Exhibit 10.5

 

EXECUTION VERSION

 

CARRY AGREEMENT

 

This Carry Agreement is made on April 27, 2012 and shall be effective as of the
Carry Start Date between:

 

BPZ Exploracion & Produccion S.R.L., a company organized and existing under the
laws of Peru (BPZ E&P); and

 

BPZ Norte Oil S.R.L., a company organized and existing under the laws of Peru
(Newco);

 

And is premised on the fact that:

 

(A)          Newco has become a party to the Contract; and

 

(B)           This Agreement sets out the Parties’ rights and obligations with
respect to Carry Costs.

 

In consideration of the premises set out above and the provisions set out below
BPZ E&P and Newco agree as follows:

 

ARTICLE 1 - DEFINITIONS

 

In this Agreement, the following capitalized words and terms shall have the
meaning ascribed to them below:

 

Affiliate means a natural or juridical person that (i) Controls a Party, (ii) is
Controlled by that Party, or (iii) is Controlled by another natural or juridical
person that also Controls that Party.

 

Agreement means this Carry Agreement and any amendment, extension or renewal to
it agreed in writing by the Parties.

 

Area means the area described in Exhibit A and delimited in Exhibit B of the
Contract, as such area may vary from time to time in accordance with the terms
of the Contract.

 

Capital and Exploratory Expenditures mean (for the purposes of this Agreement)
all costs and expenses related to Joint Operations, which are qualifying capital
expenditures in accordance with generally accepted accounting practices used by
the international petroleum industry in Peru and/or the provisions of the
Contract, and which shall include, without limitation, the following costs:

 

(i)            acquisition, processing and/or reprocessing of all geological,
geophysical and geochemical data;

 

(ii)           preparation and/or acquisition of data and information, reports,
maps, designs, drawings, plans and any geological, geophysical, geochemical,
engineering or other studies;

 

(iii)          drilling (including if applicable logging, testing and/or
suspending), deepening, sidetracking, completing, reworking and recompleting of
wells;

 

(iv)          construction and installation of platforms, plants, pipelines and
other facilities;

 

(v)           acquisition of tangible and/or intangible assets necessary or
incident to the foregoing;

 

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(vi)          all activities and studies required to elaborate the Environmental
Impact Assessment (Estudio de Impacto Ambiental) as required by the applicable
laws and regulations; and

 

(vii)         all activities and studies required to comply with the applicable
law and regulations regarding consultations with the communities (Participación
Ciudadana);

 

Plus VAT applicable to such costs and expenses, as long as such VAT can be
recovered by Carrying Party.

 

Carried Party means BPZ E&P.

 

Carried Interest means a 51% Participating Interest.

 

Carry Costs means the Carried Interest share of the Carried Party of Capital and
Exploratory Expenditures (but not Operating Expenses) incurred (or to be
incurred) in connection with the Committed Work Program (or any other work
program and budget approved in accordance with the JOA).

 

Carry Start Date means the date of the public deed signed by the Parties and
Perupetro S.A. that amends the Contract to grant Newco its Participating
Interest in the Contract.

 

Carrying Party means Newco.

 

Committed Work Program means the multi-year work program of exploration,
appraisal, development, production and/or decommissioning operations and
activities set out in Attachment D, as such work program may be modified from
time to time by agreement of the Parties.

 

Contract means that certain License Contract for Hydrocarbon Exploration and
Production on Block Z-1 offshore Peru dated as of 30 November 2001 and any
amendments of such instrument.

 

Control means to possess by virtue of ownership, whether of shares or otherwise,
the right to determine the actions of a natural or juridical person. An owner
owning indirectly or directly more than fifty percent (50%) of the voting rights
of a juridical person, shall be presumed to control that juridical person.

 

Dispute means any dispute, controversy or claim (of any and every kind or type,
whether based on contract, tort, statute, regulation, or otherwise) arising out
of, relating to, or connected with this Agreement or the operations carried out
under this Agreement, including any dispute as to the construction, validity,
interpretation, enforceability, breach or termination of this Agreement.

 

Hydrocarbons have the same meaning set out in Article 1.28 of the Contract.

 

Joint Operations means those operations and activities carried out pursuant to
the provisions of the JOA, the costs and expenses of which are chargeable to the
joint account established pursuant to the JOA.

 

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Joint Operating Agreement or JOA means that certain joint operating agreement
dated April 27, 2012 between the Parties;

 

Maximum Carry Amount means $185,000,000 plus applicable VAT (as long as such VAT
can be recovered by Carrying Party), subject to adjustment in accordance with
Section 8.3 of the Stock Purchase Agreement dated April 27, 2012 among BPZ
Energy International Holdings, L.P., BPZ Energy LLC, BPZ Resources, Inc.,
Pacific Stratus Energy S.A., and Pacific Stratus International Energy Ltd.

