be a Discovery; and


4.4.1.2.2 three months following completion of interpretation of any


infill 2D ef 2D qr 31) seismic survey s which Contractor has elected to








 provided thai if Contractor elects to conduct a seismic survey, tbc drilling ol


any Appraisal Well is contingent on Contractor's satisfaction with tbc results


of the aeismic survey;


jf Contractor determines that the results of the first Appraisal Well warrant farther





appraisal activity, Contractor may either:


4.4.2 I commence drilling of second Appraisal Well at the earliest possible date, hut


not later than two months following rig release from the first Appraisal Well;


or





4.4.2 2 conduct such infill 2D or 3D seismic surveys (or both) as Contractor


determines to be appropriate in the circumstances, and contingent on


Contractor’s satisfaction with the results of the seismic survey, commence


drilling of a second Appraisal Well at the earliest possible date, but not later


than six months following completion of interpretation of such infill 2D or 3D


seismic surveys, provided that if Contractor elects to conduct a seismic


survey, the drilling of any Appraisal Well is contingent on Contractor's


satisfaction with the results of the seismic survey; and





4 4 3 if Contractor determines that the results of the second Appraisal Well warrant farther


appraisal activity. Contractor may cither:


4.4.3,1 commence drilling of the third Appraisal Well at the earliest possible dale, but


not later than two months following rig release from the second Appraisal


Well; or


4 4 1.2 conduct such suitable infill 2D or 3D seismic surveys (or both), and





contingent on Contractor's satisfaction with the results of the seismic survey,


commence drilling of a third Appraisal Well at the earliest possible dale, but


not later than six months following completion of interpretation of such infill


2D or 3D seismic surveys.





4.4.4 Depending on tbc results of any Appraisal Well or 2D or 3D seismic surveys. Contractor


may:





4.44.1 request that the Management Committee declare a Discovery to be a


Commercial Discovery; or





4.4 4.2 cease drilling Appraisal Wells and conducting other geological, geochemical


and geophysical surveys if Contractor determines that Discovery is not a


Commercial Discovery; provided that Contractor may. in appropriate


circumstances, declare that the Discovery is an Oil Retention Area or Gas


Retention Area; or


4.4.4.)

















in*


 IR








the Discovery is a Commercial Discovery, an Oil Retention Area or a Gas


Retention Area





4.5 Kactors Affecting Schedule of K.iploration and Appraisal Activities In the First


Exploration Period


Neither parry shall introduce any unnecessary delays that will hinder the performance of the


Exploration and Appraisal activities described in Sections 4.2 and 4.4, and will direct their


representatives on the Management Committee to reflect the intent of Sections 4.2 and 4.4 in the


approvals and decisions coming before the Management Committee.


The parties acknowledge that circumstances may ulTcct the ability of Contractor to meet the





desired schedule of Exploration and Appraisal activities as contemplated by Sections 4.2 and 4.4.


fhese circumstances include:





4.5.1 the availability of qualified personnel for Contractor or its subcontractors to perform


Exploration work;


4 5.2 the availability1 of seismic crews and equipment for the conduct of Exploration work in


the Contract Area;





4.5.3 the availability of drilling crews and rigs suitable to the conditions of the Contract Area


and the expected depths, pressure conditions and other circumstances involved in drilling


to the structural trends described in Section 4.3, and meeting the health, safety and


environment standards of Contractor and the Government;





4 5 4 the availability and schedule for delivery of drill pipe, drill bits, drilling mud and other


drilling services, including well logging.





4 5.5 the operating conditions in the Territory and the Contract Area;


4 5.6 the ability to mobilize crews, equipment and materials to the Contmct Area and within


the Contract Area; and





4.5.7 any other circumstances that result in delays to the schedule of Exploration and Appraisal


work and that is outside of the reasonable control of Contractor.





45* If there is a delay for any of the above reasons that affect the ability of Contractor to meet


the desired schedule of Exploration and Appraisal activities as contemplated by Sections


42 and 4 4, then there will be an extension to the performance time for such activities by


• number of days equal U> the duration of the delay caused 3 such





need to declare the occurrence of an event of Force Majcure s


























usaw*o»«


 4.6 Commitment in Second Exploration Period





During the Second Exploration Period, Contractor slull carry out an Exploration Work Program


and Budget which shall include at least the following work:


4.6.1 acquisition of 1,000 kni of 2D seismic data within eighteen (18) months of the


commencement ol the Second Exploration Period or an equivalent amount of 3D seismic


data as determined to be suitable by the Management Committee, acquired with a


minimum of 120 truce recording and record length of not less than six seconds (two way


time TWO;


46.2 such other geological, geophysical and geochemical studies (including without limitation


3D seismic) as determined to he suitable by Contractor; and


46.3 ilie drilling of three Exploration Wells, if Contractor determines there is sufficient


technical informution to support the drilling of such Exploration Wells.


4.7 Commitment in Third Exploration Period


During the Third Exploration Period. Contractor shall carry out an Exploration Work Program


and Budget which shall include at least the following work:


4.7.1 acquisition of 500 km of 21) seismic duta, acquired with a minimum of 96 trace recording


and record length of not less than five seconds;


4.7.2 such other geological, geophysical and geoclietnical studies (including without limitation


3D seismic) as determmed to be suitable by Contractor, and


4.7.3 the drilling of three Exploration Wells, if Contractor determines there is sufficient


technical information to support the drilling of such Exploration Wells.


4.8 Performance of Exploration Work Program and Budget


4.8.1 If any wdl forming part of the Exploration Work Program and Budget provided for in


this Article 4 is abandoned for any reason other than a reason specified in Section 4.8.2


before reaching the defined objectives of such well. Contractor is permitted to drill a


substitute well. In this event, the First. Second or Third Exploration Period, as the case


may be. shall be extended by a period of time equal in length to the time spent in


preparing for and drilling the substitute well, including mobilisation and demobilisation


of the drilling rig. if applicable. The time of commencement of a substitute well will be


treated as the time of commencement of the wdl that it replaces.


4.g.2 Any well which forms part of the Exploration Work Program and Budget provided for in


this Article 4 shall be drilled to such depth as is necessary for dm evaluation of the


structural treod established by the available data and which Good Oil Field Practices and


idgement would require Contractor to attain, unless before


 20








a formation stratigraphically older than the deepest target formation is


encountered, or


repeated stratigraphic formations typical in u geological fold and thnut belt


are encountered so as to indicate to Contractor that the well is unable to reach


its target horizon; or





further drilling would present an obvious danger, such as but not limited to the


presence of abnormal pressure or excessive losses of drilling mud


(recognizing that Contractor needs to be prepared with a dnlling assembly and


drilling mud system to contain well pressures of up to 10,000 psi for the first


Exploration Well, and also be prepared for lost circulation zones expected to


be encountered in the shallow drilling section); or





4 8.2.4 impenetrable formations or formations of unexpected hardness as to render


them functionally impenetrable are encountered; or


4.8.2.5 Petroleum-bearing formations arc encountered which require protection by


running casing or liner, thereby preventing planned depths from being


reached; or


4.8.2.6 Contractor nnd the Government agree to terminate the drilling operation; or


4.8.2.7 the Government confirms that the drilling obligation has been fulfilled


In such circumstances the drilling of any such well may be terminated at a lesser depth


and shall be deemed to have satisfied Contractor’s obligations in respect of that well.


4.9 Consequences of Non-Performance


4.9.1 If. in 3 Contract Year. Contractor carries out less Exploration activity than it intended to


conduct under the Exploration Work Program and Budget for that Contract Year, the


shortfall shall be added to the Exploration Work Program and Budget to be carried out in


the next Contract Year; provided that, if Contractor performs less Exploration activity


than it is required to perform in any Exploration Penod. this Sector 4.9.1 shall not have


the effect of relieving Contractor of its obligation to perform the required amount of


Exploration in such Exploration Period without the written consent of the Government.


4.9J If, in a Contract Year. Contractor carries out more Exploration activity than b required of


it under the Exploration Work Program and Budget for that Contract Year, the excess


shall be credited against Exploration activity to be carried out in the following Contract


Year and. to the extent in excess of that Exploration activity, shall be further carried


forward, including to a subsequent Exploration Period.


4.9J For the purposes of the foregoing provisions of this Article 4 and Annex B. and except


with the consent of the Government, no work in a De\ dopment Area will be regarded as


Exploration except in respect of a Reservoir in which no Dixovery has been maAcgft


 • 4l0 Wori Proera-* Budgets





Sobjort injSec6ao4.il. Contractor shall cany oat Petroleum Operations substantially in


' '5’ fcoordanoj with Work Programs and Budgets approved by the Management Committee. Sach


an jffrmal by the Management Committee is without prejudice to any other obligations or


i liabilities of Contractor under this Agreement Contractor will prepare Work Programs and


Budgets ifl accordance with Good Oil Field Practice and reflecting prevailing conditions in die


industry.


■->' 4.11 Emergency and Other Expenditures Outside Approved Work








4.11.1 Without further approval by Management Committee, the total of all over-expenditures


under any Wort Program and Budget for any of the first four Contract Yean shall not


exceed twenty’ percent (20%) of the total expenditures in that Work Program and Budget,


and for any subsequent Coatract Year shall not exceed ten percent (10%) of the total


expenditures in that Work Program and Budget





*1.11.2 Contractor shall promptly inform the if it (or


reasonably anticipate) that any such Section 4.1 I I will be a


the manner provided in this Article 4. to the Work


and Budget





4.11.) In determining whether to approve the over-expenditures contemplated in Section 4.11.1,


the Management Committee shall consider whether such increases are necessary to


complete the program of works, provided that such increase is not the result of any failure


of Contractor to fulfil its obligations under this Agreement





4.11.4 Nothing in Section 4.10 or Section 4.11.1 precludes or excuses Contactor from taking aU


necessary and proper measures for the protection of life, health, the environment and


property if in Contractor's sole opinion there is an emergency or sobstantial ndc of an


emergency (including a fire, explosion. Petroleum release, or sabotage; incident


involving loss of life, senous injury or substantial risk of lorn of life or senous injioy to


an employee, contractor or third party, or serious properly damage; strikes and riots; or


evacuation of the Operator's personnel). As sooo as reasonably practicable, the Operator


will inform the Government of the details of the emergency and of the actions it has taken


and intends to take.





4.11.5 dial it is not possible practically to •


which may arise during the term of this Agreement and they admit


to exert all the proper efforts to overcome any emergency


wherever there is no provision specifically addressing the situation in this








4.12 Exploration





4.12.1 Contractor shall submit annually, for the approval of the Management Committee, at least a


sixty (60) days before the beginning of the following Contract Year, the Explore tior^











IPSA


 \ Work Programs and Budget* required by Sections 4.1, 4.6 and 4.7 for each Contract


i ■ Year.





4.12.2 From time to time, Contractor may submit, for the upproval of the Management


Committee, amendments to the Exploration Work Program and Budget.


4.12.3 Contractor is not obliged to carry out more Exploration in any Iixploratiun Period than is


required by Section* 4.1. 4.6 und 4.7. Contractor'* obligations to perform Exploration


duriug the First Exploration Period shall be treated as having been fulfilled at the earlier


of (i) Contractor having acquired 2000 km of 2D seismic data and drilled three


Exploration Wells; or (ii) Contractor having expended in the uggrcgatc USS40.000.000


on acquisition of 2D seismic data, conduct of geological, geophysical and geochemical


studies (including without limitation 3D seismic) and the drilling of Exploration Wells


AHer the end of the First Exploration Period, if Contractor has relinquished all of the


lands In the Contract Area other than such pans thereof as arc composed in a


Development Area, a Gas Retention Area or an Oil Retention Area, then Contractor shall


not be required to cany out any further Exploration, and the Exploration Phase shall end.


4.13 Discovery and Appraisal


4 13.1 Contractor aluril notify' the Government immediately of the results of a Discovery


4 13.2 As soon as reasonably practicable alter u Discovery is mude that, in Contractor's opinion


having regurd to Section 4.13.4, merits Appraisal, Contractor shall submit, for the


approval of the Management Committee, an Appraisal Work Program and Budget for the


Contract Year in which the Discover)1 wus made and for the following Contract Year if


necessary, or in tl»e case of a multi-year Appraisal Work Program, fix each of the


following Contract Years; provided that, if the parties shall not have agreed commercial


terms as set forth in Section 6.1 8 or Section 6.2.8. the undertaking of any Appraisal of a


Discovery of Noo- Associated Gas shall be at the discretion of the Contractor.





4.I3J From time to time Contractor may submit, for the approval of the Management


Committee, amendments to the Appraisal Work Program and Budget.





4 13.4 Ac Appraisal Work Program and Budget for a Contact Year will be such as would be


undertaken by a corporation Kicking diligently to appraise (in accordance with this


Agreement and Good Oil Field Practice) a Discovery with a view to determining if it is,


either alone or in combination with other Discoveries, a Commercial Discovery. Unless


Management Committee otherwise directs following a detailed report prepared by


Contractor assessing whether the Discovery should be appraised. Contractor shall have


no obligation to appraise a Discovery where expected production volumes and current


prices for Petroleum suggest that it would not be economic to pursue development of the


Discovery.





4.14 Commercial Discovery


4.14.1 Contractor may, at any time and having regard to Section4.14.2, propose^*! the





Management Committee declare thut a Commercial Discovery has been "““sfS








8FSA IMHHH-OI


data and informant®, in accordance with Good Oilfield Practice, including Contractor's


proposal as to that part of the Contract Area to be declared a "Development Area".


Contractor’s proposal for the Development Area will be a single contiguous area


encompassing the Field in which the Commercial Discovery has been made, plus a


reserve margin sufficient to cover the probable and possible extent of it, in accordance


with Good Oil Field Practice.


4.14.3 The Management Committee shall within thirty (30) days confirm declaration of a


Commercial Discovery and the Development Area proposed by Contractor, or propose its


revision to the areas, having regard to the requirement to encompass the Field in which


the Commercial Discovery has been made, plus a reserve margin sufficient to cover the


probable and possible extent of it, in accordance with Good Oil Field Practice. If the


Management Committee docs not approve the declaration of a Commercial Discovery or


the boundaries of the Development Area, then within thirty (30) days either party may


request that the matter be resolved by senior management negotiations pursuant to the


provisions of Section 15.2.


4.14.4 The Contractor may request, and the Management Committee approve, at any time and


from time to time, an increase of a Development Area as may be required to ensure that it


encompasses the Field concerned. The process of increasing the Development Area shall


follow the same steps as in Sections 4.142 and 4.14 3 above.


4.15 Development Plan





4.15.1 As soon as practically possible, bul not bier than nine (9) months after the declaration of


a Development Area, and in the manner required by the Government. Contractor shall


submit, for the approval of the Management Committee, a plan (the -Development Plan*)


for the Development Area.





4.15.2 From time to time, and in like manner. Contractor may submit, for the approval of the


Management Committee, amendments to the Development Plan.





4.ISJ A Development Plan will be such as would be undertaken by a corporation seeking


diligently to develop and exploit (in accordance with this Agreement and Good Ofl Field


Practice) the Petroleum in the Development Area in the long term, beat interests of the


parties.





4.15.4 Except with the consent of the Management Committee, and withou F^F**** ® ***





4.15.4.1 a description of the proposed reservoir development and management





program:





4.15.42


 4 13.4.2.2


be located in the Territory or outside of the Territory;





4.13.4.2.3 facilities for transporting the Petroleum from the Contract Area


and the Territory; and


4.15.4.2.4 facilities, wherever located, which are connected to any such


facilities os aforesaid and which (or the operation of which)


might ulTcct the integrity, management or operation thereof;





4.15.4.3 the production profiles for all hydrocarbon products, including possible


injections for the life of the I Jcvelopmcnt. the commencement of Production


and the specific rates of Petroleum production, and the level of production and


of deliveries which Contractor submit, should constitute the start of


Commercial Production;





4 15.4.4 a marketing und lifting plan, including provisions for joint marketing;





4.15.4.5 an environmental impact statement, and proposals for environmental


management covering the life of the Development;





4.15.4.6 Contractor's proposals for ensuring Uic safety, health and welfare of


individuals in or about the proposed Petroleum Operations;


4.15.4 7 Contractor's proposals for





4 13 4.7.1 the use of local poods and services;





4 13.4.7.2





4 15.4.7J ie the Territory.














4.15.4 9 an evaluation of the commercial it> of the Development, including a full


4.15.4 10 Contractor's proposal for financing of the Development;





 25





4.15.5 The Management Committee shall approve or recommend revisions to the Development


Plan proposed by Contractor within 90 days after receipt. If the Management Committee


docs not approve the Development Plan, the matter shall be referred for senior


management negotiations pursuant to the provisions of Section 15.2.


4.16 Development Work Programs and Budgets


4.16.1 Contractor shall submit, for the approval of the Management Committee, a "Development


Work Program and Budget" for each Development Area for each Contract Year. At any


time and from lime to time. Contractor may submit, for approval, amendments to it


4.16.2 A Development Work Program and Budget for a Contract Year shall be substantially in


accordance with the Development Plan for the Development Aren.


4 17 EIIS Plan





4.17.1 Within three (3) months of Uic Effective Date. Contractor shall prepare and submit to the


Management Committee for its approval, its plans for managing the environment, health


and safety relating to Petroleum Operations (the "EHS Plan").


4.17.2 The EHS Plan shall describe the procedures to be adopted by Contractor with respect to:


4.17.2.1 the protection of the environment (including air. land and water and all





organic and inorganic matter and living organisms); and





4.17.2.2 hculth, safety and welfare of persons in or affected by Petroleum Operations.


4.17.3 The procedures contained in the EHS Plan shall include such standards, practices,


methods and procedures, and shall require Contractor to do (and refrain from doing) all


such other things, which are the roost appropriate of such standards, practices, methods.


as





4.17.3.1 arc employed by others exploring for, developing or exploiting Petroleum in


the Territory, with due and proper consideration for special circumstances;


4.17.3.2 arc employed by Contractor or any of its Affiliates in a comparable place in





comparable circumstances, with due and proper consideration for special


circumsunccs; and


4.17.3 J are otherwise required by Applicable Law or this Agreement;





4.17.4 in order to reduce the risks to persons and the environment by Petroleum Operations aa


much as reasonably practicable.





4.17.5 The EHS Plan shall be reviewed annually and amended by Contractor from time to time


as may be necessary to to ensure its continuing compliance with Section 4.17.3. but not so /


practice, method, procedure or thing shall thereby become lcss

 26





protective to persons and the environment without the consent of the Management


Committee.


4.18 Information


In connection with any geological, geophysical or geochemical surveys, seismic surveys and the


drilling of any Exploratory Well, Appraisal Well or Development Well, Contractor shall provide


the Government with all original field and processed data and Contractor's interpretation and


report on its final conclusion thereof, including interpretation and processing methods, within 60


du^ of receipt by Contractor.


ARTICLE 5





CONDUCT OF WORK


5.1 Proper and Workmanlike Manner





5.1.1 Contractor shall carry out Petroleum Operations, and shall ensure that they are carried on.


in a proper, efficient and workmanlike manner, and in accordance with this Agreement


and Good Oil Field Practice and such practices and procedures employed in the


petroleum industry worldwide by prudent and diligent operators in similar circumstances.


