exv10w1



 




Exhibit
10.1

PRODUCTION SHARING CONTRACT




FOR




EXPLOITATION OF COALBED METHANE




RESOURCES IN ZIJINSHAN AREA, SHANXI




PROVINCE,



THE PEOPLE’S REPUBLIC OF CHINA




CHINA UNITED COALBED METHANE CORP. LTD.



AND


PACIFIC ASIA PETROLEUM LTD.




October, 2007

BEIJING, CHINA




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	Contents	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 
	 	Preamble	 	 	1	 
	Article 1
	 	Definitions	 	 	2	 
	Article 2
	 	Objective of the Contract	 	 	7	 
	Article 3
	 	Contract Area	 	 	7	 
	Article 4
	 	Contract Term	 	 	8	 
	Article 5
	 	Relinquishment of Contract Area	 	 	10	 
	Article 6
	 	Minimum Exploration Work Commitment and Expected Minimum Exploration Expenditures	 	 	11	 
	Article 7
	 	Management Organization and Its Functions	 	 	13	 
	Article 8
	 	Operator	 	 	18	 
	Article 9
	 	Assistance Provided by CUCBM	 	 	22	 
	Article 10
	 	Work Program and Budget	 	 	23	 
	Article 11
	 	Determination of Commerciality of CBM	 	 	25	 
	Article 12
	 	Financing and Cost Recovery	 	 	27	 
	Article 13
	 	CBM Production and Allocation	 	 	29	 
	Article 14
	 	Quality, Quantity, Price, and Destination of CBM	 	 	33	 
	Article 15
	 	Preference for the Employment of Chinese Personnel, Goods and Services	 	 	37	 
	Article 16
	 	Training of Chinese Personnel and Transfer of Technology	 	 	38	 
	Article 17
	 	Ownership of Assets and Data	 	 	40	 
	Article 18
	 	Accounting, Auditing and Personnel Costs	 	 	41	 
	Article 19
	 	Taxation	 	 	43	 
	Article 20
	 	Insurance	 	 	43	 
	Article 21
	 	Confidentiality	 	 	45	 
	Article 22
	 	Assignment	 	 	47	 
	Article 23
	 	Health, Safety and Environmental Protection	 	 	48	 
	Article 24
	 	Force Majeure	 	 	49	 
	Article 25
	 	Consultation and Arbitration	 	 	50	 
	Article 26
	 	Effectiveness and Termination of the Contract	 	 	51	 






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	Contents	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	Article 27
	 	The Applicable Law	 	 	  53	 
	Article 28
	 	Language of the Contract and Working Language	 	 	  53	 
	Article 29
	 	Miscellaneous	 	 	  54	 
	 
	 	 	 	 	 	 
	Annex I
	 	Geographical Location and
Coordinates of Connecting Points of the Boundary Lines of the Contract Area	 	 	I-1
	Annex II
	 	Accounting Procedure	 	II-1
	Annex III
	 	Personnel Costs	 	III-1
	Annex IV
	 	Data Control	 	IV-1






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Preamble



This
Contract is entered into in Beijing on this
26th day of October, 2007 by and
between China United CBM Corporation Ltd. (hereafter abbreviated as “CUCBM”), a company organized
and existing under the laws of the People’s Republic of China, having its headquarters domiciled in
Beijing, the People’s Republic of China as one part; and Pacific Asia Petroleum Ltd., a company
organized and existing under the laws of Hong Kong, having its headquarters domiciled in Hong Kong
(hereinafter referred to as the “Foreign Contractor” or “Contractor”) as the other part.




WITNESSETH



WHEREAS, all Coalbed Methane resources under the territory and internal waters of the People’s
Republic of China and within the limits of national jurisdiction of the People’s Republic of China
are owned by the People’s Republic of China; and



WHEREAS, CUCBM shall be responsible for business matters in respect of the exploitation of Coalbed
Methane resources in cooperation with foreign enterprises, and for negotiating, entering into and
implementing contracts for the exploitation of Coalbed Methane resources in cooperation with
foreign enterprises and to have the exclusive right to explore for, develop and produce the Coalbed
Methane in cooperation with foreign enterprises in areas approved by the State Council for
exploitation of Coalbed Methane resources in cooperation with foreign enterprises and the exclusive
authority to enter into this Contract as authorized by the State Council of the People’s Republic
of China; and



WHEREAS, the Foreign Contractor desires and agrees to provide funds, and apply its appropriate and
advanced technology and managerial experience to cooperate with CUCBM for the exploitation of
Coalbed Methane resources within the Contract Area and agrees to be subject to the laws, decrees,
and other rules and regulations of the People’s Republic of China in the implementation of the
Contract.



NOW, THEREFORE, IT IS MUTUALLY AGREED as hereafter set forth:




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Article 1

Definitions



The following words and terms used in the Contract shall have, unless otherwise specified herein,
the following meanings:





	1.1	 	“Coalbed Methane” or “CBM” means any gas mainly consisting of methane stored in coal seams
and/or adjacent strata (including in the overlying and underlying strata) within the Contract
Area.
	 
	1.2	 	“Coalbed Methane Products” or “CBM Products” means any or all of Coalbed Methane, methanol,
electricity generated by a coalbed methane-fired generation facility, and other Coalbed
Methane derivatives or products.
	 
	1.3	 	“Coalbed Methane Discovery” or “CBM Discovery” means a potential Coalbed Methane reservoir
worth further evaluation proved by exploration within the Contract Area.
	 
	1.4	 	“Coalbed Methane Field” or “CBM Field” means an accumulation of Coalbed Methane or otherwise
within the Contract Area which has been determined to be of commercial value and for which it
has been decided to proceed with development. The accumulation may be bounded by but is not
limited to geologic structure, fault blocks, coal discontinuities or topographical features.
Fields may also be designated as areas of similar geologic characteristics including but not
limited to coal thickness, drill depths, and gas content.
	 
	1.5	 	“Petroleum” means Crude Oil and Natural Gas deposited in the subsurface and being extracted
or already extracted, including any valuable non-hydrocarbon substances produced in
association with Crude Oil and/or Natural Gas separated or extracted therefrom.
	 
	1.6	 	“Coalbed Methane Operations” or “CBM Operations” means the Exploration Operations, the
Development Operations, the Production Operations, and other activities related to these
Operations carried out under the Contract.
	 
