EXHIBIT 10.1

CONFORMED COPY

 

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INVESTMENT NUMBER 24193

Loan Agreement

between

VAALCO GABON (ETAME), INC.

and

INTERNATIONAL FINANCE CORPORATION

 

 

Dated 13 June 2005

 

 

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TABLE OF CONTENTS

 

Article or

Section

  

Item

   Page
No.

ARTICLE I

   1

Definitions and Interpretation

   1

Section 1.01.

   General Definitions    1

Section 1.02.

   Financial Definitions    20

Section 1.03.

   Financial Calculations    25

Section 1.04.

   Interpretation    26

Section 1.05.

   Business Day Adjustment    26

ARTICLE II

   26

The Project, Project Cost and Financial Plan

   26

Section 2.01.

   The Project    26

ARTICLE III

   27

The Loan

   27

Section 3.01.

   The Loan    27

Section 3.02.

   Disbursement Procedure    27

Section 3.03.

   Interest    28

Section 3.04.

   Default Rate Interest    29

Section 3.05.

   Repayment    29

Section 3.06.

   Prepayment    29

Section 3.07.

   Fees    30

Section 3.08.

   Currency and Place of Payments    31

Section 3.09.

   Allocation of Partial Payments    32

Section 3.10.

   Increased Costs    32

Section 3.11.

   Unwinding Costs    32

Section 3.12.

   Suspension or Cancellation by IFC    32

Section 3.13.

   Cancellation by Borrower    33

Section 3.14.

   Taxes    33

Section 3.15.

   Expenses    34

ARTICLE IV

   36

Representations and Warranties

   36

Section 4.01.

   Representations and Warranties    36

Section 4.02.

   IFC Reliance    39

ARTICLE V

   40

Conditions of Disbursement

   40

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ii

 

Article or

Section

  

Item

   Page
No.

Section 5.01.

   Conditions of First Disbursement    40

Section 5.02.

   Conditions of All Disbursements    42

Section 5.03.

   Borrower’s Certification    44

Section 5.04.

   Conditions for IFC Benefit    44

ARTICLE VI

   45

Particular Covenants

   45

Section 6.01.

   Affirmative Covenants    45

Section 6.02.

   Negative Covenants    48

Section 6.03.

   Reporting Requirements    52

Section 6.04.

   Insurance    56

Section 6.05.

   IFC Base Case    59

ARTICLE VII

   59

Events of Default

   59

Section 7.01.

   Acceleration after Default    59

Section 7.02.

   Events of Default    59

Section 7.03.

   Bankruptcy    63

ARTICLE VIII

   64

Miscellaneous

   64

Section 8.01.

   Saving of Rights    64

Section 8.02.

   Notices    64

Section 8.03.

   English Language    65

Section 8.04.

   Term of Agreement    66

Section 8.05.

   Applicable Law and Jurisdiction    66

Section 8.06.

   Disclosure of Information    68

Section 8.07.

   Successors and Assignees    68

Section 8.08.

   Amendments, Waivers and Consents    68

Section 8.09.

   Counterparts    68

Section 8.10.

   Severability    68

Section 8.11.

   Rights of Third Parties    68

ANNEX A

   70

MINIMUM INSURANCE REQUIREMENTS

   70

SCHEDULE 1

   76

FORM OF CERTIFICATE OF INCUMBENCY AND AUTHORITY

  

SCHEDULE 2

  

FORM OF REQUEST FOR DISBURSEMENT

  

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Article or

Section

  

Item

   Page
No.

SCHEDULE 3

  

FORM OF LOAN DISBURSEMENT RECEIPT

  

SCHEDULE 4

   77

FORM OF SERVICE OF PROCESS LETTER

   77

SCHEDULE 5

   79

FORM OF LETTER TO BORROWER’S AUDITORS

   79

SCHEDULE 6

   81

INFORMATION TO BE INCLUDED IN ANNUAL REVIEW OF OPERATIONS

   81

SCHEDULE 7

   83

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LOAN AGREEMENT

 

AGREEMENT, dated 13 June 2005, between:

 

  (1) VAALCO GABON (ETAME), INC., a corporation organized and existing under the
laws of the State of Delaware, the United States of America (the “Borrower”);
and

 

  (2) INTERNATIONAL FINANCE CORPORATION, an international organization
established by Articles of Agreement among its member countries including the
Republic of Gabon (“IFC”).

 

ARTICLE I

 

Definitions and Interpretation

 

Section 1.01. General Definitions. Wherever used in this Agreement, the
following terms have the meanings opposite them:

 

“Accidental Discharge Prevention and

    Oil Spill Contingency Plan”

an accidental discharge prevention plan and an oil spill contingency plan
prepared by Tinworth Limited in accordance with the FPSO Contract, and
acceptable to IFC, to prevent or respond to unintentional discharges of gas,
liquids and solids to the environment, and that includes details of training and
drills, as updated from time to time or such other similar plans prepared by or
on behalf of the Borrower in respect of its operations, that are in each case
acceptable to IFC;

 

“Accounting Principles”

United States Generally Accepted Accounting Principles (US-GAAP) promulgated by
the Financial and Accounting Standards Board, together with its pronouncements
thereon from time to time, and applied on a consistent basis;

 

“Affiliate”

in respect of any Person, any other Person directly or indirectly Controlling,
Controlled by or under common Control with, such Person;

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“Agreed Environmental

    and Social Requirements”

 (i)          the Environmental, Health and Safety Guidelines;

 

  (ii) the Environmental and Social Policies;

 

  (iii) the Environmental Review Summary;

 

  (iv) the Environmental Impact Assessment(s);

 

  (v) the Environmental Plans, and, if prepared, the ESMS;

 

  (vi) the Annual Monitoring Report; and

 

  (vii) the environmental, social and occupational health and safety laws and
regulations of Gabon (including any international treaties) or promulgated by
the relevant Gabonese Authorities;

 

“Annual Monitoring Report”

the report to be prepared annually by or on behalf of the Borrower pursuant to
Section 6.03(d) of this Agreement in a form satisfactory to IFC, relating to the
environmental, social and developmental aspects of the Project or the Borrower’s
operations;

 

“Auditors”

Deloitte Touche or such other firm that the Borrower appoints from time to time
as its auditors pursuant to Section 6.01 (d) (Affirmative Covenants);

 

“Authority”

any national, supranational, regional or local government or governmental,
administrative, fiscal, judicial, or government-owned body, department,
commission, authority, tribunal, agency or entity, or central bank (or any
Person, whether or not government owned and howsoever constituted or called,
that exercises the functions of a central bank);

 

“Authorization”

any consent, registration, filing, agreement, notarization, certificate,
license, approval, permit, authority or exemption from, by or with any

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Authority, whether given by express action or deemed given by failure to act
within any specified time period and all corporate, creditors’ and stockholders’
approvals or consents;

 

“Authorized Investments”

  (a) cash in hand and/or time deposits in Dollars with the VAALCO Accounts
Bank;

 

  (b) Dollar-denominated commercial paper maturing in 270 days or less from the
date of issuance which at the time of acquisition is rated A-1 or better by
Standard & Poor’s Ratings Group or P-1 or better by Moody’s Investor Service,
Inc.; and

 

  (c) Dollar-denominated bank instruments maturing within one year after their
acquisition, issued by Eligible Banks;

 

“Authorized Representative”

any natural person who is duly authorized by the Borrower to act on its behalf
for the purposes specified in, and whose name and a specimen of whose signature
appear on, the Certificate of Incumbency and Authority most recently delivered
by the Borrower to IFC;

 

“Available Amount”

means the lesser of (i) the total amount of the Facility, as cancelled or
reduced from time to time, and (ii) the Borrowing Base Amount,

 

 

minus:

 

  (1) the amount of any outstanding Loans under the Facility; and

 

  (2) in relation to any proposed Loan (other than a Rollover Loan), the amount
of any Loans that have been requested by the Borrower and are due to be made
under the Facility on or before the date of the proposed Loan;

 

“Availability Period”

means the period from the date of this Agreement to the date that is six
(6) months before the Final Maturity Date;

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“Business Day”

a day when banks are open for business in New York, New York or, solely for the
purpose of determining the Interest Rate other than pursuant to Section 3.03
(d) (ii) (Interest), London, England;

 

“Calculation Date”

means December 31, 2004, and each subsequent December 31;

 

“Calculation Period”

means, in respect of any Calculation Date, the following twelve (12) month
period;

 

“CEMAC”

the Central African Economic and Monetary Community;

 

“Certificate of Incumbency

    and Authority”

a certificate provided to IFC by the Borrower in the form of Schedule 1;

 

“Charter”

(i) with respect to the Borrower, its articles of incorporation and bylaws
and/or such other constitutive documents, howsoever called, or (ii) with respect
to any Person (other than a natural person or the Borrower), the articles of
incorporation and bylaws and/or such other constitutive documents, howsoever
called, of that Person;

 

“Control”

the power to direct the management or policies of a Person, directly or
indirectly, whether through the ownership of shares or other securities, by
contract or otherwise, provided that the direct or indirect ownership of
fifty-one per cent (51%) or more of the voting share capital of a Person is
deemed to constitute control of that Person, and “Controlling” and “Controlled”
have corresponding meanings;

 

“Cuttings/Mud

    Disposal Plan”

a cuttings/mud disposal plan detailing how and where disposal will take place,
as updated from time to time or other similar plans, that are prepared in each
case by or on behalf of the Borrower in respect of its operations and are
acceptable to IFC;

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“Debenture”

the agreement entitled “Debenture” dated on or about the date of this Agreement
between the Borrower and IFC;

 

“Delaware”

the State of Delaware, United States of America;

 

“Derivative Transaction”

any swap agreement, cap agreement, collar agreement, futures contract, forward
contract or similar arrangement with respect to interest rates, currencies or
commodity prices;

 

“Development Plans”

(i) the development and production program(s) relating to the EEA for the Etame
field approved by the GoG on November 8, 2001 and November 17, 2003 and any
extensions or amendments thereof, (ii) the development and production program(s)
relating to the EEA for the Avouma and South Tchibala fields approved by the GoG
on March 25, 2005 and any extensions or amendments thereof, and (iii) any other
appraisal, development and production programs in relation to the Production
Sharing Contract for which the Borrower has received all necessary
Authorizations;

 

“Dollars” and “$”

the lawful currency of the United States of America;

 

“Eligible Bank”

a bank in England, with an office in London, having capital, surplus and
undistributed profits of at least US$500,000,000 (or the equivalent thereof in
any other currency) and a long-term debt rating of A or better by Standard &
Poor’s Ratings Group or A3 or better by Moody’s Investors Service, Inc.;

 

“Environmental Plans”

the Accidental Discharge Prevention and Oil Spill Contingency Plan, the
Cuttings/Mud Disposal Plan, the Hazardous Material and Waste Management Plan,
the Health, Safety and Environment Plan for Drilling Activities, and the Health,
Safety and Environment Quality Assurance Plans for FPSO Activities;

 

“Environmental and Social Policies”

IFC Operating Policies (OP) 4.01 Environmental Assessment Policy (OP) 4.04
(October 1998), Operational Policy Natural Habitats (November

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6

 

1998), IFC Policy Statement on Child and Forced Labor (March 1998), and the
Policy on Disclosure of Information (September 1998), copies of which have been
delivered to, and receipt of which has been acknowledged by, the Borrower by
letter dated April 21, 2005, which policies are incorporated herein by
reference;

 

“Environmental, Health and Safety

    Guidelines”

World Bank Guidelines for Oil and Gas Developments (Offshore) (December 2000)
and IFC Occupational Health and Safety Guidelines (June 2003) , copies of which
have been delivered to, and receipt of which have been acknowledged by, the
Borrower by letter dated April 21, 2005, which guidelines are incorporated
herein by reference;

 

“Environmental Impact Assessment(s)”

    or “EIA(s)”

the environmental and social impact assessment report(s) prepared by or on
behalf of the Borrower in respect of its operations in accordance with the
Environmental and Social Polices, Environmental Health and Safety Guidelines,
the Environmental Plans, upon their preparation, the Environmental and Social
Management System (ESMS), and the environmental, social and occupational health
and safety laws and regulations of Gabon;

 

“Environmental Review Summary” or

    “ERS”

the Environmental Review Summary dated April 21, 2005 prepared by IFC and
approved by the Borrower;

 

“Environmental and Social Management

    System” or “ESMS”

means the system created or to be created by the Borrower for managing and
monitoring the environmental and social aspects of its activities and the
Project, as agreed with IFC;

 

“Etame Accounts”

the Etame Revenue Account, the Etame Operating Account and the Tinworth Escrow
Account;

 

“Etame Accounts Agreement”

the agreement entitled the “Etame Field Trustee and Paying Agent Agreement”
dated 26 June 2002, and

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amended on November 26, 2002, and amended on or about the date of this
Agreement, between the Borrower, the Etame Accounts Bank and the Etame Trustee
and Paying Agent, pursuant to which the Etame Accounts have been established,
and are operated and maintained;

 

“Etame Accounts Bank”

JPMorgan Chase Bank, London Branch, with which the Etame Trustee and Paying
Agent has established, operates and maintains the Etame Accounts under the Etame
Accounts Agreement, or such successor entity as may be appointed pursuant to the
Etame Accounts Agreement;

 

“Etame Block”

the area approximately 45 kilometers offshore of the southern coast of Gabon
identified as the “Delimited Area” (Zone Delimitee) in the PSC;

 

“Etame Block Field(s)”

the exploitation areas within the Etame Block, including the Etame field and the
Avouma and South Tchibala fields and any other fields, that contain hydrocarbon
accumulations, and in relation to which one or more EEA(s) shall from time to
time have been granted by GOG;

 

“Etame Block Assets”

the present and future assets used in connection with exploration, appraisal,
development, maintenance and/or operation of the Etame Block Fields or in the
Etame Block;

 

“Etame Operating Account”

an interest-bearing account established and maintained by the Etame Trustee and
Paying Agent with the Etame Accounts Bank, in accordance with Section 4.1 of the
Etame Accounts Agreement;

 

“Etame Revenue Account”

an interest bearing account established and maintained by the Etame Trustee and
Paying Agent with the Etame Accounts Bank, in accordance with Section 2.1 of the
Etame Accounts Agreement;

 

“Etame Trustee and Paying Agent”

J.P.Morgan Trustee and Depositary Company Limited, which has established,
operates and

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8

 

maintains the Etame Accounts under the Etame Accounts Agreement, or such
successor entity as may be appointed pursuant to the Etame Accounts Agreement;

 

“Event of Default”

any one of the events specified in Section 7.02 (Events of Default);

 

“Exclusive Exploitation

    Authorization” or “EEA”

the Exclusive Exploitation Authorization(s) granted to the Borrower under the
PSC, including any extensions or amendments thereof, with respect to the Etame
field, the Avouma and South Tchibala fields, and any other fields in the Etame
Block;

 

“Existing IFC Loan”

means the loan provided by IFC to the Borrower pursuant to the Loan Agreement
dated April 19, 2002 as amended on May 28, 2002 and August 23, 2002;

 

“Facility”

has the meaning provided to it in Section 3.01, and, where the context so
requires, the amount of the facility described therein to the extent not
cancelled or reduced pursuant to this Agreement;

 

“Final Maturity Date”

means October 15, 2009; provided, however, that, during the Availability Period,
the Company may request that the “Final Maturity Date” be extended for a maximum
period of two (2) years, and any such extension shall be at IFC’s sole
discretion;

 

“First Loan”

means the first Loan made under the Facility;

 

“Fiscal Quarter”

any consecutive three-month period ending on March 31, June 30, September 30 and
December 31, which may be changed from time to time as a result of permitted
changes to the Borrower’s or Sponsor’s respective Fiscal Years, as the case may
be;

 

“Fiscal Year”

the accounting year of the Borrower or the Sponsor, commencing each year on
January 1 and ending on the following December 31, or such other period as the
Borrower or the Sponsor, as the case may be, with IFC’s consent, from time to
time designates as its accounting year;

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9

 

“FPSO”

a registered floating production storage and offloading tanker facility and its
mooring system;

 

“FPSO Contract”

the Contract for the Provision and Operation of an FPSO between the Borrower and
Tinworth Limited dated August 20, 2001, as amended on December 7, 2004 and
March 31, 2005, and otherwise as amended or modified from time to time;

 

“Fred. Olsen Guarantee”

the Guarantee dated September 14, 2001, issued by Fred. Olsen Energy ASA and
Prosafe ASA, jointly and severally, in favor of the Borrower guaranteeing the
obligations of Tinworth Limited under the FPSO Contract;

 

“Gabon”

Republic of Gabon;

 

“GOG”

the government of the Republic of Gabon;

 

“Hazardous Material and

    Waste Management Plan”

a hazardous material and waste management plan prepared by Tinworth Limited in
accordance with the FPSO Contract, as updated from time to time or any similar
plan prepared in connection with FPSO or related operations in the Project, that
in each case is acceptable to IFC;

 