5.1.2 In particular. Contractor shall cany on Petroleum Operations, and endeavour that they are


carried out, in such a manner as is required by Section 5.1.1 to:


5.1.2.1 protect the environment (including the atmosphere and the prevention of


pollution) and ensure that Petroleum Operations result in minimum ecological


damage or destruction, in accordance with the approved EHS Plan;


5.1.2.2 ensure the safety, health and welfare of individuals in or affected by


Petroleum Operations, in accordance with the approved EHS Plan;


5.1.2.3 manage the resources in a way which has long-term benefits lo the Federal


Region of Kurdistan and Contractor;


5.1.2.4 maintain in safe and good condition and repair, the Contract Area and all


structures, facilities, installations, equipment and oilier property, und other


works, used or to be used in Petroleum Operations;


5.1.2.5 comply with maximum axle bearing capacities of roads leading to and within


the Contract Area; and generate sufficient electrical power as required for


Petroleum Operations without pulling loud on regional or national power


network;


5.1.2.6 abandon, decommission, remove or dispose of the property and other works


mentioned in Section 5.1.2.4, clean up the Contract Area to the conditions as


of the Effective Date and make )t good and safe, and protect und restore the


environment, on the earlier


 27








5.1.2.6.1 termination of ihis Agreement, unless the Government


specifically requests that the existing remaining properly in


part or all of the Contract Aren is required for ongoing


Petroleum Operations to lie conducted by the Government, in


which case the Government shall assume all cost*, expenses,


risks and liabilities associated with fiiture Petroleum


Operations and Contractor shall be released from ail


oblignlions and liabilities for the portions of the Contract Area


which are taken over by the Oovcnuiient. including without


limitation all liability for abandonment of and


decommissioning of such portions of the Contract Area; and


5.1.2.6.2 when no longer required for Petroleum Operations;





control the flow and prevent the waste or escape of Petroleum, water or any


product used in or derived by processing Petroleum;


prevent tlic escape of any mixture of water or drilling fluid with Petroleum





treat and re-use drilling fluids to the maximum extent practicul,


prevent damage to Petroleum-bearing strata in or outside the Contract Area;





keep separate:


5.1.2.11.1 each Reservoir discovered in the Contract Area, provided that








similar oil qualities may be commingled; and





51-2-11.2 such of the sources of water discovered in the Contract Area as











5.1.2.12 prevent water or any other matter entering any Reservoir through wells in the


Contract Are*, except when required by. and in accordance with, the


Development Plan and Good Oil Field Practice;


5.1.2.13 minimise interference with pie-existing rights and activities; and





5.1.2.14 to remedy in a timely fashion any damage caused to the environment





5 2 A cert* to Contract Area


5 2-1 Subject to law uxl to this Agreement Contractor may enter and leave the Contract Area


at any rime for the purposes of Petroleum Operation* Contractor will provide the


Government with the notifications required by Applicable Law so as to permit access t£* ^


 21


the Contract Area, aid the Government will assist in providing any required permits,





approvals or other authorizations required.


Except with the consent of the Government, Contractor shall ensure dial individuals,


equipment and goods do not enter the Contract Area without meeting the entry


requirements of the Applicable I .aw. and shall notify the Government of all individuals,


vessels, aircraft, vehicles und structures entering or leaving the Contract Area for the


purposes of Petroleum Operation*


Goods, Services, Training and Secondment





Contractor shall:


5.3.1.1 give preference to the acquisition of goods und services from individuals


based in the Federal Region of Kurdistan, provided they are offered on


competitive terms and conditions, having regard to quality, price, and time of


delivery; and


5.3.1.2 with due regard to occupational health and safety requirements give





preference in employment in Petroleum Operations to qualified nationals


residing in the Federal Region of Kurdistan.


5.3.2 Except with the consent of the Government. Contractor shall draw to the attention of


suppliers based in the Federal Region of Kurdistan, in accordance with Government


policy, all opportunities for the provision of locally-available goods and services for


Petroleum Operations.


5J.3 Operator shall plan and implement training programs for such local personnel as art


appointed by the Government. The cost of such training programs shall be considered as


Recoverable Costs Contractor's proposed training program for each Contract Year shall


be subject to the approval of the Management Committee During the first Contract


Year, Contractor's expenditures on training shall be 1.5% of the Work Program A Budget


for the Contract Year, and in each subsequent Contract Year, the training expenditure


shall be the greater of USJI.500,000 and 1.5% of the Work Program A Budget for the


Contract Year In each Calendar Year, the training program shall include five academic


scholarships for masters or doctorate programs at universities in Canada. If in any


Calendar Year, Contractor does not make training expenditures in m amount required for


that Calendar Year, any shortfall shall be carried forward and added to the required


training expenditures for the following Culcndnr Year.


5.3.4 Contractor shall offer to the Government the opportunity to nominate Secondecs to the


Contractor's organization for the purposes of training Secondecs or assisting in the


conduct of Petroleum Operations, in accordance with the following provisions:





5.3.4.1 The Government acknowledges that Contractor shall engage or retain only


J /


such Secondecs as are reasonably necessary to conduct Petroleum Operations'^


 29








5.3.42 Contractor shall determine tlic number of Secondees. their hours of work, the


designated purpose und scope of such persons, minimum expertise,


qualifications and experience required and, subject to the secondment


provisions below, the selection of such persons, and the compensation to be


paid to all such persons in connection with operations. Ihe compensation


package of Seconder shall be in accordance with the existing human


resources policies and procedures of Contractor, provided that such


compensation package of Seconders shall not exceed that of other locally


recruited employees of Contractor of similar rank and experience.


5.3.4.3 Either party may propose secondment for a designated purpose Any proposal


for secondment must include the: designated purpose and scope of


secondment, including duties, responsibilities, and deliverables; duration of


the secondment; number of Secondees; work location and position within the


Contractor's organization of each Secondec; and estimated coats of the


secondment.


5.3.4.4 If such secondment position is approved by Management Committee,


Contractor shall request the Government to nominate, by a specified date,


qualified personnel to be the Sccondee for such position. The Government


has the right (but not the obligation) to nominate for each secondment position


one or more proposed Secondees who the Government considers qualified to


fulfil the designated purpose and scope of such secondment. Although each


Secondec shall report to and be directed by Contractor, each Secondec shall


remain at all times the employee of the Government


5.34.5 It is recognized that the number of potential Seconder positions shall van


with the amount of activity involved in performing the Petroleum Operations.


Secondees shall be added as appropriate as operations expand during the





5 3.4.6 Subject to the foregoing provision* regarding the number of potential





Secondec positions and the requirement that the Government nominate


suitably qualified employees, it is Contractor's intention that dunng each


Contract Year after the approval of a Development Plan, the Work Program


and Budget shall include USS500.000 for the total costs of Contractor (for


salaries, benefits, travel and expenses) for Secondees The Management


Committee shall approve the line item in Contractor’s Work Program and


Budget for Secondees in accordance with this provision. Nothing in this


Agreement shall require Contractor to expend in any Contract Year an amount


in excess of USS500.000 for salaries, benefits, travel and expenses for


Secondees. Contractor's costs for Seconder* shall be a Recoverable Cost





5J.4.7 Contractor and the will negotiate in good faith the secondment


to 5.3.4. If the parties cam**


agree on a suitable nerccment. the matter shall be referred foy





■o (he provisions of Section


s








r»A


 30





54 Hiring of Natural tin





Except with the consent of the Government, such consent not lo be unreasonably withheld or


delayed, or in an emergency, Contractor shall not flare Natural Gas. However, Contractor shall


be entitled to flare Natural Gas where it is necessary to do so for testing or in order to conduct


Petroleum Operation* for the recovery of Crude Oil, in accordance with Good Oil Field Practice,


aid such practices and procedures employed in the petroleum industry worldwide by prudent and


diligent operators in similar circumstances If there exists an alternative use for g« which is


commercial having regard to required capital and operating cosfc. Contractor shall use


commercially reasonable efforts to utilize Natural Gas for such alternative purpose, and the costs


of doing so shall be Recoverable Costa.


5.5 Operator and its Sub-Coa tractor*


5.5.1 The Operator may carry out Petroleum Operations using its own resources and staff, or


those of its agents and sub-contractors. However, the Operator may nor subcontract the


performance of the entire Work Program to a single subcontractor without the prior


Committee.





5 5 2 This Section 5.5 does not relieve Contractor of any obligation or liability under this


Agreement, and the carrying out of Petroleum Operations by its agents or sub-contractors


who have been subcontracted in accordance with Section 5.5.1 does not relieve the


Operator of any obligation or liability under this Agreement.


ART1CI.E4


SHARING OF MTROUlM


n* Government shall within four (4) months after tie firat declaration of a Commercral





Discovery, by notice to the Contractor, select for the lenn of this Agreement either the


provisions of Option A as set out in this Article 6 the provisions of Option B as act out in this


Article 6. Such selection will he irrevocable. In default of the Government making such


selection, the provisions of Option It in this Article 6 will irrevocably apply to this Agreement.





Potion A


6.1 Allocation of Petroleum under Option A





6.1.1 Petroleum Required for Petroleum Operations


Contractor shall have the right to use flee of charge Petroleum produced from the





Contract Area to the extent reasonably required for Petroleum Operations under the


Agreement.





6.1.2 Measurement Point





All Available Crude Oil and Available Natural Gas shall be measured at the applicable


Field Export PointM) in the manner described in Section 8.4 und allocated os set forth in


this Section ^











rriA»04«fli


 6.1.3 Royally Oil





The Government shall be entitled to a royalty ("Royalty Oil") for each Development Area


producing Crude Oil calculated as follow


If the Field Price of Crude Oil is US$45.00 per barrel or leas





Royalty Oil. - 12% x FP._, x ACQ.








If the Field Price of Crude Oil is greater than US$45.00 per band


Royalty Oil. - Ixsscr of: (a) 35% of ACO» and

















Royalty Oil. means the amount of Royalty Oil. expreued in bands, m the month from


FP.., means the Field Price of Crude 0.1 produced from the Development Area ia





the previous month, expressed in USS per band


ACOm menu the quantity of Available Crude Oil, expressed in barrels, produced and


saved in the month from the Development Area.





The above calculation shall be performed for each Development Area producing Crude


Oil.





The above formula is expressed as the product of the total amount of Available Crude Oil


in a month and the sum of the proportions determined according to the following table:





Field Price of Crude Oil in the Development Royalty Oil Expressed as a Percentage of


Area in the Previous Month (USVband) Available Crude Oil


4$45 A fraction (expressed as a percentage)


having as a numerator 12% of the Field Price


of Crude Oil in the previous month and a


denominator of the Field Price of Crude Oil


in the previous month


>$45 and <$79.50 A traction (expressed as a percentage) having as


a numerator 65% of the Field Price of Crude Oil


in the previous month in excess of lJSS45/barTcl.


and a denominate* of the Field Price of Cruda





>$79$0 35% of Available Crude Oil .


--1*$











tm loofrovoi


 32








A table describing the Royalty Oil at certain prices, and a sample calculation of Royalty


Oil, is attached ai Annex D - Part A under the heading "Royalty Oil". If there is a


conflict between the Royalty Oil calculation above and the table and example in Annex D ■


- Part A, the Royalty Oil calculation above will prevail





The price categories for the Field Price of Crude Oil and the Dollar amounts described


above shall be adjusted for inflation in accordance with Section 6.4 The Field Price of


Crude Oil in a month for • Development Area shall be determined in accordance with


Article 8





6.1.4 Cost Recovery


Contractor shall recover its Recoverable Costs to the extent of and out of the following





maximum limits per month of all Net Available Crude Oil produced from each


Development Area ("Cost Recovery Oil") and Available Natural Gas produced from each


Development Area ("Cost Recovery Gas").


6.1.4.1 Cost Recovery Oil





The maximum amount of Cost Recovery Oil in every month shall be the product of. (a)


Net Available Crude Oil in that month, and (b) 50%.





A table describing the Cost Recovery Oil at certain production rates, and a sample


calculation of Cost Recovery Oil, is attached as Annex D - Part A under the heading


"Cost Recovery Oil". If there is a conflict between the Cost Recovery Oil calculation


above and the table and example in Annex D - Part A. the Cost Recovery Oil calculation


above will prevail.


6.1.4.2 Cost Recovery Gas





TV of CoM Recovery Gas in every month shall be the product of. (a) ■


A nd (b) 75%. ll!


6.15 Allocation of Com Recovery Oil nd Gat I





Each month Contractor shall have the right to take and dispose of that quantity of Coil


Recovery Oil and Cost Recovery Oas which. when valued at Fidd Price, equals the }


amount of total Recoverable Costs maned in such month plus those Recoverable Costs


which have not been recovered m prior months. Any Recoverable Costs which are not


recovered in a month shall be dried forward and shall be recoverable out of Cost


Recovery Oil and Coat Recovery Gas in subsequent months until fully recovered, but not








6.1.6 Excess Cost Recovery Oil and Gas





If Contractor recoven all of its Recoverable Costs out of Cost Recovery Oil and Cost .


Recovery Oas in a month. tl*n any excess of Cost Recovery Oil and Cost Recovery





 33


in that month shall be included as Profit Oil or Profit Gas in that month, und allocated in








accordance with Sections 6.1.7 and 6.1.8, Where there is both Net Available Crude Oil


and Available Natural Gas produced in such a month, recovery of Recoverable Costs


shall occur on a pro rata basis with respect to the revenues from Net Available Crude Oil


and Available Natural Gas.


6.1.7 Profit Oil





Net Available Crude Oil produced from each Development Area In a month which iu not





Cost Recovery Oil shall be referred to as "Profit Oil". Profit Oil from each Development


Area in a month shall be allocated between Contractor and the Government as the


product of the total umount of Profit Oil available in a month and the sum of the


proportions determined according to the following table:





fAverage 1*11, rradactfe. of Government Proportion of Pro fa


Available Crude Oil ia the Oil


Development Area In (be Month


Co the ftrer 20.00* 25% of dm fir* 20.000 bopd divided 75% of (be fleet 70.000 bopd divided


Av^'oSeCXT SI’S* * by *e average daily production of


AvaOMe Crude Oil iu the mcoch


On the pteurn exceeding 20.000 70% of (be portion wrmifcg 20. XO


and *> to 40.000 bopd and up to dOJOO tepd divided


AvatiaTcIS^'IItbrS* a


Chi the portion exceed**40.000 taH MuftoSooo'b^d 60% of fee pome* exceed.eg 40.000


and apio 60,000 bopd and up to 60.000 bopd divided


by the average daily pro&xfion nf Available Crude Oil in die month


Available Crude Oil m the mooch


On the portion exceeding 60.000 60% of the portion exceeding 00.000 40% of the portion exceed** 60.000


and tip to 80,000 bopd and up to 80,001) bopd divided bopd and up to *0.000 bopd diwded


by the average daily product** of by the average dady predactioo of


Available Crude Oil in llw- month Available Crude Oil in the month


On the port too exceeding 80.000 175% of the portion exceedmg 80.000 25% of the portion exceeding 80,000


and up to 100,000 bopd and up to 100,000 bopd divided bopd and up to 100.000 bopd divided


by the average daily production of by the average dally production of


Available Crude Oil in the month Available Crude Oil m the month


On the portion in cxcea of 92.5% of the portion exceeding 7 5% of the portion exceeding


100,000 100.000 bopd divided by th* average 100,000 bopd divided by the average


daily product** of Available Crude daily production of Available Oil In


Oil in the month the month





A table describing the Profit Oil allocation at certain production rates, and a sample


calculation of Profit Oil, is attached as Annex D - Part A under the heading 'Profit Oil".


If there is a conflict between the Profit Oil calculation ubovc and the table and example in


Annex D - Part A, the Profit Oil calculation above will prevail.





6.1.8 Profit Gna


Available Natural Gas produced from each Development Area in a month which is not -





Cos* Recovery Gas shall be referred to as "Profit Gas ". Profit Gas shall be allociitcd^^











f?S*


 between the Government and Contractor on commercial terms to be negotiated in good


faith by the Government and Contractor in such a manner and at such a time so os to


allow for the earliest possible commercial development of Associated or Non-Associated


Gas on such terms and conditions which would provide economic returns to Contractor


comparable to those established in this Agreement for the commercial development of


Crude Oil.





41 •





shall pay and the Government shall be entitled to a 'Local Community


Benefit* to be utilized by the Government exclusively for the benefit of the population of


the Federal Region of Kurdistan who reside in the vicinity of the


determined as follows:





6.1.9.1 Calculation of local Community Benefit





Contractor shall pay and the Government shall be entitled to an amount (the 'Local


Community Benefit*) in cash from each Development Area producing Crude Oil.


calculated as follows:


LCB.=10SxFP«-,x CPO.





where:


LCB. means the amount of Local Community Benefit, expressed in USS, in the





month from the Development Area





FP.. i means the Field Price of Crude Oil produced from the Development Area in


the previous month, expressed in USS per barrel


CPOm means the quantity of Contractor's Profit Oil, expressed in barrels, produced


and saved in the month from the I )cvelopmenl Area.


The above calculation shall be performed for each Development Area producing Crude





Oil.


A table describing the Local Community Benefit at certain production rales, and a sample


calculation of Local Community Benefit, set out in Annex D Part A under the heading


“Local Community Benefit". If there is a conflict between the Local Community- Benefit


formula above, arid the table and example in Annex D Part A, the calculation resulting


from the Local Community Benefit formula above will prevail.





6.1.9.2 The Dollar above shall be adjusted for inflation in


accordance with Article 6.4. The Field Price of Crude Oil in u month for a


Development Area shall be determined in accordance with Article 'klc>a<


 35











.3 Option of Government to convert Local Community Benefit into working


interest





6.1.9.3.1 TTio Government shall have the option within four (4) months after


the first declaration of a Commercial Discovery to notify the


Contractor of the Government’s desire with immediate effect to


convert the focal Community Benefit payable by the Contractor


unde* this Agreement into a ten percent (10%) working interest in


the Contractor's rights and obligations under this Agreement, such


working interest to be held by a corporate entity which will be


wholly owned by the Government and whose primary objects and


purpose shall be the provision of benefit to the population of the


Federal Region of Kurdistan who reside in the vicinity of


Petroleum Operations; and. further, the Government may at its


option in duo course offer all or part of the shares in such corporate


entity to the public in the Federal Region of Kurdistan on terms


which ensure that such corporate entity will continue indefinitely


to be managed and operated exclusively for the benefit of the


population of the Federal Region of Kurdistan who reside in the


vicinity of Petroleum Operations.


6.1.9.3.2 With effect from the date of the notification by the Government to


the Contractor referred to in Section 6.1.93 1, (1) the obligation of


the Contractor to pay any Local Community Benefit will


irrevocably terminate and (2) the Oovcmment and the Contractor


will establish all necessary arrangements for the holding by the


wholly owned Government entity referred to in Section 6.1.93.1


of a ten percent (10%) working interest in the Contractor's rights


and obligations under this Agreement with the practical effect that


the wholly owned Go'crnmcni entity referred to in Section


6.1.93 1 will become a ten percent (10%) participant in the


Contractor's rights and obligations for purposes of the


implementation of das Agreement.


61.9 3.3 The parties agree that, in the event of the Government exercising


its option under Section 6 1.93.1, they will procure that the


Contractor and the entity referred to in Section 6.1.93-1 will enter


into a Joint Operating Agreement on terms which shall include and


be subject to provisions and standard^ customarily applicable in


the international Petroleum industry^


























IWA20C4O5-0I


 Option B








r, 2. | Petroleum Required for Petroleum Operations


Contractor shall hast the right to we free of charge Petroleum produced from the





Contract Areu to the extent reasonably required for Petroleum Operation* under the


Agreement.