	1.7	 	“Liquid Hydrocarbons” means any liquid hydrocarbons extracted from CBM.
	 
	1.8	 	“Exploration Operations” means operations carried out for the purpose of discovering and
evaluating CBM bearing areas by means of geological, geophysical, geochemical and other
methods including exploratory well drilling; all the work undertaken to determine the
commerciality of areas in which CBM has been discovered including core drilling, modeling,
area selection, feasibility studies, Pilot Development (including production therefrom),
formulation of the Overall Development Program; and activities related to all such operations
including negotiation and execution of longterm transportation and sales contracts.
	 
	1.9	 	“Development Operations” means operations carried out for the realization of




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CBM production from the date of approval of the Overall Development Program for any CBM
Field, including planning, design, construction, installation, drilling, developing
transportation systems, and the related research work as well as production activities,
carried out before the Date of Commencement of Commercial Production.




	1.10	 	“Production Operations” means operations and all activities related thereto carried out for
CBM production of each CBM Field from the Date of Commencement of Commercial Production,
including, but not limited to extraction, injection, stimulation, treatment, storage,
transportation and lifting, etc.
	 
	1.11	 	“Contract Area “ means a surface area demarcated with geographic coordinates for the
cooperative exploitation of CBM resources, and in the Contract, means the surface area
stipulated in Article 3.1 hereof.
	 
	1.12	 	“Exploration Area” means the surface area within the Contract Area which has not been
relinquished before the expiration of the exploration period hereof and in which Development
Operations and Production Operations have not begun.
	 
	1.13	 	“Development Area” means a portion of the Contract Area covering a CBM Field which has been
designated for development. The Development Area(s) shall be proposed by the Operator,
demarcated by the Joint Management Committee (“JMC”) and delineated as such in the Overall
Development Program submitted for approval and approved by the Department Designated by the
State Council.
	 
	1.14	 	“Production Area” means a surface area within any Development Area for the purpose of the
performance of the Production Operations within the said Development Area. The Production Area
proposed by the Operator, demarcated by JMC shall be submitted to CUCBM for consent before the
Date of Commencement of Commercial Production.
	 
	1.15	 	“Date of Commencement of Commercial Production” means the date of commencement of the
production of CBM from any CBM Field proposed and announced by JMC in accordance with the
provisions in Article 7.2.5 hereof.
	 
	1.16	 	“Calendar Year” means a period of twelve (12) consecutive Gregorian months under the
Gregorian Calendar, beginning on the first day of January and ending on the thirty-first day
of December in the same year.
	 
	1.17	 	“Contract Year” means a period of twelve (12) consecutive Gregorian months under the
Gregorian Calendar, within the term of the Contract, beginning on the Date of Commencement of
the Implementation of the Contract or any anniversary thereof.
	 
	1.18	 	“Production Year” means in respect of each CBM Field, a period of twelve (12) consecutive
Gregorian months under the Gregorian Calendar, beginning




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on
the Date of Commencement of Commercial Production of such CBM Field or any anniversary
thereof.




	1.19	 	“Calendar Quarter” means a period of three (3) consecutive Gregorian months under the
Gregorian Calendar, beginning on the first day of January, the first day of April, the first
day of July, or the first day of October.
	 
	1.20	 	“Exploratory Well” means any well drilled within the Contract Area during the exploration
period for the purpose of searching for CBM accumulations, including wells drilled for the
purpose of obtaining geological and geophysical parameters, any dry hole(s) and discovery
well(s).
	 
	1.21	 	“Pilot Development” means the installation and operation of necessary equipment within the
Contract Area (including wells) aiming at evaluating, through pilot production of Coalbed
Methane, the potential commercial value of the Coalbed Methane in a specific area.
	 
	1.22	 	“Development Well” means a well drilled after the date of approval of the Overall Development
Program for CBM Field for the purpose of producing CBM, increasing production or accelerating
extraction of CBM, including production wells, injection wells and dry holes.
	 
	1.23	 	“Work Program” means all types of plans formulated for the performance of the CBM Operations,
including but not limited to plans for exploration, development, production, transportation
and sales.
	 
	1.24	 	“Overall Development Program” means a plan prepared by the Operator for the development of a
CBM Field or part of a CBM Field (phased development) which has been reviewed and adopted by
JMC, confirmed by CUCBM and approved by the Department Designated by the State Council, and
such plan shall include, but not be limited to, recoverable reserves, the Development Well
pattern, master design, production profile, economic analysis and time schedule of the
Development Operations.
	 
	1.25	 	“Deemed Interest” means interest accruing on the development costs calculated in accordance
with the rate of interest stipulated in Article 12.2.3.2 hereof when the development costs
incurred in each CBM Field within the Contract Area are recovered by the Parties.
	 
	1.26	 	“CBM Field Straddling a Boundary” means a CBM Field extending from the Contract Area to one
or more other contract areas and/or areas in respect of which no CBM contracts have been
signed.
	 
	1.27	 	“Annual Gross Production of CBM” means the total amount of CBM produced from each CBM Field
within the Contract Area considered separately in each Calendar Year, less the amount of CBM
used for CBM Operations in such CBM Field within the Contract Area and the amount of losses,
which is saved and measured by a measuring device at the Delivery Point as specified in
Article 14.3.1 hereof.




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	1.28	 	“Annual Gross Production of Liquid Hydrocarbons” means the total amount of Liquid
Hydrocarbons produced from each CBM Field within the Contract Area considered separately in
each Calendar Year, less the amount of Liquid Hydrocarbons used for CBM Operations in such CBM
Field within the Contract Area and the amount of losses, which is saved and measured by a
measuring device at the Delivery Point as specified in Article 14.3.1 hereof.
	 
	1.29	 	“Basement” means igneous rocks, metamorphic rocks or rocks of such nature which, or
formations below which, could not contain CBM deposits in accordance with the knowledge
generally accepted in the international Coalbed Methane industry circle and shall also include
such impenetrable rock substances as salt domes, mud domes and any other rocks which make
further drilling impracticable or economically unjustifiable by the modern drilling technology
normally utilized in the international Coalbed Methane industry.
	 
	1.30	 	“Contractor” means the Foreign Contractor specified in the Preamble hereto, including
assignee(s) in accordance with Article 22 hereof.
	 