“Health, Safety and

    Environment Plan

    for Drilling Activities”

health, safety and environment plans relating to drilling activities, as updated
from time to time or such similar plans prepared in connection with drilling
activities in the Project, that are in each case acceptable to IFC;

 

“Health, Safety and

    Environment Quality

    Assurance Plan

    for FPSO Activities”

health, safety and environment plans relating to FPSO activities, as updated
from time to time or such similar plans prepared in connection with FPSO
activities in the Project, that are in each case acceptable to IFC;

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10

 

“Houston Account”

the Dollar denominated account in Houston, Texas, United States of America,
established and maintained by the Borrower with JP Morgan Chase Bank under
account number 01000030718, pursuant to Section 4.8 of the JOA, including any
balance standing to the credit of such account from time to time and the
interest credited thereto;

 

“IFC Base Case”

the cash flow forecast calculated in accordance with the financial model agreed
between the Borrower and IFC initialed by the parties for the purpose of
identification, and any subsequent forecast submitted from time to time by the
Borrower to IFC in a form and substance satisfactory to IFC, and in accordance
with Section 6.05;

 

“IFC Base Case Assumptions”

means the assumptions and principles, including the Agreed Oil Price and Proved
Reserves Criteria, mutually agreed upon by the Borrower and IFC as of the date
hereof, in respect of the IFC Base Case, as set forth in Schedule 7;

 

“Increased Costs”

the net incremental costs of, or reduction in return to, IFC in connection with
the making or maintaining of any Loan that result from any change in any
applicable law or regulation or directive (whether or not having force of law)
or in its interpretation or application by any Authority charged with its
administration that, after the date of this Agreement, imposes on IFC any
condition regarding the making or maintaining of the Loans;

 

“Increased Costs Certificate”

a certificate provided from time to time by IFC certifying the amount of, and
circumstances giving rise to, the Increased Costs;

 

“Independent Engineer”

Netherland Sewell and Associates, Inc. (NSAI) or other such independent
reservoir engineer based in the United States with a good reputation in the
international oil and gas industry, as IFC may appoint from time to time to
carry out the Reserve Certification and other services reasonably required

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11

 

by IFC (the fees and expenses of all of which services shall be for the account
of the Borrower);

 

“Interest Determination

    Date”

except as otherwise provided in Section 3.03 (d) (ii) (Interest), the second
Business Day before the beginning of each Interest Period;

 

“Interest Payment Date”

April 15 or October 15 in any year;

 

“Interest Period”

each period of six (6) months, in each case beginning on an Interest Payment
Date and ending on the day immediately before the next following Interest
Payment Date, except in the case of the first period applicable to each Loan
when it means the period beginning on the date on which that Loan is made and
ending on the day immediately before the next following Interest Payment Date;

 

“Interest Rate”

for any Interest Period, the rate at which interest is payable on any Loan
during that Interest Period, determined in accordance with Section 3.03
(Interest);

 

“Joint Operating

    Agreement” or “JOA”

the Joint Operating Agreement dated April 4, 1997, between the Borrower and the
other Project Partners referred to in subclause (i) of that definition, as
amended on January 15, 2001, September 5, 2002 and December 31, 2004, and as
amended from time to time;

 

“LIBOR”

the British Bankers’ Association (“BBA”) interbank offered rates for deposits in
Dollars which appear on the relevant page of the Telerate Service (currently
page 3750) or, if not available, on the relevant pages of any other service
(such as Reuters Service or Bloomberg Financial Markets Service) that displays
such BBA rates; provided that if BBA for any reason ceases (whether permanently
or temporarily) to publish interbank offered rates for deposits in Dollars,
“LIBOR” shall mean the rate determined pursuant to Section 3.03 (d) (Interest);

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“Lien”

any mortgage, pledge, charge, assignment, hypothecation, security interest,
title retention, preferential right, trust arrangement, right of set-off,
counterclaim or banker’s lien, privilege or priority of any kind having the
effect of security, any designation of loss payees or beneficiaries or any
similar arrangement under or with respect to any insurance policy or any
preference of one creditor over another arising by operation of law;

 

“Loan”

the principal amount of each borrowing under the Facility, or as the context
requires, the principal amount outstanding of that borrowing; provided that for
avoidance of doubt, and in accordance with Section 3.02(c) hereof, on each
Interest Payment Date all Loans (including Rollover Loans) outstanding prior to
such Interest Payment Date shall (to the extent not repaid and subject to the
fulfillment of the conditions for the making of each Loan set forth in
Section 5.02 and 5.03) be rolled over into a single Loan on such Interest
Payment Date;

 

“Marketing Contract”

at any time, the agreement(s) entered into by the Borrower for the marketing and
transportation of the Borrower’s share of the oil produced from the Etame Block
Field(s), including (for the avoidance of doubt) any Crude Oil Sales Contract
(as such term is used and defined in the Etame Accounts Agreement) so entered
into by the Borrower;

 

“Material Adverse Effect”

a material adverse effect on:

 

  (i) the Borrower, VAALCO International or the Sponsor or their respective
assets or properties;

 

  (ii) the Borrower’s, VAALCO International’s or the Sponsor’s business
prospects or financial condition;

 

  (iii) the implementation of the Project; or

 

  (iv) the ability of the Borrower, VAALCO International or the Sponsor to
comply with

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13

 

their respective obligations under this Agreement or any other Transaction
Document or Project Document;

 

“Material Contracts”

the PSC, the JOA, the FPSO Contract, the Fred. Olsen Guarantee, the Marketing
Contracts in effect from time to time, the EEA(s) and the Etame Accounts
Agreement;

 

“MOF Loan Authorization”

the Authorization of the Minister of Finance of Gabon of the financing
contemplated by this Agreement, in form and substance acceptable to IFC;

 

“MOH Loan Authorization”

the Authorization of the Minister of Mines, Energy, Petroleum and Hydraulic
Resources of Gabon of the financing contemplated by this Agreement, in form and
substance acceptable to IFC;

 

“Officer”

any of the President, Chief Executive Officer, Chief Financial Officer or Chief
Operating Officer (or their functional equivalents) of the Borrower or the
Sponsor, as the case may be;

 

“Official”

any officer of a political party or candidate for political office in Gabon or
any officer or employee (i) of the GOG (including any legislative, judicial,
executive or administrative department, agency or instrumentality thereof),
(ii) of any local Authority in Gabon or (iii) of a public international
organization;

 

“Operator”

the party designated as such pursuant to the PSC and the JOA, which, as of the
date of this Agreement, is the Borrower;

 

“Person”

any natural person, corporation, company, partnership, firm, voluntary
association, joint venture, trust, unincorporated organization, Authority or any
other entity whether acting in an individual, fiduciary or other capacity;

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14

 

“Pledge of Shares”

the agreement entitled “Pledge of Shares Agreement” dated on or about the date
of this Agreement among the Borrower, VAALCO International and IFC, pursuant to
which all of the issued and outstanding shares of the Borrower are pledged to
IFC as security for the Loans;

 

“Potential Event

    of Default”

any event or circumstance which would, with notice, lapse of time, the making of
a determination or any combination thereof, become an Event of Default;

 

“Production Sharing

    Contract” or “PSC”

the Exploration and Production Sharing Contract dated as of July 7, 1995,
between the Government of Gabon and the Borrower and other parties, collectively
as the Contractor, as amended by an undated agreement between the Government of
Gabon and the Borrower with retroactive effect to July 7, 2001;

 

“Prohibited Payments”

any offer, gift, payment, promise to pay or authorization of the payment of any
money or anything of value, directly or indirectly, to or for the use or benefit
of any Official (including to or for the use or benefit of any other Person if
the Borrower or Sponsor knows, or has reasonable grounds for believing, that the
other Person would use such offer, gift, payment, promise or authorization of
payment for the benefit of any such Official), for the purpose of influencing
any act or decision or omission of any Official in order to obtain, retain or
direct business to, or to secure any improper benefit or advantage for, the
Borrower, its Affiliates or any other Person; provided that any such offer,
gift, payment, promise or authorization of payment shall not be considered a
Prohibited Payment if, in IFC’s reasonable opinion, it is lawful under
applicable written laws and regulations;

 

“Project”

the project described in Section 2.01 (The Project);

 

“Project Documents”

      (a)         the Production Sharing Contract;

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15

 

  (b) the Joint Operating Agreement;

 

  (c) the FPSO Contract;

 

  (d) the Fred. Olsen Guarantee;

 

  (e) the Marketing Contract, in effect from time to time;

 

  (f) the Etame Accounts Agreement; and

 

  (g) the Exclusive Exploitation Authorization(s);

 

“Project Partners”

at any time, the Borrower and (i) the other Parties (as such term is defined in
the JOA) under the JOA, which, as of the date of this Agreement, are: PanAfrican
Etame Inc, Sasol Petroleum West Africa Limited, PetroEnergy Resources
Corporation, Sojitz Etame Ltd., and (ii) Energy Africa Gabon S.A.;

 

“Proved Developed

    Reserves”

at any date, those Proved Reserves that are expected to be recovered from
existing wells and installed facilities;

 

“Proved Reserves”

at any date, the estimated quantities of hydrocarbons which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Proved Reserves are limited to those quantities of hydrocarbons
which can be estimated, with reasonable certainty, to be recoverable
commercially at current prices and costs, under existing regulatory practices
and with existing conventional equipment and operating methods (taking into
account applicable laws and regulations to which the Borrower is subject);

 

“Reinsurance Assignment

    Deed”

the agreement entitled “Reinsurance Assignment Deed” dated on or about the date
hereof, between the Gabonese issuer(s) of the Etame Block related insurance
policies, IFC and the Borrower;

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16

 

“Relevant Figures”

in respect of any Calculation Date:

 

  (a) the Borrowing Base Amount;

 

  (b) the Field-Life NPV;

 

  (c) the Loan-Life NPV;

 

  (d) the LOF, LOL and Debt to Equity Ratio;

 

  (e) a projection of each of the above figures as at each future Calculation
Date; and

 

  (f) the Interest Cover for the current and each future Calculation Period
through the Final Maturity Date;

 

“Reserve Certification”

the certification of any or all of the Etame Block Fields’ Proved Reserves and
Proved Developed Reserves prepared from time to time by the Independent
Engineer, including projected capital expenditures, operating expenses, annual
production profiles and the economic life of the relevant Etame Block Fields;

 

“Restricted Payments”

all payments, including interest and principal, on Subordinated Debt, dividends,
transfers of funds and other distributions on share capital (whether in cash,
shares, or in kind) and any purchase, redemption or other acquisition of shares
by the Borrower;

 

“Rollover Loan”

a Loan made on an Interest Payment Date in the same amount, as all or a portion
of an outstanding Loan or Loans maturing on such Interest Payment Date, and
which is applied solely in refinancing all or a portion of such maturing Loan;

 

“Security”

  (a) a first ranking security interest in all of the Borrower’s proceeds and
receivables relating to and from the sale of its share (other than solely in its
capacity as the Operator) of oil production from the Etame Block Fields;

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17

 

  (b) a first ranking security interest in the funds (including any Authorized
Investments made with such funds) held from time to time in the VAALCO Accounts;

 

  (c) an assignment by way of security of the Borrower’s rights, title and
interest (other than solely in its capacity as the Operator) in and under the
Material Contracts;

 

  (d) a first ranking security interest over any and all of the Borrower’s
rights, title and interest (other than solely in its capacity as the Operator)
in all other Etame Block Assets;

 

  (f) an assignment by way of security of all rights and claims to any
compensation or other special payments in respect of the Etame Block other than
those arising in the normal course of Etame Block operations which are payable
to the Borrower (other than solely in its capacity as the Operator) by the GOG
or any of its agencies or by any other party and for whatever reason;

 

  (g) assignment by way of security of all rights, title and interest in and to
the Borrower’s share (other than solely in its capacity as the Operator) of the
Etame Block related insurance policies and reinsurance policies and any proceeds
thereof; and

 

  (h) a first ranking pledge by VAALCO International Inc of all its shares in
the Borrower.

 

“Security Documents”

the documents providing for the Security consisting of:

 

  (i) the Debenture;

 

  (ii) the Pledge of Shares;

 

  (iii) a letter from the GOG consenting to the creation of the Security;

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18

 

  (iv) the Reinsurance Assignment Deed;

 

“Sojitz Etame Limited”

a company organized and existing under the laws of England that has a 9.99%
shareholding in VAALCO International. Inc.;

 

“Sponsor”

VAALCO Energy Inc., a corporation organized and existing under the laws of
Delaware, that has a 90.01% shareholding in VAALCO International, Inc;

 

“Spread”

3.5% per annum;

 

“Subordinated Debt”

any Debt owing by the Borrower to any of its Affiliates, including the Sponsor,
all of which shall be unsecured and subordinated to any Loans, on terms and
conditions satisfactory to IFC;

 

“Subordination and Share

    Retention Agreement”

the agreement entitled “Subordination and Share Retention Agreement” dated on or
about the date of this Agreement between the Borrower, the Sponsor and IFC;

 

“Subsidiary”

with respect to any Person, any entity:

 

  (i) over 50% of whose capital is owned, directly or indirectly, by that
Person;

 

  (ii) for which that Person may nominate or appoint a majority of the members
of the board of directors or such other body performing similar functions; or

 

  (iii) which is otherwise effectively Controlled by that Person;

 

“Taxes”

any present or future taxes, withholding obligations, duties and other charges
of whatever nature levied by any Authority;

 

“Texas”

the State of Texas, United States of America;

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19

 

“Tinworth Escrow Account”

an interest-bearing account for the benefit of Tinworth Limited, which shall not
have a balance of a principal amount in excess of $2,500,000, that is
established, operated and maintained by the Etame Trustee and Paying Agent with
the Etame Accounts Bank, in accordance with Section 5.1 of the Etame Accounts
Agreement;

 

“Tinworth Limited”

Tinworth Limited, a company incorporated under the laws of Bermuda;

 

“Transaction Documents”

      (i)          this Agreement;

 

  (ii) the Security Documents;

 

  (iii) the Subordination and Share Retention Agreement; and

 

  (iv) the VAALCO Accounts Agreement;.

 

“VAALCO Accounts”

the VAALCO Operating Account and the VAALCO Insurance Proceeds Account;

 

“VAALCO Accounts

    Agreement”

the agreement entitled “VAALCO Accounts Agreement” dated on or about the date
hereof, between IFC, the Borrower and the VAALCO Accounts Bank, pursuant to
which the VAALCO Accounts will be operated and maintained;

 

“VAALCO Accounts Bank”

JPMorgan Chase Bank, London Branch, with which the VAALCO Accounts will be
operated and maintained under the VAALCO Accounts Agreement, or such successor
entity as may be appointed pursuant to the VAALCO Accounts Agreement;

 

“VAALCO Insurance

    Proceeds Account”

an interest-bearing account designated as the “Insurance Proceeds Account” to be
operated and maintained by the Borrower with the VAALCO Accounts Bank, pursuant
to the VAALCO Accounts Agreement;

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20

 

“VAALCO Operating

    Account”

an interest-bearing account to be operated and maintained by the Borrower with
the VAALCO Accounts Bank, into which advances of Loans are to be made and into
which the Dollar proceeds of the Borrower’s share of the net proceeds generated
from the export sales of oil from the Project will be deposited, minus the
payment of royalties to the GOG in accordance with the PSC and any other
payments required in accordance with the Etame Accounts Agreement;

 

“VAALCO International”

VAALCO International Inc., a corporation organized and existing under the laws
of Delaware;

 

“Western Atlas Agreement”

the Conveyance of Production Payment from Western Atlas Afrique, Ltd. to Western
Atlas International, Inc. dated December 29, 2000, and the Stock Purchase
Agreement between Western Atlas International, Inc., as seller, and the
Borrower, as purchaser, dated January 4, 2001.

 

“World Bank”

the International Bank for Reconstruction and Development, an international
organization established by Articles of Agreement among its member countries.

 

Section 1.02. Financial Definitions. (a) Wherever used in this Agreement, unless
the context otherwise requires, the following terms have the meanings opposite
them:

 

“Agreed Oil Price”

as at any date on which a determination is made, the most recently published
World Bank oil price forecast in constant dollars or, in the absence thereof,
any other oil price to be agreed upon by the Borrower and IFC;

 

“Borrowing Base Amount”

means, for the relevant Calculation Period, the lower of:

 

  (a) the Loan-Life NPV divided by 1.8, and

 

  (b) the Field-Life NPV divided by 2.0;

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21

 

“Cash Balance”

means, on any date, the Borrower’s cash and bank balances that are free of any
Liens (other than Liens in favor of IFC);

 

“Debt”

with respect to the Borrower, the aggregate of all obligations (whether actual
or contingent) of the Borrower, to pay or repay money including, without
limitation:

 

  (i) all Indebtedness for Borrowed Money;

 

  (ii) the aggregate amount then outstanding of all liabilities of any party to
the extent the Borrower guarantees them or otherwise directly or indirectly
obligates itself to pay them;

 

  (iii) all liabilities of the Borrower (actual or contingent) under any
conditional sale or a transfer with recourse or obligation to repurchase,
including, without limitation, by way of discount or factoring of book debts or
receivables; and

 

  (iv) all liabilities of the Borrower (actual or contingent) under its Charter,
any resolution of its shareholders, or any agreement or other document binding
on the Borrower to redeem any of its shares;

 

“Discount Rate”

ten per cent (10%) per annum;

 

“EBIDAX”

means earnings before interest, depreciation and amortization, and exploration
expenses.

