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Exhibit 10.1

 

AGENCIA NACIONAL DE HIDROCARBUROS

REPÚBLICA DE COLOMBIA

MODEL OF CONTRACT FOR EXPLORATION AND EXPLOITATION

(English Translation. Spanish version is binding)

 

CONTRACT NAME:  

RIO VERDE

CONTRACTOR:  

HARKEN DE COLOMBIA LIMITED

EFFECTIVE DATE:  

SEPTEMBER 14 OF 2004

 

The Contracting parties, of the one part Agencia Nacional de Hidrocarburos
hereinafter ANH, a special administrative unit attaché to the Ministry of Mines
and Energy, created by the Decree 1760 of 26 June 2003, with registered offices
in Bogotá D.C., represented by JOSE ARMANDO ZAMORA REYES, of legal age, ID No.
19.303.017 issued in Bogotá, D.C. domiciled in Bogotá D.C., who states: 1. That
as General Director of ANH, he acts on behalf of that Agency, and 2. That he has
been authorized by the Board of Directors of ANH to execute this Contract, as
evidenced in Minutes No. 019, dated July 22, 2004 and of the other HARKEN DE
COLOMBIA LIMITED - company organized in accordance with the laws of Cayman
Islands, with registered offices in Cayman Islands and a branch established in
Colombia, and registered offices in Bogotá, in accordance with public deed N°
406, dated february 19, 1993 granted in Notary 11th Bogotá represented by
GUILLERMO SANCHEZ, American, of legal age, with Passport Number 132457597, who
states that: 1. As legal representative he acts in representation of the (Name
of the Company) 2. He is fully authorized to execute this Contract, as evidenced
in the Incumbency Certificate issued by the Bogotá Chamber of Commerce 3. He
states under oath and that he is not in any way disqualified to enter into this
Contract, and 4. HARKEN DE COLOMBIA LIMITED has accredited that it has, and
undertakes to maintain, the financial capacity, the technical competence, and
the professional skills required to undertake activities under this Contract.
The above company shall be known for all purposes in this Contract as THE
CONTRACTOR.

 

ANH and THE CONTRACTOR place it on record that they have entered into the
Contract contained in the following Clauses:

 

CLAUSE 1- DEFINITIONS

 

For the purposes of this Contract, the expressions given below carry the meaning
assigned to them here.

 

Annexes A, B and C form an integral part of this Contract, and therefore every
time that the expressions referred to in this Clause are used in those Annexes,
they will carry the same meanings as are given here.

 

1.1 Abandonment: The plugging and abandonment of wells, the dismantling of
constructions and the cleaning and environmental restoration of areas in which
Exploration, Evaluation or Exploitation Operations had taken place under this
Contract, in accordance with Colombian law.

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1.2 Year: The period of twelve consecutive months of the Gregorian calendar,
counted from a specific date.

 

1.3 Calendar Year: The period of 12 months between 1 January and 31 December,
both included, of each Year.

 

1.4 Contract Area: The surface and its projections as identified in Clause 3,
and located in Annex A, in which THE CONTRACTOR is authorized by this Contract
to undertake Exploration, Evaluation and Exploitation operations for
Hydrocarbons which are the object of the same.

 

1.5 Evaluation Area: The portion of the Contract Area in which THE CONTRACTOR
makes a Discovery, and in which he decides to Perform an Evaluation Program in
order to establish commerciality or lack of the same, in accordance with Clause
7. This area will be demarcated as a regular polygon on the surface, preferably
four-sided, which will comprise the limits of the vertical projection on the
surface of the geological structure which contains the Discovery.

 

1.6 Exploitation Area: The portion of the Contract Area in which one or more
Commercial Fields are found, as established in Clause 9 (Section 9.3) of this
Contract. The area of the Commercial Fields will comprise the area of the
vertical projection on the surface of the reservoir or reservoirs forming them,
and which the Ministry of Mines and Energy defines in accordance with the Decree
3229 of 11 November 2003, or regulations which modify or replace it.

 

1.7 Barrel: The unit of measurement of volume of Liquid Hydrocarbons consisting
of 42 US gallons, corrected to standard conditions of 60° Fahrenheit and one
atmosphere of absolute pressure.

 

1.8 Good Oil Industry Practices: These are good, safe and efficient operations
and procedures, commonly used by prudent and diligent operators in international
oil industry, in similar conditions and circumstances to those arising in the
course of activities under this Contract, principally in matters related to the
use of appropriate methods and processes to obtain the maximum economic benefits
in the final recovery of reserves, reduction of losses, safe operations, and
protection of the environment, amongst others, to the extent that they are not
contrary to Colombian law.

 

1.9 Commercial Field: A portion of the Contract Area, in whose subsurface one or
more reservoirs have been discovered, and which THE CONTRACTOR has decided to
exploit.

 

1.10 Declaration of Commerciality: This is the written communication from THE
CONTRACTOR to ANH, declaring that the discovery which it has made in the
Contract Area is a Commercial Field.

 

1.11 Discovery: This is the finding of rock in which there are accumulated
Hydrocarbons, and which acts as an independent unit with regard to production
mechanisms, petrophysical properties, fluid properties, as evaluated after
drilling, or using some similar means, and taking the related fluid tests.

 

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1.12 Discovery of Non-associated Natural Gas: This is the Discovery whose
official production tests, on the understanding that the text is representative
of the reservoir or reservoirs discovered, indicates a Gas/Oil ratio (GOR) of
more than 15,000 standard cubic feet of gas for one barrel of Liquid
Hydrocarbons, and a molar composition of heptane (C7+) of less than 4%. The
gas/oil ratio is understood to be the ratio between the volume of natural gas in
cubic feet per Day, and the volume of Liquid Hydrocarbons in Barrels per Day
produced by a well, and the molar composition of heptanes (C7+) and other
Hydrocarbons of higher molecular weight. The Gas/Oil ratio (GOR) of a Discovery
with several reservoirs will be determined on the basis of the weighted average
production of each reservoir and the molar composition of heptane (C7+) as a
simple arithmetical average.

 

1.13 Day: A period of 24 hours starting at 00:00 and ending at 24:00.

 

1.14 Development/Development Operations: Activities and work undertaken by THE
CONTRACTOR including (for example only) drilling, completion and equipping
development wells, the design, construction, installation and maintenance of
equipment, pipe, transfer lines, storage tanks, transport systems, treatment
storage etc. in an Exploitation Area in the Contract Area, and outside it, as
necessary.

 

1.15 Exploration/Exploration Operations: Studies and work executed by THE
CONTRACTOR to determine the existence and location of Hydrocarbons in the
subsurface, including (as examples only) geophysical, geochemical, geological,
cartographic work and in general the activities of surface prospecting, the
drilling of Exploration Wells and other operations directly related to the
search for Hydrocarbons in the subsurface.

 

1.16 Evaluation/Evaluation Operations: All operations and activities undertaken
by THE CONTRACTOR in an Evaluation Area under Clause 7 below in order to
evaluate the Discovery, demarcate the geometry of the reservoir(s) in the
Evaluation Area and determine, amongst other things, the viability of extracting
the Hydrocarbons in economically exploitable quantities and qualities and the
impact of commercial Exploitation on the environment and social situation. The
operations include the drilling of Exploration Wells, the acquisition of
detailed seismic data, the conducting of production tests and in general;
operations designed to determine whether the Discovery is a Commercial Field and
to demarcate it.

 

1.17 Exploitation: Development and Production.

 

1.18 Effective Date: The date of signature of this Contract, as of which terms
begin to be counted.

 

1.19 Natural Gas: The mixture of Hydrocarbons in a gaseous state at standard
conditions (of temperature 60°F and one atmosphere at obsolute pressure),
composed of the most volatile members of the paraffin series of Hydrocarbons.

 

1.20 Hydrocarbons: All the organic compounds comprised mainly of the natural
mixture of carbon and hydrogen and substances that accompany them or are derived
from them.

 

1.21 Liquid Hydrocarbons: All Hydrocarbons produced in the Contract Area which
at standard conditions of temperature and pressure (60°F and one atmosphere at
absolute pressure) are in a Liquid state at the wellhead or in the separator,
and distilled and condensed substances extracted from gas.

 

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1.22 Heavy Liquid Hydrocarbons: Liquid Hydrocarbons with an API gravity of less
than 15°.

 

1.23 Penalty Interest: In pesos, the maximum legal penalty rate certified by the
competent authority; in US dollars, 3-month LIBOR plus 4%.

 

1.24 Month: The period counted from any Day of a calendar month and ending of
the same Day of the next calendar month; or, if the first Day of a month, from
that Day to the last Day of that same month.

 

1.25 Parties: At the time of execution of the Contract, ANH and THE CONTRACTOR.
Subsequently and at any time, ANH and THE CONTRACTOR and/or assigned duly
accepted by ANH.

 

If the Party “THE CONTRACTOR” consists of more than one company, said companies
will appoint one of their number to act as their representative with ANH.

 

1.26 Exploration Period: The period of 5 Years and 8 months counting from the
Effective Date, together with any extension granted, during which THE CONTRACTOR
shall execute the Minimum Exploration Program.

 

1.27 Exploitation Period: With respect to each Exploitation Area, up to 24 Years
together with any extensions granted, counting from the date of Declaration of
commerciality of the related Commercial Field, during which THE CONTRACTOR shall
execute Development and Production Operations.

 

1.28 Exploitation Plan: A guideline document prepared by THE CONTRACTOR in
accordance with Clauses 9 and 10 below, to implement the technical, efficient
and economic Exploitation of each Exploitation Area and will contain, amongst
other things, the calculation of Hydrocarbons reserves, a description of the
Production facilities and the transport of Hydrocarbons, forecasts for the
Production of Hydrocarbons in the short and medium term, a program for
Abandonment and the Exploitation Work Programs for the rest of the current
Calendar Year or the following Calendar Year.

 

1.29 Exploration Well: A well to be drilled by THE CONTRACTOR in the Contract
Area searching for Hydrocarbons reservoirs in an untested area, to find
reservoirs additional to a Discovery, or to extend the limits of known
reservoirs of a known Discovery.

 

1.30 Production/Production Operations: All operations and activities undertaken
by THE CONTRACTOR in the Exploitation Area in relation to processes of
extraction, collection, treatment, storage and transport of Hydrocarbons to the
Delivery Point, Abandonment and other operations related to the obtaining of
Hydrocarbons.

 

1.31 Minimum Exploration Program: The Program of Exploration Operations agreed
under Section 5.1 below, which is the minimum that THE CONTRACTOR agrees to
perform in each phase of the Exploration Period.

 

1.32 Additional Exploration Program: The Exploration Program that THE CONTRACTOR
undertakes to execute after the end of the Exploration Period as stipulated in
Section 5.5 below.

 

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1.33 Evaluation Program: The Evaluation Operations Plan presented by THE
CONTRACTOR to ANH under Clause 7 below to evaluate a Discovery and determine
whether there is a Commercial Field. Execution of the Evaluation Program and
also the presentation of the final report to the ANH are requirements to declare
whether a Discovery is a commercial Field.

 

1.34 Work Program: The description of activities and Exploration Activities,
Evaluation Activities or Exploitation Activities in the Contract Area under the
terms of this Contract. The Work Program will include the schedule for THE
CONTRACTOR to start and finish activities, with budgets.

 

1.35 Delivery Point: The place agreed by the Parties to measure the production
of Hydrocarbons for each Commercial Field in the minimum specifications to enter
any system of transport or refining, in order to determine the volume of
Hydrocarbons subject to royalties and the volume of Hydrocarbons due to THE
CONTRACTOR.

 

CLAUSE 2 – OBJECT

 

2.1 Object. This Contract grants THE CONTRACTOR the exclusive right to explore
the Contract Area and to exploit Hydrocarbons belonging to the Nation that are
discovered in that area. THE CONTRACTOR will be entitled to the share of the
Hydrocarbons coming from the Contract Area which are due to it under Clause 14
below.

 

2.2 Scope. THE CONTRACTOR will, in the exercise of this right, perform the
activities and conduct the operations that are the matter of the same at its
sole cost and risk, providing all resources required to project, prepare and
perform activities and Exploration, Evaluation, Development and Production
Operations in the Contract Area.

 

2.3 Exclusion of rights over other natural resources. The rights granted under
this Contract refer exclusively to the Hydrocarbons owned by the Nation
discovered in the Contract Area, and therefore do not extend to any other
natural resource that may be present there.