	1.31	 	“Parties” means CUCBM and the Contractor.
	 
	1.32	 	“Party” means either of the Parties.
	 
	1.33	 	“Operator” means the entity responsible for the performance of the CBM Operations under the
Contract.
	 
	1.34	 	“Subcontractor” means an entity which provides the Operator with goods or services for the
purpose of the Contract.
	 
	1.35	 	“Third Party” means any individual or entity except CUCBM, the Contractor and any of their
Affiliates.
	 
	1.36	 	“Chinese Personnel” means any citizen of the People’s Republic of China, including CUCBM’s
personnel and Chinese citizens employed by the Contractor and/or the Subcontractor(s),
involved in Coalbed Methane Operations under the Contract.
	 
	1.37	 	“Expatriate Employee” means any person employed by the Contractor, Subcontractor(s), or CUCBM
who is not a citizen of the People’s Republic of China. Overseas Chinese who reside abroad and
have the nationality of the People’s Republic of China and other Chinese abroad, when they are
employed by the Contractor, Subcontractor(s) or CUCBM, shall also be deemed to be Expatriate
Employees within the scope of the Contract.
	 
	1.38	 	“Affiliate” means in respect of the Contractor:






	 	(a)	 	any entity in which any company comprising Contractor directly or
indirectly holds fifty percent (50%) or more of the voting rights carried by its
share capital; or




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	 	(b)	 	any entity which directly or indirectly holds fifty percent (50%) or
more of the aforesaid voting rights of any company comprising the Contractor; or
	 
	 	(c)	 	any other entity whose aforesaid voting rights are held by an entity
mentioned in (b) above in an amount of fifty percent (50%) or more;
	 
	 	 	 	“Affiliate” means, in respect of CUCBM, any subsidiary, branch, or regional corporation
of CUCBM and any entity in which CUCBM directly or indirectly holds fifty percent (50%)
or more of the voting rights carried by its share capital.






	1.39	 	“Delivery Point” means a point or points agreed upon by the Parties for the delivery of CBM
or Liquid Hydrocarbon located within or outside the Contract Area and specified in the Overall
Development Program.
	 
	1.40	 	“Department Designated by the State Council” means the department which is designated by the
State Council of the People’s Republic of China to be responsible for administration of the
Coalbed Methane industry of the People’s Republic of China.
	 
	1.41	 	“Date of Commencement of the Implementation of the Contract” means the first day of the
month following the month in which the Contractor has received notification from CUCBM of the
approval of the Contract by the Ministry of Commerce of the People’s Republic of China.




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Article 2

Objective of the Contract





	2.1	 	The objective of the Contract is to explore for, develop, produce and sell Coalbed Methane,
Liquid Hydrocarbons or Coalbed Methane products that may exist in the Contract Area.
	 
	2.2	 	The Contractor shall apply its appropriate and advanced technology and assign its competent
experts to perform the Coalbed Methane Operations.
	 
	2.3	 	During the performance of the CBM Operations, the Contractor shall, as far as practicable and
appropriate, transfer its technology used in CBM Operations hereunder to allow the CUCBM
Personnel to utilize said technology and to train such personnel in accordance with Article 16
hereof.
	 
	2.4	 	The Contractor shall bear all the exploration costs required for the Exploration Operations.
In the event that any CBM Field is discovered within the Contract Area, the development costs
of such CBM Field shall be borne by the Parties in proportion to their participating
interests: forty percent (40 %) by CUCBM and sixty percent (60 %) by the Contractor. In the
event that CUCBM opts to participate at a level less than forty percent (40 %) of the
participating interests, or not to participate in the development of the CBM Field, the
Contractor shall bear the remaining development costs necessary for the development of the CBM
Field in accordance with Article 12.1.2 hereof.
	 
	 	 	The Parties may determine through consultations their respective proportion of
participating interests when they sign this Contract, or reach the agreement on the
development of the said CBM Field in accordance with Article 11.6 hereof.
	 
	2.5	 	If any CBM Field is discovered within the Contract Area, the CBM and/or Liquid Hydrocarbons
produced therefrom shall be allocated in accordance with Articles 12 and 13 hereof.
	 
	2.6	 	Nothing contained in the Contract shall be deemed to confer any right on the Contractor other
than those rights expressly granted hereunder.





Article 3

Contract Area





	3.1	 	The Contract Area as of the date of signature of the Contract covers a total area of
seven hundred and eight point zero seven six (___708.076___) square kilometers, as
marked out by the geographic location and the coordinates of the connecting points of the
boundary lines shown on Annex I attached hereto.
	 
	 	 	The said total area of the Contract Area shall be reduced in accordance with Articles 4,
5 and 11 hereof.




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	3.2	 	Except for the rights as expressly provided by the Contract, no right is granted in favor of
the Contractor to the surface area, subsurface area, lake bed, stream bed, subsoil and any
bodies of water or any natural resources or aquatic resources other than CBM, CBM Products and
Liquid Hydrocarbons, existing therein and any things under the surface within the Contract
Area.





Article 4

Contract Term





	4.1	 	The term of the Contract shall include an exploration period, a development period and a
production period.
	 
	4.2	 	The exploration period, beginning on the Date of Commencement of the Implementation of the
Contract, shall be divided into two (2) phases and shall consist of five (5) consecutive
Contract Years, unless the Contract is sooner terminated, or the exploration period is
extended in accordance with Article 24 hereof and Article 4.3 herein. The two (2) phases shall
be as follows:
	 
	 	 	the first phase of three (3 ) Contract Year (the first Contract Year through the third
Contract Year) for core testing;
	 
	 	 	the second phase of two (2) Contract Years (the fourth Contract Year through the fifth
Contract Year) for Pilot Development.
	 