 

“Field-Life NPV”

means as of any Calculation Date (and until the next Calculation Date), the sum
of (i) Cash Balances as at such Calculation Date, and (ii) the present value at
the Discount Rate of the projected Net Cash Flow derived from the Proved
Reserves of the Etame Block Field(s) as certified in the most recent Reserve
Certification and calculated using the Proved Reserves Criteria, the Agreed Oil
Price and other IFC Base Case Assumptions, for the period commencing on the day
following such Calculation

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22

 

Date through the longest economic life of the Etame Block Field(s)s as certified
in such Reserve Certification;

 

“Indebtedness for

    Borrowed Money “

with respect to the Borrower, all obligations of the Borrower to repay money
including, without limitation, with respect to:

 

  (i) borrowed money;

 

  (ii) the outstanding principal amount of any bonds, debentures, notes, loan
stock, commercial paper, acceptance credits, bills or promissory notes drawn,
accepted, endorsed or issued by the Borrower;

 

  (iii) any credit to the Borrower from a supplier of goods or services under
any installment purchase or other similar arrangement with respect to goods or
services (except trade accounts that are payable in the ordinary course of
business);

 

  (iv) non-contingent obligations of the Borrower to reimburse any other Person
with respect to amounts paid by that Person under a letter of credit or similar
instrument (excluding any letter of credit or similar instrument issued for the
benefit of the Borrower with respect to trade accounts that are payable in the
ordinary course of business);

 

  (v) amounts raised under any other transaction having the financial effect of
a borrowing and which would be classified as a borrowing (and not as an
off-balance sheet financing) under the Accounting Principles including, without
limitation, under leases or similar arrangements entered into primarily as a
means of financing the acquisition of the asset leased;

 

  (vi) the amount of the Borrower’s obligations pursuant to Derivative
Transactions which

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23

 

consist of swap, collar and cap agreements entered into in connection with other
Debt of the Borrower, provided that for the avoidance of double counting and for
so long as any such swap, collar or cap agreement is in effect, that Debt will
be included in Indebtedness for Borrowed Money pursuant to the terms of the
relevant Derivative Transaction and not the terms of the agreement providing for
that Debt when it was incurred; and

 

 

(vii) any premium payable on a mandatory redemption or replacement of any of the
foregoing obligations;

 

“Interest Cover”

means, for any Calculation Period, the Borrower’s actual and/or projected EBIDAX
for such Calculation Period, divided by the amount of all interest paid or
payable in respect of any Debt, net of any interest actually earned during such
period,

 

“Life of Field Coverage

    Ratio” or “LOF”

as at any date of determination, the ratio obtained by dividing (i) the sum of
Cash Balances as at such date, and the present value at the Discount Rate of the
projected Net Cash Flow derived from the Proved Reserves of the Etame Block
Field(s) as certified in the most recent Reserve Certification and calculated
using the Proved Reserves Criteria, the Agreed Oil Price and other IFC Base Case
Assumptions, for the period commencing on the day following such determination
date through the longest economic life of the Etame Block Field(s) as certified
in such Reserve Certification; by (ii) the aggregate amount of principal
outstanding and any overdue interest and other amounts owing on that date on or
in respect of all Indebtedness for Borrowed Money of the Borrower (excluding any
Subordinated Debt);

 

“Life of Loan Coverage

    Ratio” or “LOL”

as at any date of determination, the ratio obtained by dividing (i) the sum of
Cash Balances as at such date, and the present value at the Discount Rate of

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24

 

the projected Net Cash Flow derived from the Proved Reserves of the Etame Block
Field(s) as certified in the most recent Reserve Certification and calculated
using the Proved Reserves Criteria, the Agreed Oil Price and other IFC Base Case
Assumptions, for the period commencing on the day following such calculation
date up to and including the Final Maturity Date; by (ii) the aggregate amount
of principal outstanding and any overdue interest and other amounts owing on
that date on or in respect of all Indebtedness for Borrowed Money of the
Borrower (excluding any Subordinated Debt);

 

“Loan-Life NPV”

means as at any Calculation Date (and until the next Calculation Date), the sum
of (i) Cash Balances as at such Calculation Date, and (ii) the present value at
the Discount Rate of the projected Net Cash Flow derived from the Proved
Reserves of the Etame Block Field(s) as certified in the most recent Reserve
Certification and calculated using the Proved Reserves Criteria, the Agreed Oil
Price and other IFC Base Case Assumptions, for the period commencing on the day
following such Calculation Date up to and including the Final Maturity Date;

 

“Minimum Levels”

at any date, shall be 2.0 with respect to the Interest Cover, 1.8 with respect
to the LOL and 2.0 with respect to the LOF;

 

“Net Cash Flow” or “NCF”

for any period of determination, the sum of (i) all proceeds received from the
sale of the Borrower’s share (other than solely in its capacity as the Operator)
of oil production from the Etame Block Fields, minus (ii) the Borrower’s share
(other than solely in its capacity as the Operator) of operating costs,
transportation costs, cash fund contributions as required under the PSC, taxes,
royalties and capital expenditures paid for the same period, but before any
payments in respect of Debt (whether principal, interest or other fees and
charges) for the same period, plus (iii) the net proceeds of Loans received
(less Loans repaid) by the Borrower during such period;

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25

 

“Debt to

    Equity Ratio”

at any date of determination, the result obtained by dividing Debt by
Shareholders’ Equity;

 

“Proved Reserves Criteria”

means 100% of the Proved Developed Reserves or such criteria as IFC may accept
in its sole discretion;

 

“Shareholders’ Equity”

with respect to the Borrower, the aggregate of:

 

  (i) the amount paid up on the share capital of the Borrower; and

 

  (ii) the amount standing to the credit of the reserves of the Borrower
(including, without limitation, any share premium account, capital redemption
reserve funds and any credit balance on the accumulated profit and loss
account);

 

 

after deducting from that aggregate (A) any debit balance on the profit and loss
account or impairment of the issued share capital of the Borrower (except to the
extent that deduction with respect to that debit balance or impairment has
already been made), (B) amounts set aside for dividends or taxation (including
deferred taxation), and (C) amounts attributable to capitalized items such as
goodwill, trademarks, deferred charges, licenses, patents and other intangible
assets.

 

Section 1.03. Financial Calculations. (a) All financial calculations to be made
under, or for the purposes of, this Agreement and any other Transaction Document
shall be determined in accordance with the Accounting Principles and, except as
otherwise required to conform to any provision of this Agreement, shall be
calculated from the then most recently issued quarterly financial statements,
prepared on a consolidated basis, which the Borrower is obligated to furnish to
IFC under Section 6.03 (a) (Reporting Requirements).

 

(b) Where quarterly financial statements are used for the purpose of making
certain financial calculations and those statements are with respect to the last
quarter of a Fiscal Year then, at IFC’s option, those calculations may instead
be made from the audited financial statements for the relevant Fiscal Year.

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26

 

(c) If any material adverse change in the financial condition of the Borrower or
the Sponsor has occurred after the end of the period covered by the financial
statements used to make the relevant financial calculations, that material
adverse change shall also be taken into account in calculating the relevant
figures.

 

Section 1.04. Interpretation. In this Agreement, unless the context otherwise
requires:

 

(a) headings are for convenience only and do not affect the interpretation of
this Agreement;

 

(b) words importing the singular include the plural and vice versa;

 

(c) a reference to an Annex, Article, party, Schedule or Section is a reference
to that Article or Section of, or that Annex, party or Schedule to, this
Agreement;

 

(d) a reference to a document includes an amendment or supplement to, or
replacement or novation of, that document but disregarding any amendment,
supplement, replacement or novation made in breach of this Agreement; and

 

(e) a reference to a party to any document includes that party’s successors and
permitted assigns.

 

Section 1.05. Business Day Adjustment. When the day on or by which a payment is
due to be made is not a Business Day, that payment shall be made on or by the
next succeeding Business Day. Interest, fees and charges (if any) shall continue
to accrue for the period from the due date that is not a Business Day to that
next succeeding Business Day.

 

ARTICLE II

 

The Project, Project Cost and Financial Plan

 

Section 2.01. The Project. The project to be financed consists of the ongoing
and future oil and gas operations and production, developments, appraisal and
exploration in the Etame Block offshore of the southern coast of Gabon,
including related capital expenditures, working capital requirements and debt
repayment requirements relating to the Borrower’s operations in Gabon.

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27

 

ARTICLE III

 

The Facility

 

Section 3.01. The Facility.

 

(a) Subject to the provisions of this Agreement, IFC agrees to make available to
the Borrower a revolving loan facility of up to thirty million Dollars
($30,000,000) (the “Facility”).

 

(b) Each Loan under the Facility may be used solely for the Project.

 

Section 3.02. Loan Procedure.

 

(a) The Borrower may request Loans up to the Available Amount during the
Availability Period by delivering to IFC, at least ten (10) Business Days prior
to the proposed date of a Loan, a Loan request substantially in the form of
Schedule 2, and a receipt substantially in the form of Schedule 3.

 

(b) Each Loan shall be made by IFC at a bank in New York, New York for further
credit to the VAALCO Operating Account or any other place acceptable to IFC, all
as specified by the Borrower in the relevant Loan request.

 

(c) Where any Loan is outstanding on any Interest Payment Date, the Borrower in
respect of that Loan will be conclusively deemed to have given IFC a duly
completed request (and receipt) for a Rollover Loan (of an aggregate amount
equal to the outstanding amount of all Loans, including any Rollover Loan, which
are scheduled to mature on that Interest Payment Date) to be applied in
refinancing the outstanding Loan or Loans in full unless, (i) not later than
thirty (30) days prior to such Interest Payment Date, the Borrower notifies IFC
that it does not wish this provision to apply in respect of all or a portion of
any Loan, and/or (ii) IFC at any time notifies the Borrower that all or a
portion of any Loan is not eligible to be treated as a Rollover Loan because the
conditions necessary for the making of such Rollover Loan as required pursuant
to Section 5.02 and 5.03 hereof (including that the amount of such Rollover Loan
does not exceed the Available Amount) are not fulfilled.

 

(d) Each Loan (other than a Rollover Loan) shall be made in an amount of not
less than five million Dollars ($5,000,000), or, if lower, in an amount that
equals the maximum amount drawable of the Available Amount.

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28

 

Section 3.03. Interest. Subject to the provisions of Section 3.04 (Default Rate
Interest), the Borrower shall pay interest on each Loan in accordance with this
Section 3.03:

 

(a) During each Interest Period, each Loan shall bear interest at the applicable
Interest Rate for that Interest Period.

 

(b) Interest on each Loan shall accrue from day to day, be prorated on the basis
of a 360-day year for the actual number of days in the relevant Interest Period
and be payable in arrears on the Interest Payment Date immediately following the
end of that Interest Period; provided that with respect to any Loan made less
than fifteen (15) days before an Interest Payment Date, interest on that Loan
shall be payable on the second Interest Payment Date following the date of that
Loan.

 

(c) The Interest Rate for any Interest Period shall be the rate which is the sum
of:

 

  (i) the Spread; and

 

  (ii) LIBOR on the Interest Determination Date for that Interest Period for six
(6) months (or, in the case of any Loan to be made on a date other than an
Interest Payment Date, for one (1) month, two (2) months, three (3) months or
six (6) months, whichever period is closest to the duration of the relevant
Interest Period (or, if two periods are equally close, the longer one)) rounded
upward to the nearest three decimal places.

 

(d) If, for any Interest Period IFC cannot determine LIBOR by reference to the
Telerate Service or any other service that displays BBA rates, IFC shall notify
the Borrower and shall instead determine LIBOR:

 

  (i) on the second Business Day before the beginning of the relevant Interest
Period by calculating the arithmetic mean (rounded upward to the nearest three
decimal places) of the offered rates advised to IFC on or around 11:00 a.m.,
London time, for deposits in Dollars and otherwise in accordance with
Section 3.03 (c) (ii), by any four (4) major banks active in Dollars in the
London interbank market, selected by IFC; provided that if less than four
quotations are received, IFC may rely on the quotations so received if not less
than two (2); or

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29

 

  (ii) if less than two (2) quotations are received from the banks in London in
accordance with subsection (i) above, on the first day of the relevant Interest
Period, by calculating the arithmetic mean (rounded upward to the nearest three
decimal places) of the offered rates advised to IFC on or around 11:00 a.m. New
York time, for loans in Dollars and otherwise in accordance with Section 3.03
(c) (ii), by a major bank or banks in New York, New York, selected by IFC.

 

(e) On each Interest Determination Date for any Interest Period, IFC shall
determine the Interest Rate applicable to that Interest Period and promptly
notify the Borrower of that rate.

 

(f) The determination by IFC, from time to time, of the Interest Rate shall be
final and conclusive and bind the Borrower (unless the Borrower shows to IFC’s
satisfaction that the determination involves manifest error).

 

Section 3.04. Default Rate Interest. (a) Without limiting the remedies available
to IFC under this Agreement or otherwise (and to the maximum extent permitted by
applicable law), if the Borrower fails to make any payment of principal or
interest (including interest payable pursuant to this Section) or any other
payment provided for in Section 3.07 (Fees) when due as specified in this
Agreement (whether at stated maturity or upon acceleration), the Borrower shall
pay interest on the amount of that payment due and unpaid at the rate which
shall be the sum of two per cent (2%) per annum and the Interest Rate in effect
from time to time.

 

(b) Interest at the rate referred to in Section 3.04 (a) shall accrue from the
date on which payment of the relevant overdue amount became due until the date
of actual payment of that amount (as well after as before judgment), and shall
be payable on demand or, if not demanded, on each Interest Payment Date falling
after any such overdue amount became due.

 

Section 3.05. Repayment.

 

(a) The Borrower must repay each Loan made to it in full on the Interest Payment
Date immediately following the date on which such Loan is made.

 

(b) Subject to the terms of this Agreement, any amounts repaid under paragraph
(a) above may be reborrowed.

 

Section 3.06. Prepayment and Mandatory Payment. (a) The Borrower may prepay all
or any of the Loans, on not less than thirty (30) days’ prior notice to IFC, but
only if:

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30

 

  (i) the Borrower simultaneously pays all accrued interest and Increased Costs
(if any) on the amount of each Loan to be prepaid, together with all other
amounts then due and payable under this Agreement, including the amount payable
under Section 3.11 (Unwinding Costs);

 

  (ii) for a partial prepayment, the prepayment is in an amount of not less than
two million Dollars ($2,000,000); and

 

  (iii) if requested by IFC, the Borrower delivers to IFC, prior to the date of
prepayment, evidence satisfactory to IFC that all necessary Authorizations with
respect to the prepayment have been obtained.

 

(b) If at any time any of Interest Cover, LOL and/or LOF are less than the
Minimum Levels, the Borrower shall prepay all or a part of the Loans in an
amount sufficient for such ratios to be equal to or greater than the Minimum
Levels no later than thirty (30) days after the date such non-compliance first
occurred and:

 

  (i) the Borrower shall simultaneously pay all accrued interest and Increased
Costs (if any) on the amount of the Loans to be prepaid, together with all other
amounts then due and payable under this Agreement, including the amount payable
under Section 3.11 (Unwinding Costs), if the payment is not made on an Interest
Payment Date; and

 

  (ii) if requested by IFC, the Borrower shall deliver to IFC, prior to the date
of payment, evidence satisfactory to IFC that all necessary Authorizations with
respect to the payment have been obtained.

 

(c) Upon delivery of a notice in accordance with Section 3.06 (a), the Borrower
shall make the payment in accordance with the terms of that notice.

 

Section 3.07. Fees. (a) The Borrower shall pay to IFC a commitment fee at the
rate of one per cent (1%) per annum on that part of the Facility which from time
to time has not been disbursed or cancelled. The commitment fee shall:

 

  (i) begin to accrue on the date of this Agreement;

 

  (ii) be pro rated on the basis of a 360-day year for the actual number of days
elapsed; and

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31

 

  (iii) be payable semi-annually, in arrears, on the Interest Payment Dates in
each year, with the first such payment due on October 15, 2005.

 

(b) The Borrower shall also pay to IFC a front-end fee of four hundred and
thirty-seven thousand five hundred dollars ($437,500), to be paid upon the
earlier of (x) the date which is thirty (30) days after the date of this
Agreement and (y) the date of the First Loan;.

 

(c) The Borrower shall pay to IFC an annual supervision fee of fifteen thousand
US Dollars ($15,000) for each Fiscal Year during which any portion of this
Facility is committed or outstanding, whether that year is complete or not, to
be paid (i) with respect to the 2005 calendar year, within thirty (30) days of
the date of this Agreement or on or before the date of the First Loan, whichever
is earlier, and (ii) with respect to each Fiscal Year thereafter, on January 15.