 

CLAUSE 3-CONTRACT AREA

 

3.1 Area. The Contract Area covers a total of 30.341,0333 hectares. It is
described in Annex A, which forms part of this Contract and is located in the
municipal jurisdiction(s) of San Luis de palenque and El Yopal Casanare
Department. The Contract Area will be gradually reduced as stipulated in this
Clause.

 

3.2 Restrictions. If a portion of the Contract Area extends to areas within the
National Nature Park System or other reserved, restricted or excluded places,
geographically demarcated by the appropriate authority, or if zones with such
characteristics are extended into the Contract Area, THE CONTRACTOR will observe
the conditions imposed on such areas by the competent authorities. ANH assumes
no responsibility in this regard.

 

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If ANH comes to know of a claim for private ownership of Hydrocarbons in the
subsurface of the Contract Area, it will proceed as required by the relevant
provisions of law.

 

3.3 Relinquishment of Areas in Exploration, Evaluation and Exploitation. THE
CONTRACTOR will relinquish areas in Exploration, Evaluation and Exploitation in
all cases provided for in this Contract as causes of relinquishment, such as
simple surrender, expiry of terms, events provided for in Section 8.2 or failure
to perform the activities in the related Work Programs or in general any other
contractual cause that obliges THE CONTRACTOR to relinquish the area concerned.

 

3.4 Voluntary relinquishment. THE CONTRACTOR may at any time effect partial
relinquishments of the Contract Area provided that it has performed the
obligations contracted by virtue of this Contract. If these voluntary
relinquishments are effected during the Exploration Period they will be counted
for the purposes of the mandatory relinquishment of areas.

 

3.5 Restoration of areas relinquished. THE CONTRACTOR will perform all
Abandonment activities required and restore the areas relinquished as provided
for in Colombian law and this Contract.

 

3.6 Demarcation of areas relinquished. The areas relinquished by THE CONTRACTOR
will contain the minimum possible number of contiguous rectangular blocks
limited by lines running North-South and East-West, following a grid pattern
similar to that formed by the Instituto Geográfico Agustín Codazzi mapping
system.

 

3.7 Formalization of relinquishment of areas. All relinquishments effected under
this Contract will be formalized in notes of record signed by the Parties.

 

CLAUSE 4 – DURATION AND PERIODS

 

4.1 Duration. The duration of the Contract is determined by the following
Clauses.

 

4.2 Exploration Period. The Exploration Period will last for five Years and
eight months from the Effective Date and be divided into the phases described
below. The first phase commences on the Effective Date and the following phases
on the Calendar Day immediately following the end of the preceding phase:

 

Phase 1 lasting twenty (20) months

 

Phase 2 lasting twelve (12)months

 

Phase 3 lasting twelve (12)months

 

Phase 4 lasting twelve (12)months

 

Phase n lasting twelve (12)months

 

4.2.1 Right to resign during Exploration. THE CONTRACTOR may, during any phase
of the Exploration Period, resign the Contract provided that it has satisfied
the requirements of the Minimum Exploration Program of the current phase and
other obligations for its account. In order to do this THE CONTRACTOR will
complete the phase in progress and advise ANH of its decision in writing.

 

4.2.2 Extension of the Exploration Period. ANH will, at the request of THE
CONTRACTOR, extend the phase of the Exploration Period in progress until the

 

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Exploration Wells have been drilled and /or the seismic program has been
completed, plus two months, provided that the following conditions are
satisfied:

 

  a) The Exploration Operations mentioned have been started at least one month
before the date set for the completion of that phase of the Exploration Period;

 

  b) THE CONTRACTOR has performed its Exploration Operations uninterruptedly;
and

 

  c) That despite the diligence applied in Exploration Operations. THE
CONTRACTOR reasonably believes that the remaining time is insufficient to
complete them before the expiry date of the phase in progress.

 

When it requests the extension THE CONTRACTOR will deliver to ANH the documents
on which it bases that request and the related guarantee in accordance with the
requirements of Clause 22 below.

 

4.2.3 Termination of Contract upon expiry of the Exploration Period. If the
Exploration Period expires and there is no Evaluation Area or Exploitation Area
in the Contract Area, THE CONTRACTOR will relinquish all the Contract Area to
ANH, without prejudice to performance of its other obligations.

 

At all events THE CONTRACTOR is obliged to relinquish all the Contract Area and
show that it has performed its obligations of Abandonment, showing that wells
drilled have been duly plugged and abandoned, that surface constructions have
been totally dismantled and that the work of cleaning and environmental
restoration have been completed in accordance with applicable regulations.

 

4.3 Exploitation Period. The Exploitation Period is established separately for
each Exploitation Area and therefore all mentions of duration extension or
termination of the Exploitation Period refer to each individual Exploitation
Area.

 

4.3.1 Duration. The Exploitation Area will last for 24 Years counted from the
date on which ANH received the Declaration of Commerciality from THE CONTRACTOR
under Clause 8 below.

 

4.3.2 Extension. ANH will, at the request of THE CONTRACTOR, extend the
Exploitation Period up to the economic limit of the commercial field, provided
that the following conditions are satisfied:

 

  a) THE CONTRACTOR makes a written request to ANH not more than 4 Years nor
less than 1 Year prior to the expiry of the Exploitation Period for the
Exploitation Area concerned;

 

  b) The Exploitation Area is producing Hydrocarbons regularly at the date of
the request; and

 

  c) THE CONTRACTOR can show that during the 4 Calendar Years prior to the date
of the request it has conducted a drilling program that includes at least one
well per Calendar Year and/or has had an active project for pressure maintenance
or secondary, tertiary or enhanced recovery.

 

Paragraph: If THE CONTRACTOR does not meet all the conditions or meets (c)
incompletely, ANH may analyze the justifications offered by THE CONTRACTOR and
grant the extension, and it is understood that denial by ANH is not a reason of
disagreement and will not be subject to the procedure established in Clause 27
below. At all events the extension of the Exploitation Period will be formalized
by a Supplementary Clause to this Contract.

 

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4.3.3 Voluntary termination of the Exploitation Period. THE CONTRACTOR may at
any time terminate this Contract with respect to any Exploitation Area, and to
do so, will inform ANH of its decision in writing not less than 3 Months in
advance without prejudice to performance of its other obligations.

 

4.3.4 Effects of termination of the Exploitation Period. If for any reason the
operating rights and obligations cease with regard to an Exploitation Area, THE
CONTRACTOR will leave the production of wells producing at the time in perfect
conditions and leave all constructions and other real property in good condition
and pass them free of charge to ANH with all easements and goods acquired for
the purposes of Exploitation, even if they are outside the Exploitation Area.
With regard to the moveable assets used solely in the service of the
Exploitation Area, if termination occurs before 18 Years of the Exploitation
Period have elapsed, THE CONTRACTOR will offer them to ANH for sale at book
value. If within 3 Months from the date of the offer ANH has not responded
affirmatively, THE CONTRACTOR is free to dispose of them. If termination takes
place after the first 18 Years of the Exploitation Period, the assets will pass
to ANH free of charge. ANH will set the criterion with respect to the
productivity of the wells. Any disagreement with regard to the nature and
destination of the assets will be subject to the procedure set forth in Clause
27 below. Likewise, THE CONTRACTOR will be obliged to assign to ANH or to the
entity indicated by ANH, the Environmental License and the economic resources
required to attend to the obligations of Abandonment. The application of this
Clause does not imply that ANH is to assume THE CONTRACTOR´s employment
obligations to its personnel.

 

CLAUSE 5 – MINIMUM EXPLORATION PROGRAM

 

5.1 Minimum Exploration Program for each phase. During the Exploration Period
THE CONTRACTOR will implement a Minimum Exploration Program for each phase as
described in Annex B which forms part of this Contract. For performance of the
Minimum Exploration Program obligations, the Exploration Wells proposed by THE
CONTRACTOR will be Exploration Wells for a new field (Type A-3) or Exploration
Wells that form part of an Evaluation Program as described in subsection 7.3.(b)
below. Otherwise, an Exploration Well proposed by THE CONTRACTOR will require
prior acceptance by ANH.

 

5.2 Programs of Exploration Work. THE CONTRACTOR undertakes to furnish ANH with
the Program for Exploration Work for the phase being started, describing how
obligations will be discharged, not less than 8 calendar Days before each phase
of the Exploration Period begins. For the first phase, THE CONTRACTOR should
summit the Program for Exploration Work during the following 30 days from the
Effective Date.

 

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5.3 Modifications to the Minimum Exploration Program.

 

5.3.1 During the phase in progress. During the first half of any phase of the
Exploration other than the first phase, THE CONTRACTOR may substitute the
acquisition and processing of a seismic program in the Minimum Exploration
Program by the drilling of one or more Exploration Wells or by the acquisition
and processing of a seismic program of a more modern technology, provided that
the financial effort of the new Minimum Exploration Program is equal to or
greater than that originally proposed for the phase in progress. In that event,
THE CONTRACTOR will inform ANH of the substitution of Exploration Operations
proposed, in advance and in writing.

 

5.3.2 For the following phase: If an Exploration Well proves dry, and THE
CONTRACTOR sees that the prospects for the Contract area do not justify the
drilling of an Exploration Well contained in the Minimum Exploration Program of
the following phase of the Exploration Period, THE CONTRACTOR may substitute the
drilling with seismic acquisition and processing provided that the financial
effort is the same or greater that in the original Minimum Exploration Program
for the phase, and THE CONTRACTOR informs ANH of the substitution proposed in
advance and in writing.

 

5.4 Additional Exploration. THE CONTRACTOR may perform Exploration Operations in
addition to those included in the Minimum Exploration Program or the Subsequent
Exploration Program but such Exploration Operations will not change the term
agreed for the execution of the Minimum Exploration Program or the Subsequent
Exploration Program of the phase in progress or the phases that follow it. In
order to exercise this right THE CONTRACTOR will first inform ANH of the
additional Exploration Operations proposed. If mentioned exploration operations
are defined in the Minimum Exploration program for the next phase, ANH will
accredit mentioned Exploration Operations to compliance with agreed for the next
phase. If THE CONTRACTOR wishes the Additional Exploration Operations to be
credited to compliance with agreed Exploration commitments for the next phase,
if any, it will request ANH approval for this in writing and ANH has the
discretion to accept the request or deny it. If ANH accepts it ANH will
determine how all or part of the additional Exploration Operations executed will
be credited in the next phase of the Exploration Period.

 

5.5 Problems in the drilling of Exploration Wells. If, during the drilling of an
Exploration Well for the Minimum Exploration Program or Subsequent Exploration
Program and before reaching the target depth, uncontrollable geological problems
arise such as cavities, abnormal pressures, impenetrable formations, severe loss
of circulation or other technical difficulties which prevent the drilling of the
Exploration Well from continuing despite the efforts of THE CONTRACTOR to
continue with drilling work in accordance with Good Oil Industry Practices, THE
CONTRACTOR may request ANH to treat the obligation to drill as having been
discharged with the presentation of a technical report to give a detailed
description of the situation and efforts made to overcome the problem. The
reports must be presented to ANH not more than 15 calendar Days from the date
that the uncontrollable problem arises. If ANH accepts that THE CONTRACTOR
should terminate the drilling operations for the well in question, THE
CONTRACTOR will abandon or complete the well to the depth drilled and the
obligation of the Minimum Exploration Program or Subsequent Exploration Program
for that well will be considered to have been discharged.

 

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CLAUSE 6 – SUBSEQUENT EXPLORATION PROGRAM

 

6.1 Subsequent Exploration Program. If the Exploration Period ends and provided
that there is at least one Evaluation Area or Exploitation Area, THE CONTRACTOR
may retain 50% of the Contract Area (excluding Exploitation Areas) to implement
a Subsequent Exploration Program in the area retained outside of an Evaluation
Area or Exploitation Area. The following procedure will apply:

 

a) Before completing the final phase of the Exploration Period THE CONTRACTOR
will advise ANH in writing that it intends to implement a Subsequent Exploration
Program;

 

b) The notice will describe the Exploration Operations in the Subsequent
Exploration Program which THE CONTRACTOR undertakes to perform; dividing the
Program into two phases of two Years each, the first to count as of the expiry
date of the last phase of the Minimum Exploration Program. Each phase of the
Subsequent Exploration Program will contain at least the same Exploration
Operations as were agreed for the last phase of the Minimum Exploration Program;

 

c) If the obligations of the first phase of the Subsequent Exploration Program
are duly discharged THE CONTRACTOR may elect not to continue with the second
phase and in exchange must relinquish all the areas retained for that purpose or
it may elect to continue with the second phase, and must relinquish only 50% of
those areas excluding any existing Evaluation Areas and Exploitation Areas. THE
CONTRACTOR will inform ANH in writing of its decision within one month of the
end of the first phase.