 

Operating Expenses mean all costs and expenses related to Joint Operations,
other than Capital and Exploratory Expenditures, plus VAT applicable to such
costs and expenses.

 

Participating Interest means as to any Party the undivided interest of such
Party (expressed as a percentage of the total interests of all Parties) in the
rights and obligations derived from the Contract and the JOA.

 

Party means any of BPZ E&P or Newco, and Parties means both of BPZ E&P and
Newco.

 

VAT means the Value Added Tax as defined under the Peruvian tax laws.

 

ARTICLE 2 - CARRY OF BPZ

 

2.1          The Carrying Party shall be responsible for, shall bear on behalf
of the Carried Party and shall pay when due all Carry Costs, up to the Maximum
Carry Amount.

 

2.2          All cash calls, invoices, accounting, auditing, and other similar
matters in respect of the Carry Costs accrued or incurred shall be dealt with
pursuant to the JOA.

 

ARTICLE 3 - GUARANTEE

 

The Carrying Party has concurrently provided a corporate guarantee from its
ultimate parent company, Pacific Rubiales Energy Corp.

 

ARTICLE 4 - DEFAULT

 

If the Carrying Party fails to pay the Carry Costs when due, or fails to obtain
and maintain the parent company guarantee in accordance with this Agreement, the
Carrying Party shall be in default under this Agreement and deemed to be in
default under the JOA. In such case the Carrying Party shall be a “Defaulting
Party” under the JOA and the Carried Party shall have all of the rights and
remedies of a “non-defaulting Party” under the JOA with respect to the amount in
default.

 

ARTICLE 5 - ASSIGNMENT

 

5.1          No Party may assign all or part of its interest in this Agreement
except in accordance with Section 12 of the JOA; provided that no Party may
transfer any interest in this Agreement without transferring an identical
interest under the JOA.

 

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5.2          Subject to the limitations on transfer set out above, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Parties.

 

ARTICLE 6 - TERM AND TERMINATION

 

This Agreement shall be enforceable as of Carry Start Date, and shall remain in
full force and effect until the Maximum Carry Amount has been paid and final
settlement has been made among the Carried Party and the Carrying Party.

 

ARTICLE 7 - TAX

 

7.1          The Carrying Party shall be responsible for forty-nine percent
(49%), and the Carried Party shall be responsible for fifty-one percent (51%),
of any liability in respect of stamp duty, registration fees and other taxes
which is or becomes payable in connection with the entry into, performance of,
or termination of this Agreement (excluding any liability for interest,
penalties, liabilities, costs and expenses resulting from any failure to pay or
delay in paying any such duty, fee or tax, which liability shall be the sole
responsibility of the failing or delaying Party).

 

7.2          The Carrying Party shall be the beneficiary of the Peruvian tax
deductions, tax credits and/or other tax benefits that may accrue in respect of
the payment of Carry Costs on behalf of the Carried Party. The Parties shall
take all steps reasonably necessary to implement the foregoing.

 

ARTICLE 8 - NOTICES

 

8.1          Any notice or other communication required to be given under this
Agreement shall be made in writing, in English or in Spanish, and shall be
delivered by facsimile, air courier, messenger delivery or regular mail,
addressed to the Party’s address set forth below. Notices or communications
shall be effective upon receipt during regular business hours; provided that in
the case of a facsimile it shall only be effective if acknowledgement by
recipient (including a report of successful transmission produced by sender’s
facsimile) is received by sender. Any Party may, by written notice to the other
Party in the manner specified in this Article, specify an additional person or
entity to receive copies of all subsequent notices directed to such Party or to
provide other addresses for any Person to whom notices or communications are to
be directed pursuant to this Agreement.

 

8.2          The addresses of the Parties for purposes of this Agreement shall
be as follows:

 

BPZ Exploracion & Produccion S.R.L.

With copy to:

Av. EI Derby 055

BPZ Exploracion & Produccion S.R.L.

Urb. Lima Polo and Hunt Club

Two Westlake Building

Edificio Cronos - Torre 1, int 402

580 Westlake Park Blvd., Suite 525

Santiago de Surco — Lima, Peru

Houston, Texas 77079 USA

Attn: Chief Operating Officer

Attn: Chief Operating Officer

Tel:+511 708-0808

Tel: +1 (281) 556-6200

 

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Fax: +511 708-0801, or 708-0802

Fax: +1 (281) 556-6377

 

 

Newco

With copy to:

Av. Jorge Chavez 154

Pacific Rubiales Energy

Piso 8, Oficina 801 y 802

Carrera 11A No. 94-45

Lima D.C. Perú

Torre OXO, Piso 9

Attn: Chief Operating Officer

Bogotá D.C. Colombia

Tel: +51 1 612-4747

Attn: Chief Operating Officer

Fax: +51 1 421-2678

Tel: +57 1 756-0080

 

Fax: +57 1 756-0203

 

ARTICLE 9 - GOVERNING LAW AND DISPUTE RESOLUTION

 

9.1          Governing Law

 

9.1.1        The substantive laws of England and Wales, exclusive of any
conflicts of laws principles that could require the application of any other
law, shall govern this Agreement for all purposes.