6.2.2 Measurement Point


All Available Crude Oil and Available Natural Gas shall be measured at the applicable





Field Export Points) in the manner described in Section 8.4 and allocated as set forth in


this Section 6.2.


6.2.3 Royalty Oil


The Government shall be entitled to a royalty ("Royalty Oil") for each Development Area





producing Crude Oil calculated at follows:


If the Field Price of Crude Oil is US$45.00 per barrel or less





Royalty Oil.-12% xFP..,x ACO.


If the Field Pncc of Crude Oil is greater than US$45.00 per bwrtl





Royalty Oil. - Lesser of: (a) 35% of ACOm, and








FP,.,





where:





Royalty Oil. means the amount of Royalty Oil. expressed in barrels, in the month from


the Development Area





FP.. i means the Field Price of Crude Oil produced from the Development Area in


the previous montlu expressed in US$ per barrel





ACO. means the quantity of Available Crude Oil, expressed in barrels, produced and


saved in the month from the Development Area.





The above calculation shall be performed for each Development Area producing Crude


Oil





The above formula is expressed as the product of tbc total amount of Available Crude


in a month and the sum of the proportions determined according to the following table


 A table describing the Royalty Oil at certain prices, and a sample calculation of Royalty


Oil, in attached as Annex D - Part B under the heading 'Royalty Oil". If there is a


conflict between the Royalty Oil calculation above and the table and example in Annex D


Part B. the Royalty Oil calculation above will prevail.


The price categories for the Field Price of Crude Oil and the Dollar amounts described


above shall be adjusted for inflation in accordance with Section 6.4. The Field Price of


Crude Oil in a month for a Development Area shall be determined in accordance with


Article 8.





6-2.4 Cost Recovery


Contractor shall recover its Recoverable Costs to the extent of and out of the following


maximum limits per month of all Net Available Crude Oil produced from cadi


Development Area ('Cost Recovery Oil") and Available Natural Gas produced from each


Development Area ("Cost Recovery Gas")


6.2.4.1 Cos! Recovery Oil





The maximum amount of Cost Recovery Oil in every month shall be the product of: (a)


Net Available Crude Oil in that month, and (h) 50%.





A table describing the Cost Recovery Oil at certain production rates, and u sample


calculation of Cost Recovery Oil, is attached ns Annex D Part B under the heading


"Cost Recovery Oil". If there is a conflict between the Cost Recovery’ Oil calculation


above and the table uiti example in Annex I) - Port It. the Cost Recovery Oil calculation


above will prevail























CPSA KOHU CI


 6-2 4.2 Cost Recovery Cku





The maximum amount erf Cost Recovery Gas in every month shall be the product of: (a)


Available Natural Gas in that uioath. and (b) 75%.


62.5 Allocation of Cost Recovery Oil and Gas








shall Haw the right to take and dispose of that quantity of Cost


Recovery Oil and Cost Recovery Gas which, when valued at Field Price, equals the


amount of total Recoverable Costs incurred in such month plus those Recoverable Costs


which have not been recovered in prior months. Any Recoverable Costs which are not


recovered in a month shall be carried forward and shall be recoverable out of Cost


Recovery Oil and Cost Recovery Gas in subsequent months until fuDy recovered, but not


, of this.





6.2.6 Excess Cost Recovery Oil and Gas





If Contractor recovers all of its Recoverable Costs out of Cost Recovery Oil and Cost


Recovery Gas in a month, then any excess of Cost Recovery Oil and Cost Recovery Gas


in that month shall be included as Profit OU or Profit Gas in that month, and allocated in


accordance with Sections 6.2.7 and 6.2.8, Where there is both Net Available Crude Oil


and Available Natural Gas produced in such a month, recovery of Recoverable Costs


shall occur on a pro rata basis with respect to the revenues from Net Available Crude Oil


and Available Natural Gas.





6.2.7 Profit Oil





Net Available Crude Oil produced from each Development Area in a month which is not


Cost Recovery Oil shall be referred to as "Profit Oil", Profit Oil from each Development


Area in a month shall be allocated between Contractor and the Government as the


product of the total amount of Profit Oil available in £ month and the sum of the


proportions determined according to the following tabhg/f <


S


















































Ef\A XXS-05-01


rsrsrrr c™r^--r*u.


BP Os (be firjr *0.000 30% of the 6ru 40,000 bopd Chided 70% of the fra 40.000 bopd divided


by Ike evens* daily predathc* of by (he ever*, (tally preset--- of


AvailableCrudeOil m (be Booth Available Crude OU Is the month


pt* tbe exceed*# 40.000 bopd and *0.000 bopd divided 50% of tbe pomca esceedmg 40.000


aadip to 10,000 bopd aad t? » *0,000 bopd dividrd


by the evens* duly pn-toctk* of Available Crade Oil ta (be mooch


Available Crude Oil is *r neat


r&i (be portion accede# fO.OOO 65% of the poncm nunfcru 10.000 35% of lbe portioo cat redan 80.000


bopd Mid up Bo 100.000 bopd divided bopd and up n> 100.000 bopd dhrtad


by (he avmp daily production of by die average dady product** of


Avaitable Crude Oil a thr monCi Available Crude Oil la the nMd


pli Ibr portion exewdmi 100.000 IOOJOoScS* mi -p is 120.000 25% of (he portioo excemhag 100.000


Bad 120.000 bopd and up lo 120.000 bopd divided


bopd divided by (he ivtnp daily by (be average daily prodactaa af


production of An table Crude Oil n Avaitabta Oude OU ■ tba m*


the mooch


| °° mo!*wMOjSoO *0% of ttc pcrtMB exceed** bopd aid up lo" l'do'.OOQ bej dtaid^d


120.000 bopd ard up lo 140.000


bopd divided by ihe avenge daily yUadaMcCradi Oi in tbe meob


production of Available Owls OH*


tbe sooth


On ihe portion in excess of 95% of (be pertaoa exceeding 5% Of (he portion exceed*# 140.000


140,000 140.000 bopd divided by (be avenge bopd divided by tbe average duly


Oil in (He month product mo of Avutattc Oi ia (be





A table describing the Profit Oil allocation at certain production rates, and a sample


calculation of Profit Oil. is attached as Annex D - Pari B under the beading 'Profit Oil".


If there is a conflict between the Profit Oil calculation above and the table and example in


Annex D - Pan B. the Profit Oil calculation above will prevail





6.2.8 Profit Oas





Available Natural Oas produced from each Development Area in a is not


Cost Recovery Gas shall be referred to as "Profit Gas". Profit Gas be allocated


between the Government and C ontractor on commercial terms to be





faith by the Government and Contractor in such a manner and at such a time so as to


allow for the earliest possible commercial development of Associated or


Gas on such terms and condition* which would provide ccooomi to Contractor


comparable uJ those established in this Agreement for the commercial of


Crude Oi*^





 Contractor shall pay sad the Government shall be entitled to a ‘Local Community


Benefit' to be utilized by the Government exclusively for the benefit of the population of


the Federal Region of Kurdistan who reside in the vicinity of the Petroleum Operations,


determined as follows:


6.2.9.1 Calculation of Local Community Benefit





Contractor shall pay and the Government shall be entitled to an amount (the 'Local


CocnmurriTy Benefit") in cash from each Development Area producing Crude Oil.


calculated as follows:


LCB.-IO%xFP..,x CPO.


where:


LCB. means the amount of Local Community Benefit, expressed in USS. in the





FP». i means the Field Price of Crude Oil produced from the Development Area in





the previous month, expressed in USS per barrel


CPO, means the quantity of Contractor's Profit Oil. expressed in barrels, produced


and saved in (he month from the Development Area.


The above calculation shall be performed for each Development Area producing Crude


Oil.


A table describing the Local Community Benefit at certain production rates, and a sample


calculation of Local Community Benefit, net out in Annex D Part B under the heading


"Local Community Benefit". If then; is n conflict between the Local Community Benefit


formula above, and the table and example in Annex D Part B, the calculation resulting


from Use local Community Benefit formula above will prevail.


6.2.9.2 The Dollar amounts described above shall be adjusted for inflation in


accordance with Article 6.4. Ihe Field Price of Crude Oil in a month for a Development


Area shall be determined in accordance with Article 8.


6.2 9.3 Option of Government lo convert luteal Commiwity Benefit into working


Interest


6.2.9.3.1 The Government shnlI huve the option within four (4) months aficr


the first declaration of a Commercial Discovery to notify the


Contractor of the Government's desire with immediate efrect to


convert the Local Community Benefit payable by the Contractor


under this Agreement into a ten percent (10%) working interest in j


the Contractor’s rights and obligations under this Agreement, such^ar j











tPWWMMI


 41








working interest to be held by ■ corporate entity which will be


wholly owned by the Government and whose primary objects and


purpose shall be the provision of beoefit to the population of the


Federal Region of Kurdistan who reside in the vicinity of


Petroleum Operations; and. further, the Government may at its


option in due course offer all or part of the shares in such corporate


entity to the public in the Federal Region of Kurdistan on terms


which ensure that such corporate entity will continue indefinitely


to be managed and operated exclusively for the benefit of the


population of the Federal Region of Kurdistan who reside in the


vicinity of Petroleum Operations





6-2.9JJ With effect from the date of the notification by the Government to


the Contractor referred to in Section 6.2.9J.I, (!) the obligation of


the Contractor to pay any Local Community Benefit will


irrevocably terminate and (2) the Government and the Contractor


will establish all necessary arrangements for the bolding by the


wholly owned Government entity referred to in Section 62.9.3.1


of a ten percent (10%) working interest in the Contractor’s rights


and obligations under this Agreement with the practical effect that


the wholly owned Government entity referred to in Section


6.2.9 3.1 will become a ten percent (10%) participant in the


Contractor's rights and obligations for purposes of the


implementation of this Agreement


6.2.9.3.3 The parties agree that, in the event of the Government exercising





its option under Section 62.9.3.1, they will procure that the


Contractor and the entity referred to in Section 6.2.9.3.I will enter


into a Joint Operating Agreement on terms which shall Include and


be subject to provisions and standards customarily applicable in


the international Petroleum industry.


Interpretation of Article 6


6.J





The terms of Section 6.4 through Section 6.10 shall apply notwithstanding whether the


Government selects Option A or Option B as set out in Section 6.1 and Section 6.2.





6.4 Adjustment of Price Categoric*





The categories for Field Price of Crude Oil and the Dollar amounts in the tables


contained in this Article 6 and in Section 8.3.1 shall he adjusted annually in accordance


with the U.S. Consumer Price Index. The annual adjustment shall be made on a Calendar


Year basis. The adjustment .dull occur as soon as the U.S. Consumer Price Index


information for the month of January is published by the U.S. Bureau of Labor Statistics


The adjustment shall be calculated by multiplying the F ield Price of Crude Oil amounts


shown in the tables in this Article 6 by the following adjustment factor^ ^


 Where: "AF" is the adjustment factor,


"CPItono*" is the U.S. Consumer Price Index for the month of


January in the Calendar Year in which the adjustment is to occur;


and





"CPIbmc" is the U.S. Consumer Price Index for the month in which


the Effective Date occurs.





6.5 Option of Government





63 1 The Government's share of Petroleum is the quantity of Royally Oil plus the Government


share of Profit Oil and Profit Gas, and, in the event of the Government selecting the


option to convert the Local Community Benefit into a working interest pursuant to either


Section 6.1.3.9 I or Section 6.23.9.1. the Government will be entitled to a percentage


share of Cost Recovery Oil and Cost Recovery Gas commensurate with its percentage


working interest in the rights and obligations of Contractor under this Agreement.


6.5.2 Unless the Government elects otherwise pursuant (as appropriate) to Section 6.1.3 or





Section 6.2 3. Contractor shall take and receive, and dispose of, in common stream with


its own sluuc und on terms no less favourable to the Government than Contractor receives


for its own sluuc. ull of Government's share of Petroleum





6.5.3 The Government may make an election to take and separately dispose of Ciovemment's


share of Petroleum aa provided for under Section 63. Unless Contractor otherwise


agrees, which agreement will not be unreasonably withheld, the Government may not so


elect other than


633.1 in respect of all. or the same percentage of all, of Government's shares of


Crude Oil and Royalty Oil foe and throughout each Calendar Year, on not less


than six (6) months poor written notice to Contractor before the start of the


Calendar Year concerned, and


6333 in respect of Government's share of Natural Gas. in connection with its





approval of the Development Plan.





66 Lifting


6 61 Subject to this Agreement, and in accordance with the approved marketing and lifting


plan as contemplated by Section 4.15.4.4. Contractor may lift, dispose of and export from


the Federal Region of Kurdistan and the Republic of Iraq its share of Petroleum and


retain the proceeds from the sale or other disposition of that share


66-2 Upon an election by the Government to take its share separately. Contractor and the /


Government shall, from time lo time, make such agreements between them as anyf £


 4J








reasonably necessury, in accordance wilh Good Oil Field Practice and the commercial


practices of the international petroleum industry, for the separate lifting of their shares of


Petroleum.


6.7 Title and Risk


6.7.1 Petroleum shall be at the risk of Contractor until it is delivered at the Field Export Point.


6.12 Title in Contractor’s sliarc of Petroleum shall pass to it at the Field Export Point, and then


immediately be transferred to the Oovcmment for the purposes of transporting


Contractor's share of Petroleum to the Iraqi Export Point Title to Contractor’s share of


Petroleum shall be transferred back to Contractor when (and risk therein shall remain


with Contractor after) a quantity of Petroleum having equivalent value (less


transportation cost between the Field Export Point and the Iraqi Export Point) is delivered


at the Iraqi Export Point.


6.7.3 Title in the Government's share of Petroleum taken by Contractor pursuant to Section 6.2


shall pass to Contractor when (and risk therein shall remain with Contractor after) s


quantity of Petroleum having equivalent value (less transportation cost between the Field


Export Point and the Iraqi Export Point) is delivered at tbc Iraqi Export Point, except for


that share of Petroleum which Government has elected to take in kind pursuant to (as


appropriate) Section 6.1.3 or Section 6.2.3.


6 8 Downstream Delivery


Ihe Government will arrange for all required transportation for delivery of Crude Oil produced


from the Contract Area between the Deliver)1 Point and the Iraqi Export Point, with such


assistance and cooperation of the Ministry of Oil. Baghdad as may be accessary Contractor


retains the right to establish required transportation for delivery of Crude Oil produced from the


Contract Area between the Field Export Point and the Delivery Point. Contractor will receive


Crude Oil produced from the Contract Area at the Iraqi Export Point The Government ma>


elect to receive all or any portion of Crude Oil produced from the Contract Area (other than the


)at





6.8.1 the Iraqi Export Point.


6.8.2 the Field Export Point; or





6.8J the Delivery Point.





Crude Oil (other than Contractor’s share) shall be at the risk of the Government or any agency or


department of the Government once it is delivered at one of the points) described above.





Contractor's share of Crude Oil received by Contractor at the Iraqi Export Point may have been


blended with other crude oil production and transported to the Iraqi Export Point At tte Iraqi


Export Point, the Government or agency or department of the Government shall deliver to


ContracjAr a quantity of Crude Oil equivalent in value to the Crude Oil delivered at the Delivery














wsa


 44








Payment terms


tor shall pay to the Government an amount equal to Local Community Benefit and


(unless the Government has made an election under Section 6.5.3) proceeds of the Government's


*fure of Petroleum within ten (10) Business Days after Contractor has received puyment from


the buyer of such Petroleum.


Sharing on a Tai Paid Basb





Tec. The parties acknowledge that the basis for the sharing of Petroleum between the Government and





Contractor in this Article 6 is that the Government share of Petroleum is compensation for all


federal, regional and municipal taxes, fees (including stamp fees and any export fees), levies,


customs and duly obligations of Contractor related to its activities in performing the Petroleum


Operations. Therefore, Contractor has no liability for the payments of any taxes under the


Applicable Law, or for any other federal, regional and municipal taxes on income, profit or gain,


or other fees. levies, customs and duty in relation to the conduct of the Petroleum Operations


imposed by any federal, regional or municipal government in the Republic of Iraq. The


Government shall indemnify Contractor and hold Contractor harmless from any liability, cost*,


claims or damages that Contractor may suffer in the Federal Region of Kurdistan or the Republic


of Iraq in relation to federal, regional and municipal taxes, fees, levies, customs and duty


obligations of Contractor related to its activities in performing the Petroleum Operations. In


addition, the stability provisions of Section 11.2.3 shall apply to ensure that the fiscal sharing


reflected in this Agreement shall be enforceable for the term of this Agreement.


ARTICLE 7


SUPPLY OF CRUDE OIL TO KURDISTAN REGION DOMESTIC M ARKET





7.1 Domestic Market Obligation





7.1.1 Notwithstanding Section 6.5.1, if. in the event of essential regional demand declared by


the Government, it is necessary to limit exports of Crude Oil. the Government may. with


six (6) months advance wntten notice, require Contractor to meet the needs of the local


market with Crude Oil that it has produced and received pursuant to this Agreement.


Before the Government declares an event of essential regional demand, the Government's


share of Crude Oil shall be applied to meet regional demand.


12 Calculation of Regional Supply Obligation





7.2.1 Contractor's obligation to supply Crude Oil for domestic purposes shall be calculated for





each month as the lower of:





7.2.1.1 the local quantity of Crude Oil produced from the Contract Area in the


previous month multiplied by a fraction the numerator of which is the total


quantity of Crude Oil to be supplied pursuant to Section 7.1 and the


denominator is the entire production in thqfTenitory of Crude Oil from all


Contract Areas in the previous month. ■izc;





 45








7.2.1.2 twenty (20) of the total quantity of Crate Oil produced from the


Contract Area





The lower quantity computed under either Section* 72.1 1 or 7.2.12 is multiplied by the


percentage of production from the Contract Area to which Contractor i*


provided under Article 6 of this





For the purposes of determining the entire production in the Territory of Crate Oil from


all Contract Areas in a month, the Government shall provide to Contractor a report on


total Crude Oil production, approved by a





12.2 The quantity of Crude Oil computed under Section 7.2.1 shall he the maximum quantity


to be supplied by Contractor in any month pursuant to dus Article. Deficiencies, if any.


shall not be carried forward to ary subsequent month If in any Calendar Year.


Recoverable Costs exceed the difference of total sales proceeds from Crate Oil produced


and saved hereunder. Contractor shall be relieved from this supply obligation for such


Calendar Year.





7.2.3 The price at which such Crate Oil shall be delivered and sold under this Article 7


be the price as determined under Section 82. unless Contractor makes the


swap regional supply volumes for export volumes pursuant to Section 7 3.