 

d) The relinquishment of areas mentioned in this Clause is understood to be
without prejudice to the existing Evaluation Areas and Exploitation Areas.

 

6.2 When the Subsequent Exploration Program is completed, the Contract Area will
be reduced to the Evaluation Areas and/or Exploitation Areas existing at that
time.

 

CLAUSE 7 – DISCOVERY AND EVALUATION

 

7.1 Notice of Discovery. At any time within four Months of finishing the
drilling of the Exploration Well whose results indicate that there has been a
Discovery, THE CONTRACTOR will so advise ANH in writing, attaching its technical
report with the results of tests made, the description of geological aspects and
the analysis of fluids and rocks in the form indicated by the Ministry of Mines
and Energy or the authority that takes its place.

 

Paragraph: if the Discovery is of Non-Associated Natural Gas or Heavy Liquid
Hydrocarbons, THE CONTRACTOR will also deliver calculations and other supporting
information presented to the Ministry of Mines and Energy for classification
purposes.

 

7.2 Presentation of the Evaluation Program. If THE CONTRACTOR considers that the
Discovery has commercial potential it will present and implement an Evaluation

 

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Program for that Discovery as described in this Clause. If the Discovery occurs
during the Exploration Period THE CONTRACTOR will present the Evaluation Program
within six months of finishing the drilling of the discovery well and at all
events before the end of the Exploration Period. If the Discovery is the result
of the execution of the Subsequent Exploration Program, THE CONTRACTOR will
present the Evaluation Program within six months of finishing the drilling of
the discovery Exploration Well and at all events prior to the next
relinquishment of areas under Clause 6 above.

 

7.3 Content of the Evaluation Program. The Evaluation Program will contain at
least the following:

 

a) A map with the coordinates of the Evaluation Area.

 

b) The description and objectives of each of the Evaluation Operations and the
information that is to be obtained in order to determine whether the Discovery
may be declared to be a Commercial Field. If in the Evaluation Programs carried
out during the Exploration Period, THE CONTRACTOR includes drilling of
Exploration Wells, CONTRACTOR may accredit both compliance with the Minimum
Exploratory Program as well as with the corresponding Evaluation Program, up to
the drilling of two Exploration Wells provided said wells are completed before
the expiration of the term for the Evaluation Program in which they were
included or completion of the phase of the Exploration Period to which the wells
correspond, whichever is closest.

 

c) The total budget for the Evaluation Program, Year by Year;

 

d) Total term of the Evaluation Program, up to two Years if the program includes
the drilling of Exploration Wells and up to one Year in all other cases,
counting from the date of presentation to ANH; and should include the time
estimate as required for obtaining the permits to be issued by other
authorities.

 

e) The schedule of Evaluation Operations in the term mentioned in (d);

 

f) Information about the destination of the Hydrocarbons and other fluids that
THE CONTRACTOR expects to recover as a result of Evaluation Operations.

 

g) A proposal for a Delivery Point for consideration by ANH.

 

7.4 Extension of Term of the Evaluation Program. If THE CONTRACTOR decides to
drill Exploration Wells not provided for in the initially presented Evaluation
Program, ANH will extend the term of that Program for up to one Year provided
that the following conditions are satisfied:

 

a)THE CONTRACTOR has requested the extension from ANH in writing at least two
months in advance of the expiry of the original term;

 

b)THE CONTRACTOR is executing the Evaluation Operations contained in the
Evaluation Program diligently; and

 

c) The extension required is justified by the time needed to drill and test one
or more additional Exploration Wells.

 

THE CONTRACTOR will attach the documents on which its request has been based.

 

7.5 Changes to the Evaluation Program. At any time during the six months
following presentation of the Evaluation Program to ANH THE CONTRACTOR may
introduce changes, of which it will promptly inform ANH and will adjust the
total term of the same as described in Subsection 7.3(d) above, but will not
change the starting date given.

 

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7.6 Results of the Evaluation Program. THE CONTRACTOR will furnish ANH with a
full report of the results of the Evaluation Program within three months of
completing the same. The report will contain at least a geological description
of the Discovery and structural features, the physical properties of the rocks
and fluids present on the reservoirs associated with the Discovery; the
pressure, volume and temperature analysis of the fluids in the reservoirs,
production capacity (per well and for the whole Discovery); and an estimate of
the recoverable reserves of Hydrocarbons there.

 

Paragraph: If the Discovery is of Non-Associated Natural gas or a Heavy Liquid
Hydrocarbons, and at any time during the second half of the Evaluation Program,
there being time remaining, THE CONTRACTOR may request ANH to extend the
Evaluation for up to two additional Years in order to conduct feasibility
studies for the construction of infrastructure, production methods and/or the
development of markets. In such cases the request will include the information
related to the feasibility studies that THE CONTRACTOR considers necessary in
the Evaluation program. When the term of the extension expires THE CONTRACTOR
will deliver its conclusions and recommendations of the feasibility studies to
ANH.

 

7.7 This Clause will only apply to Exploration Wells drilled by THE CONTRACTOR
and making a Discovery outside the areas classed as Evaluation Areas or
Exploitation Areas. Therefore when the new volumes of Hydrocarbons found become
part of an existing Evaluation Area or Exploitation Area, there will be no
Evaluation Period.

 

CLAUSE 8 – DECLARATION OF COMMERCIALITY

 

8.1 Notice. Within three months following the expiry of the term stipulated for
the execution of the Evaluation Program, or upon expiry of the term agreed under
Section 7.6 above, if applicable, THE CONTRACTOR will deliver to ANH a written
declaration which will state clearly and precisely its unconditional decision to
exploit the Discovery, or not to do so. If the decision is positive, the
Discovery will be treated as a Commercial Field as of the time of that
declaration.

 

8.2 Surrender of rights if the decision is negative. If THE CONTRACTOR does not
deliver the declaration to ANH within the time allowed it will be understood
that THE CONTRACTOR has concluded that the Discovery is not a Commercial Field.
If the declaration is negative, or there is no declaration, THE CONTRACTOR
accepts that no rights have been generated in its favor and therefore it waives
any claim of rights over the Discovery.

 

CLAUSE 9 – EXPLOITATION PLAN

 

9.1 Presentation and Content. Within three months of the presentation of the
Declaration of Commerciality under Clause 8, THE CONTRACTOR will deliver the
Exploitation Plan to ANH, containing at least the following elements:

 

a) Map with coordinates of the Exploitation Area.

 

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b) Calculation of Hydrocarbons reserves and accumulated production of
Hydrocarbons, for each type of Hydrocarbons.

 

c) General scheme of development of the Commercial Field, to include a
description of the plan for drilling development wells, methods of extraction,
facilities and treatment of fluids extracted before the Delivery Point.

 

d) Annual production forecast for Hydrocarbons, with sensitivities, using the
optimum production rate that will allow the maximum economic recovery of
reserves.

 

e) Identification of critical factors for the execution of the Exploitation Plan
such as environmental, social, economic, logistical etc. factors and options to
deal with them.

 

f) A proposed Delivery Point for ANH to consider.

 

g) A proposed basket of up to three crudes of a similar quality for calculation
of the Fee for High Prices described in Clause 16 below.

 

h) A program for Abandonment for the purposes of Clause 30.

 

9.2. Acceptance of the Exploitation Plan. ANH will not accept the Exploitation
Plan until it has received the above information. If it has not received all the
information within 15 calendar Days following presentation it may demand the
missing information and THE CONTRACTOR will have 30 calendar Days from the
receipt of the demand to deliver it. If ANH makes no pronouncement within 15
calendar Days of presentation of the Exploitation Plan by THE CONTRACTOR, it
will be understood that the Plan is accepted. If THE CONTRACTOR does not deliver
the Exploitation Plan on the date given in Section 9.2 or if ANH has not
received the missing documentation within the 30 Days mentioned in this Section,
this will be a breach giving rise to the application of Clause 28.

 

9.3 Exploitation Area. The Exploitation Area will be demarcated as a regular
polygon, four-sided, which will comprise the Commercial Field of the portion of
it within the Contract Area, plus a margin around the Commercial Field of not
more than one kilometer provided that the Contract Area so permits. Since the
area of the Commercial Field in the Contract Area may vary, the Exploitation
Area will remain unalterable except as allowed in Section 9.4 below.

 

9.4 Enlargement of the Exploitation Area. During the Exploitation Period in an
Exploitation Area, if THE CONTRACTOR determines that a Commercial Field extends
beyond the Exploitation Area but within the valid Contract Area, it may ask ANH
to enlarge the Exploitation Area, attaching supporting documentation to its
request. If ANH is satisfied with the request it will enlarge the Exploitation
Area but it is understood that if the enlargement overlaps another Exploitation
Area, the duration of the Exploitation Period to be applied to the new global
Exploitation Area will be that whose commerciality was declared first.

 

Paragraph: If the Exploitation Area requested by THE CONTRACTOR under Section
9.4 extends beyond the bounds of the Contract Area, ANH will enlarge the
Contract Area giving the enlargement requested the Contractual status of an
Evaluation Area, unless the area in question offers one of the following
situations:

 

a) There are rights granted to another person for activities which are the same
or similar to those of this Contract;

 

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RIO VERDE SECTOR EXPLORATION AND EXPLOITATION CONTRACT

 

b) ANH is negotiating or has opened a contest for rights over it;

 

c) A competent authority has ordered restrictions, which impede the activities
object of the Contract.

 

9.5 Updating of the Exploitation Plan. THE CONTRACTOR will adjust the
Exploitation Plan annually and present it in February of each calendar Year
subject to the procedure described in Section 9.2 above, for each of the
Exploitation Areas established under the Contract. If the actual production for
the preceding Calendar Year is a 15% different from the annual production
forecast indicated in the Exploitation Plan for any Exploitation Area, THE
CONTRACTOR will provide appropriate explanations.

 

CLAUSE 10 – EXPLOITATION WORK PROGRAM

 

10.1 Preparation and Presentation. If the presentation of the Exploitation Plan
referred to in Clause 9 takes place more than six months before the end of a
Calendar Year THE CONTRACTOR will present the first Exploitation Work Program
for the rest of that calendar Year. The Plan will then subsequently be presented
Year by Year for the remaining Years, each November.

 

10.2 Content of the Exploitation Work Program. The Exploitation Work program for
each Exploitation Area will contain at least the following:

 

a) A detailed description of the Development Operations and Production
Operations which THE CONTRACTOR expects to execute during the Year with a
schedule detailed by project and Calendar Quarter, also including the time
allowed for obtaining authorizations and permits from the competent authorities.

 

b) A forecast of monthly production in the Exploitation Area for each Calendar
Year;

 

c) An estimate of costs (investments plus expenses) for the four following
Calendar Years or through to the end of the Production Period if less than 4
Years;

 

d) The terms and conditions for the development of the community programs in the
areas of influence of the Exploitation Area in question.

 

10.3 Execution and Adjustments. Development Operations and Production Operations
in the Exploitation Work program mentioned in (a) above are mandatory. THE
CONTRACTOR will start those Exploitation Operations in accordance with the
schedule submitted. During the execution of the Exploitation Work Program THE
CONTRACTOR may make adjustments to the program for the current Calendar Year
provided that they do not reduce production by more than 15% of the initial
forecast. Adjustments may not be made more often than three monthly, except for
emergency situations. THE CONTRACTOR will give advance written notice of any
adjustment to the Exploitation Work Program.

 

CLAUSE 11 – MANAGEMENT OF OPERATIONS

 

11.1 Autonomy. THE CONTRACTOR will have control of all operations and activities
considered necessary for a technically valid, efficient and economical
Exploration of the

 

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Contract Area and Evaluation and Exploitation of Hydrocarbons found there. THE
CONTRACTOR will plan, prepare, effect and control all activities with its own
means and with technical and management autonomy as defined in Colombian
legislation and observing Good Oil Industry Practices. THE CONTRACTOR will
perform all activities directly or through subcontractors.