	4.3	 	When time is insufficient to complete the Pilot Development work on a CBM discovery made
shortly before the expiration of the exploration period or when the time of the Pilot
Development work on a CBM discovery in accordance with the Pilot Development Work Program
approved by JMC as stated in Article 11 hereof extends beyond the exploration period and/or
where there is no transportation or market access or consuming facilities and/or the Parties
have not completed longterm transportation and sales agreements in respect of the CBM, CBM
Products or Liquid Hydrocarbons, subject to CUCBM’s consent, the exploration period as
described in Article 4.2 herein shall be extended. The extension of the exploration period
shall be approved by the Ministry of Commerce (MOFCOM) of the People’s Republic of China
submitted through CUCBM and which shall be a reasonable period of time required to complete
the above-mentioned work and for transportation and market access and consuming facilities to
develop and for the Parties to negotiate longterm transportation and sales agreements in
respect of the CBM, CBM Products and Liquid Hydrocarbons in order to enable JMC to make a
decision on the commerciality of the said CBM discovery in accordance with Article 11 hereof
and submits an acceptable Overall Development Program to the Department Designated by the
State Council, and until the Department Designated by the State Council makes its final
decision on the Overall Development Program. The period of extension shall be no more than two
(2) years.




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	4.4	 	The development period of any CBM Field within the Contract Area shall begin on the date of
approval of the Overall Development Program of the said CBM Field, and end on the date of the
entire completion of the Development Operations set forth in the Overall Development Program
(which may continue beyond the Date of Commencement of Commercial Production), excluding the
time for carrying out other additional development projects during the production period in
accordance with Article 11.10 hereof.
	 
	4.5	 	The production period of any CBM Field within the Contract Area shall be a period beginning
on the Date of Commencement of commercial production of the said CBM Field up to the Date of
the expiration of the production period as specified in the Overall Development Program
approved. However, the period shall not go beyond twenty(20) Consecutive Production Years
beginning on the Date of Commencement of Commercial Production of the said CBM Field, unless
otherwise provided in Article 4.6 herein and Article 24 hereof. Under such circumstances as
where the construction of an CBM Field is to be conducted on a large scale, and the time span
required therefore is long, or where separate production of each of the multiple CBM producing
zones of an CBM Field is required, or under other special circumstances, the production period
thereof shall, when it is necessary, be properly extended with the approval of the Department
Designated by the State Council.
	 
	4.6	 	Suspension or abandonment of production of a CBM Field.
	 
	4.6.1	 	Suspension of production from a CBM Field within the production period
	 
	 	 	In the event that the Parties agree to suspend temporarily production from a CBM Field
which has entered into commercial production, the Production Area covered by the CBM
Field shall be retained within the Contract Area. In no event, shall the period of such
retention extend beyond the date of the expiration of the production period of that CBM
Field. The duration of the relevant period of production suspension and the arrangement
for the maintenance operations during the aforesaid period of suspension shall be
proposed by the Operator, and shall be decided by JMC through discussion. However, the
aforesaid period of suspension shall be less than two years, unless otherwise agreed by
the Parties. In the event that the Parties fail to reach an agreement on the restoration
of production by the expiration of the production suspension period decided by JMC
through discussion, the Party who wishes to restore production shall have the right to
restore production solely. The other Party may later elect to participate in production
by paying to the other party its participating interest share of the costs incurred in
restoring such production, but shall have no rights or obligations in respect of such
CBM Field for the production during such solely restored production period.
	 
	 	 	In any event, the obligation for abandonment and site restoration shall rest solely with
the Party(s) which participate in the restored production; which shall indemnify and
hold harmless any other non-participating Party from any costs, expenses or claims
arising out of such obligation.




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	4.6.2	 	Abandonment of production from a CBM Field within the production period.
	 
	4.6.2.1	 	During the production period, either Party to the Contract
may propose to abandon production from any CBM Field within the Contract Area, provided, however, that prior written
notice shall be given to the other Party to the Contract. The other Party shall make a
response in writing within ninety (90) days from the date on which the said notice is
received. If the other Party also agrees to abandon production from the said CBM Field, then
abandonment costs shall be paid by the Parties in proportion to their participating interests
in such CBM Field. The Parties shall abandon such CBM Field in accordance with procedure
agreed on by the Parties. From the date on which the abandonment is completed, the production
period of such CBM Field shall be terminated and such CBM Field shall be excluded from the
Contract Area.
	 
	4.6.2.2	 	If the Contractor notifies CUCBM in writing of its decision
to abandon production
from a CBM Field, while CUCBM decides not to abandon production from such CBM Field, then from
the date on which the Contractor receives CUCBM’s written response of its aforesaid decision,
namely Abandonment Date, all of the Contractor’s rights and obligations under the Contract in
respect of the said CBM Field, including, but not limited to, any obligation with respect to
abandonment and site restoration in respect of such CBM Field shall be transferred to CUCBM
and terminated automatically with respect to Contractor, provided that the Contractor shall
not transfer to CUCBM any of the Contractor’s debts, existing liabilities and obligations in
respect of the said CBM Field. In addition, the Contractor shall undertake its existing
liabilities and obligations under the Contract prior to the Abandonment Date. From the
Abandonment Date, the said CBM Field shall be excluded from the Contract Area and CUCBM shall
indemnify and hold Contractor harmless from any expenses, claims or liabilities arising out of
any such rights or obligations transferred to CUCBM pursuant to this Article 4.6.2.2.
	 
	4.7	 	The term of the Contract shall not go beyond thirty (30) consecutive Contract Years from the
Date of Commencement of the Implementation of the Contract, unless otherwise stipulated
hereunder.





Article 5

Relinquishment of the Contract Area





	5.1	 	The Contractor shall relinquish a portion or portions of the Contract Area in accordance with
the following provisions:
	 
	5.1.1	 	In any of the following cases, the Contractor shall relinquish the remaining Contract Area,
except for any Development Area, proposed Development Area and/or Production Area:




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	 	(a)	 	at the expiration of the last phase of the exploration period
(including extensions) as mentioned in Article 4.2 hereof; or
	 
	 	(b)	 	at the expiration of the said exploration phase if the Contractor
exercises its option under Article 6.3 (b) of the Contract; or
	 
	 	(c)	 	at the expiration of the extended period, in the event that the
exploration period is extended in accordance with the first paragraph of Article
4.3 or Article 24 hereof.






	5.1.2	 	In the execution of Articles 5.1.1 herein, a Production Area and/or Development Area or an
area proposed by Contractor corresponding to a CBM Discovery with a possibility of or
potential for Pilot Development or awaiting Pilot Development and/or under a Pilot Development
or included in an Overall Development Program awaiting approval, shall not be regarded as an
area to be relinquished.
	 
	5.1.3	 	At the expiration of its production period of any CBM Field as specified in Article 4.5
hereof, such CBM Field within the Contract Area shall be excluded from the Contract Area.
	 