 

Section 3.08. Currency and Place of Payments. (a) The Borrower shall make all
payments of principal, interest, fees, and any other amount due to IFC under
this Agreement in Dollars, in same day funds, to Citibank, N.A., 111 Wall
Street, New York, New York, U.S.A., ABA#021000089, for credit to IFC’s account
number 36085579, or at such other bank or account in New York as IFC from time
to time designates. Payments must be received in IFC’s designated account no
later than 1:00 p.m. New York time.

 

(b) The tender or payment of any amount payable under this Agreement (whether or
not by recovery under a judgment) in any currency other than Dollars shall not
novate, discharge or satisfy the obligation of the Borrower to pay in Dollars
all amounts payable under this Agreement except to the extent that (and as of
the date when) IFC actually receives funds in Dollars in the account specified
in, or pursuant to, Section 3.08 (a).

 

(c) The Borrower shall indemnify IFC against any losses resulting from a payment
being received or an order or judgment being given under this Agreement in any
currency other than Dollars or any place other than the account specified in, or
pursuant to, Section 3.08 (a). The Borrower shall, as a separate obligation, pay
such additional amount as is necessary to enable IFC to receive, after
conversion to Dollars at a market rate and transfer to that account, the full
amount due to IFC under this Agreement in Dollars and in the account specified
in, or pursuant to, Section 3.08 (a).

 

(d) Notwithstanding the provisions of Section 3.08 (a) and Section 3.08 (b), IFC
may require the Borrower to pay (or reimburse IFC) for any Taxes, fees, costs,
expenses and other amounts payable under Section 3.14 (a) (Taxes) and
Section 3.15 (Expenses) in the currency in which they are payable, if other than
Dollars.

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32

 

Section 3.09. Allocation of Partial Payments. If at any time IFC receives less
than the full amount then due and payable to it under this Agreement, IFC may
allocate and apply the amount received in any way or manner and for such purpose
or purposes under this Agreement as IFC in its sole discretion determines,
notwithstanding any instruction that the Borrower may give to the contrary.

 

Section 3.10. Increased Costs. On each Interest Payment Date, the Borrower shall
pay, in addition to interest, the amount which IFC from time to time notifies to
the Borrower in an Increased Costs Certificate as being the aggregate Increased
Costs of IFC accrued and unpaid prior to that Interest Payment Date.

 

Section 3.11. Unwinding Costs. (a) If IFC incurs any cost, expense or loss as a
result of the Borrower:

 

  (i) failing to borrow in accordance with a request for a Loan made pursuant to
Section 3.02 (Loan Procedure), or to prepay in accordance with a notice of
prepayment or pursuant to Section 3.06 (b); or

 

  (ii) prepaying all or any portion of the Loans;

 

then the Borrower shall immediately pay to IFC the amount which IFC from time to
time notifies to the Borrower as being the amount of those costs, expenses and
losses incurred.

 

(b) For the purposes of this Section, “costs, expenses or losses” include any
premium, penalty or expense incurred to liquidate or obtain third party deposits
or borrowings in order to make, maintain or fund all or any part of the Loans.

 

Section 3.12. Suspension or Cancellation by IFC. (a) IFC may, by notice to the
Borrower, suspend or cancel the right of the Borrower to the undisbursed portion
of the Facility in whole or in part:

 

  (i) if the First Loan has not been made by December 31, 2005 or such other
date as the parties agree;

 

  (ii) if any Event of Default has occurred and is continuing or if the Event of
Default specified in Section 7.02 (f) (Events of Default) is, in the reasonable
opinion of IFC, imminent; or

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33

 

  (iii) if any event or condition has occurred and is continuing which has or
can reasonably be expected to have a Material Adverse Effect.

 

(b) Upon the giving of any such notice, the right of the Borrower to the
undisbursed portion of the Facility shall be suspended or cancelled, as the case
may be. The exercise by IFC of its right of suspension shall not preclude IFC
from exercising its right of cancellation, either for the same or any other
reason specified in Section 3.12 (a). Upon any cancellation the Borrower shall,
subject to paragraph (d) of this Section 3.12, pay to IFC all fees and other
amounts accrued (whether or not then due and payable) under this Agreement up to
the date of that cancellation. A suspension shall not limit any other provision
of this Agreement.

 

(c) Any portion of the Facility that is cancelled under this Section 3.12 may
not be reborrowed.

 

(d) In the case of a partial cancellation of the Facility pursuant to paragraph
(a) of this Section 3.12, or Section 3.13 (a) below, interest on the amount then
outstanding of the Loans remains payable as provided in Section 3.03 (Interest).

 

Section 3.13. Cancellation by the Borrower. (a) The Borrower may, by notice to
IFC, irrevocably request IFC to cancel either in whole or in part the
undisbursed portion of the Facility on the date specified in that notice (which
shall be a date not earlier than thirty (30) days after the date of that
notice); provided that the Borrower may request any such cancellation only once
in any Fiscal Year.

 

(b) IFC shall, by notice to the Borrower, cancel the undisbursed portion of the
Facility effective as of that specified date if, subject to Section 3.12
(d) above IFC has received all fees and other amounts accrued (whether or not
then due and payable) under this Agreement up to such specified date; and

 

(c) Any portion of the Facility that is cancelled under this Section 3.13 may
not be reborrowed.

 

Section 3.14. Taxes. (a) The Borrower shall pay or cause to be paid all Taxes
other than taxes, if any, payable on the overall income of IFC on or in
connection with the payment of any and all amounts due under this Agreement that
are now or in the future levied or imposed by any Authority of Gabon, the United
Kingdom or the United States of America or by any organization of which Gabon,
the United Kingdom or the United States of the America is a member or any
jurisdiction through or out of which a payment is made.

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34

 

(b) All payments of principal, interest, fees and other amounts due under this
Agreement shall be made without deduction for or on account of any Taxes.

 

(c) If the Borrower is prevented by operation of law or otherwise from making or
causing to be made those payments without deduction, the principal or (as the
case may be) interest, fees or other amounts due under this Agreement shall be
increased to such amount as may be necessary so that IFC receives the full
amount it would have received (taking into account any Taxes payable on amounts
payable by the Borrower under this subsection) had those payments been made
without that deduction.

 

(d) If Section 3.14 (c) applies and IFC so requests, the Borrower shall deliver
to IFC official tax receipts evidencing payment (or certified copies of them)
within thirty (30) days of the date of that request.

 

Section 3.15. Expenses. (a) The Borrower shall pay or, as the case may be,
reimburse IFC or its assignees on demand any amount paid by them on account of,
all taxes (including stamp taxes), duties, fees or other charges payable on or
in connection with the execution, issue, delivery, registration or notarization
of the Transaction Documents and any other documents related to this Agreement
or any other Transaction Document.

 

(b) The Borrower shall pay promptly, on demand, to IFC or as IFC may direct:

 

  (i) the out-of-pocket expenses (including travel and subsistence expenses)
reasonably incurred by IFC in conducting its annual supervision review of the
Borrower and the Project, the administration by IFC of the investment provided
for in this Agreement, or otherwise in connection with any restructuring of the
Loans or amendment, supplement, or modification to, or any waiver under, any of
the Transaction Documents, payable upon receipt of an invoice from IFC;

 

  (ii) any fees agreed upon among the Borrower and IFC in connection with any
restructuring of the Loans, or amendment, supplement, modification or waiver
under, any of the Transaction Documents;

 

  (iii) the fees and expenses of IFC’s technical consultants (including, without
limitation, the Independent Engineer) and the public accountants, incurred in
connection with the investment by IFC provided for under this Agreement;

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35

 

  (iv) the reasonable fees and expenses of IFC’s counsel in Gabon, France,
Delaware, London, England and New York, New York and any other relevant
jurisdictions, incurred in connection with:

 

  (A) the preparation of the investment by IFC provided for under this Agreement
and any other Transaction Document;

 

  (B) the preparation and/or review, execution and, where appropriate,
translation and registration of the Transaction Documents and any other
documents related to them;

 

  (C) the giving of any legal opinions required by IFC under this Agreement and
any other Transaction Document;

 

  (D) the administration by IFC of the investment provided for in this Agreement
or otherwise in connection with any amendment, supplement or modification to, or
waiver under, any of the Transaction Documents; and

 

  (E) the registration (where appropriate) and the delivery of the evidences of
indebtedness relating to the Loans; and

 

  (v) the costs and expenses incurred by IFC in relation to efforts to enforce
or protect its rights under any Transaction Document, or the exercise of its
rights or powers consequent upon or arising out of the occurrence of any Event
of Default or Potential Event of Default, including legal and other professional
consultants’ fees on a full indemnity basis.

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36

 

ARTICLE IV

 

Representations and Warranties

 

Section 4.01. Representations and Warranties. The Borrower represents and
warrants that:

 

(a) the Borrower is a company duly incorporated and validly existing under the
laws of Delaware, and has the corporate power – and has obtained all required
Authorizations – to own its assets, conduct its business as presently conducted
and to enter into, and comply with its obligations under, the Transaction
Documents to which it is a party or will, in the case of any Transaction
Document not executed as at the date of this Agreement, when that Transaction
Document is executed, have the corporate power to enter into, and comply with
its obligations under, that Transaction Document;

 

(b) each Transaction Document to which the Borrower is a party has been, or will
be, duly authorized and executed by the Borrower and constitutes, or will, when
executed constitute, a valid and legally binding obligation of the Borrower,
enforceable in accordance with its terms;

 

(c) neither the making of any Transaction Document to which the Borrower is a
party nor (when all the Authorizations referred to in Section 5.01(d)
(Conditions of Loans) have been obtained) the compliance with its terms will
conflict with or result in a breach of any of the terms, conditions or
provisions of, or constitute a default or require any consent under, any
indenture, mortgage, agreement or other instrument or arrangement to which the
Borrower is a party or by which it is bound, or violate any of the terms or
provisions of the Borrower’s Charter or any Authorization, judgment, decree or
order or any statute, rule or regulation applicable to the Borrower;

 

(d) to the best of the Borrower’s knowledge after due inquiry:

 

  (i) subject to clause (ii) below, all the Authorizations (other than
Authorizations that are of a routine nature and are obtained in the ordinary
course of business) needed by the Borrower as of the date of this Agreement to
conduct its business, carry out the Project and execute, and comply with its
obligations under, this Agreement and each of the other Transaction Documents to
which it is a party have been obtained and are in full force and effect; and

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37

 

  (ii) the Borrower has the necessary Authorization from the Minister of
Commerce of Gabon to maintain a branch office in Gabon and to renew such branch
office every two years and the Borrower is in the process of renewing its
registration for its branch office, which registration the Borrower reasonably
believes will be issued in the ordinary course of business by such Minister;

 

(e) the Borrower’s Charter has not been amended since June 14, 1995;

 

(f) neither the Borrower nor any of its property enjoys any right of immunity
from set-off, suit or execution with respect to its assets or its obligations
under any Transaction Document;

 

(g) since December 31, 2004, the Borrower:

 

  (i) has not suffered any change that has a Material Adverse Effect or incurred
any substantial loss or liability;

 

  (ii) has not undertaken or agreed to undertake any substantial obligation;

 

(h) the financial statements of the Borrower for the period ending on
December 31, 2004:

 

  (i) have been prepared in accordance with the Accounting Principles, and
present fairly the financial condition of the Borrower as of the date as of
which they were prepared and the results of the Borrower’s operations during the
period then ended;

 

  (ii) disclose all liabilities (contingent or otherwise) of the Borrower, and
the reserves, if any, for such liabilities and all unrealized or anticipated
liabilities and losses arising from commitments entered into by the Borrower
(whether or not such commitments have been disclosed in such financial
statements);

 

(i) the Borrower is not a party to, or committed to enter into, any contract
which would or might affect the judgment of a prospective investor other than
the FPSO Contract;

 

(j) the Borrower has no outstanding Lien on any of its assets other than Liens
arising by operation of law, and no contracts or arrangements, conditional or
unconditional, exist for the creation by the Borrower of any Lien, except for
the Security, security granted to IFC in connection with the Existing

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38

 

IFC Loan, and the Liens created pursuant to the FPSO Contract and the Etame
Accounts Agreement;

 

(k) all tax returns and reports of the Borrower required by law to be filed have
been duly filed and all Taxes, obligations, fees and other governmental charges
upon the Borrower, or its properties, or its income or assets, which are due and
payable or to be withheld, have been paid or withheld, other than those
presently payable without penalty or interest;

 

(l) the Borrower is not engaged in nor, to the best of its knowledge after due
inquiry, threatened by, any litigation, arbitration or administrative
proceedings, the outcome of which could reasonably be expected to have a
Material Adverse Effect;

 

(m) to the best of its knowledge and belief after due inquiry, the Borrower is
not in violation of any statute or regulation of any Authority;

 

(n) no judgment or order has been issued which has or may reasonably be expected
to have a Material Adverse Effect;

 

(o) (i) to the best of its knowledge and belief, after due inquiry, the Borrower
is not in violation of any of the Agreed Environmental and Social Requirements;
and

 

  (ii) the Borrower has not received nor is it aware of any complaint, order,
directive, claim, citation or notice from any Authority with respect to any
matter of the Borrower’s compliance with the relevant environmental, health and
safety laws and regulations in effect in Gabon such as, without limitation, air
emissions, discharges to surface water or ground water, noise emissions, solid
or liquid waste disposal, or the use, generation, storage, transportation or
disposal of toxic or hazardous substances or wastes;

 

(p) neither Borrower nor Sponsor nor any of their respective Affiliates, nor any
Person acting on its or their behalf, has made, with respect to the Project or
any transaction contemplated by this Agreement, any Prohibited Payment;

 

(q) it is the Operator of the Project;

 

(r) it owns, solely in its own name, a working interest under the PSC equal to
at least 30.35% during the exploration phase and at least 28.07% during the
production phase, free and clear of all Liens (other than the Lien in favor of

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39

 

IFC in connection with the Existing IFC Loan) and any other interests of any
other Person;

 

(s) all written information regarding the Borrower, the Sponsor, their
respective Affiliates and the Project furnished to IFC prior to or
contemporaneously herewith, by or on behalf of the Borrower, was and continues
to be true and accurate (other than projections and other forward looking
statements that the Borrower believes to be reasonable) and does not contain any
information that is misleading in any material respect nor does it omit any
information the omission of which makes the information contained in it
misleading in any material respect;

 

(t) it is not incorporated or otherwise organized under the laws of, and does
not have a registered office or place of business in, the United Kingdom;

 

(u) it is not engaged in any business activity outside the scope of the PSC;

 

(v) as of the date of this Agreement, neither the GOG nor any of its Authorities
has exercised the GOG’s preference rights under Article 24 or Article 25 of the
PSC and the Borrower has no reason to believe any such exercise is contemplated;

 

(w) except as specified in the Western Atlas Agreement or pursuant to the
Production Sharing Contract, the Borrower has no partnership, profit-sharing or
royalty agreement or other similar arrangement whereby the Borrower’s income or
profits might be shared with any other Person;

 

(x) none of the representations and warranties in this Section 4.01 omits any
matter the omission of which makes any of such representations and warranties
misleading.

 

Section 4.02. IFC Reliance. The Borrower acknowledges that it makes the
representations and warranties in Section 4.01 (Representations and Warranties)
with the intention of inducing IFC to enter into this Agreement and that IFC
enters into this Agreement on the basis of, and in full reliance on, each of
such representations and warranties.