 

Paragraph: THE CONTRACTOR may use the facilities and wells existing in the
Contracted area, before the execution date of the contract, upon authorization
of the pertinent authority.

 

11.2 Responsibilities. THE CONTRACTOR will conduct all operations under this
Contract diligently, responsibly, efficiently and with appropriate technical and
economic criteria. It will ensure that all subcontractors observe the terms of
this Contract and Colombian law. THE CONTRACTOR will be solely liable for any
damages caused through operations and activities derived from this Contract
including those caused by subcontractors, but it is understood that at no time
shall it be responsible for errors of judgment or damages and losses which are
not the result of gross negligence or deceit. If the Contract subcontracts the
work and services subcontracted will be executed in its name and therefore THE
CONTRACTOR will remain directly responsible for all obligations in the
subcontract and derived from the same, and is not relieved by the existence of
the subcontracts. ANH assumes no direct or several responsibility for this
matter.

 

11.3 Obtaining permits. THE CONTRACTOR undertakes to obtain, for its own account
and risk, all licenses, authorizations, permits and other rights required by law
and necessary for the operations to be executed under this Contract.

 

11.4. Damage to Assets. All costs and expenses required to replace or repair
damage to or loss of assets and equipment due to fire, flood, storm, accidents
or other similar events will be a risk of THE CONTRACTOR and THE CONTRACTOR will
inform ANH of losses or damage suffered as soon as possible after the event.

 

12. CLAUSE 12 – ROYALTIES

 

12.1 Collection. THE CONTRACTOR will make available to ANH the percentage of
Hydrocarbons production established in the law as royalties in cash or in kind,
as ordered by the competent authority.

 

12.2 Payment of shares. ANH will pay the entities indicated in the law their
share of the royalty and THE CONTRACTOR will in no event be responsible for
payment to any of those entities.

 

12.3 Collection in kind. If the royalty is collected in kind, THE CONTRACTOR
will deliver the appropriate volume of Hydrocarbons and the Parties will agree
on a procedure to program deliveries and other elements required. At all events,
ANH has one Month to withdraw that volume. If this term has expired and ANH has
not withdrawn the royalty volume, THE CONTRACTOR undertakes to store the
Hydrocarbons for three consecutive months and ANH will pay it a monthly storage
fee, which will be agreed by the Parties in each case. At the end of that time
THE CONTRACTOR may sell the Hydrocarbons as provided in Section 12.4 below.

 

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Paragraph: If storage is not available, THE CONTRACTOR will produce the field
and take the royalties volume, accrediting ANH, for a later submission, this
royalty volume that the ANH had the right to receive bud it did not.

 

12.4 Sale of royalty volumes. If ANH considers it convenient and provided that
regulations so permit, THE CONTRACTOR will sell the royalty Hydrocarbons and
deliver the cash proceeds of sale to ANH. For this purpose the Parties will
agree on the details of the sale but THE CONTRACTOR will at all events make best
efforts to sell that production at the highest price available in the market.
ANH will pay THE CONTRACTOR the direct cost and a reasonable selling margin.

 

12.5 Collection in cash. If THE CONTRACTOR is required to pay the royalty in
cash, it will deliver the sums payable to ANH within the time allowed by the
competent authority. If payment is made late, THE CONTRACTOR will pay ANH the
principal amount together with penalty interest and any expenses incurred in
securing payment.

 

CLAUSE 13 – MEASUREMENT

 

13.1 Measurement. THE CONTRACTOR will effect metering, sampling and quality
control of the Hydrocarbons produced and will keep the equipment or instruments
used for metering calibrated in accordance with standards and methods accepted
by Good Oil Industry Practice, and law and regulations in force, making such
analyses may need to be made, and effect corrections as relevant to the
Liquidation of the net volumes of Hydrocarbons received and delivered in
standard conditions. THE CONTRACTOR will adopt all measures necessary to
preserve the integrity, reliability, and safety of the installations and the
equipment or instruments used for metering. Also, it will maintain regular
calibration records of such equipment and instruments and of daily measurements
of production and consumption of Hydrocarbons and fluids in the Commercial Field
for ANH or the competent authorities to review. ANH will be entitled to inspect
the metering equipment installed by the Contract, and all the units used for
measurement in general.

 

13.2 Common Installations. When two or more production fields use the same
development installations, they must include a metering system, which allows
determination of the production coming from each of those fields.

 

CLAUSE 14-AVAILABILITY OF PRODUCTION

 

14.1 Determination of volumes. THE CONTRACTOR will transport the Hydrocarbons
produced, except those which had been used for the benefit of operations and
this Contract, and those that are inevitably lost in these functions, to the
Delivery Point. The Hydrocarbons will be measured in accordance with the
procedure described in Section 13.1 above, and based on that measurement, the
volume of royalties referred to in Clause 12 will be established, and the
remaining Hydrocarbons will be the property of THE CONTRACTOR.

 

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RIO VERDE SECTOR EXPLORATION AND EXPLOITATION CONTRACT

 

14.2 Availability. As of the Delivery Point, and without prejudice to the
provisions of law which regulate this matter, THE CONTRACTOR will be free to
sell the Hydrocarbons in Colombia or export them, or to dispose of them in any
other manner.

 

CLAUSE 15-NATURAL GAS

 

15.1 Use. THE CONTRACTOR will avoid wasting natural gas extracted from a field,
as provided for in law and regulation on the matter, and before the Delivery
Point concerned, it may use that gas as fuel for operations, as a source of
energy for maximum final recovery of Hydrocarbon reserves, or confining it in
the reservoirs, in order to use it for these purposes during the life of the
Contract.

 

15.2 The use of associated natural gas. If THE CONTRACTOR discovers one or more
Commercial Fields with associated natural gas, it will, within the next three
Years after starting Exploitation of the Commercial Field, present ANH with a
project for the use of the associated natural gas. If THE CONTRACTOR fails to
perform this obligation, ANH may dispose of the associated natural gas coming
from those fields, free of charge, subject to the provisions of law in force.

 

CLAUSE 16-CONTRACTUAL ECONOMIC RIGHTS OF ANH.

 

16.1 Fee for the use of the subsurface. THE CONTRACTOR will pay ANH the
following fees for the use of the subsurface:

 

16.1.1 Areas in Exploration. As of the second phase of the Exploration, and for
each other phase, THE CONTRACTOR will pay ANH a fee denominated in dollars,
which will be the result of multiplying the number of hectares and fraction of a
hectare of the Contract Area, excluding Exploitation Areas, by the amount in US
Dollars presented in the following table. Payment will be made in the month
following the start of the phase concerned.

 

Value per phase in US$ / Hectare

 

Size of urea è

--------------------------------------------------------------------------------

  

For the first

100.000 Has.

--------------------------------------------------------------------------------

  

For each

additional

Hectare.

--------------------------------------------------------------------------------

Duration of the Phase

   <12 months    > 12 months    <12 months    > 12 months

In polygons A y B

   0.75    1.0    1.0    1.5

Outside from Polygons

   0.5    0.75    0.75    1.0

Areas Offshore

   0.25

 

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16.1.2 Evaluation and Exploitation areas. THE CONTRACTOR will pay ANH a fee in
an amount denominated in dollars, which results from multiplying the production
of Hydrocarbons corresponding to the Contract to and a Clause 14 by US$0.10 for
each barrel of Liquid Hydrocarbons. This amount will increase according to
I(n-2) defined in clause 16.2 as of the January 1st, 2006 For natural gas, this
amount will be US$0.01 per 1000 cubic feet. This payment will be made
half-Yearly in arrears, in the first month of the next half-Year.

 

16.2 Fee for High Prices.

 

For Liquid Hydrocarbons: When the accumulated production from the Exploitation
area, including the royalty volume, exceeds 5 million Barrels of Liquid
Hydrocarbons, and if the price of the marker crude West Texas Intermediate (WTI)
exceeds the base price Po, THE CONTRACTOR will pay ANH an amount denominated in
US dollars, payable by calendar month in arrears, within 30 calendar Days
following each due date.

 

For Natural Gas: five (5) years after a field started exploitation, according to
the approval minute issued by the authority, and if the price of the marker
Natural Gas “U.S. Gulf Coast Henry Hub” exceeds the base price Po, THE
CONTRACTOR will pay ANH an amount denominated in US dollars, payable by calendar
month in arrears, within 30 calendar Days following each due date.

 

The amount due for this fee for each Exploitation Area will be the result of
applying the following formula:

 

LOGO [g33224image003.jpg]

 

 

Where:

 

Value of Liquid Hydrocarbons at the Delivery Point

 

For Liquid Hydrocarbons

 

For the purpose of this formula, it will be the reference price for the
corresponding calendar Month expressed in US dollars per barrel, from a basket
of a maximum of three oil crudes of a similar quality to that coming from the
Exploitation Area, presented by THE CONTRACTOR in the Exploitation Plan agreed
with ANH, and adjusted for the Delivery Point by a pre-agreed margin.

 

If, having applied the procedure for the determination of the value of the
Liquid Hydrocarbons in accordance with preceding paragraph, differences arise in
shortages or overages in the reference price of the basket and real sale price
at

 

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RIO VERDE SECTOR EXPLORATION AND EXPLOITATION CONTRACT

 

the Delivery Point by more than 3%, the Party which considers that it is
affected may request a review of the basket or of the margin of adjustment. For
the purposes of this process, the real sale price of Liquid Hydrocarbons
produced in the Exploitation area for the corresponding calendar month will be a
weighted average of the sale prices agreed by THE CONTRACTOR with buyers who are
not related parties and have no other kind of corporate relationship, and where
at all events the transactions are conducted in a framework of normal commercial
practice, deducting the cost of transport and handling between the Delivery
Point and the reference sale point in accordance with tariffs provided by the
Ministry of Mines and Energy.

 

When THE CONTRACTOR sells the Hydrocarbons for refining for internal supply, the
terms of Section 16.5 will apply.

 

For Natural Gas

 

For the purpose of this formula, it will be the real selling price of the
Natural Gas for the corresponding calendar Month expressed in US dollars per
million of British Thermal Units (US$/MMBTU) agreed by THE CONTRACTOR with
buyers, excluding transportation & processing costs between the Delivery Point
and the real selling point. At any moment, ANH will require supporting
documentation to verify real selling prices of the Natural Gas.

 

Volume of Hydrocarbons of THE CONTRACTOR.

 

This is the volume of Hydrocarbons expressed in Barrels for Liquid Hydrocarbons
and in British Thermal Units (BTU) for Natural Gas, which correspond to THE
CONTRACTOR according to Clause 14, in a given calendar Month.

 

P:

 

For Liquid Hydrocarbons, is the average price per Barrel of the market crude
West Texas Intermediate (WTI), in US dollars per Barrel (US$/Bl), and for
Natural Gas is the average price of the marker “U.S. Gulf Coast Henry Hub” in US
dollars per million of British Thermal Units (US$/MMBTU). This average prices
are for the relevant calendar Month, whose specifications and locations are
published in media of international repute.

 

Po

 

For Liquid Hydrocarbons, is the base price per Barrel of the market crude, in US
dollars per Barrel (US$/Bl), and for Natural Gas is the average price in US
dollars per million of British Thermal Units (US$/MMBTU), indicated in the
following table:

 

API OF LIQUID HYDROCARBONS PRODUCED

   Po (US$/Bbl)

>15 & <=22

   28

>22 &<=29

   27

>29

   26

PRODUCED EXPORTED NATURAL GAS

   Po (US$/MMBTU)      6

 

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For heavy Liquid Hydrocarbons with an API above of ten degrees (10o), Po will be
forty US$ dollars per barrel (40 USD$/Bl) and for heavy Liquid Hydrocarbons with
an API equal or below to ten degrees (10o) THE CONTRACTOR will pay nothing to
ANH for high prices scenarios. For Natural Gas to the internal Colombian
consume, in case of its price will be regulated by Comisión de Regulación de
Energía y Gas –CREG – or another similar organism, THE CONTRACTOR will pay
nothing to ANH for high prices scenarios; otherwise, the parties will agree a
natural Gas marker and Po value, signing the agreement.

 

This base price will be adjusted annually as of the first of January 2006,
applying the following formula:

 

Po = Po(n-1) x (1+I(n-2))

 

where

 

  Po(n-1) is the value of Po for the preceding calendar Year

  In-2) is the annual variation expressed as a fraction of the US-CPI during the
Calendar Year, two Years before that for which the calculation is made, as
published by the US Department of Labor.