	5.2	 	Within ninety (90) days prior to the date of relinquishment of the Contract Area, the
Contractor shall submit to CUCBM a report on its completed Exploration Operations on the areas
proposed to be relinquished, including a map showing the proposed areas to be relinquished
with the geographic location and the coordinates of the connecting points of the boundary
lines.
	 
	5.3	 	In the exploration period, the Contractor shall bear the fee for CBM exploration right of the
Contract Area paid in accordance with the relevant laws and regulations of the People’s
Republic of China. In the development period, CUCBM and the Contractor shall, in proportion to
their respective participating interests, bear the fee for CBM mining right of the Development
Area paid in accordance with relevant laws and regulations of the People’s Republic of China.
Herein so-called the fees for CBM exploration and mining rights shall be paid pursuant to
Article 5.2.20 of Annex II hereof.





Article 6

Minimum Exploration Work Commitment

and Expected Minimum Exploration Expenditures





	6.1	 	The Contractor shall begin to perform the Exploration Operations within six (6) months after
the Date of Commencement of the Implementation of the Contract, unless otherwise agreed upon
by the Parties.
	 
	6.2	 	The Contractor shall fulfill the minimum exploration work commitment and expected minimum
exploration expenditures for each Calendar Year of each




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phase of the exploration period in accordance with the regulations of relevant
government departments and the provisions of this Contract:




	6.2.1	 	During the first phase of the exploration period, the Contractor shall:






	 	(a)	 	carry out a minimum 50 km of 2-D seismic data acquisition and drill
three ( 3) Exploration Wells; and
	 
	 	(b)	 	spend two million eight hundred thousand ($2,800,000) U.S. dollars as
its expected minimum exploration expenditures for such Exploration Operations.






	6.2.2	 	During the second phase of the exploration period, the Contractor shall:






	 	(a)	 	drill four (4) Pilot Development wells; and
	 
	 	(b)	 	spend two million ($2,000,000) U.S. dollars as its expected
minimum exploration expenditures for such Exploration Operations.






	6.2.3	 	With respect to the minimum exploration work commitment for each phase of the exploration
period committed by the Contractor in accordance with Articles 6.2.1 and 6.2.2 herein, when
calculating whether the minimum exploration work commitment has been fulfilled, the number of
Exploration Wells and Pilot Development Wells shall be the basis of such calculation.
	 
	6.3	 	At the expiration of the first phase of the exploration period, the Contractor has options
(a) or (c) and at the expiration of the second phase of the exploration period options (b) or
(c) as follows:






	 	(a)	 	to enter the next phase and continue exploration, provided that the
Contractor has fulfilled all its minimum exploration work commitment and minimum
exploration expenditures during the first phase; or
	 
	 	(b)	 	to conduct Development Operations and Production Operations only on any
CBM discoveries in accordance with the procedures under Article 11 hereof provided,
however, that the minimum exploration work commitments up to the date of such
expiration of the said exploration phase have been fulfilled and the areas
specified in Article 5 hereof have been relinquished; or
	 
	 	(c)	 	to terminate the Contract.






	6.4	 	At the end of any year of any phase of the exploration period, if the actual exploration work
and/or expenditures fulfilled by the Contractor is less than the minimum exploration work
commitment and/or expenditures set forth for the said year as a result of force majeures such
as natural disasters etc., the Contractor shall give reasons to CUCBM for the under
fulfillment. With the consent of relevant government departments, the unfulfilled balance of
the said year shall be added to the minimum exploration work commitment and/or expenditures
for the next exploration year.




12









 






	6.5	 	Where the Contractor has fulfilled ahead of time the minimum exploration work commitment for
any phase of the exploration period, the duration of such exploration phase stipulated in
Article 4.2 hereof shall not be shortened thereby, and if the exploration expenditures
actually incurred by the Contractor exceeds the minimum exploration expenditures for the said
year of the said exploration phase, the excess part shall be only deducted from and credited
against the minimum exploration expenditures for the next year.
	 
	6.6	 	At the expiration of any phase during the exploration period, if the exploration work
actually fulfilled by the Contractor is less than the minimum exploration work commitment for
such phase, and if the Contractor opts to terminate the Contract under Article 6.3 (c) herein,
or if the said phase is the last exploration phase, the Contractor shall, within thirty (30)
days from the date of the decision of its election to terminate the Contract or within thirty
(30) days from the date of the expiration of the exploration period, pay CUCBM only any
unfulfilled balance of the minimum exploration work commitment in U.S. dollars after it has
been converted into a cash equivalent using the method provided in Annex II-Accounting
Procedure hereto.





Article 7

Management Organization and Its Functions





	7.1	 	For the purpose of the proper performance of the CBM Field, the Parties shall establish a
Joint Management Committee (JMC) within forty-five (45) days from the Date of Commencement of
the Implementation of the Contract.
	 
	7.1.1	 	CUCBM and the Contractor shall each have the right to appoint an equal number of
representatives (two to five) to form JMC, and each Party to the Contract shall designate one
of its representatives as its chief representative. The representative of the Operator of the
companies comprising the Contractor shall be the chief representative of the Contractor.
Either Party may replace any of its representatives, or designate another representative as
its chief representative, by a written notice to the other Party, pursuant to Article 29.2
hereof. All the aforesaid representatives shall have the right to present their views on the
proposals at the meetings held by JMC. When a decision is to be made on any proposal, the
chief representative from each Party to the Contract shall be the spokesman on behalf of the
Party to the Contract.
	 
	 	 	The chairman of JMC shall be the chief representative designated by CUCBM, and the vice
chairman shall be the chief representative designated by the Contractor. The chairman of
JMC shall preside over meetings of JMC. In his absence, one representative present at
the meeting from CUCBM shall be designated to act as the chairman of the meeting. In the
absence of the vice chairman of JMC, one representative present at the meeting from the
Contractor shall be designated to act as the vice chairman of the meeting. The





13









 











Parties may, according to need, designate a reasonable number of advisers who may
attend, but shall not be entitled to vote at JMC meetings.




	7.1.2	 	A regular meeting of JMC shall be held at least once a Calendar Quarter, and other meetings,
if necessary, may be held at any time at the request of any Party to the Contract, upon giving
reasonable notice to the other Party of the date, time and location of the meeting and the
items to be discussed.
	 