7,2.4 Contractor shall not be obliged to transport such Crate Oil beyond the Field Export


Point, but upon request by the Government. Contractor shall assist in


transportation and such assistance shall be without cost or risk to»





7.3 Sw ap of Regional Supply V for F.iport Volur





Crude Oil delivered by Contractor to the Government or any agency or department of the


Government pursuant to Section 7.1 or 72 may. at Contractor’s option, be exchanged for xn


equivalent quality adjusted quantity of Crude Oil at an Iraqi export point. Where Contractor


elects to receive an equivalent quality adjusted quantity of Crude Oil at an Iraqi Export Point, the


following procedure shall apply;





7.3.1 Contractor shall deliver a notice indicating its election to take Crate Oil at an export


point, such notice to indicate the Iraqi export point or points where Contractor is willing


to accept an equivalent quality adjusted quantity of Crude Oil. and the Contractor's


assessment of quality and quantity adjustment mechanism or formula required so that


Contractor's deliveries pursuant to Section 7.1 or 12 will be equivalent at the export


point or points, and (ailing agreement on the mechanism or formula, the matter shall be


referred for senior management negotiations pursuant to the provisions of Section 15.2;





7.3.2 if Contractor has offered more than ooe possible export point, the Government may select


one or more points al which it will provide equivalent quality adjusted quantity or Crude


Oil; and the Government will confirm its acceptance of Contractor's roech«ism or


formula, or propose revisions to it as it believes are appropriate, to which Contractor sha!!


either accept or propose its own revisoos, and failing agreement on the myharusm or


formula, the matter shall be resolved by an expert pursuant to Section \*>A\p{.


 46





each month. Contractor shall deliver a written notice advising the Government of the


quantity of Crude Oil delivered by Contractor pursuant to Section 7.1 or 7.2, and the


equivalent quality adjusted quantity of Crude Oil to be delivered by the Government at an


Iraqi export point as determined by tbc agreed mechanism or formula;


i7.3.4 the Government shall deliver to Contractor the equivalent quality adjusted quantity or


Crude Oil at an Iraqi Export Point promptly following Contractor's notice; and


7.3.S either the Government or the Contractor may request an adjustment of the mechanism or


formula agreed under Section 7.3.1 and 7.3.2 not more frequently than twice in any


Calendar Year, and following such request, the process for proposing and agreeing on the


mechanism or formula tinder Sections 7.3.1 and 7.3.2 shall be utilized.


ARTICLE 8


VALUATION AND MEASUREMENT OF PETROLEUM





8.1 Point or Valuation


Petroleum is valued f.o.b.. or equivalent, at the Field I xport Pouit. The value of Petroleum





calculated in the manner described in this Article 8 is the "Field Price*. In any place in this


Agreement where the Field Price of Crude Oil in a month is referenced, it shall be calculated as


the average of the Field Price of Crude Oil on each day in that month, expressed in Dollars.





8 2 Value of Crude Oil





The value of Crude Oil from a Development Area.


8.2.1 sold f.o.b. (or equivalent) at the Field Export Point in an arm s length transaction is the


price payable for it; or





8.2.2 sold other than f.o.b., or equivalent, at the Field Export Point in an arm's length


transaction is the price payable for it, less such fair and reasonable proportion of such


price that relates to the transportation and delivery of the Petroleum downstream of the


Field Export Point; or


8.2.3 sold other than as mentioned in Sections 8.2.1 and 8.2.2 is based on the average netback





value or f.o.b. value of cither;


8.2.3.1 a bosket of at least three light crude oil types entering the Mediterranean


and/or Black Sea;


8.23.2 a basket of at least three medium sour crude oil types entering the


Mediterranean and/or Black Sea; or


8.2.3.3 a basket of


at least three heavy crude oil types entering the Mediterranean


and/or Black





 47








whichever basket is most representative of Crude Oil produced from the Development


Area, and then adjusted for quality, less the actual transportation charge from the Fidd


Export Point to the Iraqi Export Point to a maximum charge according to prevailing


tariffs generally applicable in the Republic of Iraq, not to exceed US$3.75 per barrel. For


the purposes of determining the vuluo of a basket of crude oil, the average prices quoted


by Platt's Oilgram for the relevant month shall be used.


8.3 Natural Gas Markets





8.3.1 If Natural Gas can be made economically available for sale, it will be made available at


the Field Export Point for a price which takes due account of (I) the commercial value of


Natural Gas in markets considered reasonably accessible to Nntural Gas from the


Contractor's Field and (2) the prevailing tariffs generally applicable in the Republic of


Iraq.


8 3 2 Ihc price in Section 8,3.1 shall be adjusted from time to time to reflect changes in





competitive market conditions.


8.3.1 The Government may purchase Natural Gas from Contractor at the Field lx port Point at


the price in Section 8.3 1 for domestic use in Kurdistan.





8.3.4 If Contractor identifies a market for Natural Gas outside of Kurdistan. Contractor shall


propose to the Government to form a joint venture for the sale of Natural Gas to such


market, with participating interests of 50% to Contractor and 50% to the Government.


Ihc terms of this joint venture shall be set forth in a separate agreement to be mutually


agreed by the parties, which agreancut shall contain provisions contemplating the


sharing of revenues, investments and operating costs in such joint venture in proportion


to the above percentages Contractor shall supply gas to the joint venture at the Fidd


Export Point at the price in Section 83.1.





84 Measurement


The volume and quality of the Available Crude Oil and Available Natural Gas produced from





each Field will be measured at or upstream of the Field Export Point, at the responsibility and


aw of Contractor, with the use of the metering methods, equipment and instruments





by the oil industry , including without limitation the following.


8 4.1 Available Crude Oil shall be the actual quantity ddivered at the Field Export Point





minus bottom sediment and water, adjusted to 60 degrees Fahrenheit. Quantity





to the methods and tables described in ASTM Designation DI250. API Gravity shall be


determined using the test described in ASTM Designation D287 The amount of water


and to be subtracted in calculating the quantity of Oil sold shall be determined


according to the method described in ASTM Designation D1796 or D473.


8 4 2 Available Natural Gas shall be the actual quantity delivered at the Field Export Point i





standard reference conditions of a temperature of sixty degrees (60*) Fahrenheit and








Em toowwei


 48





pressure of fourteen and nsty-five hundredths (14.65) PSIA Adjustment from observed


conditions to standard reference conditions shall be made according to the methods and


tables described in ASTM Designation D3588.


4.3 Samples of Crude (hi shall be taken from the tanks in the Contract Area, or from the


delivery pipelines when line sampling devices are available. Tests to determine quality


shall be made from such samples and shall be made in accordance with the appropriate


tests or procedures in the most recent edition of the Annual Book of ASTM Standards


published by the American Soocty for T esting Materials.


|


1.4.4 In performing its several obligations under this Article 8 the Contractor shall adhere


strictly to Good Oil Field Practice





1.4-5 As used herein "ASTM* refers to the specifically designated lest or procedure in edition


of the Annual Book of ASTM Standards published by the American Society for Testing


Materials.


ARTICLE 9


SIGNATURE BONUS AND PAYMENTS


9.1 Signature Bonus


Within thirty (30) days of the Effective Date the Contractor shall pay USS5.000.000 to the


account of the Government.


9.2 Payment Mechanism


All payments due from the Contractor to the Government under this Agreement and any


payments which may fall due from the Government to the Contractor pursuant, without


limitation and by way of illustration, to any indemnification provided in this Agreement by the


Government to the Contractor or in connection with the purchase of Natural Gas by the


Government from the Contractor pursuant to Section 8.3. shall be made in Dollars, unless


otherwise agreed, and within thirty (30) days after the end of the month in which the obligation


to make the payment is incurred to a bank specified by the party to whom the payment is due


9.3 Late Payment


Any amount no* paid in full when due shall bear interest at a rate per annum equal to the oor(l)


month term for UBOR current from day to day. plus, to the extent that the same shall be


permitted by Applicable Law. five (5) percentage points, or iJ from the due date for payment


until the amount, together with interest thereon, is paid in fulM ,


 ARTICLE 10


RELINQUISHMENT OF CONTRACT AREA





Arc*





Contractor shall relinquish:


10.1.1.1 ot the end of the First Exploration Period. Dot less than twenty-five percent


(25%) of the portion of the Contract Area that is not a Development Area. Gas


Retention or Oil Retention Area ut the end of the First Exploration Period; und


10.1.12 ut the end of the Second Exploration Period, not less than n farther twenty





percent (20%) of the portion of the remaining Contract Area that is not a


Development Arcu. Gas Retention Area or Oil Retention Area at the end of


Second Exploration Period





10.12 At the end of any Contract Year. Contractor may relinquish some, or all. of the Contract


Area Any nrca so relinquished will be credited against the next relinquishment


obligation of Contractor under Section 10.1 I.


Contractor shall consult with and give not less than sixty (60) days notice to the


Management Committee of the areas which, at any time, it wishes to relinquish.


However. Contractor shall not be required to relinquish any area which it deems to have


undiscovered Petroleum potential Management Committee approval is required for the


relinquishment of any urea, unless Contractor is relinquishing all of the lands in the


Contract Area other than such parts thereof as are composed in a Development Area, a


Gas Retention Area or an Oil Retention Area.





10.1.3 If Contractor does not relinquish a portion of the Contract Area at the time and in the


manner required by this Section 10.1. the Government shall notify Contractor of its


faihae to relinquish the required portion of the Contract Area, and


comply with its relinquishment obligation within sixty (60) days of such


10.2 Flaal


Area





At the end of the all of the Contract Area other


than such parts thereof as comprised in a Development Area, a Gas Retention Area or an Oil


Retention Area.





10.3 Relinquishment of Development Area


10.3.1 Except with the consent of the Government, a Development Area shall be deemed to be


relinquished on the first to occur of:





10.3.1.1 production from the Development Area censing permanently (as detenmped


by Management Committee) or for n continuous period of thirty six (36)^^














EKA XXXMM-ei


 so


months (excluding any months during which there is an event of Force


Majcure); and


10.3.1.2 the twentieth (20th) anniversary of the date of the declaration by Contractor of


the first Commercial Discovery in regard to the Contract Area, plus a number


of months equal to the total number of months during that twenty (20) year


period during which there was an event of Force Majcure. plus any extensions


pursuant to Section 10.3.2 or Section 10.3.3.


10.3.2 Within twelve (12) months prior to the end of the period in Section 10.3.1.2, Contractor


may give notice to the Government of its desire to extend the terra of this Agreement us it


rclutcs to any Development Area for an additional penod of five (5) years, if:


IOJ.2.1 there is production of Petroleum at thnt time und in Contractor’s opinion there


ia n reasonable expectation of continued production of Petroleum in


commercial quantities from the Development Aiea; or


10.3.2.2 production of Petroleum has ceased but in Contractor’s opinion there is a


reasonable expectation that production of Petroleum in commercial quantities


from the Development Area will recommence,


any such extension being subject to (lie approval of the Government, which shall not be


unreasonably withheld and which approval shall be deemed to have been given if the


Government shall not, within three (3) months of the Government having received notice


of the Contractor's desire to extend the term, have notified the Contractor of its intention


to withhold its approval of the further extension of the term


10.3.3 Within twelve (12) months prior to the end of any extended lerm pursuant to


Section 10.3.2. Contractor may give notice lo the Government of its desire to extend the


term of this Agreement os it relates to any Development Area for a further period of five


(5) years, if either of the circumstances described in Section 10.J.2.I or I0J.2.2 exist,


any such extension being subject to the approval of the Government, which shall not be


unreasonably withheld find wliieh approval shall be deemed to have been given if the


Government shall not, within three (3) months of the (iovemraeni having received notice


Of the Contractor's desire to extend the term, have notified the Contractor of its intention


to withhold its approval of the further extension of the term.


10.4 Termination of Agreement in respect of Relinquished Area


Ibis Agreement shall terminate in respect of a part of the Contract Area which is relinquished.


10.5 Gas Retention Area


If a Discovery (or the Appraisal of n Discovery) of Non-Associutcd Gas demonstrates that the


Discovery is not commercially viable at that time, either alone or in combination with other


Discoveries, Contractor is permitted to submit a comprehensive study to the Government


demonstrating that the Discovery is likely to become commercial within fifteen (15) years. The /


study shull contain a detailed evaluation of the Discovery based on known information, a map o£^











»ka


I


51








die area which Contractor believes would be the l>cvelopment Area of the Discovery if it is


commercial, and an economic model establisliing the potential for the Discovery to become


commercial in the liiture. If the Government approves the study, which approval shall not be


unreasonably withheld or delayed, the Government shall declare a Gas Retention Area in respect


of the proposed Development Area of the Discovery us defined in the study. A Gas Retention


Aren shall continue as if it were a Development Area with continuous production of Petroleum,


provided that Contractor shall take all reasonable actions available to Contractor to make the Gas


Retention Area commercially viable; and further provided thut Use Gas Retention Area will bo


relinquished after fifteen years if Contractor has not requested that the Management Committee


declare die Discovery to he a Commercial Discovery pnor to that time.


10 6 Oil Retention Area





If a Discovery (or the Appraisal of a Discovery) of Crude Oil demonstrates that the Discovery is


not commercially viable at that time, either alone or in combination with other Discoveries.


Contractor is permitted to submit a comprehensive study to the Government demonstrating that


the Discovery is likely to become commercial within fifteen (15) years. The study shall contain


a detailed evaluation of the Discovery hosed on known information, a map of the area which


Contractor believes would he the Development Area of the Discovery if it is commercial, and an


economic model establishing the potential for the Discovery to become commercial b the future.


If the Government approves the study, which approval shall not be unreasonably withheld or


delayed, the Government ahull declare an Oil Retention Area in respect of the proposed


Development Area of the Discovery as defined in the study. An Oil Retention Area shall


continue as if it were a Development Area with continuous production of Petroleum, provided


that Contractor shall tukc all reasonable actions avuilnblc to Contractor to make the Oil Retention


Area commercially viable; and further provided that the Oil Retention Area will be relinquished


after fifteen years if Contractor has not requested that the Management Committee declare the


Discovery to be a Commercial Discovery prior to that time.





ARTICLE II


OBLIGATIONS OF GOVERNMENT





The Government shall:








11.1.1 within thirty (30) days after the Effective Date, provide Contractor with the current and


historical technical data pertaining to the Contract Area, including seismic and wdl data


available to the Government from areas adjacent to die Contract Area to assist Contractor


with seismic interpretation of the Contract Area, to be used by Contractor exclusively for


Petroleum Operations;





11.1.2 the (rovemment shall, upon request by Contractor, such request to be supported by a


suitable map or plan, moke available to Contractor such Innd as may reasonably be


required for the conduct of Petroleum Operations. Contractor shall pay a reasonable


vner/user of such land. Such compensation shall be treated us














|TSAJ00fr«M>l


 52








11.1.3 permit free access for Contractor to the Contract Area and to structures, facilities,


installations, equipment and other property within the Contract Area and existing roads


and bridges leading to it;





||1.4 permit use of raw water available within and m the vicinity of the Contract Area for the


ptvposc of Petroleum Operations free of charge (however, all installations foe off take,


treatment and distribution of water shall be the responsibility of Contractor); and to allow


usage of all other utilities at the same charges payable by other citizens of the Federal





11.1.5 allow use of Petroleum produced by Contractor from the Field for Petroleum Operations


free of charge;


11.1.6 permit use of existing wells and facilities within the Contract Area for Petroleum





Operations in accordance with the approved Development Plan;


11.1.7 assist Contractor in the development of a security plan and the implementation of private


security setviccs for all of its operations in the Territory related to this Agreement, ensure


the safety and security of the Contractor's property and personnel in the Contract Area


and to protect them from loss, injury ami damage resulting from war (declared or


undeclared), civil conflict, sabotage, blockade, riot, terrorism, unlawful commercial


extortion, or organized crime. Notwithstanding anything to the contrary contained herein.


Contractor acknowledges and agrees tliat the obligations undertaken by the Government


hereunder are no greater than the general obligations of the Government towards citizens


of the Territory in respect to the perils named above;





11 I I continuously provide current information on known or potential environment, health and


threats including location of conventional.


: or residue thereof (collectively. "Ordnance");





11.1.9 visas, approvals..


authorizations, rights of way. and renewals thereof from any





in the Republic of Iraq.





11.1.10 ensure Contractor has the unrestricted right to import all equipment, supplies and


materials necessary or desirable for the conduct of Petroleum Operations, and the


unrestricted right to export all such equipment, supplies and materials which were


imported on a temporary basis with all such imports and exports exempt from import and


were imported and not leased or rented by Contractor may only be exported with the


approval of the Management C ommittee, and if such approval is given, with an


appropriate credit to Recoverable Costs for the remaining value of such equipment,


supplies and materials;


11.1.11 ensure Contractor has the unrestricted right to hire and grant entry into Iraq and


the Federal Region of Kurdistan persons who are nationals from foreign countries to /


rist in the conduct of Petroleum Operations, provided that such foreign nationals abidq^


 53





by the prov isions of Applicable Law; such persons to be exempt from taxes and fees lor


entry and exit;


11.1.12 grant to Contractor the flail right to take the benefit of any future laws or


amendments to laws which would represent an improvement in the Contractor’s rights


compared to the provisions contemplated by this Agreement, provided that such benefits


shall apply prospectively and not retrospectively from the date of implementation;


11.1.13 allow unrestricted access to transportation downstream of the Field Export Point





for Petroleum produced from the Contract Area; grant all approvals as may be necessary


or desirable to permit Contractor to construct pipelines and facilities downstream of tlie


Field Export Point so as to permit production from the Contract Area to be delivered to


the national or regional pipeline network in order to have access to export markets; to use


best efforts to assist Contractor to obtain approvals from other governments in the


Republic of Iraq whose approvul may he needed for the construction, ownership and


operation of any such pipeline* and facilities; and allow unrestricted access to present and


future transportation systems downstream of the Field Export Point to allow marketing


of Petroleum from the Contract Area;





11.1.14 arrange for foreign exchange to be converted in accordance with the principles set


out in this Agreement; and


11.1.15 not apply any export quotas to Petroleum produced from the Contract Area until


at least 100,000 bopd is bang produced, and in respect of production in excess of that


daily rate, any export restrictions shall be applied proportionately to all production in the


Territory.


11.2 Stability





11.2.1 Hie Government constitutes the government of the Territory which has been one of two


in the Federal Region of Kurdistan. The Federal Region of Kurdistan is


a region by the Constitution of the Republic of Iraq. Pursuant to a


Unification Agreement of 23 January 2006 the KRG is being constituted as the single


government of the Federal Region of Kurdistan and in consequence thereof -





112 1.1 the parties acknowledge that this Agreement is entered into by the parties at a


time when the Government is the proper authority and government of the


Territory, with full power and authority to enter into this Agreement;





1J.2.I2 this Agreement is binding on any successor government of the region of


Kurdistan having authority over the Territory. and the Government shall cause


this Agreement to be recognized and adopted by stxh «tcaor government


112.2 In the event of any change in governing policy m The Republic of Iraq that results in the


and sudden termination of this agreement for any rearoc. the Government


Contractor for all Recoverable Costs plus a sum to be negotiated bored


on the calculated present value of future net revenues to Contractor for the tfarabon of











iriA


 I1.2J n»e Government shall take no action which prevents or impedes the due


performance of rights and obligations of the parties. The Government the


stability of terms and conditions of this Agreement and the tax and fiscal framework in


effect in Federal Region of Kurdistan and the Republic of Iraq at the dale of this


Agreement, and will not introduce or aher the terms and conditions of the Agreement or


the tax and fiscal framework in a manner which would negatively affect the economic


balance of this Agreement Should any changes occur to the terms and conditions of this





Agreement or the lax and fiacal framework in effect on the Effective Date, the


Government shall, at Contractor's election, either:


11.2.3.1


of this Agreement, including without limitation the


of Article 6, ao as to restore the fiscal balance


of this and grant to Contractor the same benefits under this





Agreement as it was to receive as though the terms and conditions of this


or the tax and fiscal framework, had not been changed; or








11-2-32 allow the and with such altered terms and


of the or altered tax and fiscal framework to be


included as Recoverable Costs





If a tax, income tax. duty, levy or other charge, whether imposed by the federal


government of the Republic of Iraq or bythe Government, becomes applicable to


Contractor or to Petroleum Operations, the Government shall assume, pay and discharge,





in the name and on behalf of Contractor. Contractor's obligations in relation to


duty, levy or charge out of Royalty Oil. Local Community Benefit or


of the Available Petroleum The Government acknowledges that payment by


Contractor of the Local Community Benefit and the Government's share of


(or. if the Government has elected to take its share in kind, delivery by the Contractor of


the Government’s share of Available Petroleum at the Field Export Point) constitutes


payment of Contractor's such taxes, duties, levies or charges Whenever the provisions of


this Section apply, the Government shall furnish to Contractor the proper official receipts


evidencing the payment of Contractor's taxes, duties, levies or charges. Such receipts


shall be issued by the proper authorities and shall state the amount and other particulars


customary for such receipts


However, should


altered terms and conditions of the .Agreement or altered tax and


fiscal framework » .~»~ivd> affect the economic balance of this Agreement so radically


effective expropriation of this Agreement. Contractor’s rights under the


--- - 11.22 shall apply.