 

The calculation mentioned above will be made in December of each Year.

 

Paragraph: if the price of the marker crude West Texas Intermediate (P) or of
the Natural Gas Marker “US Gulf Coast Henry Hub” lose recognition as
international marker prices, ANH will select a new marker crude or Natural gas
marker, and will modify the table based on the new index, maintaining
equivalencies with the Po values for the marker crude West Texas Intermediate or
for the Natural Gas marker “US Gulf Coast Henry Hub”.

 

Not less than three months in advance, ANH may request Contractor in writing to
pay the fee to ANH in kind for a period of not less than six months. THE
CONTRACTOR will accede to this request provided that it does not effect affect
its commercial commitments. The volume corresponding to ANH will be that which
results from calculating the “A” factor.

 

16.3 Production Tests. The Liquid Hydrocarbons obtained as a result of the
production tests conducted by THE CONTRACTOR will also pay the fee mentioned in
the preceding Sections, provided the conditions of Section 16.2 are satisfied.
Natural Gas obtained in Production Tests conducted by THE CONTRACTOR will not
pay the fees for high prices.

 

16.4 Participation in production during the extension of the Exploitation
period. In all cases of extension of the Exploitation Period in an Exploitation
Area, THE CONTRACTOR will recognize and pay ANH as a production participation, a
sum equivalent of 10% of the production of light Liquid Hydrocarbons and the
Delivery Point, or 5% of non-associated natural gas or Heavy Liquid Hydrocarbons
obtained by THE CONTRACTOR as of the expiry date of the initial duration of the
Exploitation

 

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Period, valued at the Delivery Point after deducting the royalty percentage. The
fees mentioned in Sections 16.1.2 and 16.2 will not be accrued on this
participation. During the extension to the Exploitation Period, fees for the use
of the subsurface and for high prices from subsections 16.1.2 and 16.2,
respectively, will apply only on the volume of THE CONTRATIST, excluding the
production participation mentioned in paragraph16.4.

 

16.5 Prices for internal supply. If THE CONTRACTOR sells its crude to attend to
refining needs for internal supply, the prices will be calculated in the manner
established in Resolution 18-1709 of 23 December 2003 of the Ministry of Mines
and Energy, or any of provision of law regulation, which amends or replaces it.

 

CLAUSE 17-UNIFICATION

 

When an economically viable reservoir extends continuously to one or more areas
outside the Contract area, THE CONTRACTOR, under agreement with ANH and the
interested parties, will, subject to prior approval the competent authority,
implement of cooperative plan for unified Exploitation, subject to the
provisions of Colombian law.

 

CLAUSE 18 - OWNERSHIP OF ASSETS

 

18.1 Ownership. In furtherance of the terms of Subsection 4.3.4, the
installations, assets, materials and equipment owned by THE CONTRACTOR and used
for Exploitation Operations will pass free of charge to the ownership of ANH
when the Contract area is relinquished, or upon termination of this Contract,
when either event takes place after the first 18 Years of the Exploitation, even
if those assets are outside the Contract Area.

 

18.2 THE CONTRACTOR will transfer to ANH - free of charge, upon relinquishing
the area or upon termination of the Contract, when either event occurs in the
first 18 Years of the Exploitation Period - all rights derived from Contracts
under the project financing such as leasing, build-operate-transfer (BOT),
build-operate-maintain-transfer (BOMT), build-own-operate-transfer (BOOT), and
modernize-operate-transfer (MOT), and similar, which upon termination establish
the obligation to transfer ownership of the assets, equipment and installations
to THE CONTRACTOR, when those Contracts have been entered into for the
Exploitation Period of the respective area. In all cases, when those contracts
were signed lasting more than the Exploitation Period, it is necessary an
authorization by ANH.

 

18.3 Inventories. THE CONTRACTOR will take physical inventories of the equipment
and assets attached to Exploitation Operations, at reasonable intervals, at
least every three calendar Years, classifying them, as the case may be, as being
the property of THE CONTRACTOR or of third parties. ANH will be entitled to be
represented when such inventory is taken. For this purpose, THE CONTRACTOR will
advise ANH not less than 15 Calendar Days in advance.

 

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18.4 Arrangement of assets. THE CONTRACTOR may sell the assets or equipment not
essential for maintaining existing Exploitation conditions. Nonetheless, after
18 Years of the Exploitation, for each Exploitation area, or when 80% of the
proven reserves had been produced, whichever shall occur first, THE CONTRACTOR
will require the prior approval of ANH to make such sales.

 

CLAUSE 19-SUPPLY OF INFORMATION AND CONFIDENTIALITY

 

19.1 Technical information. THE CONTRATIST will keep ANH promptly and constantly
informed on the progress and results of operations. Therefore, in addition to
documents required in the course of this Contract, THE CONTRACTOR will deliver
to ANH, as and when obtained, and before the expiry date of each of the phases
of the Exploration Period, and by calendar Year during the Exploration Period,
all the information of a scientific, technical and environmental nature,
obtained during performance of this Contract. This information on Exploration
and Exploitation will be delivered to ANH in accordance with the Manual for the
Supply of Exploration and Exploitation Information.

 

19.2 Confidentiality of Information. The Parties agree that all data and
information produced, obtained or developed as a result of the operations and
this Contract are considered to be strictly confidential for five (5) calendar
Years afterwards, counted from the end of the calendar Year in which they are
produced, obtained or developed, or until termination of Contract or at the
moment of partial relinquishment of areas for the acquired information in those
areas, whichever shall first occur. For interpretation of data coming from the
operations executed under this contract, the confidentiality term will be twenty
(20) years, counted from the date to deliver it to ANH or until termination of
Contract or at the moment of partial relinquishment of areas for the acquired
information in those areas, whichever shall first occur. This stipulation does
not apply to data or information which the Parties should supply in accordance
with provisions of law or regulations in force, nor those required by
affiliates, consultants, contractors, auditors, legal advisers, financial
institutions and competent authorities with jurisdiction over the Parties or
their affiliates, and or due to the rules of any stock exchange on which the
shares of THE CONTRACTOR or its related parties are listed; however, the
delivery of information must be communicated to the other Party. Restrictions on
the disclosure of information will not impede THE CONTRACTOR from supplying data
or information to companies interested in the possible assignment of rights in
relation to the Contract Area, provided that such companies sign a related
confidentiality agreement, and agree to comply with the terms of this Clause.
ANH undertakes not to deliver to third parties any information or data obtained
as a result of THE CONTRACTOR’s operations, except as necessary to comply with
some provision of law applicable to ANH, or the normal course of its functions.
For the rest of the cases, ANH will require a previous authorization by THE
CONTRATIST.

 

19.3 Use of Information. If the period of confidentiality in the preceding
Clause expires, it is understood that THE CONTRACTOR transfers all rights of
data and interpretations to ANH. From that time onwards, ANH may dispose of the
information freely.

 

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19.4 Information meetings. ANH may call THE CONTRACTOR to hold an information
meeting at any time during the life of this Contract.

 

19.5 Half-Yearly executive report. In addition to the information referred to in
other Clauses of this Contract, the Manual for the Supply of Information, and
the requirements of Colombian legislation, THE CONTRACTOR will deliver to ANH
basic and summary information on matters such as productivity, reserves, and
production and forecasts, Exploration Operations, Evaluation Operations,
Exploitation Operations executed and projected for the following calendar Year,
personnel, industrial safety, environment and communities, national content in
hiring and procurement, etc. The report for the second half-Year is the annual
operations report, and the Program for execution in the following calendar Year.
This report will be delivered within 60 calendar Days following the end of each
calendar half-Year.

 

CLAUSE 20-INSPECTION AND FOLLOW UP

 

20.1 Visits to the Contracted Area. During the life of this Contract, ANH may at
its own risk and any time, and using procedures considered appropriate, visit
the Contract Area to inspect it and to follow up the activities of THE
CONTRACTOR and subcontractors, directly related to this Contract, and to ensure
that this Contract is being performed. At the same time, it may check the
accuracy of information received. If the inspector detects failures or
irregularities on the part of THE CONTRACTOR, he may make observations which THE
CONTRACTOR will reply to writing, within the time given by ANH.

 

THE CONTRACTOR will, at its own cost, place at the disposal of ANH
representative such facilities of transport, accommodation, meals and facilities
on the same conditions as those provided for its own personnel.

 

20.2 Delegation. ANH may delegate inspection and follow-up operations in the
Contract Area in order to ensure that THE CONTRACTOR is performing obligations
contracted under the terms of this contract and Colombian law. The absence of
activities of inspection and follow-up by ANH in no way relieves THE CONTRACTOR
from complying with Contract obligations by virtue of this Contract, and does
not imply any reduction in the same.

 

CLAUSE 21 – INSURANCE

 

21.1 Insurance. THE CONTRACTOR will take all insurances required by Colombian
law and on its discretion; it may take any other normal insurance expected in
Good Oil Industry Practices. At the same time, it will require each
[sub]contractor performed anywhere in the Contract area, to take or maintain the
insurances which it considers necessary. The costs incurred by the taking and
maintenance of these insurances are for the account and responsibility of THE
CONTRACTOR.

 

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21.2 Employment liability insurance. THE CONTRACTOR will establish an insurance
policy to guarantee payment of salaries, benefits and indemnities and other
employment liabilities which might arise from court orders derived from claims
made by employees contracted by THE CONTRACTOR, as the sole and true employer of
the same. The validity of the policy will be not less than three Years from the
date of termination of this Contract, and the sum insured the equivalent of 10%
of THE CONTRACTOR’s payroll for employees assigned to the performance of this
Contract during the Year prior to termination.

 

CLAUSE 22-GUARANTEES

 

22.1 Object Of The Guarantees. THE CONTRACTOR will issue in favor of ANH, in the
form, and on the terms and conditions provided for in this Contract, guarantees
to secure the performance and correct execution of all obligations of each phase
of the Exploration Period, and of the subsequent Exploration Program if any, and
activities inherent in such obligations. In no case will this guarantee have the
nature of a penalty clause.

 

22.2 Form of Guarantees. THE CONTRACTOR will, at its own expense, establish one
or more standby letters of credit, which shall be unconditional and irrevocable,
payable at sight and opened with a bank or financial institution established in
Colombia or other instrument or organism accepted by ANH.

 

22.3 Delivery of Guarantees. THE CONTRACTOR will deliver guarantees mentioned in
this Clause to ANH, in accordance with the essential terms of forms contained in
Annex C of this Contract, not less than eight calendar Days prior to the start
of each phase of the Exploration Period, or of the subsequent Exploration
Program if any. To the first phase THE CONTRACTOR will delivers within 30
calendar days following each due date. If for reasons alien to the wishes of THE
CONTRACTOR, duly justified, THE CONTRACTOR is unable to deliver the guarantees
to ANH in the time permitted here, ANH may extend the delivery date at the
request of THE CONTRACTOR. If THE CONTRACTOR fails to deliver guarantees within
the terms permitted will be a cause of breach of Contract.

 

22.4 Amount of Guarantees. THE CONTRACTOR will deliver the guarantees
corresponding to each phase of the Exploration Period or the Subsequent
Exploration Program, as the case may be, for 10% of the budget value of the
phase of the Minimum Exploration Program or the subsequent Exploration Program
as the case may be, denominated in dollars and payable in Colombian pesos The
amount of guarantee for each phase may not be less than US$100,000. The amount
of guarantee for each phase may not be higher than US$3,000,000.

 

22.5. Validity of guarantees. Each and every guarantee must be valid for the
term of the phase whose obligations are being guaranteed, plus three (3) months
more. In a case of extensions, guarantees must also be extended or replaced by
others of the same value, with a minimum period of the time of the extension
plus three (3) months more.

 

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22.6 Rejection Of Guarantees. ANH will reject guarantees provided by THE
CONTRACTOR if they fail to comply with the requirements of this Clause. ANH will
have one Month from the time of receipt and mentioned in Section 22.3, to advise
THE CONTRACTOR of rejection, and to return the guarantee presented. THE
CONTRACTOR will have 15 days calendar to correct the guarantees If not correct
the guarantees, guarantees rejected will be understood not to have been
delivered for the purposes of Section 22.3.