	7.2	 	The Parties shall empower JMC to:
	 
	7.2.1	 	Review and adopt the Work Programs and budgets proposed by the Operator and subsequent
amendments thereto;
	 
	7.2.2	 	Determine the potential commerciality of each Coalbed Methane Discovery that has been made
in accordance with the Operator’s Pilot Development report and report its decision to CUCBM
for confirmation;
	 
	7.2.3	 	Review and adopt the Overall Development Program and budget for each CBM Field and the
amendments to the budget;
	 
	7.2.4	 	Approve or confirm the following items of procurement and expenditures:






	 	(a)	 	approve procurement of any item within the budget with a unit price
exceeding Two Hundred Thousand U.S. dollars (U.S. $200,000) and any single
purchase order of total monetary value exceeding Six Hundred Thousand U.S. dollars
(U.S. $600,000 );
	 
	 	(b)	 	approve a lease of equipment, or an engineering subcontract or a
service contract within the budget of a monetary value exceeding Three Hundred
Thousand U.S. dollars (U.S. $300,000 ); and
	 
	 	(c)	 	confirm excess expenditures pursuant to Article 10.2.1 hereof and the
expenditures pursuant to Article 10.2.2 hereof;






	7.2.5	 	Propose and announce the Date of Commencement of Commercial Production of each CBM Field
within the Contract Area;
	 
	7.2.6	 	Determine the type and scope of information and data provided to any Third Party in
accordance with Article 21.5 hereof;
	 
	7.2.7	 	Demarcate boundaries of the Development Area and the Production Area of each CBM Field;
	 
	7.2.8	 	Review and approve the Joint Operating Agreement in accordance with Article 8.8 hereof;
	 
	7.2.9	 	Review and approve the insurance program proposed by the Operator and emergency procedures
on safety and environmental protection;




14









 






	7.2.10	 	Review and approve personnel training programs;
	 
	7.2.11	 	Review and approve minutes and/or resolutions of JMC meetings, and discuss, review, decide
and approve other matters that have been proposed by either Party to the Contract or submitted
by the expert groups pursuant to Article 7.4.2 hereof or by the Operator; and
	 
	7.2.12	 	Review and examine matters required to be submitted to relevant authorities of the
Chinese Government and/or CUCBM for approval, consent or confirmation.
	 
	7.3	 	Decisions of JMC shall be made unanimously through consultation. All decisions made
unanimously shall be deemed as formal decisions and shall be equally binding upon the Parties.
When matters upon which agreement cannot be reached arise, the Parties may convene another
meeting in an attempt to find a new solution thereto based on the principle of mutual benefit.
	 
	7.3.1	 	During the exploration period, the Parties shall endeavor to reach agreement through
consultation on exploration programs and annual exploration Work Programs. If the Parties fail
to reach agreement through consultation, the Contractor’s proposal shall prevail, provided
that such proposal is not in conflict with the relevant provisions in Articles 4, 5 and 6
hereof.
	 
	7.3.2	 	If it is considered by the chairman and/or the vice chairman or their nominees that a matter
requires urgent handling or may be decided without convening a meeting, JMC may make decisions
through facsimiles or the circulation of documents.
	 
	7.4	 	JMC shall establish the following subordinate bodies:
	 
	7.4.1	 	Secretariat
	 
	 	 	The secretariat shall be a permanent organization consisting of
two (2) secretaries. One secretary shall be appointed by each of the
Parties. The secretaries shall not be members of JMC, but may
attend meetings of JMC as observers. The duties of the secretariat
are as follows:






	 	(a)	 	to keep minutes of meetings;
	 
	 	(b)	 	to prepare summaries of the resolutions for JMC meetings;
	 
	 	(c)	 	to draft and transmit notices of meetings; and
	 
	 	(d)	 	to receive and transmit proposals, reports or plans submitted by the
Operator and/or proposed by any Party to the Contract, that require discussion,
review or approval by JMC.






	7.4.2	 	Expert Groups




15









 












Advisory expert groups shall be established in accordance with the




requirements of the Coalbed Methane Operations in various periods. Each expert group
shall consist of an equal number of CUCBM Personnel and the Contractor’s employees, and,
with the agreement of JMC, any other personnel. JMC shall discuss and decide upon their
establishment or dissolution, size, tasks, location of their work and the appointment of
their leaders in accordance with the requirements of their work. The expert groups which
should be of a reasonable size and number shall have the following functions:




	 	(a)	 	to discuss and study matters assigned to them by JMC and submitted by
the Operator to JMC for its review and approval and any other matter assigned to
them by JMC and to make constructive suggestions to JMC;
	 
	 	(b)	 	to have access to and observe and investigate the Coalbed Methane
Operations conducted by the Operator without affecting such Operations at its
office and operating sites as work requires and to submit relevant reports to JMC;
and
	 
	 	(c)	 	to attend meetings of JMC as observers at the request of JMC.






	7.5	 	When one of the companies comprising the Contractor acts as the Operator, CUCBM shall have
the right to assign professional representatives for the CBM Operations. The Operator’s staff
shall regularly discuss their work with the professional representatives of CUCBM.
	 
	 	 	The professional representatives shall have access to the centers of research, design,
and data processing related only to the execution of the Contract and to the operating
sites to observe all the activities and study all the information with respect to the
CBM Operations. Whether to provide such access to the aforesaid centers outside the
People’s Republic of China shall be decided by JMC through discussion. If the decision
is made, such access shall be arranged by the Operator and the Operator shall use all
reasonable endeavors to assist the professional representatives to have access to Third
Parties’ sites. The work of professional representatives of CUCBM shall be arranged by
the manager(s) of the departments of the Operator in which professional representatives
work.
	 
	 	 	Professional representatives of CUCBM, except for the professional representatives in
charge of procurement who shall undertake their functions in accordance with Article 7.6
herein, shall not interfere in the decision making on relevant matters by departmental
manager(s) of the Operator. However, such professional representatives shall have the
right to make proposals and comments to departmental manager(s) of the Operator or to
report directly to CUCBM’s representatives in JMC.
	 
	7.5.1	 	On the principle of mutual cooperation and coordination, the Operator shall provide the
professional representatives with necessary facilities and assistance to perform office work
and to observe the operating sites.