IIJ Foreign Eicbange





113.1 Contractor shall have the right to open, maintain, and operate Foreign Exchange honk


both m and outside of the Federal Region of Kurdistan and the Republic of Iraq


and local currency bank accounts inside the Federal Region of


Republic of IrayY


 55





11 .3-2 Contractor shall have the right to transfer all funds received in and converted to Foreign


Exchange u> the Federal Region of Kurdistan »d the Republic of Iraq to bank accounts


outside the Federal Region of Kurdistan and the Republic of Iraq, subject only lo the


payment of taxes, fees, dimes or imposts of general application in the Federal Region of


Kurdistan and the Republic of Iraq.


113.3 Contractor shall have the right to hold, receive and retain outside the Federal Region of


Kurdistan and the Republic of Iraq and freely use all funds received and derived from


Petroleum Operations without any obligation to repatriate or return the funds to the


Federal Region of Kurdistan or the Republic of Iraq, including but not limited to all


payments received from export sales of the Contractor’s shnre of Petroleum and any sales


proceed* from an assignment of their interest in this Agreement





11.3.4 Contractor shall luive the right to import into the Federal Region of Kurdistan and the


Republic of Iraq funds required for Petroleum Operations in Foreign Exchange and to


export freely any fluids held in the Federal Region of Kurdistan and the Republic of Iraq


to outside bank accounts.





11.3.5 Contractor shall have the right to pay outside of the Republic of Iraq for goods, works


and services of whatever nature in connection with the conduct of Petroleum Operations


without having first lo transfer to the Federal Region of Kurdistan or the Republic of Iraq


the fluids for such payments.





11.3.6 Whenever such n need arises Contractor shall be entitled to purchase local currency with


Foreign Exchange and convert local currency into Foreign Exchange, according to


prevailing rules.


11.3.7 Contractor and its Affiliates and foreign subcontractors shall have the right to pay outside





the Federal Region of Kurdistan and the Republic of Iraq the principal and interest on


loans used for funding Petroleum Operations without having lo first transfer to the


Federal Region of Kurdistan or the Republic of Iraq the funds for such payment.


113.1 Contractor shall have the right to pay wages, salaries, allowances aod benefits of Foreign


Employees working in the Federal Region of Kurdistan in Foreign Exchange partly or


wholly outside of the Federal Region of Kurdistan and the Republic of Iraq..


ARTICLE 12


RECOVERABLE COSTS





12.1 Generally


12.1.1 Contractor's accounts shall be prepared and maintained in accordance with Annex B





12.13 Only incurred by the Contractor in carrying on Petroleum Operations


arc Recoverable Costs, ut without prejudice to any other provision of this A£tement


which would result in cost or expense not being a Recoverable Cast^{


I








' f: |2-2 Recoverable Casn


(In any Contract Year, Recoverable Costs are. subject as further provided in Arana B. the sum of


! (hove of die following that are not Ineligible Costs:


i 12.2 1 the sura of:





12.2.1.1 recoverable Exploration Costs;


12-2.12 recoverable Appraisal Costs;


12.2.1J recoverable Development Costs;





122-1.4 recoverable Operating Costs; and


122.1 _5 costs lo Contractor of providing training pursuant to Section 5.3J and


Secondces;


12-2.2 Recoverable Costs in any previous Contract Year, to the extent in excess of the value of


Contractor’s share of Petroleum under Article 6 (as selected by the Government pursuant


to Section 6.1.4.1 or Section 624.1) in those previous Contract Years,








Any federal or regional customs, taxes, duties and other fees shall be Recoverable Costs in such


category as is appropriate for the activities to which they relate.


12.3 Recoverable Costs Allocation


Where there is more than one Development Area:





12.3.1 recovery of Exploration Costs incurred anywhere in the Contract Area can be made from


Available Crude Oil and Available Natural Gas from any Development Area; and


12.3.2 those Recoverable Costs which are in the nature of overhead, infrastructure and common


facility costs will be allocated for Cost Recovery Oil and Cost Recovery Gas purposes


among the Development Arens pro rata on the basis of the barrels of oil equivalent


produced from each Development Area.


ARTICLE 13


TITLE TO EQUIPMENT





13.1 Property





13.1.1 AH structures, fecilities. installations, equipment and other properly, and other works,


used or to be used in Petroleum Operations, shall be and remain the property of


Contractor while so used or held for use. and shall become the property of the


Government once the Recoverable Costs charged by Contractor in respect of such


structures, facilities, installations, equipment, property and works have been recovered icn /











ETSA2CK±»4\


 57





Contractor. Once such structures, facilities, installations, equipment, property, and


works have become the property of the Government, Contractor shall continue to have


lull and free use of such property in any part of the Contract Area, together with the


continued right to move such property wherever it is needed for Petroleum Operations,


and Contractor shall have no obligation to maintain except as required in accordance with


Good Oil Field Practice for property and equipment required for Petroleum Operations


13.12 Section 13.1.1 does not apply to property leased or rented to Contractor or leased or


rented by or belonging to third parties providing services


ARTICLE 14


EXISTING CONDITIONS





14.1 Base Line Study


14.1.1 The Contractor shall not be responsible for any environmental damage and conditions


existing in the Contract Area on the Effective Date, and the Government shall indemnity


Contractor from and against any liability, loss, costs, claims or damages, including


obligations to remediate or decommission any facilitic* or surface damage in effect a! the


Effective Date


14.1.2 In order to determine the environmental damage and conditions on such date. Contractor


shall cany out a baseline environmental study to be conducted by an independent


environmental firm mutually acceptable to the Government and Contractor identifying


the environmental condition* of the Contract Area und its installations mid wells on the


Effective Pate.


14.1.3 Contractor and the Government shall jointly review and approve this report if the





Government shall undertake and pay far any remedial measures rccrenmmdrd for


immediate action in the approved report as well aa far any future •virormcrtal costs








arising after the Effective Date and resulting from Petroleum Operations. The approved





bare line study shall he used for the purpose of determining the environmental damage


occurring alter the Effective Dale as a result of Petroleum Operations.


14.1.5 Contractor shall pay for the com of the environmental baseline study. Such cost shall be


u Recoverable Cost.





14.2 limitation





Contractor shall not be liable fee any toss or damage. including but jam fowled to^lUge.


pipelines or means of transportation which arc not under the direct possession and control of the


Contractor or its Affiliates or its subcontractors or the Operator In addition to the foregoing, the j


Contractor shall not be liable for any damage whatsoever in respect of the Government share <£f ^


 Petroleum, storage or transportation thereof once the Government tun taken custody of the


Government share of Petroleum.


14.3 Ordnance





14.3.1 Contractor acknowledges that Ordnance may exist in the Contract Area and surrounding


areas Contractor further acknowledges that due to sand coverage and possible


Ordnance dangerous to life, health and equipment may be within the Contract Area or be


reintroduced into such areas aaJ that there are potential dangers concerning the discovety


of and making safe such newly discovered items of Ordnance. It shall be Contractor's


responsibility to exercise care during the performance of the Petroleum Operations, and


Contractor shall all limes be vigilant in ensuring its personnel takes care during the


performance of Petroleum Operations.


14.3.2 Contractor shall include as part of its personnel orientation program for Petroleum


Operations a program for the recognition, precaulionary measures and action upon


discovery for Ordnance. Such program shall be:


14.3.2.1 mandatory for all personnel involved in the performance of Petroleum


Operations, including but nol limited to employees of subcontractors;


14.3.2.2 conducted prior lo the performance of Petroleum Operations and deployment


lo the Contract Area of any person involved in the performance of Petroleum


Operations; and


14.3.23 conducted in a language to ensure understanding by the personnel


participating in the program and subsequently to be employed related to


Petroleum Operations.


1433 If Contractor discovers Ordnance. Contractor shall immediately implement the necessary


safety procedures to secure the area and shall iramcdiatoly notify (he Government who


shall arrange the disposal of the Ordnance.


14.3 4 The Government acknowledges that the existence of Ordnance requires due allowance


for costs and delay of Petroleum Operations.


ARTICLE 15


CONSULTATION AND ARBITRATION


15.1 Dispute Resolution


A party who desires to submit a dispute between the parties arising in. out of. or relating to this


Agreement or to the breach, termination or validity thereof (a "Dispute*) for resoktoon shall


commence the dispute resolution process by providing the other parties to the Dispute written


notice of the Dispute ("Notice of Dispute"). The Notice oC Dispute shall contain a brief


statement of the nature of the Dispute and the relief requested^


 59














IV panic* to a Dispute shall initially seek to resolve any Dispute by negotiations among Senior


Executive*. A -Senior Executive- mean* any individual who has authority to settle the Dispute


for a party, and is not a representative of one of the parties on the Management Committee


Within thirty (30) days after the date of the receipt by each party to the Dispute of the Notice of


Dispute (which notice shall request negotiations among Senior Executives), the Senior


Executives representing the paties to the Dispute shall meet at ■ mutually acceptable time and


place to exchange relevant information in an attempt to resolve the Dispute. If the Senior


Executives fail to resolve the Dispute, then they shall elect whether to refer to binding expert


determination under Section 15.4. or binding arbrtrxaon under Section 153. Absent a.


to refer to an expert, all unresolved Disputes shall be subject to binding arbitration


153 Arbitration








153.1 Any Dispute not finally resolved by Senior Executive


referred to binding expert determination under Section 15.4 shall be exclusively anJ


definitively resolved through final and binding arbitration. The artatraben shill V


conducted in accordance with the Rules of Arbitration of the International Chamber of


Commerce (ICC") (as then in effect).





1533 TV arbitration shall be conducted by three arbitrators, unless all parties to the Dispute


agree to a sole arbitrator within thirty (30) Days after the filing of the arbitration.





13.33 If the arbitration is to V conducted by a sole arbitrator, then the arbitrator will be jointly


selected by the parties to the Dispute. If the panics to the Dispute foil to agree on the


arbitrator within thirty (30) Dnys after tV filing of the arbitration, then the ICC shall


appoint the arbitrator.


153.4 ll the arbitration is to be conducted by three arbitrators, then each party to the Dispute


shall appoint one arbitrator within thirty (30) Days of the filing of the arbitration, and the


two arbitrators so appointed shall select the presiding arbitrator within thirty (30) Days


after the latter of the two arbitrators lias been appointed by the parties to the Dispute. If a


party to the Dispute fails to appoint its party-appointed arbitrator or if the two party


appointed arbitrators cannot reach an agreement on the presiding arbitrator within the


applicable time period, then the ICC shall appoint the remainder of the three arbitral on


not yet appointed.


15.3.5 Unless otherwise agreed by all parties to the Dispute, the place of arbitration shall be


Geneva, Switzerland TV arbitration proceedings shall be conducted in the English


language and the arbitrators) shall be fluent in the English language.


153.6 When interpreting any Dispute arising under this Agreement, the arbitraton shall apply


Applicable Law. For the avoidance of doubt, to the extent that the laws of the Republic


of Iraq os applied and administered in the Federal Region of Kurdistan may not be


consistent with international low (as defined in Article 3K of Ac Statute of the


International Court of Justice), then international law shall prevail^











WSAMMEOI


 60





15 J.7 The arbitral tribunal shall make its decision within sixty (60) days after completion of the


parties' presentation to the tribunal, and it Shull be a condition of the appointment of each


arbitrator that it commit to make its decision within that time period. The sixty (60) day


limit shall not apply to disputes that involve a claim by a party that this Agreement is


terminated, expropriated or otherwise similarly fundamentally changed. The award of


the arbitral tribunal shall be final and binding. Judgment on the award of the arbitral


tribunal may be entered and enforced by any court of competent jurisdiction.


15.3.8 All arbitrators shall be and remain at all times wholly impartial, and. once appointed, no


arbitrator shall have any ex parte communications with any of the parties to the Dispute


concerning the arbitration or the underlying Dispute other than communications directly


concerning the selection of the presiding arbitrator, where applicable


15.3.9 The costs of the arbitration proceedings, including counsel's fees, shall be determined by


the arbitral tribunal as part of its uwurd


15.3.10 Tlie award shall include interest, as determined by the arbitral award, from the


date of any default or other breach of this Agreement until the arbitral award is paid in


full. Interest shall be awarded, subject to Applicable Low, at the one (I) month term for


LIBOR plus five (5) percentage points


153.11 The parties waive their rights to claim or recover, and the arbitral tribunal shall





not uward, any punitive, multiple, or other exemplary damages (whether statutory or


common law) except to the extent such damages have been awarded to a third party and


are subject to allocation between or nmong the parties to the Depute





15.3.12 To the extent permitted by law. any right to appeal or challenge any arbitral


decision or award, or to oppose enforcement of any such decision or award before a court


or any governmental authority, is hereby waived by the parties except with respect to the


limited grounds for modification or Don-enforcement provided by any applicable


arbitrauon statute or treaty.





15.3.13 During any period in which a dispute has been referred to arbitration,


performance of this Agreement by the parties shall nevertheless continue as though such


dispute tfid not exist Any time limits established in this Agreement fix the termination


of the Agreement in the event of breach shall be suspended while the dispute is being


arbitrated





15.4 Expert Determination


For any decision or Dispute referred to an expert by the Senior Executives pursuant to Section


15.2, or for any other matters where the parties so agree, the parties hereby agree that such


decision shall be conducted expeditiously by an expert selected unanimously by the parties to the


Dispute. The expert is not an arbitrator of the Dispute and shall not be deemed to be acting man


arbitral capacity. The party desiring an expat determination shall give the other parties to the


Dispute written notice of the request for such determination. If the parties to the Dispute are


unable to agree upon an expert within ten (10) Days after receipt of the notice of request for an /I


expert determination, then, upon the request of any of the parties to the Dispute, the Internationa^


i


 61








Centre for Expertise of the International Chamber of Commerce shall appoint such expert and


shall administer such expert determination through the ICC's Rules for Expertise. The expert,


once appointed, shall have no ex parte communications with any of the parties to the Dispute


corxxming the expert determination or the underlying Dispute. All parties agree to cooperate


fully in the expeditious conduct of such expert determination and to provide the expert with


access to all facilities, books, records, documents, information and personnel necessary to make


a fully Informed decision in an expeditious manner. Before issuing his final decision, the expert


shall issue a draft report and allow the parties to the Dispute to comment on it. The expert shall


endeavour to resolve the Dispute within thirty (30) Days (but no later than sixty (60) Days) after


his appointment, taking into account the circumstances requiring ufl expeditious resolution of the


matter in dispute. For each Dispute referred to an expert, the parties to the Dispute shall each


submit to the expert its proposed outcome of the Dispute, and the expert shall select the most


reasonable proposal of those submitted as his decision. I he expert's decision shall be final and


binding on the parties to the Dispute.


15.5 Waiver of Sovereign Immunity


Any party that now or hereafter has a right to claim sovereign immunity for itself or any of its


assets hereby waives any such immunity to the fullest extent permitted by the laws of any


applicable jurisdiction. This waiver includes immunity from (i) any expert determination oe


arbitration proceeding commenced pursuant to this Agreement; (ii) any judicial, administrative


or other proceedings to aid the expert determination or arbitration commenced pursuant to this


Agreement; and (iii) any effort to confirm, enforce, or execute any decision, settlement, award,


judgment, service of process, execution order or attachment (including pre-judgment attachment)


that results from an expert determination, arbitration or any judicial or


proceedings commenced pursuant to this Agreement Each party acknowledges that its


and obligations hereunder are of a commercial and not a:





ARTICLE It


FINANCIAL AND TECHNICAL DATA. RECORDS AND REPORTS





16.1 Ownership


16.1.1 Ibe Government shall have tide to nil technical data and information acquires! in the





carrying on. or as a result of Petroleum Operations, provided that Contractor shall have


the right to retain a copy of all data during the term of thi s Agreement.


16.1.2 Section 16.1.1 includes all data and information, whether raw. derived, processed,


interpreted or analysed (including cores, cuttings, samples, and all geological,


geophysical, geochemical, drilling, well, production and engineering data and


information) that Contractor collects and compiles. Contractor shall he entitled to retain


50% of all cores, cuttings and other physical samples acquired during Petroleum


Operations, for the term of this Agreement. Contractor shall use diligence and care in


accordance with Good Oil Field Practice so as not to cause damage to any physical


samples in Contractor’s possession^/

















M«SA2

 62








16.2 Records. Storage, Retrieval and Submission





162.1 Contractor shall keep full, complete and accurate book*, accounts and other records of


Petroleum Operations and of the vole or other disposition of Petroleum, of the data and


information mentioned in Section 16.1 and of nil other financial, commercial, legal,


operational, technical and other dnU and information acquired or generated for, or


resulting, directly or indirectly, from, Petroleum Operations (including that relating to


marketing and otherwise to die sale of Petroleum).


16.2.2 Contractor shall make the originals or copies of nil such data, information and records


available to the Government (or as it shall direct) at reasonable limes at the Operator's


offices in the Territory, und shall promptly deliver the same to the Government (or as it


directs) as and when, and in such manner as. the Government directs.


16.2.3 Without prejudice to Section 16.2.2, Contractor shall store all such data and information


as the Government, after consultation with Contractor, reasonably directs, and otherwise


in accordance with Good Oil Field Practice, and provide the Government with the details


of its data storage and retrieval system.


16.2.4 Contractor may retain copies of all such data und information and records delivered to the





Government (or as it shall direct) for use in or in relation to Petroleum Operation* in


compliance with obligations under law. but not otherwise without the consent of the


Government.





16.2.5 Except with the or m required by law or the rules of a


recognised slock or as otherwise provided in this Agreement. Contractor may


not sell or disclose any such data,


16.) Reports





Contractor shall provide the Government with such reports as are mentioned in Annex B and as


Deluding aa annual report on Contractor’s measures to protect


with Section 51.2.1.