 

9.2          Dispute Resolution

 

9.2.1        Notification. A Party who desires to submit a Dispute for
resolution shall commence the dispute resolution process by providing the other
parties to the Dispute written notice of the Dispute (“Notice of Dispute”). The
Notice of Dispute shall identify the parties to the Dispute and contain a brief
statement of the nature of the Dispute and the relief requested. The submission
of a Notice of Dispute shall toll any applicable statutes of limitation related
to the Dispute, pending the conclusion or abandonment of dispute resolution
proceedings under this Article 9.

 

9.2.2        Negotiations. The parties to the Dispute shall seek to resolve any
Dispute by negotiation between Senior Executives. A “Senior Executive” means any
individual who has authority to negotiate the settlement of the Dispute for a
Party. Within thirty (30) Days after the date of the receipt by each party to
the Dispute of the Notice of Dispute (which notice shall request negotiations
among Senior executives), the Senior Executives representing the parties to the
Dispute shall meet at a mutually acceptable time and place to exchange relevant
information in an attempt to resolve the Dispute. If a Senior Executive intends
to be accompanied at the meeting by an attorney, each other party’s Senior
Executive shall be given written notice of such intention at least three
(3) Days in advance and may also be accompanied at the meeting by an attorney.
Notwithstanding the above, any Party may initiate arbitration proceedings
pursuant to Article 9.2.3 concerning such Dispute, prior to initiating or
completing the Dispute resolution procedures in this Article 9.2.2

 

9.2.3        Arbitration. Any Dispute not finally resolved by alternative
dispute resolution procedures set forth in Article 9.2.2 shall be exclusively
and definitively resolved through final and binding arbitration, it being the
intention of the Parties that

 

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this is a broad form arbitration agreement designed to encompass all possible
disputes. Arbitration proceedings may be commenced pursuant to Article 9.2.3
prior to initiating or completing the Dispute resolution procedures in
Article 9.2.2.

 

(a)           Rules. The arbitration shall be conducted in accordance with
Rules of Arbitration of the International Chamber of Commerce (ICC), as then in
effect (the “Rules”):

 

(b)           Number of Arbitrators. The arbitration shall be conducted by three
arbitrators, unless all parties to the Dispute agree to a sole arbitrator within
thirty (30) Days after the filing of the arbitration. For greater certainty, for
purposes of this Article 9.2.3, the filing of the arbitration means the date on
which the claimant’s request for arbitration is received by the other parties to
the Dispute.

 

(c)           Method of Appointment of the Arbitrators.

 

(1)           If the arbitration is to be conducted by a sole arbitrator, then
the arbitrator will be jointly selected by the parties to the Dispute within
thirty (30) days after commencement of arbitration.

 

(2)           If the arbitration is to be conducted by three arbitrators and
there are only two parties to the Dispute, then each party to the Dispute shall
appoint one arbitrator within thirty (30) Days of the filing of the arbitration,
and the two arbitrators so appointed shall select the presiding arbitrator
within thirty (30) days after the latter of the two arbitrators has been
appointed by the parties to the Dispute.

 

(d)           Consolidation. If the Parties initiate multiple arbitration
proceedings, the subject matters of which are related by common questions of law
or fact and which could result in conflicting awards or obligations, then all
such proceedings may be consolidated into a single arbitral proceeding.

 

(e)           Place of Arbitration. Unless otherwise agreed by all parties to
the Dispute, the place of arbitration shall be New York, NY.

 

(f)            Language. The arbitration proceedings shall be conducted in the
English language and the arbitrator(s) shall be fluent in the English language.
Any foreign-language documents presented at such arbitration shall be
accompanied by an English translation thereof.

 

(g)           Entry of Judgment. The award of the arbitral tribunal shall be
final and binding. Judgment on the award of the arbitral tribunal may be entered
and enforced by any court of competent jurisdiction.

 

(h)           Notice. All notices required for any arbitration proceeding shall
be deemed properly given if sent in accordance with Section 7.

 

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(i)            Interest. The award shall include interest, as determined by the
arbitral award, from the date of any default or other breach of this Agreement
until the arbitral award is paid in full. Interest shall be awarded at the
Agreed Interest Rate (as the same is defined in the JOA).

 

(j)            Currency of Award. The arbitral award shall be made and payable
in U.S. dollars, free of any tax or other deduction.