16









 












	7.5.2	 	The number of professional representatives, which shall be a reasonable number and consistent with accepted international CBM industry practice and sound economic
practice, shall be decided by JMC through consultations.
	 
	7.6	 	When one of the companies comprising the Contractor acts as the Operator, in respect of the
items listed in the procurement plan, the procedures and provisions hereunder shall be
followed:
	 
	7.6.1	 	The procurement department of the Operator shall inform the professional representatives
appointed by CUCBM in charge of procurement of all the items of procurement and specifications
relating thereto.
	 
	7.6.2	 	The Operator shall be subject to Articles 15.1 and 15.3 hereof and reach agreement through
consultation with the professional representatives of CUCBM in charge of procurement when
preparing the procurement plan in accordance with the Work Program and budget. The
professional representatives of CUCBM in charge of procurement shall work out an inventory
listing the equipment and materials which can be made and provided in China and a list of
manufacturers, engineering and construction companies and enterprises in China which can
provide services and undertake subcontracting work.
	 
	7.6.3	 	Unless otherwise agreed upon by the Parties, the Operator shall, in general, make
procurement by means of calling for bids and shall notify at the same time manufacturers and
enterprises concerned both inside and outside China, and the work of calling for bids shall be
done within the territory of China.
	 
	7.6.4	 	When any procurement is to be made by means of calling for bids, the manufacturers and
enterprises in China applying for bidding which are included in a list delivered in advance to
the Operator by the professional representatives of CUCBM in charge of procurement shall be
invited. The professional representatives of CUCBM in charge of procurement shall have the
right to take part in the work of calling for bids, including examination of the list of
bidders to be invited, preparing and issuing bidding documents, opening bids, evaluation of
bids, and shall have the right to consult with the Operator on the determination of award of
contracts and to participate in negotiations for various contracts. The foregoing shall be
handled in an expeditious, efficient and timely manner.
	 
	7.6.5	 	With respect to the items of procurement by means other than calling for bids, the Operator
and the professional representatives of CUCBM in charge of procurement shall, in accordance
with the provisions specified in Article 7.6.2 herein, define those items which are to be
procured in the People’s Republic of China and those items which are to be procured abroad.
	 
	7.7	 	All salaries, costs and expenses with respect to the staff members of the Parties in the
subordinate bodies of the JMC established in accordance with Article 7.4 herein, those with
respect to the professional representatives referred to in Article 7.5. herein, and those with
respect to the representatives




17









 












of JMC referred to in Article 7.1.1 herein while attending JMC
meetings, shall
be paid by the Operator and charged respectively to the exploration costs, development
costs and operating costs in accordance with Annex II- Accounting Procedure hereto.
During the exploration period, all salaries, costs and expenses with respect to the
staff members of CUCBM in the subordinate bodies of JMC, the CUCBM professional
representatives and the CUCBM representatives of JMC shall be paid by the Operator in
accordance with Annex III — Personnel Costs hereto. All salaries, costs and expenses
with respect to the above mentioned personnel to be paid and charged during the
development period and production period shall be determined by the Parties through
consultation. It is understood no salary duplication for any individual shall be
allowed. In the event any individual occupies more than one chargeable position, then
the higher applicable salary shall be charged to the Joint Account for the period during
which the higher position is occupied.




	7.8	 	The specific responsibilities and working procedures within JMC shall be proposed by the
Parties, and discussed and determined by JMC in accordance with the relevant provisions
herein.





Article 8

Operator





	8.1	 	The Parties agree that Pacific Asia Petroleum Ltd shall act as the Operator for the CBM
Operations within the Contract Area, unless otherwise stipulated in Article 8.8 herein and
Article 29.4 hereof.
	 
	8.2	 	For the implementation of the Contract, each company comprising the Contractor shall register
with the State Administration for Industry and Commerce of the People’s Republic of China, or
if any of such companies is already registered, such company shall amend its registration to
include in the Contract in accordance with the relevant provisions of the State Administration
for Industry and Commerce. CUCBM shall, at the request of the Contractor, provide assistance
for this purpose.
	 
	 	 	The person designated by Operator to be in charge of CBM Operations shall have the full
right to represent the Contractor in respect of the performance of the CBM Operations.
The names, positions and resumes of the staff and organization chart of the Operator
shall be submitted in advance to CUCBM and the appointment of the Operator’s senior
staff must be subject to the consent of CUCBM.
	 
	 	 	The parent corporation of each company comprising the Contractor which is not itself a
parent corporation shall, at the request of CUCBM, provide CUCBM with a written
performance guarantee acceptable to CUCBM.
	 
	8.3	 	The Operator shall have the following obligations:




18









 












	8.3.1	 	To apply the appropriate and advanced technology and business managerial
experience of the Contractor or its Affiliates to perform the CBM Operations
reasonably, economically and efficiently in accordance with sound international
practice.
	 
	8.3.2	 	To prepare Work Programs and budgets related to the CBM Operations and to carry out the
approved Work Programs and budgets.
	 
	8.3.3	 	To be responsible for procurement of installations, equipment, and supplies and entering
into subcontracts and service contracts related to the CBM Operations, in accordance with the
approved Work Programs and budgets and the applicable provisions of Articles 7.2.4, 7.6 and
10.2 hereof.
	 
	8.3.4	 	To prepare in advance, in accordance with Article 16 hereof, a personnel training program
and budget before the commencement of the Exploration Operations, Development Operations and
Production Operations respectively, and, in accordance with the said program and budget, to be
responsible for preparing an annual personnel training program and budget and carrying out the
annual program and budget after approval by JMC.
	 
	8.3.5	 	To establish an insurance program, and to enter into and implement the insurance contracts
in accordance with Article 20 hereof.
	 
	8.3.6	 	To issue cash-call notices to all the Parties to the Contract to raise the required funds
based on the approved budgets and in accordance with Article 12 hereof and Annex II -
Accounting Procedure hereto.
	 
	8.3.7	 	To maintain complete and accurate accounting records of all the costs and expenditures of
the CBM Operations in accordance with the provisions of Annex II — Accounting Procedure hereto
and to keep the accounting books secure and in good order.
	 
	8.3.8	 	To make necessary preparation for regular meetings of JMC, and to submit in advance to JMC
necessary information related to the matters to be reviewed and approved by JMC.
	 