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40

 

ARTICLE V

 

Conditions of Loans

 

Section 5.01. Conditions of First Loan The obligation of IFC to make the First
Loan is subject to the fulfillment prior to or concurrently with the making of
that First Loan of the following conditions:

 

(a) the following agreements, together with any amendments to such agreements
entered into after the date hereof, each in form and substance satisfactory to
IFC, have been entered into by all parties to them and have become (or, as the
case may be, remain) unconditional and fully effective in accordance with their
respective terms (except for this Agreement having become unconditional and
fully effective, if that is a condition of any of those agreements), and IFC has
received a copy of each of those agreements to which it is not a party:

 

  (i) each Transaction Document; and

 

  (ii) each Project Document, including, without limitation, an amendment to the
Etame Accounts Agreement on or about the date of this Agreement and in a form
and substance satisfactory to IFC;

 

(b) IFC’s Security has been duly created and perfected as: (i) first ranking
security interests in the VAALCO Accounts and the respective funds held therein;
(ii) a security interest in all of the Borrower’s rights, title and interest
(other than solely in its capacity as the Operator) in the Etame Revenue Account
and the Etame Operating Account, subject to the interests of the GOG, and the
Etame Trustee and Paying Agent to the extent expressly provided in the Etame
Accounts Agreement; (iii) a security interest in all of the “Security Assets”
(as defined in the Debenture), (iv) a first ranking pledge by VAALCO
International of all of the Borrower’s shares; and (v) an assignment by way of
security of all rights, title and interest in and to the Borrower’s share of
Project-related insurance policies, reinsurance policies and any proceeds of any
of them;

 

(c) the Borrower has obtained, and provided to IFC copies of, all Authorizations
(including, without limitation, the MOF Loan Authorization and the MOH Loan
Authorization) that are necessary as of the date of this Agreement for:

 

  (i) the Facility;

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41

 

  (ii) the business of the Borrower as it is presently carried on and is
contemplated to be carried on;

 

  (iii) the Project;

 

  (iv) the due execution, delivery, validity and enforceability of, and
performance by the Borrower of its obligations under, this Agreement and the
other Transaction Documents, the Project Documents and any other documents
necessary or desirable to the implementation of any of those agreements or
documents; and

 

  (v) the remittance to IFC or its assigns in Dollars of all monies payable with
respect to the Transaction Documents;

 

and all those Authorizations are in full force and effect and in form and
substance satisfactory to IFC;

 

(d) IFC has received a legal opinion satisfactory in form and substance to IFC,
from Borrower’s counsel in Gabon relating to the transactions contemplated by
this Agreement;

 

(e) IFC has received a legal opinion satisfactory in form and substance to IFC,
from its special counsel on English law matters with regard to this Agreement
and other Transaction Documents and Project Documents governed by English Law;

 

(f) IFC has received a legal opinion satisfactory in form and substance to IFC,
from its special counsel in New York, New York, and concurred in by counsel for
the Borrower and the Sponsor, with regard to this Agreement and other
Transaction Documents and Project Documents;

 

(g) IFC has received a legal opinion satisfactory in form and substance to IFC,
from Texas counsel for the Borrower and the Sponsor, with regard to this
Agreement and the other Transaction Documents and the Project Documents;

 

(h) IFC has received copies of all insurance policies required to be obtained
pursuant to Section 6.04 (Insurance) and Annex A prior to the date of First
Loan, and a certification of the Borrower’s insurers or insurance agents
confirming that such policies are in full force and effect and all premiums then
due and payable under those policies have been paid;

 

(i) IFC has received, or has received irrevocable written instructions to deduct
from the proceeds of the First Loan, the fees specified in Section 3.07

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42

 

(Fees) required to be paid before or on the date of the First Loan, as the case
may be;

 

(j) if IFC so requires, IFC has received the reimbursement of all invoiced fees
and expenses of IFC’s counsel as provided in Section 3.15 (b) (iv) (Expenses) or
confirmation that those fees and expenses have been paid directly to that
counsel;

 

(k) IFC has received a copy of the authorization to the Auditors referred to in
Section 6.01(e) (Affirmative Covenants);

 

(l) IFC has received a Certificate of Incumbency and Authority;

 

(m) the Borrower has delivered to IFC evidence, substantially in the form of
Schedule 4, of appointment of an agent for service of process pursuant to
Section 8.05 (d) (Applicable Law and Jurisdiction);

 

(n) the Existing IFC Loan, together with all interest, prepayment fees and other
amounts payable with respect thereto, shall have been fully repaid, or IFC shall
have received irrevocable written instructions to deduct from the proceeds of
the First Loan, an amount equal to all principal, interest and other amounts
outstanding under or in respect to the Existing IFC Loan;

 

(o) the Borrower has delivered to IFC a letter confirming, inter alia, that
(i) the Borrower is in compliance with all of its material obligations under the
Production Sharing Contract, and (ii) there are no material disputes relating to
the Production Sharing Contract, which letter shall be in form and substance
satisfactory to IFC; and

 

(p) the Borrower has delivered to IFC evidence reasonably satisfactory to it
confirming that its branch office registration in Gabon is in full force and
effect and that it is duly maintaining such branch office.

 

Section 5.02. Conditions of All Loans. The obligation of IFC to make any Loan,
including the First Loan, and any Rollover Loan, is also subject to the
conditions that:

 

(a) no Event of Default or Potential Event of Default has occurred and is
continuing or will occur on making such Loan;

 

(b) in respect of any Loan which is not a Rollover Loan, the proceeds of that
Loan are, at the date of the relevant request, needed by the Borrower for the
purpose of the Project, or will be needed for that purpose within six (6) months
of that date or are needed to reimburse the Borrower for costs incurred in
connection with the Project;

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43

 

(c) since the date of this Agreement, nothing has occurred and is continuing
that has or can reasonably be expected to have a Material Adverse Effect;

 

(d) since the date of its most recent financial statements, the Borrower has not
incurred any material loss or liability (except such liabilities as may be
incurred in accordance with Section 6.02 (Negative Covenants ));

 

(e) the representations and warranties made in Article IV are true and correct
in all material respects on and as of the date of that Loan with the same effect
as if those representations and warranties had been made on and as of the date
of that Loan (but in the case of Section 4.01 (c) (Representations and
Warranties), without the words in parentheses);

 

(f) the proceeds of that Loan are not in reimbursement of, or to be used for,
expenditures in the territories of any country which is not a member of the
World Bank or for goods produced in or services supplied from any such country;

 

(g) IFC has received (if it so requires) a legal opinion or opinions in form and
substance satisfactory to IFC, of IFC’s counsel in Gabon, New York, New York,
London, England and/or Texas, and concurred in by counsel for the Borrower in
the relevant jurisdiction(s), with respect to any matters relating to that Loan;

 

(h) after giving effect to that Loan, the Borrower would not be in violation of:

 

  (i) its Charter;

 

  (ii) any provision contained in any document to which the Borrower is a party
(including this Agreement) or by which the Borrower is bound;

 

  (iii) any law, rule, regulation, Authorization or agreement or other document
binding on the Borrower directly or indirectly limiting or otherwise restricting
the Borrower’s borrowing power or authority or its ability to borrow; or

 

  (iv) any Agreed Environmental and Social Requirements.

 

(i) the representations and warranties made by the Sponsor and VAALCO
International, respectively, in Section 20.01 of the Subordination and Share
Retention Agreement and Section 3.01 of the Pledge of Shares,

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44

 

respectively, are true and correct in all material respects on and as of the
date of that Loan with the same effect as if those representations and
warranties had been made on and as of the date of that Loan; and

 

(j) following the making of the Loan, including any Rollover Loan, the aggregate
outstanding amount of all Loans under the Facility shall not exceed the
Available Amount and the Borrower’s Interest Cover (for the current Calculation
Period, and if the date of the Loan falls during the last two Fiscal Quarters of
any year, the next Calculation Period as well), LOF and LOL shall not be less
than the Minimum Levels. If IFC so requires in connection with any Loan
(including any Rollover Loan), the Borrower shall provide to IFC an updated IFC
Base Case confirming the above.

 

Section 5.03. Borrower’s Certification.

 

(a) Except as provided for in Section 5.03(b), the Borrower shall deliver to IFC
with respect to each request for Loan:

 

  (i) certifications, in the form included in Schedule 2 signed by an Authorized
Representative, relating to the conditions specified in Section 5.02 (Conditions
of All Loans) (other than the condition in Section 5.02 (g)) expressed to be
effective as of the date of that relevant Loan; and

 

  (ii) such evidence as IFC may reasonably request of the proposed utilization
of the proceeds of that Loan or the utilization of the proceeds of any prior
Loan.

 

(b) In the case of any Rollover Loan, except where the Borrower makes a specific
representation or where certifications or evidence is requested by IFC pursuant
to Section 5.03(a) above, the Borrower shall deemed to have provided such
certifications as of the date of such Rollover Loan.

 

Section 5.04. Conditions for IFC Benefit. The conditions in Section 5.01 through
Section 5.03 are for the benefit of IFC and may be waived only by IFC in its
sole discretion.

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45

 

ARTICLE VI

 

Particular Covenants

 

Section 6.01. Affirmative Covenants. Unless IFC otherwise agrees, the Borrower
shall:

 

(a) carry out the Project and conduct its business with due diligence and
efficiency and in accordance with (i) good international oil industry practices
and standards; (ii) sound financial and business practices generally accepted in
the international oil industry; (iii) the Development Plan(s) and approved work
programs; and (iv) all applicable laws and regulations;

 

(b) cause the Loans to be applied exclusively to the Project;

 

(c) maintain an accounting and control system, management information system and
books of account and other records, which together adequately reflect truly and
fairly the financial condition of the Borrower and the results of its operations
in conformity with the Accounting Principles;

 

(d) maintain at all times a firm of internationally recognized independent
public accountants acceptable to IFC as auditors of the Borrower;

 

(e) irrevocably authorize, in the form of Schedule 5, the Auditors (whose fees
and expenses shall be for the account of the Borrower) to communicate directly
with IFC at any time regarding the Borrower’s accounts and operations, and
provide to IFC a copy of that authorization, and, no later than thirty (30) days
after any change in Auditors, issue a similar authorization to the new Auditors
and provide a copy thereof to IFC;

 

(f) upon IFC’s request, such request to be made with reasonable prior notice to
the Borrower, except if an Event of Default or Potential Event of Default is
continuing or if special circumstances so require, permit representatives of
IFC, during normal office hours, to:

 

  (i) visit the Project site and any of the premises where the business of the
Borrower is conducted;

 

  (ii) inspect all facilities, plant and equipment comprised in the Project;

 

  (iii) have access to the Borrower’s books of account and records; and

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46

 

  (iv) have access to those employees and agents of the Borrower who have or may
have knowledge of matters with respect to which IFC seeks information;

 

(g) design, construct, operate, maintain and monitor all of its sites, plant,
equipment and facilities in accordance with the Agreed Environmental and Social
Requirements;

 

(h) within not less than 180 days from the date of this Agreement, prepare and
establish an ESMS acceptable to IFC;

 

(i) update the Environmental Plans in the ESMS, from time to time, in a manner
consistent the Agreed Environmental and Social Requirements;

 

(j) from time to time, execute, acknowledge and deliver or cause to be executed,
acknowledged and delivered such further instruments as may reasonably be
requested by IFC for perfecting or maintaining in full force and effect the
Security or for re-registering the Security or otherwise to enable the Borrower
to comply with its obligations under the Transaction Documents;

 

(k) (i) obtain and maintain in force (and where appropriate, renew in a timely
manner) all Authorizations (including, without limitation, any Authorizations
from any Authority of the GOG and/or CEMAC) that are necessary for the
implementation of the Project, the carrying out of the Borrower’s business and
operations generally and the compliance by the Borrower with all its obligations
under the Transaction Documents and the Project Documents; and

 

  (ii) comply with all the conditions and restrictions contained in, or imposed
on the Borrower by, those Authorizations;

 

(l) enter into and maintain in effect at all times a Marketing Contract relevant
for the sale of production from the Etame Block Fields in a form satisfactory to
IFC, and deliver to IFC a signed copy of such Marketing Contract in effect from
time to time;

 

(m) pay all royalties and all Taxes including license and other fees, which are
properly assessed against it, not later than the due date therefor;

 

(n) maintain at all times, the Interest Cover, LOL and LOF for the current
Calculation Period (and during the last two Fiscal Quarters of any Fiscal

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47

 

Year, the next Calculation Period as well) at or above the Minimum Levels and
the Debt to Equity Ratio at or below 50:50;

 

(o) ensure that the funds in the VAALCO Accounts are used only as permitted in
accordance with the Transaction Documents and that the funds in the Etame
Accounts are used only as permitted in accordance with the Etame Accounts
Agreement;

 

(p) consult with IFC prior to the appointment by the Borrower of an expert or
arbitrator pursuant to the provisions of any Project Document to resolve any
disputes referred to in Section 6.03 (j);

 

(q) make the ERS or, as appropriate, information contained in the ERS, available
to all those who request it from the Borrower;

 

(r) periodically review the form of the Annual Monitoring Report and advise IFC
as to whether modification of the form is necessary based on any changes in the
Project, and/or revise the form as agreed with or requested by IFC;

 

(s) at all times duly maintain (i) its corporate existence in the State of
Delaware; and (ii) any qualifications for doing business in Gabon and Texas
under the laws of Gabon and Texas, respectively, and comply, in a timely manner,
with all the laws applicable to it;

 

(t) ensure that any interest rate of any Subordinated Debt shall not, at any
time, be higher than the interest rate specified in respect of the Loan under
this Agreement;

 

(u) contemporaneously with the execution of this Agreement, provide the Sponsor
and the VAALCO Accounts Bank with a copy of this Agreement;

 

(v) in the event the GOG or any of its Authorities elects to exercise its
preference rights under Article 24 and/or Article 25 of the PSC, ensure that any
payments made by the GOG and/or its Authorities, following the exercise of such
rights, are paid to the Etame Revenue Account or, if required to be paid
elsewhere, are transferred promptly to the Etame Revenue Account;

 

(w) comply with all of its obligations under the Project Documents and at all
times maintain and enforce its rights under the Project Documents;

 

(x) other than as required under Section 35 of the PSC, export its entire share
(other than solely in its capacity as the Operator) of the oil produced from the
Etame Block Fields and receive Dollar-denominated sales proceeds therefor;

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48

 

(y) ensure adequate segregation of costs including financing thereof incurred in
connection with the Project and any other activity for the purpose of the books
of account and other records in conformity with applicable law, the PSC, the JOA
and any other relevant agreement and in accordance with the Accounting
Principles;

 

(z) prior to the election by any Project Partner to take any of its share of oil
production from the Etame Block Fields in kind, ensure that such Project Partner
has (i) entered into an agreement with the Operator that provides, inter alia,
that all proceeds from the sale of such oil are deposited directly into the
Etame Revenue Account, such agreement to be satisfactory in form and substance
to IFC, or (ii) entered into such other arrangements with the Operator as shall
be acceptable to IFC, acting reasonably, to ensure that such Project Partner is
able to fulfill its direct or indirect obligations under or in connection with
any Material Contracts; provided that for avoidance of doubt, the arrangements
in place as of the date of this Agreement in respect of PanAfrican Etame, Inc.
shall be deemed to fulfill the requirements of this subclause (ii); and

 

(aa) publicly disclose, annually the Borrower’s share of all payments made to
local, regional or central governmental Authorities, unless such disclosure has
already been made by the respective Authorities.

 

Section 6.02. Negative Covenants. Unless IFC otherwise agrees, the Borrower
shall not:

 

(a) make any Restricted Payments:

 

  (i) if, either prior to or after making such Restricted Payment, an Event of
Default or Potential Event of Default shall or would occur or be continuing; or

 

  (ii) if, after making such Restricted Payment, the Debt to Equity Ratio would
exceed 50:50, or any of the LOL or LOF, for the relevant Calculation Period
would fall below 2.0;

 

provided always that if the Borrower is permitted to make any Restricted
Payments pursuant to this Section 6.02 (a), such Restricted Payments shall be
made in accordance with the terms of the VAALCO Accounts Agreement;

 

(b) incur expenditures or commitments for expenditures for fixed or other
non-current assets, other than those required for carrying out the Project or
necessary for repairs, replacements and maintenance of satisfactory operating
conditions that are essential to the Borrower’s business or operations unless
(i) after incurring such expenditure or commitment for expenditure, any of the
LOF

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49

 

or the LOL shall fall below the Minimum Levels, and (ii) if such expenditures
are not included in the IFC Base Case updated as of the most recent Calculation
Date, unless those expenditures or commitments do not exceed an aggregate amount
equivalent to one million Dollars ($1,000,000) in the relevant Calculation
Period;

 

(c) incur, assume or permit to exist any Debt except:

 

  (i) the Loan;

 

  (ii) the Existing IFC Loan;

 

  (iii) Subordinated Debt; and

 

  (iv) any other short-term Debt for working capital purposes incurred in the
ordinary course of business which, when aggregated with all other Debt, would
not result in the Debt to Equity Ratio exceeding 50:50;

 

(d) enter into any agreement or arrangement to lease any property or equipment
of any kind, except the FPSO Contract and leases of land/buildings and
equipment, as necessary to carry on the Borrower’s business and operate the
Project;

 

(e) enter into any Derivative Transaction or assume the obligations of any party
to any Derivative Transaction unless the Derivative Transaction is consistent
with a hedging program previously approved by IFC, which approval shall not be
unreasonably withheld;

 

(f) enter into any agreement or arrangement to guarantee or, in any way or under
any condition, assume or become obligated for all or any part of any financial
or other obligation of another Person except as required by the terms of the
JOA;

 

(g) create or permit to exist any Lien on any property, revenues or other
assets, present or future, of the Borrower, except for:

 

  (i) the Security, and Liens in favor of IFC connection with the Existing IFC
Loan;

 

  (ii) the naming of IFC as loss payee under the Borrower’s insurance policies
and/or the Borrower’s share of the insurance policies related to the Etame Block
Fields (other than solely in its capacity as the Operator);

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50

 

  (iii) the Liens created under the FPSO Contract and the Etame Accounts
Agreement; and

 

  (iv) any Lien arising from any tax, assessment or other governmental charge or
other Lien arising by operation of law, in each case if the obligation
underlying any such Lien is not yet due or, if due, is being contested in good
faith by appropriate proceedings so long as:

 

  (A) those proceedings do not involve any substantial danger of the sale,
forfeiture or loss of any part of the Project, title thereto or any interest
therein, nor interfere in any material respect with the use or disposition
thereof or the implementation of the Project or the carrying on of the business
of the Borrower; and