16.4 Export of Data and Information


Subject to Applicable Law as applied in the Republic of Iraq, upon notice to the


(but without need for specific Government consent). Contractor shaft be entitled to export to


Contractor’s head office outside of the Territory or to other designated offices any data,


information or records which are required for analysis or for financial reporting. No other data.


Information and records shall be taken out of, or transmitted trom or stored outside, the Territory


without the consent of the Government Such consent shaft not be withheld if resources for the


processing, interpretation or analysis thereof are not available in the Territory, if the data,


information and records are promptly returned to the Tetfitary and accurate copies (c


and representative samples) are retained in the Tenitor^^^





 63





16.5 line of Data and Information





16.5.1 The Government may make »udi use as it wishes of the data and


in this Article 16 for its internal use. or for the purposes of general statistical and other


general reporting (publicly or otherwise) on its activities.


16.5.2 Except with the consent of the Government, Contractor nuy only use the data and





information mentioned in Section 16.1 for its Petroleum Operations.


16.6 Confide*tiallty of Data and Information





16.6.1 For ilie purposes of this Section 16.6. "Confidential Information" includes:


16.6.1.1 the data, information und records referred to elsewhere in this Article 16;





166.1.2 any information regarding Petroleum Operations; imd


166.1.3 any patents, discoveries, trade marks, cultural properties, tools, products,


forms, books, programs, techniques, designs, research, plans, development


activities, computer programs, cyphers, maintenance plans, list of names of


employees and their positions, and financial statements which have the


chnrncter of being private and confidential and are related to Petroleum





16.6.2 The Government shall not publicly or other than for the purpose


of then the


later of:


16.6-2.1 five (5) yean after it





16.6 2-2 this to apply in respect of the point at or in respect of





16 6 3 Except with the consent of the Government. Contractor shall not disclose any


Confidential Information other than





16.6.3.1 to iu employees, contractors and affiliate* to the


16.6.32








I6.6.3J


I6AJ4





16.6.3 5


 64








16.6.3.6 to its and its Affiliates' officers, directors and employees, subject to the


Contractor taking customary precautions to ensure sucli data and information


is kept confidential;





16.6.3.7 on a need to know husin to contractors, consultants, and advisors employed by


the Contractor or its Affiliates where disclosure of such data and information


is reasonably necessary in connection with Petroleum Operations or otherwise


pursuant to the legitimate exercise of the rights of Contractor,


16.6.3.8 to a bona fide prospective transferee from Contractor of all or a part of its


interest in this Agreement (including a corporation with whom Contractor or


its Affiliate is having discussions directed toward a merger, amalgamation,


consolidation, the sole of a majority ownership interest in Contractor or


Affiliate or similar transaction).


16.6.3.9 to its insurers, bonks or other financial institutions, underwriters and investors


and their advisors on a need to know basis in respect of the Contract Area and


die Agreement;





16.6 3.10 to the extent such data and Information must be disclosed, pursuant to any


requirement of applicable laws, to a government or governmental department,


ministry, board, commission, agency, tribunal, securities commission or stock


exchange having jurisdiction;


16.6.3.11 in legal or arbitration proceedings involving the rights and obligations of


Contractor.





16-6.3.12 of a general descriptive or general informational nature in respect of


Petroleum Operations (including independent engineering reports, but


excluding any reports commissioned by or prepared for Contractor) provided


that such information shall not include any proprietary information or data


relating to technology, marketing, trade secrets, competitive mitten or other


;or





16.6.3.13 with th of the not to be unreasonably


withheld or





Contractor shall ensure that a person mentioned in Section 16.63.1 _ the data


and information disclosed to it confidential in the terms of this Article 16





16.64 The Government may release data without compensation to Contractor on portions of the


Contract Area which have been relinquished by Contractor, except where Contractor has


not recovered its Recoverable Costs related to the acquisition of such data. Until


its Recoverable Costs related to the data on relinquished lands,


it may sell such and any amounts recaved for sale of data shall be credited to


X





 65





16.6.5 All negotiations, arbitration, and expert determinations relating to a IJisputr (including a


from negotiation, an arbitral award, documents exchanged or


ind memorials, briefs or other documents


)arc ! and may not be disclosed by the parlies, their


employees, officers, directors, counsel, consultants, and expen witnesses, except to the


required by law. provided, however, that breach of this confidentiality provision shall not





void any aettlcmcnl. expert determination or award.


16-7 Trade Secrets





16.7.1 Notwithstanding Section 16.6, the Government shall not publicly discloac or make


available, other than as required for the purpose of the resolution of disputes under this


Agreement, any dnlu or information submitted to it by Contractor, which;


16.7.1.1 is a trade secret of, or data and information the disclosure of which would, or


could reasonably be expected to, adversely uffect, Contractor in respect of its


lawful business, commercial or financial affairs; and


16.7.12 was clearly marked as such when it was submitted to the Government.





16.7.2 Without prejudice to Scctioo 16.7.1.1:





16.7.2.1 the Government may, at any time and from time to tune.


Contractor requiring it to show cause, within the time specified for the


pwpose in the notice, why the data and information which H has


pursuant to Section 16.7.1.2 should still be considered a


information os mentioned in





16.7.2.2 if Contractor does not


iger be


16.7.





16.7.3 The Government shall not use the


Contractor or any Affiliate in any


prior wnuen approval from Contractor, who such approval at iu


























Release to revise it to


 66





such comments or to refrain from making it after the other party have had the opportunity to





comment as required by this Section 16 8





ARTICLE 17


AUDIT





17.1 Independent Audit


The Government has the right, at Contractor's cost, to an independent audit (starting, except in


the ease of manifest error or fraud, within twelve (12) months after the end of the Contract Yeur,


mid concluding within six (6) months of its commencement) of Contractor's books ami accounts


relating to this Agreement for any Contract Year. The Government may require only a single


independent audit in respect of any Contract Year. Contractor shall forward u copy of the


independent auditor's report to the Government and the Management Committee within sixty


(60) days following the completion of the audit.


17.2 Government Audit


The Government may inspect and audit (by itself or as it directs), and at its own cost.


Contractor’s books ami accounts relating to this Agreement for any Contract Year (starting


within twelve (12) months after the end of the Year, and concluding within six (6) months of this


start). The Government may only conduct a single audit in respect of any Contract Year. This


Section 17.2 docs not affect any audit rights arising under the provisions of Applicable Law


17.3 Kireplions





17.3.1 All audit exceptions shall be raised by the Government within six (6) months alter receipt


of the independent auditor's report by the Government or completion of the audit by the


Government (or as it directed), as the case may be. failing winch Contractor's books and


be conclusively deemed correct except in the case of manifest error or








I7J.2 Contractor shall fully respond to an audit exception within sixty (60) days of its being


raised, failing which the exception shall be deemed accepted.


I7.3J the parties as a consequence of an audit shall be made





promfdy.





174





Contractor shall fully and expeditiously *sse


17.5 Affiliates





The foregoing provisions of this Article 17 apply in respect of Affiliates of Contractor.





Contractor shall use its best endeavours to ensure that its Affiliates axnpiy with them (at


InnnElasraMtioMdtaSeaiaaPg^

















JOOMJSOI


 ARTICLE 18


INDEMNITY AND INSURANCE





1*1 Indemnity


18 1.1 Contractor shall defend, indemnify and bold harmless (he Goverraacni from all claims of


whatsoever nature which arc brought against the Government by any third party directly


in respect of Petroleum Operations, and all costs, expenses and liabilities incurred by the


Government os a consequence thereof. The Government shall give Contractor prompt


notice of any such claim and shall not settle it without the prior consent of Contractor.


18.1.2 The Government shall defend, indemnify and hold harmless Contractor from all claims of


whatsoever nature which are brought against Contractor by any third party directly in


respect of any failure by the Government to perform its obligations under this Agreement,


and all coats, expenses and liabilities incurred by Contractor ar u consequence thereof.


Contractor shall give the Government prompt notice of any such claim and shall not settle


it without the prior consent of the Government.


18.2 Insurance


Contractor shall take out and maintain insurance in respect of its liabilities for Petroleum


Operations in the amounts and types which ore appropriate in accordance with Oood Oil I ield


Practice, but this obligation applies only if such insurance is available at a cost which is not


materially in excess of the insurance costs applicable for the international oil & gas industry*.


Contractor shall supply evidence of Contractor’s insurance to the Government within 120 days


following the Effective Dale, and on each anniversary of the Effective Date during the term of


this Agreement.





ARTICLE If


FORCE MAJF.CRE





19.1 Fart* Majearc Relief


19.1.1 Subject to the further provisions of this Article 19. a party shall not be liable for any


failure to perform an obligation under thU Agreement to the extent such performance is


prevented, hindered or delayed by events or circumstances which are heyond its


reasonable control and the effects of which could not and cannot reasonably be avoided


or overcome by it ("Force Manure")


 68


or the Republic of Iraq (or of a political subdivision thereof) which





substantially prevents or hinders Contractor1* ability to conduct Petroleum


Operations.


19.13 Notwithstanding Section 19.1.1, the following shall not be Force Majeure:


19.1.3.1 failure to pay money;


19.1.3.2 in the case of Contractor, the law, or any action or inaction of the government,


of a place other than the Federal Region of Kurdistan or the Republic of Iraq


(or of a political subdivision thereof); and


19.1.3.3 in the cane of the Government, the law, or any action or inaction of the


Government, or any governmental agency in the Federal Region of Kurdistan


or the Republic of Iraq


192 Procedure





A party claiming Force Majeure shall;


19.2.1 notify the other party as soon as reasonably practicable of the event or circumstance


concerned, and of the extent to which performance of its obligations is prevented,


hindered or delayed thereby;


19.2.2 keep the other party fully informed as to the actions taken, or to be taken, by it to


overcome the cfleets thereof, and, from lime to time, provide it with such information


and permit it such access, as it may reasonably require for the purpose of assessing such


effects and the actions taken or to be taken; and


19.2.3 resume performance of its obligations as soon as reasonably practicable after the event or


circumstarKc no longer exists


19J Consult* boo





shall consult with each other and take all reasonable steps to minimise the losses of


either party and to minimise any overall delay or prejudice to Petroleum Operations as a result of


Force Mqcura.


19.4 Third Parties


Where a party enters into an agreement in relation to this Agreement with a third party , a failure


by the third party to perform an obligation under that agreement shall be Force Majeure affecting


that party only if performance of that obligation was prevented, hindered or delayed by events or


circumstances which (if the third party were party to this Agreement in the capacity of the party


coocemed) udbld (in accordance with the provisions of this Article 19) be Force Majeure


affecting ilyl j


 69





19.5 Extension of T





If Force Majeurc materially prevent*, hinders or delays Petroleum Operations, the time period


for the performance of obligations by a party shall be extended by a period equal to the duration


of the Force Majeurc condition. If Force Majeurc materially prevents, hinders or delays


Petroleum Operations for more than three (3) consecutive months, the parties shall discuss, in


good faith, amendments regarding the term of. and the periods of time in which Petroleum


Operations (including tltc duration of each period of the Exploration Phase) are to be carried out


under, this Agreement.


ARTICLE 20


RESTRICTIONS ON ASSIGNMENT


20.1 Assignment by Contractor





20.1.1 Except with the consent of the Government, which consent shall not be unreasonably


withheld or delayed, or as permitted by this Section 20.1, no alignment or other dealing


by Contractor in respect of this Agreement shall be of any force or effect


20.1.2 Upon notice to the Government, Contractor shall be permitted to assign its rights under


this Agreement to a wholly-owned subsidiary that has been incorporated for the purpose


of holding this Agreement. Any such assignment shall not relievo Contractor from its


obligations under this Agreement, without the written approvnl of the Government.


20.1.3 Contractor may assign all or part of its rights, obligations and interests arising from this


Agreement to a third party provided (hat the third party


20.1 J.l has the technical and financial ability to perform the obligations to be assumed


by it under this Agreement, and


20.1 as to the interest assigned to it. accepts and assumes all of the terms and


conditions of this Agreement


20.1.4 Any such assignment shall be subject to the prior written consent of the Government,


which consent shall not be unreasonably withheld or delayed. By way of clarification,


and not in limitation of the foregoing provision* of this Section 20.1 J. the Government


dull not be considered to be acting unreasonably in declining to 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 representative


of the Government


20 1J Section 20.1.1 docs not apply to an agreement for the sale of Crude Oil under which the


pnee therefor is payable (or such Crude Oil is exchanged for other Petroleum) after title





20.1.6 Section 20.1.1 docs not apply to any encumbrance granted by Contractor. For the


purposes of the foregoing, encumbrance includes any mortgage, charge, pledge, lien. /


assignment by way of security, title retention, option, nght to acquire, right (


 70


pre-emption, right of set off, counterclaim, trust arrangement, overriding royalty, net





profits interest, or any other security, preferential right, equity or restriction, any


agreement to give or to create any of the foregoing and any transaction which, in legal


terms, is not a secured borrowing but which has an economic or financial effect similar to


that of a secured borrowing.





20.2 Assignment by Government


202.1 Except with the consent of the Contractor, which consent shall not be unreasonably


withheld or delayed, or as permitted by this Section 20.2, the Government shall not


assign any interest in this Agreement or the Contract Area; provided, however, that


subject to Section 6.2.93, the Government may assign it* rights in the Local Community


Benefit.


20.2 2 Section 20.2.1 does not upply to an agreement for the sale of Crude Oil under which the


price therefor is payublc (or such Crude Oil is exchanged for other Petroleum) after title


thereto has passed to live Government


ARTICLE 21





OTHER PROVISIONS





21.1 Notice of Default


Upon any breach or failure to perform any obligation of this Agreement by a party, the other


party must give written notice of the breach or failure in writing and within thirty (30) days from


the date that the party become aware of the occurrence of the breach or failure, together with u


direction to remedy the breach or cause the obligation to be performed, otherwise the violating


party shall bear legal responsibility for the breach or failure according to the provisions of this


Agreement and Applicable Law.


2\2 Notices


AU notices, demands, instructions, wavers, consents or other communications to be provided


pursuant u> this Agreement shall be in writing in English, shall be effective upon receipt, and


shall be sent by personal delivery, couner or facsimile, to the following addresses:





I f to Contractor, to: WestemZagros limited


do Western Oil Sands Inc.


Suite 2400,440 Second Avenue SW


Calgary, Alberta


Canada T2P5E9


4


Facsimile: ♦I 403 234 9156,


 If (0 the Government, to: Office of the Prime Minister


Kurdistan Regional Government, Sulaimany Administration


Sulaymaniyah, Iraqi Kurdistan





Facsimile: .964 31 30527


The addresses and facsimile numbers for notices given pursunnt to this Agreement may be


changed by means of a notice given to all parties at least fifteen Business Days prior to the


effective date of such change.


21.3 Language





This Agreement lias been written in the English language. An unofficial translation of this


Agreement in the Arabic language will be provided by the Contractor to the Government within


sixty (60) days of the date of signature of this Agreement. In ease of a conflict between the


provisions or interpretation or the English text of this Agreement and the Arabic translation, the


English text shall prevail.


21.4 Ratification of Agreement as Applicable Law





Upon adoption of this Agreement as law in the Federal Region of Kurdistan, this Agreement


shall have the force of law within the Federal Region of Kurdistan, shall form part of Applicable


Law and shall take precedence over any other current law, decree or administrative order (or part


thereof) of the Federal Region of Kurdistan which is inconsistent with or conflicts with this


Agreement except as specifically otherwise provided in this Agreement.


21.5 Enurement and Third Party Rights





This Agreement shall be binding upon and enure to the benefit of the parties and their respective


i and permitted assigns. Unless specifically provided in this Agreement (including in


19.4), the parties do not intend that any tom of this Agreement be enforceable by any


person who is not a party to this Agreement





21.6 Ar dr i/Modificstic





This Agreement shall not be amended or modified in any respect, except^ to a written


■ by the officials or representatives authorized by each party





21.7 OECD Convention





The Government acknowledges that Contractor is legally obliged by legislation in its home


country to comply with the 1999 OECD Convention on Combating Bribery of Foreign Public


Officials in International Business Transactions and the Canadian Corruption of Foreign Public


Officials Act (Canada)^





 72





21.8 Severability





If any provision of Ail Agreement is hdd to be invalid. illegal or unenforceable, the invalidity,


illegality or unenforceability will not affect any other provision of this Agreement and this


Agreement will be construed as if the invalid, illegal or unenforceable provision had never been


contained herein unices the deletion of the provision would result in such material change to








219 Entire Agreement





This Agreement, including the Annexes, together with documents to be delivered at the time of


execution of this Agreement, constitute the entire agreement between the parties pertaining to the


subject matter hereof and supersede all prior agreements, understandings, negotiations and


discussions, whether oral or written, of the parties. There arc no warranties, representations or


other agreements between the parties in connection with the subject matter hereof except as


specifically set forth in this Agreement and in any document delivered at the time of execution of


this Agreement.


21.10 Relationship of Parties





This Agreement shall not be deemed or construed to authorize any parry to act as an agent,


servant or employee for any other pmty for any purpose whatsoever. The parties acknowledge


that they do not have the right or authority or jurisdiction to enter into contracts or obligations on


behalf of the other party





21.11 Further Assurances





The parties shall execute, acknowledge ami deliver such other instruments and take or


from taking such other action as may be reasonably required to more fully assure the


performance of the provisions of this Agreement and otherwise assure the carrying out of the


intent and purpose of this Agreemen^( ^
























































trsA ro*>-«?oi


 IN WITNESS WHEREOF, the parties have executed tliis Agreement in


Sulaymaniyah, Kurdistan Region, Iraq, on the fourth day of May 2006, and each party has


delivered and received three fully executed copies.


Kurdistan Regional Government - Iraq/Sulaimany Administration^/ f

















His Excellency Mr. Omar Fatah Hussein Dilsbad Abdul-Rahmun Muhammed


Prime Ml. Chairman of General Enterprise for





Special Project*











WesternZagros limited








Ah- ■ eXd








M. Simon Hatfield


Officer


Director


 Annex A -


CONTRACT AREA


 B-I


Annex B -





ACCOUNTING PROCEDURE





CLAUSE 1


GENERAL PROVISIONS


1.1 Purpose and Definition*


I I I Hie purpose of this Annex B is to further define the manner in which the costs


expenses of Petroleum Operations will be recorded. Recoverable Costs will be


determined, and Contractor’s lxx>ks and accounts will be prepored and maintained, and


ancillary mutters.


1. 1.2 A reference to a Clause is to a clause of this Annex B unless the contrary is stated.


1.1-3 A reference to an Article or Section is to an article or section of the Agreement to which


this Annex B is attached.


1.2 Accounting Records


Contractor shall maintain complete accounts, books and records (the “Accounting Records’), on


an accrual basis, of all costs, expenses and revenues of, or relating to. Petroleum Operations, and


the sale or other disposition of Petroleum, oo an accurate basis and in accordance with generally


accepted accounting principles and standards of the international petroleum industry.