 

(k)           Exemplary Damages. The Parties waive their rights to claim or
recover, and the arbitral tribunal shall not award, any punitive, multiple, or
other exemplary damages (whether statutory or common law) except to the extent
such damages have been awarded to a third party and are subject to allocation
between or among the parties to the Dispute.

 

9.2.4        Confidentiality. All negotiations, mediation, arbitration, and
expert determinations relating to a Dispute (including a settlement resulting
from negotiation or mediation, an arbitral award, documents exchanged or
produced during a mediation or arbitration proceeding, and memorials, briefs or
other documents prepared for the arbitration) are confidential and may not be
disclosed by the Parties, their employees, officers, directors, counsel,
consultants, and expert witnesses, except to the extent necessary to enforce
this Article 7 or any arbitration award, to enforce other rights of a Party, or
as required by law; provided, however, that breach of this confidentiality
provision shall not void any settlement, expert determination or award.

 

ARTICLE 10 - GENERAL PROVISIONS

 

10.1        Further Acts

 

Each of the Parties shall, and shall cause their respective Affiliates to, take
such further actions and to execute, acknowledge and deliver all such further
documents as are reasonably required to effect the making of any payment
contemplated by this Agreement and otherwise to carry out this Agreement.

 

10.2        Responsibility for Costs

 

Except as expressly set out in this Agreement, each Party shall be liable for
its own legal, accounting and other costs and expenses that are incurred by such
Party in connection with the negotiation of this Agreement and the performance
of such Party’s obligations under this Agreement.

 

10.3        Public Announcements

 

Neither Party nor its Affiliates shall, without the prior written approval of
the other Party, make any public announcement or press release with respect to
the transactions contemplated by this Agreement; provided, however, that a Party
may make such a public announcement or issue such a press release without such
prior written approval if same is required by order of a court of competent
jurisdiction or required by

 

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applicable laws or stock exchange regulations, provided that such Party shall
make all reasonable efforts to give prompt written notice to all Parties prior
to such disclosure.

 

10.4        Severability

 

Any term or provision of this Agreement judicially determined to be invalid or
unenforceable shall be deemed, to the extent so determined, invalid or
unenforceable, but the remainder of this Agreement, or the application of such
term or provision to circumstances other than those to which it is held invalid
or unenforceable, shall not be affected thereby.

 

10.5        Joint Preparation

 

Each provision of this Agreement shall be construed as though all Parties
participated equally in the drafting of the same. Consequently, the Parties
acknowledge and agree that any rule of construction that a document is to be
construed against the drafting party shall not be applicable to this Agreement.

 

10.6        No Third Party Beneficiaries

 

The Contracts (Rights of Third Parties) Act 1999 shall not apply to this
Agreement and no term of this Agreement shall be enforceable by a third party.

 

10.7        Relationship of the Parties

 

The rights, duties, obligations and liabilities of the Parties under this
Agreement shall be individual, not joint or collective. It is not the intention
of the Parties to create, nor shall this Agreement be deemed or construed to
create a mining or other partnership, or association or (except as explicitly
provided in this Agreement) a trust. This Agreement shall not be deemed or
construed to authorize any Party to act as an agent, servant or employee for any
other Party for any purpose whatsoever except as explicitly set forth in this
Agreement. In their relations with each other under this Agreement, the Parties
shall act in good faith and shall deal fairly with each other but shall not be
considered fiduciaries except as expressly provided in this Agreement.

 

10.8        Waiver

 

Unless expressly provided in this Agreement, a delay on the part of either Party
in exercising its rights under this Agreement or failure to exercise its rights
shall not operate as a waiver of such rights. Any tacit or implicit waiver by
either Party of a right or remedy under this Agreement in a particular instance
shall not operate as a waiver of such right or remedy in any other instance or
as to any such Party.

 

10.9        Amendment

 

This Agreement may be amended only by written agreement between the Parties,
executed by duly authorized representatives.

 

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10.10      Counterparts

 

This Agreement may be executed in two counterparts each of which when executed
and delivered shall be an original but both of which together shall constitute
one and the same instrument.

 

10.11       Entirety

 

This Agreement sets out the entire agreement of the Parties regarding the
subject matter of this Agreement and supersedes all prior agreements and
undertakings, oral or written, between the Parties with respect to the subject
matter of this Agreement.

 

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IN WITNESS of their agreement, each Party has caused this Agreement to be
executed by its duly authorized representative, on the date first written above.

 

BPZ Norte Oil S.R.L

BPZ EXPLORACION & PRODUCCION S.R.L.

 

 

 

 

By:

/s/ Luis Rafael Zoeger Nuñez

 

By:

/s/ Luis Rafael Zoeger Nuñez

Title:

Luis Rafael Zoeger Nuñez

Title:

Luis Rafael Zoeger Nuñez

Date:

4/27/12

Date:

4/27/12

 

[Signature Page to Carry Agreement]

 

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