 

  (B) the Borrower has set aside adequate reserves sufficient to promptly pay in
full any amounts that the Borrower may be ordered to pay on final determination
of any such proceedings;

 

(h) enter into any transaction except in the ordinary course of business on the
basis of arm’s-length arrangements (including, without limitation, transactions
whereby the Borrower might pay more than the ordinary commercial price for any
purchase or might receive less than the full ex-works commercial price (subject
to normal trade discounts) for its products);

 

(i) establish any sole and exclusive purchasing or sales agency;

 

(j) enter into any partnership, profit-sharing or royalty agreement or other
similar arrangement whereby the Borrower’s income or profits are, or might be,
shared with any other Person;

 

(k) enter into any management contract or similar arrangement whereby its
business or operations are managed by any other Person;

 

(l) form or have any Subsidiary;

 

(m) make or permit to exist loans or advances to, or deposits (except commercial
bank deposits in the ordinary course of business) with, other Persons or
investments in any Person or enterprise other than as permitted by the VAALCO
Accounts Agreement, the Etame Accounts Agreement and Section 4.8 of the JOA and
the Accounting Procedures set forth in Exhibit “A” to the JOA;

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51

 

(n) change its Charter in any manner which would be inconsistent with the
provisions of any Transaction Document;

 

(o) change its Fiscal Year;

 

(p) change in any material way the nature or scope of the Project or change the
nature of its present or contemplated business or operations;

 

(q) sell, transfer, lease or otherwise dispose of all or a substantial part of
its assets, other than inventory, whether in a single transaction or in a series
of transactions, related or otherwise other than assets that have been worn out
or are obsolete and are replaced or upgraded or that are no longer required for
the purposes of carrying out the Project, in each case in the ordinary course of
business and in a manner consistent with the Transaction Documents;

 

(r) undertake or permit any merger, spin-off, consolidation or reorganization;

 

(s) terminate, amend or grant any waiver with respect to any provision of any
Project Document; provided that the Borrower may from time to time amend or
grant waivers with respect to (i) provisions of a Project Document (other than
the PSC, JOA and the Etame Accounts Agreement) if necessary for the
implementation and safe and efficient operation of the Project so long as such
amendments or waivers have no Material Adverse Effect and do not change any
material provisions such as the parties to such Project Documents, pricing and
payment and term, etc.; and (ii) provisions of the PSC and/or the JOA solely for
the purposes of effectuating a permitted transfer of interests thereunder by one
of the other Project Partners but in no event by the Borrower;

 

(t) use the proceeds of any Loan in the territories of any country which is not
a member of the World Bank or for reimbursements of expenditures in those
territories or for goods produced in or services supplied from any such country;

 

(u) engage in any business activity outside the scope of the PSC and with
respect to activities within the scope of the PSC, any business activity that
might hinder the completion and normal operations of the Project or the
Borrower’s ability to perform fully its obligations under the Transaction
Documents and Project Documents;

 

(v) make (and shall not authorize or permit any Affiliate or any other Person,
acting on its behalf to make) with respect to the Project or any transaction
contemplated by this Agreement, any Prohibited Payment. The Borrower further
covenants that should IFC notify the Borrower of its concerns that there has
been a violation of the provisions of this Section or of Section 4.01 (p) of
this

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52

 

Agreement, it shall cooperate in good faith with IFC and its representatives in
determining whether such a violation has occurred, and shall respond promptly
and in reasonable detail to any notice from IFC, and shall furnish documentary
support for such response upon IFC’s request;

 

(w) reduce its working interest under the PSC below 30.35% during the
exploration phase and below 28.07% during the production phase; and

 

(x) create or permit to exist any Lien on the Houston Account.

 

Section 6.03. Reporting Requirements. Unless IFC otherwise agrees, the Borrower
shall:

 

(a) as soon as available but in any event within sixty (60) days after the end
of each Fiscal Quarter, deliver to IFC:

 

  (i) two (2) copies of the Borrower’s complete financial statements for such
quarter prepared in accordance with the Accounting Principles;

 

  (ii) a report, with respect to the relevant Development Plans and work
programs, on the progress in implementation of the Project, including any
factors that have or could reasonably be expected to have a Material Adverse
Effect;

 

  (iii) a certificate from an Officer of the Borrower attaching a description of
available data on monthly rates for sales, on oil, gas and water production and
injection rates and other items of maintenance and improvements and
extraordinary items relating to the Project; and

 

  (iv) a statement of all transactions during that quarter between the Borrower
and each of its Affiliates, if any, and a certification by an Officer of the
Borrower that those transactions were on the basis of arm’s-length arrangements;

 

(b) as soon as available but in any event within ninety (90) days after the end
of each Fiscal Year, deliver to IFC:

 

  (i) two (2) copies of its complete and audited financial statements for that
Fiscal Year (which are in agreement with its books of account and prepared in
accordance with the Accounting Principles), together with the Auditors’ audit
report on them, all in form satisfactory to IFC;

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53

 

  (ii) a management letter and such other communication from the Auditors to the
Borrower or its management commenting, with respect to that Fiscal Year, on,
among other things, the adequacy of the Borrower’s financial control procedures,
accounting systems and management information system and on the deficiencies, if
any, that the Auditors consider material in the Borrower’s financial accounting
and other systems, management and accounts;

 

  (iii) a report by the Auditors certifying that, on the basis of its financial
statements, the Borrower was in compliance with the financial ratios and
financial covenants contained in Sections 6.01 (Affirmative Covenants) and 6.02
(Negative Covenants) as of the end of that Fiscal Year or, as the case may be,
detailing any non-compliance;

 

  (iv) a report by the Borrower on its operations during that Fiscal Year, in
the form of, and addressing the topics listed in, Schedule 6;

 

  (v) a statement by the Borrower of all transactions between the Borrower and
each of its Affiliates, if any, during that Fiscal Year, and a certification by
an Officer of the Borrower that those transactions were on the basis of
arm’s-length arrangements; and

 

  (vi) a certification from an Officer of the Borrower that, to the best of such
Officer’s knowledge after due inquiry, there exists no Event of Default or
Potential Event of Default or, if such event exists, specifying its nature, the
period of its existence and what action the Borrower proposes to take with
respect to it;

 

(c) deliver to IFC, promptly following receipt, a copy of any management letter
or other communication sent by the Auditors (or any other accountants retained
by the Borrower) to the Borrower or its management in relation to the Borrower’s
financial, accounting and other systems, management or accounts, if not provided
pursuant to Section 6.03 (b) (ii);

 

(d) within ninety (90) days after the end of each Fiscal Year, deliver to IFC an
Annual Monitoring Report, confirming compliance with the applicable national or
local requirements and the Agreed Environmental and Social Requirements,
together with the action being taken to ensure compliance;

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54

 

(e) as soon as possible but no later than three (3) days after its occurrence,
notify IFC by facsimile of any incident or accident which has or may reasonably
be expected to have an adverse effect on the environment, health or safety,
including, without limitation, explosions, spills or workplace accidents which
result in death, serious or multiple injury or major pollution, specifying, in
each case, the nature of the incident or accident, the on-site and off-site
impacts arising or likely to arise therefrom and the measures the Borrower is
taking or plans to take to address those impacts; and keep IFC informed of the
on-going implementation of those measures;

 

(f) give notice to IFC, concurrently with the Borrower’s notification to its
stockholders, of any meeting of its stockholders, such notice to include the
agenda of the meeting; and, as soon as available, deliver to IFC two (2) copies
of:

 

  (i) all notices, reports and other communications of the Borrower to its
stockholders, whether any such communication has been made on an individual
basis or by way of publication in a newspaper or other communication medium; and

 

  (ii) the minutes of all stockholders’ meetings;

 

(g) give notice to IFC of any meetings of the Operating Committee and the
Technical Committee (as each such term is defined in the JOA) and the Technical
Consulting Committee (as such term is defined in PSC); and, as soon as
available, deliver to IFC two (2) copies of:

 

  (A) all notices, reports and other communications material to the Etame Block
or the Etame Block Fields distributed in connection with such meetings; and

 

  (B) the minutes of all such meetings;

 

(h) deliver copies to IFC of all Development Plans, Work Programs and Budgets
(as such term is defined in the JOA) for the Etame Block or Etame Block Fields
approved by the Operating Committee pursuant to the JOA and all EIA(s) in
relation to the Project;

 

(i) promptly notify IFC of any proposed change in the nature or scope of the
Project or the business or operations of the Borrower and of any event or
condition which has or may reasonably be expected to have a Material Adverse
Effect;

 

(j) promptly upon becoming aware of (i) any litigation or administrative
proceedings before any Authority or arbitral body to which the

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55

 

Borrower is or may become a party; (ii) any material dispute with any Authority
or any other Project Partner; (iii) any technical or other material disputes
with any other third party under any Project Document; or (iv) the occurrence of
any event of force majeure under any Project Document, notify IFC by facsimile
of that event specifying the nature of that litigation, the proceedings or the
event and the steps the Borrower is taking or proposes to take with respect
thereto;

 

(k) promptly upon the occurrence of an Event of Default or Potential Event of
Default, notify IFC by facsimile specifying the nature of that Event of Default
or Potential Event of Default and any steps the Borrower is taking to remedy it;

 

(l) provide to IFC, in a timely manner, the insurance certificates and other
information referred to in Section 6.04 (d) (Insurance);

 

(m) provide to IFC a Reserve Certification, at the Borrower’s expense, within
sixty (60) days of the end of each Fiscal Year and, from time to time but no
more than two (2) times per Fiscal Year, as otherwise reasonably requested by
IFC, provided that:

 

  (i) if IFC or the Borrower fails to dispute the accuracy of the Reserve
Certification within a period of 30 days from the Reserve Certification being
provided, the parties will be deemed to have accepted the Reserve Certification
for the purposes of determining Proved Reserves and Proved Developed Reserves
for the period covered by the Reserve Certification;

 

  (ii) if IFC notifies the Borrower or the Borrower notifies IFC (such notice to
IFC to be given at the same time as the Borrower provides the Reserve
Certification to IFC) that it disputes the accuracy of the information contained
in the Reserve Certification, IFC and the Borrower, shall use all reasonable
endeavors to resolve the dispute within a period of 30 days from the Reserve
Certification being provided;

 

  (iii) if the parties cannot resolve the dispute within the 30 day period
specified in Section 6.03(m)(ii), the dispute shall be determined by an
independent consultant, having internationally recognized experience and
expertise in the determination of petroleum reserves (deemed to be acting as an
expert and not as an arbitrator), who shall be selected by IFC with the consent
of the Borrower, (such consent not to be unreasonably withheld);

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56

 

  (iv) if the Borrower disputes IFC’s selection in good faith within 10 days of
being notified by IFC of its selection, the independent consultant shall be
selected by the then President of the Society of Petroleum Engineers (UK); and

 

  (v) the independent consultant shall be directed to provide a written
determination on the dispute within a period of 60 days from the date of his
appointment and that decision shall be binding on the parties and shall
constitute the agreement on Proved Reserves and Proved Developed Reserves for
the period covered by the Reserve Certification.

 

(n) within ninety (90) days of the end of each Fiscal Year, provide IFC with a
copy of the IFC Base Case in accordance with Section 6.05;

 

(o) promptly notify IFC if (i) the GOG or any of its Authorities notifies the
Borrower that the GOG is exercising its preference rights under Article 24
and/or Article 25 of the PSC or (ii) the Borrower has reason to believe the GOG
and/or any of its Authorities intends to exercise such rights; and

 

(p) promptly provide to IFC such other information as IFC from time to time
requests about the Borrower, its assets and the Project.

 

Section 6.04. Insurance.

 

(a) Insurance Requirements and Borrower’s Undertakings. Unless IFC otherwise
agrees, the Borrower shall:

 

  (i) insure and keep insured, with financially sound and reputable insurers,
all its assets and business against all insurable losses to include the
insurances specified in Annex A and any insurance required by law;

 

  (ii) punctually pay any premium, commission and any other amounts necessary
for effecting and maintaining in force each insurance policy;

 

  (iii) promptly notify the relevant insurer of any claim by the Borrower under
any policy written by that insurer and diligently pursue that claim;

 

  (iv) comply with all warranties under each policy of insurance;

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57

 

  (v) not do or omit to do, or permit to be done or not done, anything which
might prejudice the Borrower’s, or, where IFC is a loss payee or an additional
named insured, IFC’s right to claim or recover under any insurance policy; and

 

  (vi) not vary, rescind, terminate, cancel or cause a material change to any
insurance policy;

 

provided always that if at any time and for any reason any insurance required to
be maintained under this Agreement shall not be in full force and effect, then
IFC shall thereupon or at any time while the same is continuing be entitled (but
have no such obligation) on its own behalf to procure such insurance at the
expense of the Borrower and to take all such steps to minimize hazard as IFC may
consider expedient or necessary.

 

(b) Policy Provisions. Each insurance policy required to be obtained pursuant to
this Section 6.04 shall be in English language, be on terms and conditions
acceptable to IFC, and shall contain cut-through provisions, and assignment of
reinsurance proceeds with respect to insurance governed by Gabon law, together
with provisions to the effect that:

 

  (i) no policy can expire nor can it be cancelled or suspended by the Borrower
or the insurer for any reason (including failure to renew the policy or to pay
the premium or any other amount) unless IFC and, in the case of expiration or if
cancellation or suspension is initiated by the insurer, the Borrower receive at
least forty-five (45) days’ notice (or such lesser period as IFC may agree in
respect of cancellation, suspension or termination in the event of war and
kindred peril) prior to the effective date of termination, cancellation or
suspension;

 

  (ii) IFC and all contractors working at the Project site during the
construction phase are named as additional named insured on all liability
policies obtained by the Borrower pursuant to Annex A and, to the best of the
Borrower’s efforts, on any liability policies obtained by third parties in
connection with the Project;

 

  (iii) where relevant, all its provisions (except those relating to limits of
liability) shall operate as if they were a separate policy covering each insured
party;

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58

 

  (iv) on every insurance policy on the Borrower’s assets which are the subject
of the Security and for business interruption, IFC is named as loss payee for
any claim of, or any series of claims arising with respect to the same event
whose aggregate amount is, the equivalent of five hundred thousand Dollars
($500,000) or more (which amount relates to the Etame Block Assets as a whole
and not just the Borrower’s working interest therein).

 

(c) Application of Proceeds.

 

  (i) At its discretion, IFC may remit the proceeds of any insurance paid to it
to the Borrower to repair or replace the relevant damaged assets or may apply
such proceeds towards any amount payable to IFC under this Agreement, including
to repay or prepay all or any part of the Loan in accordance with Section 3.06
(Prepayment); provided that there shall be no minimum amount or notice period or
prepayment fee for any such prepayment.

 

  (ii) The Borrower shall use any insurance proceeds it receives (whether from
IFC or directly from the insurers) with respect to the Borrower’s interest in
the Etame Block Assets (other than solely in its capacity as the Operator) for
loss of or damage to any asset solely to replace or repair that asset
consistently with good international oil and gas practices.

 

(d) Reporting Requirements. Unless IFC otherwise agrees, the Borrower shall
provide to IFC the following:

 

  (i) as soon as possible after its occurrence, notice of any event which
entitles the Borrower to claim for an aggregate amount exceeding the equivalent
of five hundred thousand Dollars ($500,000) under any one or more insurance
policies;

 

  (ii) within thirty (30) days after any insurance policy is issued to the
Borrower, a copy of that policy incorporating any loss payee provisions required
under Section 6.04 (b) (iv) (unless that policy has already been provided to IFC
pursuant to Section 5.01 (i) (Conditions of First Loan));

 

  (iii)

not less than ten (10) days prior to the expiry date of any insurance policy
(or, for insurance with multiple renewal

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59

 

 

dates, not less than ten (10) days prior to the expiry date of the policy on the
principal asset), a certificate of renewal from the insurer, insurance broker or
agent confirming the renewal of that policy and the renewal period, the premium,
the amounts insured for each asset or item and any changes in terms or
conditions from the policy’s issue date or last renewal, and confirmation from
the insurer that provisions naming IFC as loss payee or additional named
insured, as applicable remain in effect;

 

  (iv) such evidence of premium payment as IFC may from time to time request;
and

 

  (v) any other information or documents on each insurance policy as IFC
requests from time to time.

 

Section 6.05. IFC Base Case. The IFC Base Case shall be prepared in a manner
acceptable to IFC, and the Net Cash Flow and the Relevant Figures determined as
of and from the most recent Calculation Date, in accordance with the IFC Base
Case Assumptions, the latest Reserve Certification and other relevant
information, and submitted by the Borrower to IFC within ninety days (90) days
of the end of each Fiscal Year, subject to the provisions of Section 6.03(m),
and at any time requested by IFC, including, without limitation on or prior to
any Interest Payment Date.