IJ Language and Units of Account











1-3 2 The Accounting Records, and all reports to the


IJ.3 Contractor shall maintain its-Accounting Records in US$. Amounts received or paid in


other currencies shaJI be converted into USS on the basis of the average of the buying and


the selling exchange rates for the applicable currency published by Citibank NA and


prevailing on the date on which such amounts were received or |





1-3.4 It b the of the the Contractor should


an ii or loss at the expense of. or to the benefit of. the other,


Therefore. or losses will be credited or charged to the


 CLAUSE 2


CLASSIFICATION AND ALLOCATION





2-1 Exploration Costs


•Exploration Costs" are those costs, whether of a capital or operating nature, moored after


signature of this Agreement which directly relate to Exploration and are incurred in respect of


activities carried out substantially in accordance with an approved Exploration Work Program


Mid Budget and in accordance with Good Oil Field Practice, but without prejudice to


Section 4.11 of the Agreement, including costs of;





2.1.1 related abandonment and site remediation





2.1.2 (including desk studies and analysis of


survey data) used in aerial, topographic, geological, geochemical, geophysical and


seismic surveys, purchased survey and other geoscience data (k





2.L3 permanent, auxiliary or temporary faciHtics. including camps.








21.4 workshops, power and facilities. and


facilities.





2.1.5 security personnel, equipment and services, including detection, removal and disposal of


unexploded ordnance and all related environmental, health and safety costs;


2 1.6 floating crafl, automotive equipment, furniture and office equipment;


2.1.7 work conducted pursuant to Section 4.11 of the Agreement in connection with





Exploration activities,


2.1.8 the environmental baseline study' referred to in Section 14.1 of the Agreement; and


2.1.9 if approved by the Government, employee housing, recreational, educational, health and





meals facilities, and other similar costs necessary for Exploration.


2.2 Appraisal Costs


'Appraisal Costs’ are those Exploration Costs that directly relate to Appraisal.





2J Development Costs


’Development Costs- arc;








2.3.1 in respect of a Development Aren, and before the start of Commercial Production from it,


those costs, whether of a capital or operating Aature. which directly relate to the


Exploration, Appraisal or Development of it. arx^-*


 2.3.2 in respect of a Development Area, and after the start of Commercial Production from it,


those costs of a capital nature which directly relate to the Development of it (including


conduct or acquisition of seismic surveys), or to the production of Petroleum from it;


and are incurred in respect of activities earned out substantially in accordance with an approved


Work Program and Budget and in accordance with Good Oil Field Practice, or are incurred


puisuant to Section 4.11 of the Agreement, including costs of:


2.3.3 workshops, power and water facilities, warehouses, site offices, ncccss and


communication facilities;


2.3.4 security personnel, equipment and services, including detection, removal and disposal of


unexplodcd ordnance and all related environmental, health and safety costs;


2.3.5 production facilities, wellhead production tubing, sucker rods, surfucc pumps, (low lines,


gathering equipment, storage facilities, all other equipment, treating plants nnd


equipment, secondary recovery systems;


2.3.6 permanent, auxiliary or temporary facilities, including camps, camp support costs, access


roads and bridges and other related infrastructure;


2.3.7 pipelines nnd other facilities for transporting Petroleum produced in die Contract Area to


the Field Export Point;





2.3.8 pipelines and other facilities exclusively used for transporting Petroleum produced in the


Contract Area beyond the Field Export Point;


2 3.9 pipelines and other facilities for transporting Petroleum produced in the Contract Area


and other fields beyood the Field Export Point, provided that the costs of such pipelines


and other facilities shall be equitably allocated on a facility usage basis between the


Contract Area and the other Adds.


2.3.10 movable assets and subsurface drilling and production tools, equipment and instruments,


and miscellaneous equipment;


2.3.11 floating craft, automotive equipment, furniture and office equipment; and


2.3.12 if approved by the Government, employee and welfare housing, recreational, educational,


health and meal facilities, and other similar costs necessary for the Development.


1A Opera tisg Costs


’Operating Costs’ are. in respect of a Development Area and after the start of Commercial


Production from it, those costs of an operating nature which directly relate to the Development


thereof, or to the production of Petroleum therefrom, and are incurred in respect of activities


carried out substantially in accordance with an approved Development Work Program and


incurred pursumt to Section 4.11 of the Agreement Operating Costs shall


 2.4 I the decommissioning cost reserve as described in Clause 3.15 of this Accounting


Procedure;


2 4.2 pipeline tariffs, export terminal charges and charges for similar facilities, whether


upstream or downstream of the Field Export Point; but where the Contractor owns such


pipelines and export terminals and similar downstream facilities, the capital and operating


costs of such facilities shall be included in Development Costs and Operating Costs,


respectively, under this Agreement; and


2.4.3 security personnel, equipment and services, including detection, removal and disposal of


uncxplodcd ordnance in the Contract Area or near the area of Petroleum Operations and


required in order to permit Petroleum Operations to be conducted safely, in Contractor''


opinion, and all related environmental, health and safety costs.


2.5 General and Administrative Costs


"General and Administrative Costs" are all main office, field office and general administrative





expenditures incurred after signature of this Agreement related to Petroleum Operations,


including supervisory, accounting and employee relations services, that cannot be directly


charged under any other section of this Accounting Procedure, determined as the sum of the


following.


2.5.! Exploration Overheat! - Contractor shall be entitled to an annual charge to Exploration





Costs based on ten (10%) percent of the total of Exploration Costa, including Appraisal


Costs, during each Contract Year or liaction thereof;





2.5.2 Development Overhead - Contractor shall be entitled to an annual charge to Dor lopment


Costs based on ten (10%) percent of the total of Development Costs dwing each Contract


Year or fraction thereof, and


2-5.3 Operating Overhead - Contractor shall be entitled to an annual charge to Operating Costs


hased on ten (10%) percent of the total of Operating Costs during each Contract Year or


fraction thereof.





The foregoing percentages may be reviewed but not more often than annually, and any


appropriate adjustment approved by the parties shall be made, if necessary, prospectively.





Contractor’s costs must be charged as direct charges whenever possible. General and


administrative costs compensate Contractor's .Affiliates for costs which are properly allocable to


Petroleum Operations under the Agreement but which cannot, without unreasonable effort ani'cc


release of confidential data proprietary to the Contractor's Affiliates, be charged under any other


section. General and administrative costs will be billed monthly. General and administrative


costs are not subject to audit by Government. Contractor must budget for general and


administrative costs.





All General and Administrative Costs shall he regularly allocated to Exploration Costs.


Development Costs and Operating Costs in accordance with Clauses 2.5.1, 2.5.2 and 2.5.3


above, respectively^'£











EPSA 1006-05-01


 2.6 Miscellaneous Receipts


"Miscellaneous Receipts* ore:





2.6.1 dll monies received by Contractor, other than for the talc or other disposal of Petroleum


from a Development Area, which are directly related to the conduct of Petroleum


Operations, including:


2.6.1.1 umounts received from the sale or other disposal of Petroleum from


production testing activities undertaken in Exploration and Appraisal wells;


2.6.1.2 amounts received for the disposal, loss, or destruction of property, the cost of


which is a Recoverable Cost;


2.6.1.3 amounts received by the Contractor under an insurance policy, the premiums


of which are Recoverable Costs, in respect of damage to or loss of property;


2.6.1.4 amounts received as insurance (the premiums of which are Recoverable


Costs), compensation or indemnity in respect of Petroleum lost or destroyed


prior to the Field Expod Point;


2.6.1.3 amounts received from the hiring or leasing of property, the cost of which is a


Recoverable Coat;


2.61.6 amounts received from supplying information obtained from Petroleum


Operations;


2.6.1.7 amounts received as charges for the use of employee amenities, the costs of


which are Recoverable Costs: and


2.6.1.8 amounts received in respect of expenditures which are Recoverable Costs, by¬


way of indemnity or compensation for the incurring of the expenditure, refund


of the expenditure, or rebate, discount or commission in respect of the


expenditure; and


2.6.2 the value of property, the cost of which is a Recoverable Cost, when that property ceases


to be used in Petroleum Operations.


2.7 Ineligible Costs


"Ineligible Costs” are:


2.7.1 interest (or any puyment in the nature of, in lieu of. or having the commercial effect of.


interest) or other cost under, or in respect of. a Loan Facility;


2.7.2 currency hedging costs;


2.7J costs relating to formation of corporations or of. any partnerships or joint venture


arrangements, other than in respect of a unitisalion£,( y





usowmsoi


 payments of dividends or the





'7.5 repayment* of equity or loan capital;


17.6 payments of private overriding royalties, net profits interests and the like.





17.7 depreciation;


17 * Royalty Oil;








2.79 .ncumd as a result of maxoniplijoc* by Contractor with Good Oil Kidd Practice,


including costs incurred as a result of any negligent act or omission, or wilful


misconduct, of Contractor, its agents or sub-contract.**, including any amount paid in


settlement of any chum alleging negligence or wilful misconduct, whether or not


negligence or misconduct is admittod or whether such sum is stated to be paid on an


cx-grntia or sintilnr basis;





2.7.10 payment of compensation or dumiiuos under this Agreement, cxcopt to the extent such


compensation or damages relate to an award or allocation made in favour of Contractor in


the resolution of a Dispute;





2.7.11 costs relating to the settlement of disputes, which arc not approved in advance by the


Government, including all costs and expenses of arbitration or litigation proceedings


under this Agreement;





2.7 12 decommissioning costs actually incurred which have been taken








2.7.13 payments under Section 9.3 of dns Agreement.


2.7.14 audit fees and accounting fees (excluding fees and expenses incurred for the conduct of


audit and accounting services required by An Agreement) incurred praam to tb*


connection with intra-group corporate reporting requirements (wtietber or not required by


Uw);





2.7.15 except with the consent of the Government, cost*, including donations, relating to public


 B-7





2.7.19 costs Dot falling within any of the above items which are stated dtewbere in this


Agreement not to be recoverable, or costs incurred without the consent or approval of the


Government where such is required.


2-8 Other Matters


2.8.1 The methods mentioned in this Clause 2.8 will be used to calculate Recoverable Costa.





2J 2 Inventory levels shall be in accordance with Good Oil Field Practice. The value of


inventory items not used in Petroleum Operations, or sold, the cost of which has been


recovered as an Operating Cost, shall be treated as Miscellaneous Receipts. Tbe cost of


an item purchased for inventory shall be a Recoverable Cost at such time as the item is


incorporated in the inventory in the Federal Region of Kurdistan.





2.8.3 Where the cost of anything, or a receipt (or value) in respect of anything, relates only


partially to the carrying out of Petroleum Operations, only that portion of the cost or the


receipt (or value) which relates to the carrying out of Petroleum Operations will be o


Recoverable Cost or assessed as a Miscellaneous Receipt. Where any cost or related


receipt (or value) relates to more than one of Exploration Costa, Appraisal Costs,


Development Costs and Operating Costs, or to more than one Development Area, the


cost or related receipt (or value) will he apportioned in on equitable manner.


CLAUSE 3


COSTS, EXPENSES ANI> CREDITS


Subject as otherwise provided in this Agreement, the following costs, cluugcs and credits shall


be included in die determination of Recoverable Costs.


3.1 Sarface Right*





All direct coats necessary for the acquisition, renewal or relinquishment of surface rights


acquired and maintained in force for the purposes of the Agreement.


3.2 labour and Associated Labour Costs


3 2.1 Costs of Contractor's locally recruited employees based in the Territory. Such costs shall





include the costs of employee benefits and slate benefits for employees and levies


imposed on Contractor as an employer, transportation and relocation costs within the


Territory of the employee and such members of the employee’s family (limited to spouse


and dependent children) as required by law or customary practice therein. If such


employees are also engaged in other activities, the cost of such employees shall be


apportioned on a time sheet basis according to sound and generally acceptable accounting





3.2.2 Costs of salaries and wages including bonuses of Contractors employees and Secondces


directly and necessarily engaged in the conduct of the Petroleum Operations, whether


temporarily or permanently assigned, irrespective of the location of such employ ees, it /


being understood that in the case of those personnel only a portion of whose time is/y\ £











mw


 B-8








wholly dedicated to Petroleum Operations under the Agreement, only that pro-rau


portion of applicable salaries, wages, and other costs as delineated in Clauses 3.2.3, 3.2.4,


3.2.5, 3.2.6 and 3.27 shall be charged oiul the basis of such pro-rata allocation shall be


specified.





3.2.3 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 Clause 3.2 2


3.2.4 Expenses or contributions made pursuant to assessments or obligations imposed under





Applicable Law which are applicable to Contractor’s cost of silanes and wages


chargeable under Clause 3.2.2.


3.2-5 Contractor's cost of established plans for employees' group life insurance, hospitalisation,


pension, slock purchases, savings, bonus and other benefit plans of alike nature


customarily granted to 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 Clause 3.22.


3 2.6 Reasonable housing, transportation, travel and other support expenses of employees of


Contractor, including those made for housing, travel, relocation, schooling and security


of tbc expatriate employees and their families and personal effects, assigned to the


Territory whose salaries and wages arc chargeable to Petroleum Operations under


Clause 3.2.2.


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 authorised under Contractor's slumlord personnel policies. Contractor shall


ensure that all expenditures related to transportation costs arc equitably allocated to the


activities which have benefited from tlie personnel concerned.


3.2.7 Reasonable personul expenses of personnel whose salaries and wages arc chargeable to


Petroleum Operations under Clause 3.2.2 and for which expenses such personnel


reimbursed under Contractor's standard personnel policies In the event such expenses


ore 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.


3J Transportation and Employee Relocation Costs








The cost of transportation of employees, equipment, materials and supplies other Uian as


provided in Clause 3.2 necessary for the conduct of the Petroleum Operations along with other


related costs, including import duties, customs fees, unloading cluuges. dock lees, mid inland and


ocean freight charger^ ^











[PSA 3Q0A4M4I


B-9


J.4 Charges for Smka


For purposes of this Clouse 3.4. Affiliates which arc not wholly owned by Contractor or


34 1 Third partUs


The actual coats of contract services, services of professional consultants, utilities, and


other services necessary for the conduct of die Petroleum Operation* performed by third


parties other than an Affiliate of Contractor.


3.4.2 AffiUattt of Contractor


3.4.2.1 Professional and Administrative Services Expenses: cort of professional and


administrative tervices provided by any Affiliates of Contractor for the direct


benefit of Petroleum Operations, including services provided by the


production, exploration, legal financial, insurance, accounting and computer


services, divisions other than those covered by Clause 3.4.2.2 or Clause 3.6 or


3.8.2 which Contractor may use in lieu of having its own employees. Charges


shall reflect the cost of providing their services and shall not include any


dement of profit and shall be no less favourable than similar charges for other


operations carried oo by Contractor and its Affiliates. The charge-out rate


sluill include all costs incidental to the employment of such personnel Where


the work is performed outside the home office base of such penoond. the


daily rate shall be charged from the dale 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.





3.4 2.2 Scientific or Technical Personnel: cost of scientific or technical personnel


services provided by any Affiliate of Contractor for the direct benefit of


Petroleum Operations, which cos! shall be charged on a cost of service basis


and shall not indude any dement of profit Unless the work to be done by


such personnd is covered by an approved Work Program and Budget.


Contractor shall not authorise work by such personnel.


3.4J.3 Equipment and Facilities, use of equipment and facilities owned and furnished


by Contractor's Affiliates, at rases 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 oo


comparable terms in the area where the Petroleum Operations are bring


conducted. The equipment and facilities referred to herein shall exdude


mayor investment items such as (hut not limited to) drilling rigs, producing


platforms, oil treating facilities, oil and gas loading and transportation


systems, storage and terminal facilities and other mayor facilities, aates for


which shall be subject to separate agreement with the Government'





 B-IO





W c


Covts of acquiring, leasing, installing, operating. repairing and


systems including radio and microwave facilities between the Contract Area. Contractor’s base


facility in the Territory and Contractor's bead office In Iraq and in its corporate parent's home





3.6 omcc. Storage ami Miscellaneous Facilities





cos« to and operating any office, sub-office,


or other facility in the Territory directly serving the








3.7 EcotogkaJ and Environment


3.7.1 Costs incuned in the Contract Area as a result of legislation for archaeological and


geophysical surveys relating to identification and protection of cultural sites or resources.


3.7.2 Costs incurred in environmental or ecological surveys required by this Agreement or





3.7.3 Costs to provide or have available pollution containment and removal equipment.





3.7.4 Costs of actual control and cleanup of oil spills, and of such further responsibilities


resulting therefrom as may be required by Applicable l-»w.


3 7.5 Costs of restoration of the operating environment





3J Material Costs



































3 8.2 shall be to the


 B-l I





18.3 Matcnul purchused from or sold to Affiliates of Contractor or transferred from other


activities of Contractor to or from Petroleum Operations sliall be valued and charged or


credited at the prices specified in Clauses 3 8.3.1, 3 8.3.2 and 3.8.3.3.


3 8.3.1 New matenal, 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'* length transactions in the open


market.


3.8.3.2 Used material (Conditions “B". "C and "D“):


3.8 3.2.1 Matcriul which is in sound and serviceable condition and is


suitable for re use without reconditioning shall be classified as


Condition HB' and priced at seventy-five per cent (75%) of the


current price of new material defined in Clause 3.8.3.1;


3.8.3.2.2 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" und priced at not


more titan fifty per cent (50%) of the current pnee of new material


as defined in Clause 3.8.3.1; the cost of reconditioning shall be


charged to the reconditioned material provided tlut the value of


Condition "C" material plus the cost of reconditioning docs not


exceed the value of Condition 'B" material;


18.3.2.3 Material which cannot be classified as Condition *B" or Condition


-C* shall be classified as Condition "D" and pneed at a value


commensurate with its use by Contractor. If material is not fit for


use by Contractor it shall be disposed of as junk-


3.1.) J Material involving erection costs shall be charged at the applicable condition


percentage of the current knocked-down price of new matenal as defined in


Clause 3.8.3.1.


3 8.3.4 When the use of material is temporary and its service to the Petroleum


Operations does not justify the reduction in pnee as provided foe in


Clause 3.8.3.2-2, such material shall be pneed on a basis that will result in a


net churgc to the accounts under this Agreement consistent with the value of


the service rendered.


3.8.3.5 Premium prices - whenever miitcrial is not readily obtainable at published or


listed prices because of national emergencies, strikes or other unusual causes


over which Contractor has no control. Contractor may charge Petroleum


Operations for tlic required material at 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 Government of


the proposed charge prior to charging Petroleum Operations for such material A


and the Government shall have the right to challenge the transaction on audi^--( £


 B-12





3.8.3.6 Warranty of material furnished by Contractor • Contractor docs not warrant


the material furnished In case of defective material, credit shall not be passed


to Petroleum Operations until adjustment has been received by Contractor


from the manufacturers of the material or their agents.


3.9 Rentals, Dulles and Other Assessments


All rentals, levies, charges, fees, contributions and other charges of every kind and nature


(excluding the Local Community Benefit) levied by any Federal Region of Kurdistan or


Republic of Iraq governmental authority in connection with the Petroleum Operations and paid


directly by Contractor (save where the contrary is expressly provided in this Agreement).


3.10 Insurance and Losses


Insurance premiums and costs incurred for insurance provided that such insurance is cumomary.


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 Affiliates of Contractor. Except in


cases of failure to insure where insurance coverage is required pursuant to this Agreement, actual


costs and losses incurred shall be allowable to the extent not made good by insurance. Such


costs may include repair and replacement of property resulting from damuges or losses incurred


by fire, flood, storm, theft, accident or other cause.