 

22.7 Calls on Guarantees. ANH will call on guarantees if THE CONTRACTOR is in
breach of all or part of any of the obligations guaranteed, without prejudice to
the performance of obligations contracted. The payment of standby letters of
credit does not relieve THE CONTRACTOR of its obligation to pay indemnities for
damages caused to third parties by its beach. ANH reserves the right to resort
to mechanisms for the solution of disputes when the value of the guarantee is
not sufficient to cover the amount of indemnities.

 

CLAUSE 23 - SUBCONTRACTORS, PERSONNEL AND TECHNOLOGY TRANSFER

 

23.1 Subcontractors. In order to conduct operations under this contract, THE
CONTRACTOR may, observing the terms of Colombian law, enter into contracts for
its own account and risk, to obtain goods and services in Colombia or abroad.
THE CONTRACTOR will include stipulations in its contracts, which bind
subcontractors to the observance of Colombian legislation, and the terms of this
contract.

 

23.2 List of Contracts and Subcontractors. THE CONTRACTOR will keep an updated
list of contracts for work, services and suppliers, and will place it at the
disposal of ANH upon request. The list will specify at least the name of the
supplier, contractor or subcontractor, the object of the contract, its value,
and its duration.

 

23.3 National Procurement. THE CONTRACTOR will give preference to national
bidders for the supply of goods and services, on equality of conditions, being
competitive in quality, delivery and price.

 

23.4 Personnel. For all legal purposes, THE CONTRACTOR acts as sole employer of
the employees which it contracts for activities undertaken in this Contract, and
therefore, will be responsible for employment obligations arising from
employment relations or contracts, such as payment of salaries and social
benefits, payroll taxes, affiliation and payment of pension contributions,
health and occupational risks to the social security system, as required by law.
THE CONTRACTOR will train Colombian personnel appropriately and diligently, to
find personnel that contractor considers necessary for operations under this
contract. At all events, THE CONTRACTOR will comply with the provisions of law
which govern the proportion of local and expatriate employees in executive and
non-executive posts.

 

23.5 Technology Transfer. THE CONTRACTOR undertakes to pay for, or to hold for
its account, training programs for professionals, or to use sponsorship for
research projects, as designated by ANH in areas related to the development of
this Contract,

 

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and during the life of the same. Training will be related to the oil industry,
in technical, environmental, commercial, or legal areas, amongst others.
Training may be effected through the integration of professionals appointed by
ANH to THE CONTRACTORs working group organized for the Contract area, or for
other related activities. All the costs of training, except for employment costs
incurred in favor of professionals received, in compliance with THE CONTRACTOR´s
obligations under this clause, will be fully assumed by THE CONTRACTOR. THE
CONTRACTOR will not a bear any costs derived from the employment relationship of
the beneficiaries of training. In order to comply with the obligations of
technology transfer in accordance with the terms of this Clause, each of the
phases of the Exploration Period and its extensions will contain a commitment
from THE CONTRACTOR to advance technology transfer programs for a value
equivalent to a 25% of the amount of the fee for the use of the subsurface
mentioned in SubSection 16.1.1 of the phase in the course of the Exploration
Period. With regard to Exploitation Areas, technology transfer will be for a
value equivalent to 10% of amount of the fee for the use of the subsurface
mentioned in SubSection 16.1.2 for the Calendar Year. In no event, will THE
CONTRACTOR be required to pay more than US$ 100.000 per phase or per Calendar
Year as the case may be, in technology transfer. The technology transfer
programs will be agreed in advance by ANH and THE CONTRACTOR.

 

CLAUSE 24-OPERATOR

 

24.1 Without prejudice to its entitlement to perform operations directly, THE
CONTRACTOR may contract a third-party to act as operator, provided that the
latter can show experience, suitability, and financial soundness. In such cases,
the designation of the operator will require the final approval of ANH.

 

24.2 If THE CONTRACTOR is formed by two or more companies, it will state which
of them will act as operator.

 

24.3 If more of 2 different operators at the same time in this Contract are
required, it will be approval by ANH.

 

24.4 If the operator decides to resign, it shall give at least 90 calendar Days´
notice.

 

24.5 Being the Operator a third party, if ANH becomes aware that the operator
has engaged in negligent practices, practices not in accordance with Good Oil
Industry Practices in relation to compliance with the obligations under this
Contract, it will so advise Contractor, which will have 90 calendar Days from
date of requirement to adopt corrective measures. If after this time the
deficient conduct continues, ANH will require THE CONTRACTOR to change the
operator.

 

CLAUSE 25-THE RIGHT TO MAKE ASSIGNMENTS

 

25.1 The Right. THE CONTRACTOR has the right to assign or transfer all or part
of its interest, rights and obligations under this Contract, with the prior
written authorization of ANH, to another person or company which has the
financial capacity, the technical competence, the professional skills and the
legal capacity required to act in Colombia.

 

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25.2 Procedure. For this purpose, THE CONTRACTOR will send a written request to
ANH, indicating the essential elements of the negotiations, such as the name of
the potential assign, the information on its legal, financial, technical and
operational capacities, the value of the rights and obligations to be assigned,
the scope of operations, etc. Within 60 working Days of receipt of the request
presented in full form, ANH will exercise its discretion to analyze information
supplied by THE CONTRACTOR, after which it will make a decision, and will not be
obliged to explain the decision. If any of companies forming THE CONTRACTOR is
involved in a process of merger, spin off, absorption, or transformation into
another type of Corporation, it will be sufficient to advise ANH promptly,
without prejudice to the information that other Colombian authorities may
require. ANH reserves the right to evaluate the new situation of THE CONTRACTOR
or any of the companies thus formed, with regard to financial capacity,
technical competence, professional skills and legal capacity required to act,
and may require that guarantees be supplied.

 

Paragraph: When the right to make assignments is in favour of companies that
control or manage THE CONTRACTOR, or in favour of one of the companies that are
part of it or branches or between companies belonging to the same economic
group, if ANH does not give an answer within the established time, it will be
understood that the operation was authorized.

 

CLAUSE 26 - FORCE MAJEURE AND ACT OF THIRD PARTIES

 

26.1 Definitions. For the purposes of this Contract, force majeure is an
unforeseen event which it is not possible to resist, such as a law, an act of
authority, a shipwreck, an earthquake, etc; and an act of a third party is an
irresistible act, legally alien to the party alleging it, such as a war, and
ill-intentioned act of third parties, etc. For the purposes of this Contract,
both force majeure and the act of third parties will be considered to relieve
responsibility, and to excuse performance of non-financial obligations affected
by such circumstances, provided that they have an alien cause, and the Party
receiving notice of the same accepts that it is irresistible, and that the event
occurring represented an impediment.

 

26.2 Suspension. The performance of obligations under this Contract will be
suspended throughout the time during which either Party is unable to perform all
or part of its obligations, for reasons of force majeure or irresistible acts of
third parties. If either Party is affected by any of such circumstances, it will
advise the other within 15 calendar Days following, invoking this Clause, and
presenting appropriate justification, specifying the causes originating the
impediment, the manner in which compliance of the related obligation is
affected, the estimated period of suspension of activities, and any other
information which allows it to be shown that the event has occurred, and was
irresistible.

 

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26.3 Acceptance. Within 15 calendar Days following receipt of advice, the Party
not affected will respond in writing, accepting the circumstance and relieve the
other of responsibility, or rejecting the circumstance, and if accepted, the
terms for compliance with obligations affected will be suspended. In this case,
the suspension will commence from the moment at which the event invoked as a
cause for suspension occurred. If the Party not affected does not reply within
the time given, it will be understood that it accepts the occurrence of the
cause invoked, and performance of the obligations affected will be suspended.
Suspension will only interrupt compliance of the obligations affected.

 

26.4 Cessation Of Suspension. The Party affected by the cause relieving
responsibility will resume compliance of obligations suspended within one month
following the disappearance of the event invoked as a cause of suspension. In
this case, it will inform the other Party within 15 calendar Day following. The
Party obliged to perform the obligation will employ best efforts to perform
within the terms and conditions agreed by the Parties.

 

26.5 Effects On Terms. If the suspension impedes the performance of any of the
Exploration Operations contained in any of the phases of the Minimum Exploration
Program, or of the Subsequent Exploration Program, and that impediment is
prolonged for more than two consecutive months, ANH will restore the terms
required by the Contract for a period equal to that of the impediment, without
prejudice to the fact that THE CONTRACTOR must extend the existing guarantee or
obtain a new one, in the terms of Clause 22.

 

CLAUSE 27 - SOLUTION OF DISPUTES BETWEEN THE PARTIES

 

27.1 Executive Instance. Any difference or disagreement arising in regard to
performance of this Contract will be solved by the officers of the Parties
authorized for this purpose. If the disagreement has not been resolved within
thirty calendar Days from date of written notice, the matter will be referred to
the most senior executive of the Parties resident in Colombia, in order to seek
a joint solution. If within thirty calendar Days following the date on which one
of the Parties has requested the other that the disagreement the submitted to
those senior executives as mentioned, the Parties reach an agreement or decision
on the matter in question, within fifteen calendar Days of reaching such an
agreement or decision, that agreement or decision adopted will be signed.

 

27.2 Expert Intervention, and Arbitration. If within the thirty Days mentioned,
the senior executives of the Parties cannot reach an agreement or decision, or
if within the fifteen Days mentioned, no agreement or decision adopted is
signed, either Party may resort to the mechanisms provided for in Subsections
27.2.1, 27.2.2, and 27.2.4, as the case may be, and as follows:

 

27.2.1 Technical Experts. If the matter is a technical disagreement, it will be
submitted to the opinion of experts appointed as follows: one by each party, and
the third named by the other two experts. Should the experts not agree, at the
petition of either party,

 

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the third expert will be appointed by the association of professionals on the
matter involved in the dispute or a related area, where the association is a
technical body acting as consultative institution for the Government, based in
Bogota.

 

Once the experts have been appointed:

 

a) the experts will issue their opinion within thirty Days of appointment. The
experts will indicate the place and time for the receipt of information from the
Parties. At the request of the experts, the Parties may grant an extension of
the initial term allowed.

 

b) The Parties will deliver all relevant information, which the experts may
consider to be necessary;

 

c) The Parties will focus and demarcate the matter on which the experts are to
decide;

 

d) The costs and expenses of the technical experts will be borne by the Parties
in equal portions; and

 

e) The opinion will be issued by majority, and will be binding on the Parties
for the purposes of settlement.

 

27.2.2 Accounting Experts. If the disagreement is an accounting matter, it will
be submitted to the opinion of experts who will be qualified public accountants,
one appointed by each party, and the third by the two principal experts. Should
the two experts fail to agree, and at the petition of either party, the third
expert will be appointed by the Junta Central de Contadores (Colombia´s Board of
Public Accountants) in Bogota. Once the experts have been appointed, the
procedure will be similar to that stipulated in sub-paragraphs (a) to (e) of the
preceding paragraph.

 

27.2.3 Dispute As To Nature. If the disagreement between the Parties is with
regard to its nature, as a technical, accounting or legal matter, then it will
be considered to be a legal matter.

 

27.2.4 Arbitration. Any disagreement or controversy derived from or related to
this Contract, and which is not a technical or accounting disagreement, will be
resolved by arbitration. The arbitration tribunal will be composed of three
arbitrators named by mutual agreement between the Parties. If the Parties cannot
agree on the appointment of the arbitrators, they will be appointed by the
Bogota Chamber of Commerce Arbitration and Conciliation Centre, upon the request
of either Party. At all events, the arbitrators will have accredited experience
of more than five Years in matters related to the oil industry. The tribunal
will apply Colombia substantive law in force, and its decision will be in law.
Arbitration proceedings will be conducted in Spanish.

 

27.2.5 Exclusion. In accordance with the terms of Subsection 4.3.2 above, the
lack of agreement between the Parties regarding the extension of the
Exploitation Period for each Exploitation Area will not be deemed to be a
disagreement, and will not be subject to the procedures established in this
Clause.