 

ARTICLE VII

 

Events of Default

 

Section 7.01. Acceleration after Default. If any Event of Default occurs and is
continuing (whether it is voluntary or involuntary, or results from operation of
law or otherwise), IFC may, by notice to the Borrower, require the Borrower to
repay the Loans or such part of the Loans as is specified in that notice. On
receipt of any such notice, the Borrower shall immediately repay the Loans (or
that part of the Loans specified in that notice) and pay all interest accrued on
them, and any other amounts then payable under this Agreement. The Borrower
waives any right it might have to further notice, presentment, demand or protest
with respect to that demand for immediate payment.

 

Section 7.02. Events of Default. It shall be an Event of Default if:

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(a) the Borrower fails to pay when due any part of the principal of, or interest
on, any Loan or any fees payable in connection therewith and such failure
continues for a period of five (5) days;

 

(b) the Borrower fails to pay when due any part of the principal of, or interest
on, any loan from IFC to the Borrower other than the Loans and any such failure
continues for the relevant period of grace provided for in the agreement
providing for that loan;

 

(c) the Borrower fails to comply with any of its obligations under this
Agreement or any other Transaction Document or any other agreement between the
Borrower and IFC (other than as set out in subsections (a) and (b) or as
expressly addressed in this Section 7.02 below), and any such failure continues
for a period of thirty (30) days after the date on which IFC notifies the
Borrower of that failure or, if earlier, the date on which the Borrower becomes
aware of such failure;

 

(d) any party to a Transaction Document (other than IFC or the Borrower) fails
to observe or perform any of its obligations under that Transaction Document,
and any such failure continues for a period of thirty (30) days after the date
on which IFC notifies the Borrower of that failure or, if earlier, the date on
which the Borrower becomes aware of such failure;

 

(e) any representation or warranty made in Article IV or in connection with the
execution of, or any request (including a request for a Loan, or in respect of a
Rollover Loan, a deemed request) under, this Agreement or any other Transaction
Document is found to be incorrect in any material respect;

 

(f) any Authority condemns, nationalizes, seizes, or otherwise expropriates all
or any substantial part of the property or other assets of the Borrower or of
its capital stock, or assumes custody or control of that property or other
assets or of the business or operations of the Borrower or of its capital stock,
or takes any action for the dissolution or disestablishment of the Borrower or
any action that would prevent the Borrower or its officers from carrying on all
or a substantial part of its business or operations;

 

(g) the Borrower:

 

  (i) takes any step (including petition, giving notice to convene or convening
a meeting) for the purpose of making, or proposes or enters into, any
arrangement, assignment or composition with or for the benefit of its creditors;

 

  (ii) ceases or threatens to cease to carry on its business or any substantial
part of its business; or

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61

 

  (iii) is unable, or admits in writing its inability to pay its debts as they
fall due or otherwise becomes insolvent;

 

(h) an order is made or an effective resolution passed or analogous proceedings
taken for the Borrower’s winding up, bankruptcy or dissolution or a petition is
presented or analogous proceedings taken for the winding up or dissolution of
the Borrower;

 

(i) the beneficiary of any Lien lawfully takes possession, or a liquidator,
judicial custodian, receiver, administrative receiver or trustee or any
analogous officer is appointed, of the whole or any material part of the
undertaking or assets of the Borrower or an attachment, sequestration, distress
or execution (or analogous process) is levied or enforced upon or issued against
any of the assets or property of the Borrower for an amount in excess of the
equivalent of five hundred thousand Dollars ($500,000) and is not discharged
within thirty (30) days; or

 

(j) any other event occurs which under any applicable law would have an effect
analogous to any of those events listed in Section 7.02 (g), Section 7.02
(h) and Section 7.02 (i);

 

(k) the Borrower fails to pay any of its Debt (other than the Loans or any other
loan from IFC to the Borrower) or to perform any of its obligations under any
agreement pursuant to which there is outstanding any Debt, and any such failure
continues for more than any applicable period of grace or any such Debt becomes
prematurely due and payable or is placed on demand, provided such non-payment or
non-performance will not be an Event of Default if (i) such non-payment or
non-performance relates to a Debt not exceeding one hundred fifty thousand
Dollars ($150,000) and (ii) is being contested by the Borrower in good faith in
a court of competent jurisdiction for reasons other than its inability to make
due and punctual payment and for which the Borrower has set aside adequate
reserves;

 

(l) any Authorization necessary for the Borrower to perform and observe its
obligations under any Transaction Document, or to carry out the Project, is not
obtained when required or is rescinded, terminated, lapses or otherwise ceases
to be in full force and effect, including with respect to the remittance to IFC
or its assignees, in Dollars, of any amounts payable under any Transaction
Document, and is not restored or reinstated within thirty (30) days of notice by
IFC to the Borrower requiring that restoration or reinstatement;

 

(m) any Security Document or any of its provisions:

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62

 

  (i) is revoked, terminated or ceases to be in full force and effect or ceases
to provide the security intended or the priority contemplated under this
Agreement and/or the Subordination and Share Retention Agreement, without, in
each case, the prior consent of IFC;

 

  (ii) becomes unlawful or is declared void; or

 

  (iii) is repudiated or its validity or enforceability is challenged by any
Person and any such repudiation or challenge continues for a period of thirty
(30) days, during which period such repudiation or challenge has no effect;

(n) any Transaction Document (other than a Security Document) or any of its
provisions:

 

  (i) is revoked, terminated or ceases to be in full force and effect without,
in each case, the prior consent of IFC, and that event, if capable of being
remedied, is not remedied to the satisfaction of IFC within thirty (30) days of
IFC’s notice to the Borrower; or

 

  (ii) becomes unlawful or is declared void;

 

(o) any Transaction Document (other than a Security Document) is repudiated or
the validity or enforceability of any of its provisions at any time is
challenged by any Person and such repudiation or challenge is not withdrawn
within thirty (30) days of IFC’s notice to the Borrower requiring that
withdrawal; provided that no such notice shall be required or, as the case may
be, the notice period shall terminate if and when such repudiation or challenge
becomes effective;

 

(p) any Project Document;

 

  (i) is breached by any party to it and that breach has or could reasonably be
expected to have a Material Adverse Effect; or

 

  (ii) is revoked, terminated or ceases to be in full force and effect without
the prior consent of IFC, or performance of any of the material obligations
under any such agreement becomes unlawful or any such agreement is declared to
be void or is repudiated or its validity or enforceability at any time is
challenged by any party to it;

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63

 

(q) the Borrower ceases to be the Operator of the Project and the Person
designated as the Operator is not acceptable to IFC;

 

(r) the Borrower’s right to participate in the Etame Block or the Etame Block
Fields is revoked;

 

(s) Control of the Borrower is transferred to any Person without the consent of
IFC, provided such consent shall not be unreasonably withheld if the proposed
transferee has a proven technical record in the international oil industry, if
relevant, sound financial standing and, in IFC’s reasonable judgment, a good
reputation;

 

(t) the Borrower, the Sponsor and/or any of their respective Affiliates has been
found by a judicial process or other official inquiry to have offered or given
something of value to influence the action of an Official, or to have threatened
injury to person, property or reputation, in connection with the Project in
order to obtain or retain business or other improper advantage in the conduct of
business;

 

(u) a final judgment, order or arbitral award for the payment of money in excess
of the equivalent of five hundred thousand Dollars ($500,000) is rendered
against the Borrower or any of its properties and that judgment, order or
arbitral award continues to be unsatisfied for a period of thirty (30) days;

 

(v) the Borrower ceases to carry on its business; or the Project is abandoned by
the Borrower or, all or a significant part of the operations of the Project or
in the Etame Block is interrupted for more than 180 consecutive days;

 

(w) any of the events specified in Section 7.02 (g) through (k) or in
Section 7.02 (u) occur to the Sponsor or VAALCO International, or any of their
respective properties, assets or share capital; provided that, in the case of
Section 7.02 (k) and Section 7.02 (u), such event shall only be an Event of
Default if the aggregate amount of the unpaid Debt or the final judgment, order
or award, as the case may be, exceeds one million Dollars ($1,000,000) or its
equivalent;

 

(x) there occurs any amendment, waiver or termination of the Etame Accounts
Agreement without IFC’s prior written consent,

 

Section 7.03. Bankruptcy. If the Borrower is liquidated or declared bankrupt,
the Loan, all interest accrued on it and any other amounts payable under this
Agreement will become immediately due and payable without any presentment,
demand, protest or notice of any kind, all of which the Borrower waives.

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64

 

ARTICLE VIII

 

Miscellaneous

 

Section 8.01. Saving of Rights. (a) The rights and remedies of IFC in relation
to any misrepresentation or breach of warranty on the part of the Borrower shall
not be prejudiced by any investigation by or on behalf of IFC into the affairs
of the Borrower, by the execution or the performance of this Agreement or by any
other act or thing which may be done by or on behalf of IFC in connection with
this Agreement and which might, apart from this Section, prejudice such rights
or remedies.

 

(b) No course of dealing or waiver by IFC in connection with any condition of
any Loan under this Agreement shall impair any right, power or remedy of IFC
with respect to any other condition of any Loan, or be construed to be a waiver
thereof; nor shall the action of IFC with respect to any Loan affect or impair
any right, power or remedy of IFC with respect to any other Loan.

 

(c) Unless otherwise notified to the Borrower by IFC and without prejudice to
the generality of Section 8.01 (b), the right of IFC to require compliance with
any condition under this Agreement which may be waived by IFC with respect to
any Loan is expressly preserved for the purposes of any subsequent or other
Loan.

 

(d) No course of dealing and no failure or delay by IFC in exercising, in whole
or in part, any power, remedy, discretion, authority or other right under this
Agreement or any other agreement shall waive or impair, or be construed to be a
waiver of or an acquiescence in, such or any other power, remedy, discretion,
authority or right under this Agreement, or in any manner preclude its
additional or future exercise; nor shall the action of IFC with respect to any
default, or any acquiescence by it therein, affect or impair any right, power or
remedy of IFC with respect to any other default.

 

Section 8.02. Notices. (a) Any notice, request or other communication to be
given or made under this Agreement shall be in writing. Subject to
Sections 6.03 (e), (j) and (k) (Reporting Requirements) and Section 8.05
(j) (Applicable Law and Jurisdiction), any such communication may be delivered
by hand, airmail, facsimile or established courier service to the party’s
address specified below (or at such other address as such party notifies to the
other party from time to time) and will be effective upon receipt.

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65

 

For the Borrower:

 

VAALCO Gabon (Etame), Inc.

4600 Post Oak Place

Suite 309

Houston, TX 77027

United States of America.

 

Facsimile: 713-623-0982

 

Attention: President

 

For IFC:

 

International Finance Corporation

2121 Pennsylvania Avenue, N.W.

Washington, D.C. 20433

United States of America

 

Facsimile: (202) 974-4322

 

Attention: Director, Oil, Gas, Mining and Chemicals Department

 

With a copy (in the case of communications relating to payments) sent to the
attention of the Senior Manager, Financial Operations Unit, at:

 

Facsimile: 202-974-4371.

 

(b) The Borrower shall ensure that any notices delivered pursuant to a Project
Document that are to be provided to IFC, either directly or through the
Borrower, shall be delivered by one of the methods specified in Section 8.02
(a).

 

Section 8.03. English Language. (a) All documents to be provided or
communications to be given or made under this Agreement shall be in the English
language.

 

(b) To the extent that the original version of any document to be provided, or
communication to be given or made, to IFC under this Agreement or any other
Transaction Document is in a language other than English, that document or
communication shall be accompanied by an English translation certified by an
Authorized Representative to be a true and correct translation of

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66

 

the original. IFC may, if it so requires, obtain an English translation of any
document or communication received in another language other than English at the
cost and expense of the Borrower. IFC may deem any such English translation to
be the governing version between the Borrower and IFC.

 

Section 8.04. Term of Agreement. This Agreement shall continue in force until
all monies payable under it have been fully paid in accordance with its
provisions.

 

Section 8.05. Applicable Law and Jurisdiction. (a) This Agreement is governed by
and shall be construed in accordance with the laws of England.

 

(b) For the exclusive benefit of IFC, the Borrower irrevocably agrees that any
legal action, suit or proceeding arising out of or relating to this Agreement or
any other Transaction Document to which the Borrower is a party may be brought
in the courts of England. By the execution of this Agreement, the Borrower
irrevocably submits to the non-exclusive jurisdiction of such courts in any such
action, suit or proceeding. Final judgment against the Borrower in any such
action, suit or proceeding shall be conclusive and may be enforced in any other
jurisdiction, including Gabon and Delaware, by suit on the judgment, a certified
or exemplified copy of which shall be conclusive evidence of the judgment, or in
any other manner provided by law.

 

(c) Nothing in this Agreement shall affect the right of IFC to commence legal
proceedings or otherwise sue the Borrower in Gabon, Delaware or any other
appropriate jurisdiction, or concurrently in more than one jurisdiction, or to
serve process, pleadings and other papers upon the Borrower in any manner
authorized by the laws of any such jurisdiction.

 

(d) The Borrower hereby irrevocably designates, appoints and empowers the Chief
Executive and the Head of the Litigation Group of Bird & Bird located at 90
Fetter Lane, London EC4A 1JP (reference VAAEN.0001), as its authorized agent
solely to receive for and on its behalf service of the writ of summons or other
legal process in any action, suit or proceeding arising out of or relating to
this Agreement or any Transaction Document which IFC may bring in the courts of
England.

 

(e) As long as this Agreement or any other Transaction Document to which the
Borrower is a party remains in force, the Borrower shall maintain a duly
appointed and authorized agent to receive for and on its behalf service of the
writ of summons or other legal process in any action, suit or proceeding brought
by IFC in the courts of England with respect to this Agreement or such other
Transaction Documents. The Borrower shall keep IFC advised of the identity and
location of such agent.

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67

 

(f) The Borrower irrevocably waives:

 

  (i) any objection which it may have now or in the future to the laying of the
venue of any action, suit or proceeding in any court referred to in this
Section; and

 

  (ii) any claim that any such action, suit or proceeding has been brought in an
inconvenient forum.

 

(g) To the extent that the Borrower may be entitled in any jurisdiction to claim
for itself or its assets immunity with respect to its obligations under this
Agreement or any other Transaction Document to which it is a party from any
suit, execution, attachment (whether provisional or final, in aid of execution,
before judgment or otherwise) or other legal process or to the extent that in
any jurisdiction that immunity (whether or not claimed), may be attributed to it
or its assets, the Borrower irrevocably agrees not to claim and irrevocably
waives such immunity to the fullest extent now or in the future permitted by the
laws of such jurisdiction.

 

(h) The Borrower also consents generally with respect to any proceedings arising
out of or in connection with this Agreement or any other Transaction Document to
which it is a party to the giving of any relief or the issue of any process in
connection with such proceedings including, without limitation, the making,
enforcement or execution against any property whatsoever (irrespective of its
use or intended use) of any order or judgment which may be made or given in such
proceedings.

 

(i) To the extent that the Borrower may, in any suit, action or proceeding
brought in any of the courts referred to in Section 8.05 (b) or a court of
Gabon, Delaware or elsewhere arising out of or in connection with this Agreement
or any other Transaction Document to which the Borrower is a party, be entitled
to the benefit of any provision of law requiring IFC in such suit, action or
proceeding to post security for the costs of the Borrower, or to post a bond or
to take similar action, the Borrower hereby irrevocably waives such benefit, in
each case to the fullest extent now or in the future permitted under the laws of
Gabon, Delaware or, as the case may be, the jurisdiction in which such court is
located.

 

(j) The Borrower also irrevocably consents, if for any reason the Borrower’s
authorized agent for service of process of summons, complaint and other legal
process in any action, suit or proceeding is not present in England, to service
of such papers being made out of those courts by mailing copies of the papers by
registered air mail, postage prepaid, to the Borrower at its address specified
pursuant to Section 8.02 (Notices). In such a case, IFC shall also send by
facsimile, or have sent by facsimile, a copy of the papers to the Borrower.

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68

 

Section 8.06. Disclosure of Information. (a) IFC may disclose any documents or
records of, or information about, this Agreement or any other Transaction
Document, or the assets, business or affairs of the Borrower to:

 

  (i) its outside counsel, auditors and rating agencies,

 

  (ii) any other Person as IFC may deem appropriate in connection with any
proposed sale, transfer, assignment or other disposition of IFC’s rights under
this Agreement or any Transaction Document or otherwise for the purpose of
exercising any power, remedy, right, authority, or discretion relevant to this
Agreement or any other Transaction Document.

 

(b) The Borrower acknowledges and agrees that, notwithstanding the terms of any
other agreement between the Borrower and IFC, a disclosure of information by IFC
in the circumstances contemplated by Section 8.06 (a) does not violate any duty
owed to the Borrower under this Agreement or under any such other agreement.

 

Section 8.07. Successors and Assignees. This Agreement binds and benefits the
respective successors and assignees of the parties. However, the Borrower may
not assign or transfer any of its rights or obligations under this Agreement
without the prior consent of IFC.

 

Section 8.08. Amendments, Waivers and Consents. Any amendment or waiver of, or
any consent given under, any provision of this Agreement shall be in writing
and, in the case of an amendment, signed by the parties.