3.11 Legal Expenses


All reasonable costs and expenses resulting from the handling, investigating, asserting,


defending, or settling of any claim or legal action necesury 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 oU of the Petroleum


Operations, or suns paid in respect of legal services necessary for the protection of the job!


interest of the Government and Contractor shall be allowable. Such expenditures shall include.


in settlement or satisfaction of any such litigation and claims. Where legal services are rendered


in such matters by salaried or regularly retained lawyers of Contractor or an Affiliate of


Contractor, such compensation shall be included instead under Clause 3.2 or 3 4.2 as applicable.





3.12 Claims


Expenditures made m the settlement or satisfaction of any loss. daim. damage, judgement or


other expense arising out of or relating to Petroleum Operations


3.13 Training Costs





All costs and expenses incurred by Contractor b the training of its employees engaged in


Petroleum Operations, and such other training as is required by this Agreement


3.14 General and Admbbtrative Coats





Tbc costs described in Clause 2.5// c














 B-13





3.15 C'o*t»





Estimates of the monies required for the funding of the decommissioning of the Contract Area


shall be charged as Recoverable Costs beginning in the Contract Year following the Contract


Year in which Commercial Production first occurs. The amount charged in each Contract Year








first be calculated








3.15.2 There shall be deducted from n total decommissioning costs the provisions for


costs made, and as Recoverable Costs, in all previous Contract


to the approved date of


forecast IJBOR three (3) month rate (whichever is








3.15J The residual decommissioning costs, resulting from the calculations under Clauses 3.15 1


and 3.15.2 immediately above, shall then be discounted to the Contract Yew in question


at the forecast rate for three (3) month LIBOR for each Contract Year remaining until the








3.15.4 The discounted total of residual decommissioning costs shall then be divided by the total


number of Contract Years remaining prior to the Contract Year of decommissioning


itself, including the Contract Year in question





3.15.5 The resultant amount shall be the addition to the decommiarioaiag costs reserve for the


Contract Year in question.





It is the intention of this provision that the total accumulated provision allowed, including


interest culculutcd to the Contract Year of decommissioning at the rale of three (3) month


LIBOR, will equal the total decommissioning costs. If the amount in Clause 3.15.5 immediately


above is u negative amount, then such amount shall be treated as a reduction of Recoverable


Costs for the Contract Year in question.





3.16 Other Expenditure*





Other reasonable expenditures not covered or dealt with in the foregoing provisions of this


Clause 3 which arc necessarily incurred by Contractor for the proper, economical and efficient


conduct of Petroleum Operations.





3.17 Terrorism Damage





I he pnrties agree that, where the field equipment is damaged or destroyed by an act of war or


terrorism, and where (here was not wilful misconduct by the Contractorvthe loss of the


Contractor will be indemnified by considering such loss as Recoverable Cos^j-


 B-14








118 Duplication


There shall be no duplication of charges and credits.





CLAUSE4


INVENTORIES


Inventories of property in use m Petroleum Operations shall be taken at reasonable intervals but


at least once a year with respect to movable assets and once every three yean with respect to


immovable assets. When an assignment of rights under this Agreement takes place. Contractor


may. at the request of the assignee, take a special inventory provided that the cost* of aich


inventory are home by the assignee.





CLAUSES


PRODUCTION STATEMENT








From the start of production from the Contract Area, Contractor shall suhenit a monthly


statement (the ’Production Statement*) to the Government showing the following information


separately for each producing Development Area and in aggregate for the Contract Area:





5.1.1 the quantity of Crude Oil produced and sold or earned in inventory;


5.1.2 the quality characteristics of such Crude Oil produced and saved;


5.1 T Ihc quantity of Natural (las produced and saved.





5.1.4 the quality characteristics of such Natural Gas produced and saved;


5.1.5 the quantities of Crude Oil and Natural Gas used for the purposes of carrying on drilling


and production operations und pumping to field storage;


5.1.6 the quantities of Crude Oil and Natural Gas unavoidably lost;





5.1.7 the quantities of Natural Gas flared and vented;


5.1.8 the si/e of Petroleum stocks held at the beginning of the month in question;


5.1.9 the size of Petroleum slocks held at the end of the month in question,





5.1.10 the quantities of Natural Gas reinjected into the Reservoirs; and


5.1.11 in respect of the Contract Area as a whole, the quantities of Petroleum transferred at the


Field Export Point.


All quantities shown in this statement shall be expressed in both volumetric (barrels of


Crude Oil and cubic meters of Natural Gas) and in weight (metric tonnes^ £


 Tbe Production Statement for each month shall be submined to (he Government no beer than ten


(10) days after the end of such mooth.


CLAUSE 6


VALUE OF PRODUCTION AND PRICING STATEMENT


6.1 Value of Production and Pricing Statement Information


Cootractor shall, for the purposes of Article 6 of the Agreement, prepare a "Value of Production


and Pncing Statement* providing calculations of the value of Crude Oil and Natari! Gas


produced and saved during each Quarter. This Value of Production and Pricing Statement shall


contain tbe following information:


6.1.1 tbe quantities and the pnee payable in respect of sales of Natural Gas and Crude Oil


delivered to third parties during the Quarter in question; and


6.1.2 the quantities and price payable in respect of sales of Natural Oas and Crude Oil





62 Subnotion of Value of Production and Pricing Statement


The Value of Production and Pricing Statement for each Quarter shall be submitted to the


Government not later than twenty-one (21) days after the end of such Quarter


CLAUSE 7


COST RECOVERY STATEMENT





7.1 Quarterly Statement


Contractor shall prepare with respect to each Quarter a 'Cost Recovery Statement' containing


the following information:


7.1.1 Recoverable Costs carried forward from the previous Quarter,


7.12 Recoverable Costs for the Quarter in question:





7.13 Credits under the Agreement for the Quarter in question;


7.1.4 Total Recoverable Costs for the Quarter in question (Clauses 7.1.1 plus 7.1.2 less 7.1.3).


7.1.5 quantity aad value of Contractor’s share of Petroleum unde* Article 6 of the Agreement in


tbe Quarter in question; and


7.1.6 amount of Recoverable Costs to be carried forward into the next Quarter (Clause 7.1.4


less Clause 7.1.5^g





 B-16





7J Preparation and Submission of Cmst Recovery Statement*


7.2.1 Provisional Cost Recovery Statements, containing estimated information "hor


necessary, shall be submitted by Contractor on the last day of each Quarter


72.2 Final Quarterly Cost Recovery Statements shall be submitted within thirty (30) days after


the end of the Quarter in question


7.3 Annual Statement


An Annual Cost Recovery Statement doll be submitted within ninety (90) days after the end of


each Contract Year. The annual statement shall contain the categories of information listed in


Section 12.1 for the Contract Year in question, separated into the Quarters of the Contract Year


in question, and showing the cumulative positions at the end of the Contract Year in question.


7.4 Annual Statement


In calculating the recovery of Recoverable Costs, the following principles shall apply:


7.4.1 Costs shall be recovered in the following order.


7.4.1.1 Operating Costs;


7.4.1.2 General and Administrative Costs;


7.4.1.3 Exploration Costs;


7.4.1.4 Appraisal Costs.


7.4.1.5 Development Costs; and


7.4.1.6 any other costs and expense not included in the above; and


7.42 Within each of the above categories, costs shall be recovered on a ‘first in. first out"








CLAUSE 8


STATEMENTS OF EXPENDITURE AND RECEIPT





8.1 Quarterly Statement


The Operator shall prepare with respect to each Quarter a Statement of Expenditure and


Receipts. The statement will distinguish between Exploration Costs. Appraisal Costs,


Development Costs and Operating Costs and will identify major items within these categories.





8.1.1 actual expenditures and receipts for the Quvter in question;





8.12 cumulative expenditure and receipts for the Contract Year in








IVSA


 B-17





S.U at the Contract Year end;


114 variations between budget forecast and thereof.





The Statement of Expenditure and Receipt) of each Quarter shall be submitted lo the


Government no later than fifteen (15) days after the end of such Quarter


8.2 Aununl Statement


Contractor shall prepare a final end-of-year statement (the "Final Accounts Statement"). The


Statement will contain information as provided in the production statement. Value of Production


and Pricing Statement. Cost Recovery Statement and Statement of Expenditure and Receipts, but


will be hased on actual quantities of Petroleum produced und cost* incurred. This Statement will


be used to make uny adjustments thnt are necessary to the payments made by Contractor under


this Agreement. The Final Accounts Statement of each Contract Year shall be submitted to the


Government within ninety (90) days of the end of such Contract Year Contractor will assist in


pioviding information so as to permit the Government to prepare reports on/he results of


activities and tho financial status of the project at the end of each Calendar Yewrf^


 C-l








Annex C


ILLUSTRATIVE DRILLING PLAN








































































































li^SA »0H)S4>I


 D-l


Annex D


Part A





SAMPLE TABLES AND EXAMPLES OF ROYALTY Oil-, COST RECOVERY OIL,


PROFIT OIL AND LOCAL COMMUNITY BENEFIT FOR OPTION A


A. Royalty OH





FIELD [Royalty


PRICE %


LSS.BBL


30 L_ 12 0%


40 [12 0%


50 | 173%


60 25 3%


70 30 0%


7950 15 0%


90 15 0%


100 35 0%


no 15 0%


120 35 0%


130 35 0%





Example





Example calculation of tbc Royalty Oil





At a Field Price of USS70.00/burrcl with a monthly a\eragc Available Crude Oil rate of 250,000


barrels per day (bopd), the Royalty Oil is calculated as


Royalty Oil - [12%> x $45 + 65% x (US$70.00 - $45.00)J/US$70.00 x 250,000 bopd





Royally Oil = ($5.40 + 65% x US$25.00yiJSS70.00 x 250.000 bopd


Royalty Oil = USS21.65/USS70.00 x 250,000 bopd





Royalty Oil - 30.9% x 250,000 bopd


Royalty Oil-77250 bopd J,


J


 B. Cost Recover)' Oil





Maximum


Average


Monthly Available Cost


Available Recovery Oil


Oil %


'000 bopd


50 50.0%


150 50.0%


250 50.0%


350 50.0%


450 50.0%


550 50.0%





650 50.0%


" 750 ' 50.0%


850 50.0%


950 50.0%


1050 50.0%





Example








Example calculation of the Cost Recovery Oil


Net Available Crude Oil = (250,000 - 77.250) bopd





Net Available Crude Oil * 172,750 bopd





If the monthly average Net Available Crude Oil rate is 172,750 barrels per day, then before


payout:





Cost Recovery Oil ~ 50% x 172,750Aopd


Cost Recover)’ Oil = 86,375 bopd^_ ^





 Eumplc calculation of tbr Govern meat Profit Oil





At a monthly average Available Crude Oil rale of 250.000 barrel* per day (bopd\ the


Government proportion of Profit Oil is calculated at:





Production Rate Government Proportion of GosermncnT


Profit Oil Calculation Proportion of


Profit Oil





25% Of Uic first 20,000 bopd divided 2$0A*2QJ)QO 2.0%


by the average daily Available Oil 250,000


30% of the portion exceeding 20.000 °"000) 2.4%


bopd und up to 40,000 bopd divided


by the uvernge daily Available Oil


40% of the portion exceeding 40,000 40% x (60.000 - 40.000) 3.2%


bopd and up to 60.000 bopd divided 250.000


by the uvciago daily Available Oil


60% of the portion exceeding 60.000 60% x (80.000 - 6Q.Q0Q) 4.8%


250.000


bopd and up to 80,000 bopd divided


bv the average daily Available Oil


6.0%


75% of the portion exceeding 80,000


bopd and up to 100,000 bopd divided


bv the average daily Available Oil


92.5% of the portion exceeding 55.50%


100.000 bopd divided by the average 250,000


daily Available Oil


1




















E«A200Mrtfll


 D-4











Profit Oil - (172.750 86.375) bopd


• Profit Oil- 86 J75bopd


[v


II tlur monthly avenge Profit Oil rate in 86,375 barrels per day. then:


•M


Government nhare of Profit Oil -73.90S x 86,375 bopd


Government share of Profit Oil - 63,831 bopd


A similar calculation can be done for the Contractor, however, the result will he the balance of


Profit Oil. or in this cue 22,544 barrel* per day of Profit Oil











l>. Local Community benefit





AVERAGE Local Community


MONTHLY benefit


AVAILABLE %


OIL


*000 BOPD


50 10.0%


150 10.0%


250 10.0 .


350 10.0%


450 10.0%


550 10.0%


650 10.0%


750 10 0%


850 100%


450 10.0%


1050 10.0%











At a Field Price of US$70.00toarrd with the Contractor'* share of the monthly average Profit Oil


rate at 22.544 barrel* per day, the Contractor's Profit Oil has a value of US$1.578,080 per day


and the Local Community benefit is calculated as


Local Community Benefit - 10* x US$70.00 x 22JA4 bopd





Local Community Benefit - US$7.00 x 22.544 bopd


Local Community Benefit - US$157.808 per day^

















EfSAK«*«»4l


 D-5











Part B


SAMPLE TABLES AND EXAMPLES OF ROYALTY Oil, C OVI RECOVERY OIL,


PROFIT OIL AND LOCAL COMMUNITY BENEFIT FOR OPTION B





A- Royalty OU





FIELD Realty


PRICE %


USS/BBL


30 120%


40 12 0%


50 17 3%


60 25 3%


70 30 9%


79 50 35 0%


90 35 0%


100 35 0%


no 35 0%


120 350% j


130 350% I





Example


Example calculation of the Royalty Oil








At a Field Price of US$70.00/band with a monthly average Available Crude Oil rnte of 250,000


barrels per day (bopd). live Royalty Oil is calculated ns:


Royalty Oil = [12% x $45 ♦ 65% x (US$70.00 - S45.00)J/US$70.00 x 250.000 bopd





Royalty Oil - [$5.40 + 65% x US$25.00)/US$70.00 x 250.000 bopd


Royalty Oil - US$21.65/US$70 00 x 250.000 bopd





Royulty Oil - 30.9% x 250.000 bopd


Royalty Oil = 77,250


3


 B. Cost Recovery Oil


Average Maximum


Monthly Available Cost


Available Recovery OH


Oil •/.


'000 bopd


50 50 0%


150 50 0%


250 50 0%


350 50 0%


450 50.0%


550 50 0%


650 50 0%


750 50 0%


850 50 0%


950 50 0%


1050 50.0%





Example


Example calculation of the Cost Recovery Oil


Net Available Crude Oil - (250,000 - 77,250) bopd


Net Available Crude Oil - 172,750 bopd


If the monthly average Net Available Crude Oil rate is 172,750 barrels per day, then before





payout:


Cost Recovery Oil = 50% x 172,75(Vbopd


Cost Recovcty Oil - 86,375 bop^/ *






































fKSA 2009-05-01


 c. Profit Ofl








Average Month!)


Available OU Profit Share


000 bopd _ %_ 1


50 _510%_|


150 57 0%


250 77 2%


350 78 7%


450 82 3%


550 84 6%


650 80 2%


750 . 87 4%


850 88 3%


950 89 0%


1050 09 0%








Ilium pie calculation of the Government Profit Oil


At a monthly average Available Crude Oil tale of 250.000 barrels per day (bopd), the





Government proportion of Profit Oil is calculated us:





Production Kate Government Proportion of Government


Profit Oil Calculation Proportion of


Profit OU


30% of the first 40.000 bopd divided 30% x 40.000 480%


by the average daily Available Oil 250,000


50% of the portion exceeding 40.000 SStei tgQ.W- 4Q.WQJ 8.00%


bopd and up to 80.000 bopd divided 250.000


by the av erage daily Available Oil


65% of the portion exceeding 80,000 65Sx <100.000-80.0001 5.20%


bopd and up to 100,000 bopd divided 250,000


bv the average daily Available Oil


75% of the portion exceeding 100.000 75% i (120.000 100.000) 6.00%


bopd and up to 120,000 bopd divided 250,000


by the average daily Available Oil


80% of the portion exceeding 120.000 80S 5 <140.000- 120.000) 6.40%





bopd and up to 140.000 bopd divided 250.000


by the average daily Available Oil


95% of the portion exceeding 140.000 95%*(230.000.- J4Q.0QOJ 41.80%


bopd divided by the average daily 250,000


Available Oil


Government Share of Profit Oil 72.20%

















ePSAfflCMM!


I











[ Profit Oil * (172.750 - 86.375) bopd


Profit Oil- 86,375 bopd


If Che monthly average Profit Oil is 86.375 barrels per day. then:


Government share of Profit Oil - 72.20% x 86,375 bopd


Government share of Profit Oil - 62.363 bopd


A similar calculation can be done for the Contractor, however, the result will be the balance of


Profit Oil. or in this case 24.012 bands per day of Profit Oil





D. l ocal Community Benefit





AVERAGE Benefit


MONTHLY


AVAILABLE


OIL %


•000 BOPD


50 10.0%


150 10.0%


250 10.0%


350 10.0%


450 10.0%


550 10.0%


650 10.0%


750 10.0%


850 10.0%


950 100%


l0W 10.0%








At a Field Price of US$70.00/barrel with the Contactor's share of the monthly average Profit Oil


rate of 24.012 b*Teis per day. the Contractor s Profit Oil has a value of USS1.680,840 per day


and the Local Community Benefit is calculated as:


Local Community Benefit - 10% x US$70.00 x 24.012 bopd


Local Community Benefit - US$7.00 x 24,012 bopd





Local Community Benefit "US$168,084 per




















ITlA 70064101


 Annex E


DRAFT LAW





KURDISTAN KF(;|QMAL GOVERNMENT





























After perusal of the [Constitution of the Federal Region of Kurdistan (1992) the Constitution of


the Republic of Iraq (2005); and the Unification Agreement for the Federal Region of Kurdistan


dated 23 January 2003)


lAnd after approval of the Kurdistan Regional Assembly]











Artklcl


The terms and condition* of the Exploration l*roduction and Sharing Agreement executed by the


Kurdistan Regional Government (Sulaymamyn) and WcstcmZagros Limited on 4th May 2006 in


regard to the South Sulavmaniya Area (the "EPSA") urc hereby confirmed and ratified as binding


on Uic Kurdistan Regional Government and they shall forthwith have the force oflaw within the


Federal Region of Kurdistan





Article 2





The execution of the EPSA by His Excellency Mr. Omar Fatah Hussein in his capacity as Prime


Minister of the areas of the Federal Region of Kurdistan administered by the Kurdistan Regional


Government (Sulaymaniya) is hereby confirmed, authorised and ratified so thnt the terms of the


duly executed EPSA shall be in full force and effect and be binding on the Kurdistan Regional


Government in all govemorates comprising the Federal Region of Kurdistan and shall be binding


on all persons within the Federal Region of Kurdistan^^

















FI’S A MOfc-OI-OI


2 Exemptions, dispensations and reliefs concerning (without limitation) taxation and customs


- duties granted under the terms of the EPSA by the KRG (Sulaymamya) to WestcmZagros


Limited are hereby confirmed and ratified and shall have: the force of law and be binding on all


Ministries, concerned authorities, competent officials and other persons throughout the Federal


Region of Kurdistan





Article 4








Region of Kurdistan shall implement the provisions of this Law within their respective


jurisdictions to enable and to facilitate WcstcmZagros Limited's performance of the EPSA.














This Law shall remain in full force and effect throughout the duration of the EPSA including any


extension thereof.








Article 6


This Law shall be published m the Official Gazette of the Federal Region of Kurdistan and shall




















President


Federal Region of Kurdistan


Republic of Iraq











Promulgation on:


Corresponding to: (





























EWASomm-oi