 

CLAUSE 28 – TERMINATION

 

28.1 Causes Of Termination. This Contract will terminate and THE CONTRACTOR’s
rights will cease in any of the following circumstances:

 

a) Expiry of the Exploration Period, with no discovery having been made by THE
CONTRACTOR;

 

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b) Expiry of the Exploitation Period. In this case, the effects of this Contract
with regard to the Exploitation Area will cease, with regard to that area in
which the Exploitation Period has terminated;

 

c) Resignation of Contractor during Exploration, in the cases provided for in
Subsection 4.2.1;

 

d) Resignation of THE CONTRACTOR at any time during the Exploitation Period;

 

e) At any time, by mutual agreement between the Parties;

 

f) Through a declaration of breach on the part of Contractor;

 

g) Through the application of any of the causes of unilateral termination
provided for in this Contract;

 

h) With the occurrence of any of the causes of termination or forfeiture ordered
by the law.

 

In the circumstances provided for in (f), (g) and (h) ANH will call on the
guarantee mentioned in Clause 22, without prejudice to any recourse it may have,
or actions which may decide to bring.

 

28.2 Causes of Termination due to Breach. The causes of termination due to
breach are the following:

 

a) Assignment of all or part of this Contract, without observing the provisions
of Clause 25;

 

b) Unjustified suspension of Exploration Operations for more than six continuous
months in any given phase;

 

c) Unjustified continuous suspension of Evaluation Operations or Exploitation
Operations during half the term of the Evaluation Program in an Evaluation Area,
or for 6 consecutive months in an Exploitation area. In such cases, the effects
of this Contract will cease with regard to the Evaluation Area or the
Exploitation area in which the suspension of operations has occurred;

 

d) Improper use of resources and minerals which are not part of an object of
this Contract;

 

e) Omission or delay in the delivery the delivery of Exploration Operation
results, Evaluation technical information delivery o production impida
desarrollo de las funciones de la ANH

 

f) Omission or delay in the delivery of guarantees on conditions satisfactory to
ANH;

 

g) Breach of any other obligations contracted by THE CONTRACTOR under this
Contract.

 

28.3 Procedure for a Declaration of Breach. Should any of the causes of breach
occur, ANH may terminate this Contract sixty Days after having sent written
requirements to THE CONTRACTOR, indicating the cause invoked for such a
declaration, provided that THE CONTRACTOR has not presented any explanations
satisfactory to ANH within 20 working Days after the date of the requirement, or
has not corrected its performance of the Contract within sixty Days. If within
the term of 20 Days as mentioned, THE CONTRACTOR presents explanations
satisfactory to ANH,

 

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and the remaining term to complete the terms of sixty calendar Days is not
sufficient to perform the obligations pending, ANH may grant additional time for
performance, without prejudice to any demand for guarantees required to support
it. If at the end of this time, the corrective measures necessary have not yet
been taken, ANH will declare breach and termination of this Contract. It is
understood that the term provided for compliance with pending obligations in no
case modifies the term agreed for the execution of the Minimum Exploration
Program for the following phase of phases of the Exploration Program, if any.

 

28.4 Causes of Unilateral Termination. ANH may declare this Contract terminated
at any time in the following circumstances:

 

a) If a process of Liquidation of THE CONTRACTOR is initiated, THE CONTRACTOR
being a corporate entity;

 

b) If a judicial embargo is placed on THE CONTRACTOR which seriously affects
performance of the Contract.

 

If THE CONTRACTOR is formed by a number of corporate entities or natural persons
or both, the causes mentioned above will apply if they seriously affect the
performance of the Contract.

 

28.5 Mandatory Clauses. ANH will declare termination, forfeiture or the
mandatory liquidation of this Contract with the occurrence of causes given in
the law, such as those provided for in Law 418 of 1997, successively extended
and amended by Laws 540 of 1999 and 782 of 2002 or Law 40 of 1993, or in laws
which replace or amend them.

 

28.6 Subsequent Obligations. If this Contract is terminated for any cause, and
at any time, the Parties are obliged to perform their legal obligations to each
other, and to third parties, as contracted in this Contract. This includes the
assumption of responsibility for loss and damage resulting from the unilateral
termination and for causes acceptable to THE CONTRACTOR, where there are
mandatory indemnities or compensation to pay.

 

CLAUSE 29-ENVIRONMENT

 

29.1 THE CONTRACTOR will pay special attention to the protection of the
environment, and to compliance with regulations on the matter. At the same time,
THE CONTRACTOR will adopt and implement specific contingency plans to attend to
emergencies, and repair damage in the most efficient and timely way possible.

 

29.2 THE CONTRACTOR will make a half-Yearly report to ANH on environmental
aspects of operations in progress, the application of preventive plans and
contingency plans, and with regard to the state of activities or applications to
the environment convert environmental authorities with regard to permits,
authorizations, concessions or licenses, as the case may be.

 

29.3 If an activity or Exploration Operations requires permits, authorizations,
concessions or environmental licenses, THE CONTRACTOR will not pursue that
activity or operation until the permit, authorizations, concession or license is
obtained.

 

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29.4 THE CONTRACTOR may not commence Exploitation without approval of the
environmental impact study and the issue of related environmental licenses.

 

29.5 Failure to comply with any of the obligations in terms of subsection 29.3
and 29.4, is a cause of termination of breach, in terms of Subsection 28.2 (g).

 

CLAUSE 30-ABANDONMENT

 

30.1 Abandonment. Without prejudice to the terms of Subsection 4.3.4 of this
Contract, in all cases where there is application for the relinquishment of
onshore or offshore areas, THE CONTRACTOR will program and undertake all
activities of Abandonment, in accordance with Colombian legislation, and
observing Good Oil Industry Practices.

 

30.2 Relinquishment of Exploration Areas and Evaluation Areas. Within sixty Days
of the date on which an Exploration Area or Evaluation Area should be
relinquished, THE CONTRACTOR will implement a program for Abandonment to the
satisfaction of ANH and other competent authorities.

 

30.3 Relinquishment of Exploitation Areas. The Exploitation Plan for each
Exploitation Area will include the related Abandonment Program. That is, THE
CONTRACTOR will make the necessary adjustments to the Abandonment Program in it
is updating of the Exploitation Plan, as required by Section 9.4.

 

30.4 Abandonment fund.

 

30.4.1 Creation. When the first calendar Year of the Month in which THE
CONTRACTOR commenced commercial and regular production expires, for the
production of Hydrocarbons from some Exploitation Area, from that time onwards
THE CONTRACTOR will keep a special account in its books, denominated
“Abandonment Fund”, and in order to guarantee the availability of funds required
to implement the Abandonment Program mentioned in the preceding Section, THE
CONTRACTOR will establish an escrow account or a bank guarantee; and in either
case, the terms and conditions of the guarantee determined by the Parties within
the Year preceding the date on which the Abandonment Fund must be established.
If there is no agreement on the matter, THE CONTRACTOR will establish a bank
guarantee in the terms of this Clause.

 

30.4.2 The Amount of the Abandonment Fund. The amount of the Abandonment Fund at
the end of each Calendar Year will be the result of applying the following
formula:

 

where:

 

AMA = (PAH/RIH)2 x CAB

 

AMA is the value of the Abandonment Fund which THE CONTRACTOR must show has been
made for each Exploitation Area, at the end of the Calendar Year.

 

PAH is the accumulated volume of Hydrocarbons produced in each Exploitation
Area, from the start of production until 31 December of the Year for which the
calculation is made.

 

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RIH are the proven reserves of Hydrocarbons in each Exploitation Area, expressed
in Liquid Hydrocarbons Barrels, in accordance with the Exploitation Plan and its
updates. This includes accumulated production (PAH_) plus remaining proven
reserves.

 

CAB is the estimated updated costs of the Abandonment operations for each
Exploitation Area. In case of annual adjustments, they will be reduced by the
value of Abandonment costs already executed.

 

All calculations of production and reserves of Hydrocarbons mentioned above (PAH
and RIH) will be made in Liquid Hydrocarbons Barrels. For this purpose, the
Parties agree that for the purposes of the conversion, 5700 ft.³ of gas at
standard conditions are equivalent to one Barrel of Liquid Hydrocarbons.

 

The variables in the formula will be reviewed and updated annually by THE
CONTRACTOR, based on real disbursements in Abandonment activities, and in terms
of production and reserve volumes for Hydrocarbons.

 

Paragraph: For the purposes of this Clause, proven reserves are the volume of
Hydrocarbons which, after due geological analysis and engineering, THE
CONTRACTOR estimates with reasonable certainty to be recoverable commercially,
since Exploitation began, based on known reservoirs, and in accordance with the
economic conditions, operating methods and the regulatory framework in force at
the time of the calculation.

 

30.5 The performance of the obligations of this Clause does not relieve THE
CONTRACTOR from its obligation to undertake all Abandonment operations in each
Exploitation Area for its own account and risk.

 

CLAUSE 31- CONTRACT DOMICILE AND APPLICABLE LAW

 

For all purposes of this Contract, the Parties establish as their domicile the
city of Bogota, Colombia. This Contract will be governed in all its parts by
Colombian law, and THE CONTRACTOR waives any attempt at diplomatic claims to
support its rights and obligations under this Contract, except in the case of
denial of justice. It is understood that there will not be denial of justice if
THE CONTRACTOR has had access to all recourse and means of action available
under Colombian law.

 

CLAUSE 32-REPRESENTATION

 

Without prejudice to THE CONTRACTOR´s legal rights derived from provisions of
law or the Clauses of this Contract, ANH will speak for THE CONTRACTOR before
the Colombian authorities with regard to activities undertaken under this
Contract, provided that it should do so and will supply government officials and
agencies with all data and reports they may legally require. THE CONTRACTOR will
be obliged to prepare those reports and send them to ANH. Expenses incurred by
ANH to attend to any matter

 

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referred to in this Clause will be for account of THE CONTRACTOR, but THE
CONTRACTOR´s approval will be required when those expenses exceed US$5,000 or
colombian pesos equivalent. The Parties declare that, for any relations with
third parties, neither the terms of this Clause nor those of any other Clause of
this Contract imply the granting of any general powers of representation nor
that the Parties have formed a civil or commercial corporation or other
relationship in which either Party could be considered to be severally liable
for the acts or omissions of the other or to have the authority or mandate to
commit the other with regard to some obligation. This Contract refers to
activities within the territory of the Republic of Colombia.

 

CLAUSE 33- PAYMENTS AND CURRENCY

 

33.1 Currency. All payments to be made by THE CONTRACTOR to ANH under this
Contract will be made in United States dollars if permitted by exchange
regulations or in Colombian pesos and at the bank designated by ANH. THE
CONTRACTOR may make payments in other currencies when exchange regulation permit
and ANH gives its authorization.

 

33.2 Exchange Rate. If currency is to be converted, the Market Reference Rate
(TRM) for the date of payment will be applied, as published by the
Superintendency of Banks, or the agency that replaces it.

 

33.3 Penalty interest. If payments due from THE CONTRACTOR to ANH are not made
within the terms established, THE CONTRACTOR will pay Penalty Interest.

 

CLAUSE 34 – TAXES

 

THE CONTRACTOR accepts that it is subject to Colombian tax law.

 

CLAUSE 35 – SERVICE OF NOTICE AND COMMUNICATIONS

 

35.1 Domicile for Service and Communications. Notice served and communications
sent between the Parties will be addressed to their legal representatives to the
domiciles registered for service of judicial notices, which at the date of
execution of this Contract are:

 

ANH: Calle 37 No. 7-43 p. 5 Edificio Guadalupe, Bogota, Colombia

 

THE CONTRACTOR: Calle 114 No. 9-01 Piso 10, Oficina 1003, Bogotá, Colombia

 

35.2 Changes. If a Party changes legal representation or domicile as indicated
above, it will officially advise the other within five Days of doing so.

 

35.3 Effective date. A communication between the Parties in relation to this
Contract will be effective upon receipt by the Party to whom it is addressed at
the domicile indicated above and in any case when delivered to the domicile for
service of judicial notice registered at the Chamber of Commerce.

 

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RIO VERDE SECTOR EXPLORATION AND EXPLOITATION CONTRACT

 

CLAUSE 36 – EXTERNAL COMMUNICATIONS

 

If THE CONTRACTOR needs to make a public statement or announcement or communiqué
with respect to the Contract regarding information that might affect the normal
performance of the same, THE CONTRACTOR will give notice to ANH at least two
days in advance. Anyhow, external notices on Discoveries made, declared or to be
declared commercial, and and the volumes of reserves of Hydrocarbons shall be
authorized by ANH.

 

CLAUSE 37 – LANGUAGE

 

The official language for all purposes and actions related to this Contract will
be Spanish.

 

CLAUSE 38 – FORMALIZATION

 

The signatures of the Parties will formalize this Contract.