 

Section 8.09 Counterparts. This Agreement may be executed in several
counterparts, each of which is an original, but all of which together constitute
one and the same agreement.

 

Section 8.10. Severability. To the fullest extent permitted by law, the
invalidity or unenforceability of any provision of this Agreement in any
jurisdiction shall not affect the validity or enforceability of any other
provision hereof in such jurisdiction or of such or any other provision in any
other jurisdiction.

 

Section 8.11. Rights of Third Parties. A Person who is not a party to this
Agreement has no rights under the Contracts (Rights of Third Parties) Act 1999
to enforce or enjoy the benefit of any term of this Agreement.

 

[The remainder of this page was left blank intentionally]

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69

 

IN WITNESS WHEREOF, the parties have caused this Agreement to be signed in their
respective names as of the date first above written.

 

VAALCO GABON (ETAME), INC.

By:  

/s/ W. Russell Sheirman

Name:

 

W. Russell Sheirman

Title:

 

President

 

INTERNATIONAL FINANCE CORPORATION

By:  

/s/ Rashad-Rudolf Kaldany

Name:

 

Rashad-Rudolf Kaldany

Title:

 

Director

(Oil, Gas, Mining and Chemicals Department)

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70

 

ANNEX A

Page 1 of 6

 

MINIMUM INSURANCE REQUIREMENTS

 

The Borrower shall effect and maintain the following insurance covers, at all
times during the period of the Loan Agreement, under forms of policies and with
insurers and reinsurers acceptable to IFC, in the following terms:

 

1. Marine Cargo Insurance, (for imported plant and equipment)

covering imports (and returns if applicable) of plant, equipment, machinery and
materials to the Project site;

 

Cover is to be on the basis of Institute Cargo Clauses (A) plus War, plus
Strike, Riot and Civil Commotion and should include a minimum of 60 days of
storage on site.

 

Sum Insured

   :    No less than the value of all plant, equipment and supplies, plus
insurance and freight (CIF).

Deductibles

   :    Not to exceed US$ 50,000 each loss.

Insured

   :   

The Project Partners and IFC.

General

   :   

Cover to include 50/50 Clause.

 

2. Construction “All Risks” (“CAR”)/ Builders’ Risk

 

Cover

   :    All contract works executed and in the course of execution, materials
and temporary works (exceeding project values of US$ 1,000,000, against “all
risks” of physical loss or damage, except as may be excluded in the policy.

Sum Insured

   :    An amount sufficient to pay claims on a reinstatement basis.

Deductibles

   :    In respect of any one occurrence, arising during the construction and
testing period:

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71

 

ANNEX A

Page 2 of 6

 

          i)       from Storm, Tempest, Flood, Water Damage, Tsunami,
          Subsidence and Collapse    Not more than
US$500,000           ii)     from any other cause    Not more than
US$500,000

Period of Cover

   :    To cover individual works contracts from the commencement of works until
hand-over of
completed works or when completed works are transferred to operational insurance
cover.

Insured

   :    The Project Partners, the Project contractors and suppliers and IFC.

General

   :    a)    Cover shall include transit within Gabon of locally procured goods
and materials.           b)    Claims will be paid in the currency in which the
cost is incurred.           c)    The insurers and reinsurers to waive all
rights of subrogation against each insured party hereunder.           d)   
Faulty Design coverage is to be included to the extent that coverage is
available. The sum insured should be on a full replacement cost basis and should
include any ‘free issue’ supplied to the management contractor such as start up
electricity costs etc.           e)    Both Ocean Marine and CAR covers shall
carry a 50/50 hidden damage provision.

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72

 

ANNEX A

Page 3 of 6

 

3. Operational Insurances:

 

A. COVERAGE:

 

Section A(i):

   Platform/Pipeline Physical Damage Insurance including Removal of Debris or
Wreck.

Section A(ii):

  

Removal of Debris and /or Wreck only.

Section B:

  

Operator’s Extra Expense.

Section C:

  

Business Interruption/Extra Expense.

Section D(i):

  

Umbrella Liabilities including liability arising from U.S. operations.

Section D(ii):

  

Excess Umbrella Liabilities including liability arising from U.S. operations.

Section E:

  

Limited Terrorist Coverage.

Section F:

  

Hull & Machinery.

 

B. SUM INSURED/LIMIT OF LIABILITY

 

Section A(i):

   The replacement value of the property insured, but not to exceed the
scheduled value, but a separate and additional limit up to $5,000,000 any one
occurrence in respect of Removal of Debris and/or Wreck, not to exceed the
scheduled value.

Section A(ii):

  

$1,000,000 any one occurrence.

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73

 

ANNEX A

Page 4 of 6

 

Section B:

   $25,000,000 (100%) any one occurrence, but $10,000,000 (100%) any one
occurrence in respect of Onshore U.S.A. Operations, and a separate and
additional $1,000,000 (100%) any one occurrence for Care, Custody and Control.

Section C:

  

At a minimum, All Fixed Expenses, including principal, interest and fees under
the Loan Agreement, for the agreed indemnity period

Section D(i):

  

$5,000,000 any one accident or occurrence and in the aggregate as applicable.

Section D(ii):

  

$20,000,000 any one accident or occurrence and in the aggregate as applicable.

Section E:

  

As per agreed values and/or limits in the applicable sections herein.

Section F:

  

Agreed Value ( to be confirmed by IFC )

 

C. DEDUCTIBLES AND/OR EXCESS:

 

Section A(i):

   $250,000 each loss or occurrence deductible excluding Total or Constructive
Total Loss. The deductible applicable to the Nido CALM Buoy is $150,000 each
loss or occurrence, excluding Total or Constructive Total Loss.

Section A(ii):

   $250,000 any one occurrence.

Section B:

   $250,000 (100%) each loss or occurrence deductible, except $100,000 each loss
or occurrence deductible in respect of Onshore U.S.A. Operations and Care,
Custody, and Control which shall be subject to a $25,000 (100%) deductible each
loss or occurrence.

Section C:

   Not more than 30 days.

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74

 

ANNEX A

Page 5 of 6

 

Section D(i):

   Excess of underlyings as per schedule, or $100,000 self-insured retention, as
applicable.

Section D(ii):

   Excess of Section Di.

Section E:

   As per the deductible and/or excess in the applicable sections.

Section F:

   To be agreed by IFC.

 

4. Third Party Liability Insurance:

 

For construction and operational periods, third party liability insurances with
a minimum limit of indemnity of US$10,000,000 and shall include full cross
liabilities.

 

5. Miscellaneous

 

Other insurance which,

 

  a) is customary or necessary to comply with local or other requirements, such
as contractual insuring responsibility, Workers’ Compensation and Employers’
Liability insurances in relation to all workmen employed at the Project or in
connection with its operation; motor vehicle liability insurance for all
vehicles owned, hired, leased, used or borrowed for use in Gabon in connection
with the Project;

 

  b) is considered by the Borrower to be desirable or prudent, or required by
IFC; or

 

  c) are required by local legislation or the PSC.

 

6. General

 

  a) The Borrower shall procure that each policy effected pursuant to this Annex
A shall comply with the requirements of Section 6.04(b), and in addition
provide:

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75

 

ANNEX A

Page 6 of 6

 

  i) that the protection which is granted to IFC under the policies is not to be
invalidated by any act or failure to act on the part of the Borrower, the
Project Partners, the FPSO operator, or other contractors or subcontractors; and

 

  ii) that IFC is not responsible to the insurers or reinsurers for the payment
of insurance premiums or any other obligations of the Borrower.

 

  b) Each policy effected pursuant to this Annex A:

 

  i) shall be in such form and substance as is consistent with the obligations
of the Borrower under this Annex A, as may be approved by IFC, and

 

  ii) shall not include any provision for self-insurance, or any self-insurance
retention except to the extent of the deductibles as specified in this Annex A.

 

  c) If IFC reasonably considers that, as a result of a material change in the
identified risk exposure, any of the terms, conditions, amounts and deductibles
of insurances procured pursuant to this Annex A are inadequate or inappropriate,
IFC may require that the Borrower procure such amended and/or additional
insurances as may be reasonably required to cover such material change.

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76

 

SCHEDULE 1

Page 1 of 2

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77

 

SCHEDULE 4

Page 1 of 2

 

FORM OF SERVICE OF PROCESS LETTER

[Letterhead of Agent for Service of Process]

(See Section 5.01 (m) of the Loan Agreement)

 

[Date]

 

International Finance Corporation

2121 Pennsylvania Avenue, N.W.

Washington, D.C. 20433

Attention: Director, Oil, Gas and Chemicals Department

 

Re: [Gabon/                    ]

 

Dear Sirs:

 

Reference is made to Section 5.01(m) of the Loan Agreement dated June     , 2005
(the “Loan Agreement”) between VAALCO Gabon (Etame), Inc. (the “Borrower”) and
International Finance Corporation (“IFC”). Unless otherwise defined herein,
capitalized terms used herein shall have the meaning specified in the Loan
Agreement.

 

Pursuant to Section 8.05 (d) of the Loan Agreement, the Borrower has irrevocably
designated and appointed the undersigned,                              with
offices currently located at                                          as its
authorized agent to receive for and on its behalf service of process in any
legal action or proceeding with respect to the Loan Agreement and the other
Transaction Documents to which it is a party in the courts of England.

 

The undersigned hereby informs you that it has irrevocably accepted that
appointment as process agent as set forth in Section 8.05 (d) of the Loan
Agreement from                              until                             
and agrees with you that the undersigned (i) shall inform IFC promptly in
writing of any change of its address in                             , (ii) shall
perform its obligations as such process agent in accordance with the relevant
provisions of Section 8.05 (e) of the Loan Agreement, and (iii) shall forward
promptly to the Borrower any legal process received by the undersigned in its
capacity as process agent.

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78

 

SCHEDULE 4

Page 2 of 2

 

As process agent, the undersigned and its successor or successors agree to
discharge the above-mentioned obligations and will not refuse fulfillment of
such obligations as provided under Section 8.05 (e) of the Loan Agreement.

 

Very truly yours,

[                    ]

By         Title:

 

 

cc: VAALCO Gabon (Etame), Inc.

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79

 

SCHEDULE 5

Page 1 of 2

 

FORM OF LETTER TO BORROWER’S AUDITORS

 

(See Section 5.01(k) and Section 6.01(e) of

the Loan Agreement)

 

[Borrower’s Letterhead]

 

[Date]

 

[NAME OF AUDITORS]

[ADDRESS]

 

Ladies and Gentlemen:

 

We hereby authorize and request you to give to International Finance Corporation
of 2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433, United States of
America (“IFC”), all such information as IFC may reasonably request with regard
to the financial statements of the undersigned company, both audited and
unaudited. We have agreed to supply that information and those statements under
the terms of an Loan Agreement between the undersigned company and IFC dated
                            ,                  (the “Loan Agreement”). For your
information we enclose a copy of the Loan Agreement.

 

We authorize and request you to send two copies of the audited accounts of the
undersigned company to IFC to enable us to satisfy our obligation to IFC under
Section 6.03 (b) (i) of the Loan Agreement. When submitting the same to IFC,
please also send, at the same time, a copy of your full report on such accounts
in a form reasonably acceptable to IFC.

 

Please note that under Section 6.03 (b) (ii) and (iii) and Section 6.03 (c) of
the Loan Agreement, we are obliged to provide IFC with:

 

(a) a copy of the annual and any other management letter or other communication
from you to the undersigned company or its management commenting on, among other
things, the adequacy of the undersigned company’s financial control procedures
and accounting and management information system; and

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(b) a report by you certifying that, based upon its audited financial
statements, the undersigned company was in compliance with the financial ratios
and financial covenants contained in Sections 6.01 and 6.02 of the Loan
Agreement as at the end of the relevant Fiscal Year or, as the case may be,
detailing any non-compliance.

 

Please also submit each such communication and report to IFC with the audited
accounts.

 

For our records, please ensure that you send to us a copy of every letter which
you receive from IFC immediately upon receipt and a copy of each reply made by
you immediately upon the issue of that reply.

 

Yours truly,

VAALCO GABON (ETAME), INC.

By         Authorized Representative

 

Enclosure

 

cc:

  

Director

Oil, Gas and Chemicals Department

International Finance Corporation

2121 Pennsylvania Avenue, N.W.

Washington, D.C. 20433

United States of America

 

 

 

 

 

 

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INFORMATION TO BE INCLUDED IN ANNUAL REVIEW OF

OPERATIONS

 

(See Section 6.03 (b) (iv) of the Loan Agreement)

 

(1) Sponsors and Shareholdings. Information on any changes in share ownership of
Borrower, the reasons for such changes, and the identity of new shareholders and
information on a change in the identity of the other Project Partners.

 

(2) Country Conditions and Government Policy. Report on any material changes in
conditions in Gabon, including government policy changes, that directly affect
the Borrower (e.g. changes in government economic strategy, taxation, foreign
exchange availability, price controls, and other areas of regulation.)

 

(3) Management and Technology. Information on significant changes in (i) the
Borrower’s senior management or organizational structure, and (ii) technology
used by the Borrower, including technical assistance arrangements.

 

(4) Corporate Strategy. Description of any changes to the Borrower’s corporate
or operational strategy, including changes in products, degree of integration,
and business emphasis.

 

(5) Markets. Brief analysis of changes in Borrower’s market conditions (both
domestic and export), with emphasis on changes in market share and degree of
competition.

 

(6) Operating Performance. Discussion of major factors affecting the year’s
financial results (sales by value and volume, operating and financial costs,
profit margins, capacity utilization, capital expenditure, etc.).

 

(7) Relevant Payments to the government or any other Authority. Amounts
contributed by the Project under the terms of its PSC, or any other revenue
payments made to the government of Gabon or any other Gabonese Authority.

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(8) Other Project Development Benefits. Total direct (and to the extent feasible
indirect) employment generated by the Project in Gabon, training and other
social benefits from the Project.

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SCHEDULE 7

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IFC BASE CASE ASSUMPTIONS

 

1. Currency: All projections in constant US Dollars.

 

2. Agreed Oil Price: Brent as per World Bank Forecast.

 

3. Discount: US$3.35 per barrel, and for the Calculation Date of December 31,
2004 and thereafter, the twelve (12) month trailing average Discount realized,
as may be agreed by IFC.

 

4. Proved Reserves Criteria: Based on Proved Developed Reserves and Reserve
Certification carried out as of each Calculation Date or such other Proved
Reserves Criteria, or otherwise agreed by IFC.

 

5. Production: Based on the production profile corresponding to the Proved
Reserves Criteria as provided in the most recent Reserve Certification, or
otherwise agreed by IFC.

 

6. Fiscal System: Production Sharing, Recovery of Petroleum Costs, State
Participation and other relevant calculations as defined in the PSC.

 

7. Gross Revenue: Based on the sum of all proceeds, in whatever currency,
received from the sale of hydrocarbons and any other revenues received by the
permit holder(s). For projections, based on the applicable Production and Agreed
Oil Price less Discount.

 

8. Gross Operating Expenses: Based on: (i) fixed operating expenses (including
G&A US$4.1 million, air/sea-support US$6.9 million, fuel and other costs US$1.8
million) of US$12.8 million per year, or otherwise agreed by IFC; (ii) FPSO
expenses in accordance with the Contract between the Borrower and Tinworth
Limited dated August 20, 2001 (as amended or supplemented from time to time) and
any other FPSO-related charges accepted under the PSC; (iii) variable operating
expenses related to the relevant Etame Block Field(s) as per the Reserve
Certification, or otherwise agreed by IFC; (iv) non-recoverable expenses such as
payments to the hydrocarbon support fund; (v) provisions for abandonment; and
(vi) any new operating expenses which may arise as a result of changes to the
Project. Reserve Certifications to include projected Gross Operating Expenses.

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9. Gross Capital Expenditures: Capital expenditures associated with the Project
and any other actual or projected capital expenditures that are necessary to
sustain actual or projected Production, as per the Reserve Certification, or
otherwise agreed by IFC.

 

10. Depreciation: Based on Successful Method of Accounting ((a) All capital
expenditures are depreciated on a unit of production basis; (b) G&G exploration
expenditures are written off in the year incurred; and (c) Future risked
development and appraisal capital expenditures are treated as exploration
deferred assets to be written off appropriately), and subject to the Accounting
Principles.

 

11. Receivables: 30 days of Revenue receipts, or otherwise agreed by IFC.

 

12. Other Current Assets: 15 days of Revenue receipts, or otherwise agreed by
IFC.

 

13. Other Long-term Assets: 4.5 days of Revenue receipts, or otherwise agreed by
IFC.

 

14. Payables: 250 days of Operating Expenses, or otherwise agreed by IFC.

 

15. Interest Rate: Based on the six (6) month US$ forward curve according to
Bloomberg function FWCV [GO], as of the date of calculation.

 

16. Relevant Figures: All Relevant Figures to be calculated based on the
Borrower’s net share and where relevant, its financial statements. In addition,
Relevant Figures in respect of the projected amount of the Loans as at any date,
shall be calculated on the assumption that the outstanding amount of the Loans
at any date are equal to the projected Available Amount on such date.