 

In witness whereof, this document is signed in Bogotá, this fourteen (14) day of
Septemberpf year two thousand four (2004).

 

AGENCIA NACIONAL DE HIDROCARBUROS

 

JOSÉ ARMANDO ZAMORA REYES

 

DIRECTOR GENERAL

 

THE CONTRACTOR

 

HARKEN DE COLOMBIA LIMITED

 

GUILLERMO SANCHEZ

 

LEGAL REPRESENTATIVE

 

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RIO VERDE SECTOR EXPLORATION AND EXPLOITATION CONTRACT

 

ANNEX “A” – CONTRACTED AREA

 

ANNEX TO THE “RÍO VERDE” SECTOR EXPLORATION AND EXPLOITATION CONTRACT

 

The total Contracted Area in the block described below has an extension of
thirty thousand three hundred and forty-one (30,341) hectares and three hundred
and thirty-three (333) square meters. The cartographic data was taken from the
Political Map of Colombia, digital file of I.G.A.C, at a scale of 1:1’500.000.

 

RIO VERDE BLOCK

 

The area of the polygon taken from the vertexes described below is of thirty
thousand three hundred and forty-one (30,341) hectares and three hundred and
thirty-three (333) square meters and located in the municipal jurisdictions of
San Luis de Palenque and El Yopal in the Casanare Department. This area is
described below as appears in the drawing attached as Annex “A”, which makes an
integral part of this Contract, as well as in the corresponding charts:
“RECREO-912” Geodesic Vertex of Instituto Geográfico Agustín Codazzi has been
taken as point of reference, whose GAUSS plane coordinates with origin in Bogotá
are: N-1’051.829,47 meters, E-1’158.055,62 meters, that correspond to the
geographic coordinates Latitude 05° 03’58”0,207 North to the Equator, Longitude
72° 39’ 20” 0,698 to the West of Greenwich.

 

Point A:

 

From this vertex (RECREO-912) continuing N 89° 4.’ 7.” 0,214 thousand E for a
distance of 46552.53 meters until reaching Point ‘A’, departure point to mark
boundaries whose coordinates are N-1052586 meters, E- 1204602 meters.

 

Point B:

 

From this point continuing to the NORTH for a distance of 13757 meters until
reaching point ‘B’, whose coordinates are N- 1066343 meters, E- 1204602 meters.

 

Point C:

 

From this point continuing to the EAST for a distance of 22078 meters until
reaching point ‘C’, whose coordinates are N- 1066343 meters, E- 1226680 meters.

 

Point D:

 

From this point continuing to the SOUTH for a distance of 13787 meters until
reaching point ‘D’, whose coordinates are N- 1052556 meters, E- 1226680 meters.

 

Point E:

 

From this point continuing N 89° 47’ 51” 0,335 thousand W for a distance of
6972.08 meters until reaching point ‘E’, whose coordinates are N- 1052580.63
meters, E- 1219707.96 meters.

 

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RIO VERDE SECTOR EXPLORATION AND EXPLOITATION CONTRACT

 

Point F:

 

From this point continuing N 89° 38’ 19” 0,972 thousand W for a distance of
10698.64 meters until reaching point ‘F’, whose coordinates are N- 1052648.06
meters, E- 1209009.53 meters.

 

From this point continuing S 89° 11’ 35” 0,890 thousand W for a distance of
4407.97 meters until reaching point ‘A’, departure point and closing of the
boundary.

 

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RIO VERDE SECTOR EXPLORATION AND EXPLOITATION CONTRACT

 

Calculation of the area directions, and distances as of the gauss coordinates,

origin Bogotá

Table of Data and Results for the RIO VERDE Sector

 

Municipal Jurisdictions of San Luis de Palenque and El Yopal in Casanare
Department

 

Vertex

--------------------------------------------------------------------------------

   NORTH

--------------------------------------------------------------------------------

   EAST

--------------------------------------------------------------------------------

   Distance

--------------------------------------------------------------------------------

   North Diff.

--------------------------------------------------------------------------------

   East Diff.

--------------------------------------------------------------------------------

   DIRECTION

--------------------------------------------------------------------------------

Point

   1,051,829.47000    1,158,055.62000                                   
46552.52763    756.53000    46,546.38000    N 89° 4.' 7.'' 0,214 mil E

A

   1,052,586.00000    1,204,602.00000                                    13757
   13,757.00000    0.00000    NORTE

B

   1,066,343.00000    1,204,602.00000                                    22078
   0.00000    22,078.00000    EAST

C

   1,066,343.00000    1,226,680.00000                                    13787
   -13,787.00000    0.00000    SOUTH

D

   1,052,556.00000    1,226,680.00000                                   
6972.083505    24.63000    -6,972.04000    N 89° 47' 51'' 0,335 mil W

E

   1,052,580.63000    1,219,707.96000                                   
10698.6425    67.43000    -10,698.43000    N 89° 38' 19'' 0,972 mil W

F

   1,052,648.06000    1,209,009.53000                                   
4407.966895    -62.06000    -4,407.53000    S 89° 11' 35'' 0,890 mil W

A

   1,052,586.00000    1,204,602.00000                    

AREA OF THE POLYGON

   30,341.000               

 

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RIO VERDE SECTOR EXPLORATION AND EXPLOITATION CONTRACT

 

MAP

LOGO [g33224image007.jpg]

 

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RIO VERDE SECTOR EXPLORATION AND EXPLOITATION CONTRACT

 

ANNEX “B” OF THE MINIMUM EXPLORATION PROGRAM

ANNEX TO “RIO VERDE” SECTOR EXPLORATION AND EXPLOITATION CONTRACT

 

THE CONTRACTOR agrees to complete as a minimum, the following Minimum
Exploration Program:

 

The following activities shall be carried out during Phase 1:

 

  • Re-completion of Tilodirán No. 1 Well in the Upper Gachetá Formation and
development of a testing program focused to evaluation of the structure in which
the well is completed.

 

  • Re-completion of Macarenas Well No. 1 in the Upper Gachetá Formation,
extensive testing program, evaluation of the structure.

 

  • Re-processing of the 300 kilometers of available seismic.

 

  • Geological and Geophysical evaluation of the block, including evaluation of
Río Verde No. 1 Well.

 

  • Acquisition of a new 2D seismic program with a minimum of 50 kilometers of
length.

 

During Phase 2, CONTRACTOR shall carry out the drilling of an Exploration Well
and acquisition of a minimum program of 25 kilometers of new 2D seismic.

 

During Phase 3, drilling of an Exploration Well.

 

During Phases 4 and 5, drilling of an Exploration Well for each phase.

 

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ANNEX “C” – LETTER OF CREDIT FORM

 

ANNEX TO THE “RIO VERDE” SECTOR EXPLORATION AND EXPLOITATION

CONTRACT

 

LETTER OF CREDIT NO.    :   __________________________________________
PLACE AND DATE OF ISSUANCE    :  

__________________________________________

EXPIRATION DATE    :  

[             The time between this date and the date for termination of the
commitments shall not be of less than 60 days.             ]

PAR VALUE    :  

                             (US$            )

ISSUER BANK    :  

[             Name of the Issuer Bank             ]

BENEFICIARY    :  

Agencia Nacional de Hidrocarburos - ANH

ORDERING PARTY    :  

[             Name of the Company             ]

NAME OF THE CONTRACT    :  

RIO VERDE

 

We hereby inform you that under the name and to the order of [            Name
of the Company             ], we have issued this irrevocable stand-by letter of
credit for the amount in Colombian pesos resulting from the conversion at the
market exchange rate on the date the communication of non-fulfillment described
below is sent to us for the amount of                  Dollars of the United
States of America (US$            ), to guarantee compliance and correct
execution of all the obligations of Phase              for the Exploration
Period, having a term of              and of the other activities and
obligations under the EXPLORATION AND EXPLOITATION CONTRACT, entered into
between the companies of THE CONTRACTOR and ANH on             , hereinafter
referred to as THE CONTRACT.

 

It is agreed that the responsibility of the [            Name of the Issuer Bank
            ] under this stand-by letter of credit is exclusively limited to the
above mentioned amount in Colombian legal currency.

 

In the event of non-fulfillment by THE CONTRACTOR of any or all the obligations
and of other activities related to said obligations under THE CONTRACT described
in the first paragraph of this stand-by letter of credit hereinafter referred to
as GUARANTEED OBLIGATIONS, the Beneficiary shall give notice on said
non-fulfillment to [            Name

 

Page 41

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of the Issuer Bank             ] at the offices in                             ,
within the term of this letter of credit. Within fifteen (15) days after we
received said notice, we will proceed to unconditionally pay to the order of the
Beneficiary the claimed amounts charged to this letter of credit, without
exceeding in no case, the total guaranteed value.

 

If the mentioned notice of non-fulfillment is not given within the term of this
letter of credit, our responsibility shall cease.

 

The notice informing to the [            Name of the Issuer Bank             ]
on non-fulfillment of the GUARANTEED OBLIGATIONS, shall consist on a document
duly signed by the Legal Representative of ANH or whoever acts in such
condition, stating the non-fulfillment by THE CONTRACTOR of the GUARANTEED
OBLIGATIONS and requesting payment of this letter of credit. Said notice shall
contain the number of this letter of credit and its value converted to Colombian
currency at the market exchange rate effective on the date on which said notice
is sent to us as certified by the Colombian Banking Superintendence or the
entity replacing it for said purpose.

 

This Document will be governed by the Rules and Uniform Uses Related to the
Documentary Credits (Last Revision) published by the International Chamber of
Commerce (CCI).

 

 

--------------------------------------------------------------------------------

Signature of the Legal Representative of the Issuer Bank

 

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TABLE OF CONTENTS

 

CLAUSE1 - DEFINITIONS    1 CLAUE 2 – OBJECT    5 CLAUSE 3 – CONTRACTED AREA    5
CLAUSE 4 – DURATION AND TERMS    6 CLAUSE 5 – MINIMUM EXPLORATORY PROGRAM    8
CLAUSE 6 – SUBSEQUENT EXPLORATION PROGRAM    10 CLAUSE 7 – DISCOVERY AND
EVALUATION    10 CLAUSE 8 – DECLARATION OF COMMERCIABILITY    12 CLAUSE 9 –
EXPLOTIATION PLAN    12 CLAUSE 10 – EXPLOITATION WORKS PROGRAMS    14 CLAUSE 11
– MANAGEMENT OF OPERATIONS    14 CLAUSE 12 - ROYALTIES    15 CLAUSE 13 –
MEASUREMENT    16 CLAUSE 14 – PRODUCTION AVAILABILITY    16 CLAUSE 15 – NATURAL
GAS    17 CLAUSE 16 – CONTRACT ECONOMIC RIGHTS OF ANH    17 CLAUSE 17 –
UNIFICATION    21 CLAUSE 18 – ASSETS OWNERSHIP    21 CLAUSE 19 – SUPPLY OF
INFORMATION AND CONFIDENTIALITY    22 CLAUSE 20 – INSPECTION AND FOLLOW-UP    23
CLAUSE 21 – INSURANCE    23

 

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CLAUSE 22 - GUARENEES    24 CLAUSE 23 – SUB-CONTRACTORS, PERSONNEL AND
TECHNOLOGY TRANSFERENCE    25 CLAUSE 24 – OPERTOR    26 CLAUSE 25 – ASSIGNMENT
RIGHTS    26 CLAUSE 26 – FORCE MAJEURE AND ACTS OF THIRD PARTIES.    27 CLAUSE
27 – OLUTION OF DISPUTES BETWEEN THE PARTIES    28 CLAUSE 28 – TERMINATION    29
CLAUSE 29 – ENVIRONMENT    31 CLAUSE 30 - ABANDONMENT    32 CLAUSE 31 – CONTRACT
DOMICILE AND APPLICABLE LAW    33 CLAUSE 32 - REPRESENTATION    33 CLAUSE 33 –
PAYMENTS AND CURRENCY    34 CLAUSE 34 - TAXES    34 CLAUSE 35 – NOTICES AND
COMMUNICATIONS    34 CLAUSE 36 – EXTERNAL COMUNIQUES    35 CLAUSE 37 – LANGUAGE
   35 CLAUSE 38 – FORMALIZATION    35 ANNEX A – CONTRACTED AREA    36 ANNEX C
LETTER OF CREDIT FORM    41

 

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