	8.3.9	 	To inform directly or indirectly all the Subcontractors which render services for the CBM
Operations in China and all the Expatriate Employees of the Operator and of Subcontractors who
are engaged in the CBM Operations in China that they shall be subject to the laws, decrees,
and other rules and regulations of the People’s Republic of China.
	 
	8.3.10	 	To report its work to JMC as provided in Article 7.2 hereof.
	 
	8.4	 	In the course of the performance of the CBM Operations, any direct losses, arising strictly
out of the gross negligence or willful misconduct of the Operator, (excluding personnel
specified in Article 1.2 of Annex III-Personnel Costs, hereto) shall be solely borne by the
Operator. Losses arising from any cause other than strictly out of the gross negligence or
willful misconduct of




19









 












the Operator shall be borne by the Parties in accordance with their
respective
participating interest. The Operator shall make its best efforts in accordance with
international CBM industry practice to include provisions similar to this Article 8.4
herein in related subcontracts and service contracts.




	8.5	 	In the course of the performance of the CBM Operations, the Operator shall handle the
information, samples or reports in accordance with the following provisions:
	 
	8.5.1	 	The Operator shall provide CUCBM with various information, samples and data in accordance
with relevant regulations and Annex IV — Data Control hereto. The ownership of all the
information, samples and data shall vest in CUCBM; and the Operator shall have the right to
use and handle such information, samples and data in accordance with Annex IV — Data Control
hereto. The information and data shall be reported to CUCBM at the same time that the Operator
reports them to its parent corporation. Upon receipt by the Operator of any report from its
parent corporation concerning such information and data, a copy of such report shall be
furnished to CUCBM as soon as practicable.
	 
	8.5.2	 	The Operator shall furnish CUCBM in a timely manner with reports on safety, environmental
protection and accidents related to the CBM Operations and with financial reports prepared in
accordance with the provisions of Annex II — Accounting Procedure hereto.
	 
	8.5.3	 	The Operator shall provide the non-operator(s) of the Contractor with copies of the relevant
data and reports reasonably required by non-operator(s) and referred to in Articles 8.5.1 and
8.5.2 herein.
	 
	8.5.4	 	The Operator shall, at the request of any Party to the Contract, furnish that Party to the
Contract with the following:
	 
	8.5.4.1	 	Procurement plans for purchasing equipment and materials, inquiries, offers, orders and
service contracts;
	 
	8.5.4.2	 	Technical manuals, technical specifications, design criteria, design documents (including
design drawings), construction records and information, consumption statistics, equipment
inventory, and spare parts inventory;
	 
	8.5.4.3	 	Technical investigation and cost analysis reports; and
	 
	8.5.4.4	 	Other information relating to the CBM Operations in the Contract Area already acquired by
the Operator in the performance of the Contract.
	 
	8.6	 	In the course of performing the CBM Operations, the Operator shall abide by the laws,
decrees, standards and other rules and regulations with respect to environmental protection
and safety of the People’s Republic of China and shall endeavor in accordance with the
international CBM industry practice to:




20









 












	8.6.1	 	Minimize the damage and destruction caused by the CBM Operations to
community and ecological environment;
	 
	8.6.2	 	Control blowouts promptly and prevent or avoid waste or loss of CBM discovered in or
produced from the Contract Area;
	 
	8.6.3	 	Prevent land, forests, vegetation, crops, buildings and other installations from being
damaged and destroyed; and
	 
	8.6.4	 	Minimize the danger to personnel safety and health.
	 
	8.7	 	Project Management Team
	 
	 	 	In any CBM Field within the Contract Area where CUCBM has a
participating interest in the development of the said Field, a
project management team (hereafter referred to as “PMT”) shall be
established for the development of such CBM Field in the
organization of the Operator within thirty (30) days from the date
of approval of the Overall Development Program for the said Field.
	 
	 	 	PMT shall comprise those personnel designated by the Parties and the
number of CUCBM’s personnel shall be no less than one third (1/3) of
the total number of personnel within PMT. The Contractor shall
designate a person acting as the manager of PMT, and CUCBM shall
designate a person acting as the deputy manager of PMT.
	 
	 	 	PMT shall be located at the Operator’s office within the Chinese
territory. The working location(s) of the members of PMT shall be
decided according to the need of the work.
	 
	 	 	The specific organization, staffing and working system of PMT and responsibilities and
competence of various positions including those of CUCBM’s personnel assigned to PMT
shall be determined by the Parties through consultation prior to the approval of the
Overall Development Program for the said CBM Field. The PMT shall exist for the period
of the development of said CBM Field.
	 
	8.8	 	Conduct of CBM Operation.
	 
	8.8.1	 	Not later than one year prior to the forecasted date of the full recovery of development
costs and Deemed Interest thereon, (“Cost Recovery Date”), in accordance with the Overall
Development Program for the first CBM Field within the Contract Area forecasted to recover
said costs, the Parties shall commence good faith negotiations of a Joint Operating Agreement
and Organization.
	 
	8.8.2	 	It is the intent of the Contractor and CUCBM that effective no later than said Cost
Recovery Date, all CBM Operations within the Contract Area will be conducted by the Contractor
and CUCBM as Operator pursuant to such Joint Operating Agreement.




21









 












	8.9	 	The expenses incurred in the transfer and takeover of the CBM Operations to
CUCBM and Contractor as Operator shall be approved as a budget item and charged to the
operating costs in accordance with Annex II- Accounting Procedure.
	 
	8.10	 	With a view to efficiently conducting Work Programs approved by the JMC, the Operator
shall have the right to use or occupy/and, including to obtain rights of way, inside or
outside the Contract Area, subject to promulgated Chinese laws and regulations.
	 
	 	 	The costs to be charged to Contractor for such land shall be reasonable and mutually
agreed to in writing by CUCBM and Contractor. Any costs incurred by the Operator for
this purpose shall be respectively charged to exploration costs, development costs and
operating costs having regard to the date on which the same are actually incurred.
	 
	8.11	 	Associated with the Contract Area and included in the grants of rights hereunder will be a
pipeline right-of-way, if required, from the Contract Area to the Delivery Point.





Article 9

Assistance Provided by CUCBM





	9.1	 	To enable the Contractor to carry out expeditiously and efficiently the CBM Operations, CUCBM
shall have the obligation to assist the Contractor at its request to:
	 
	9.1.1	 	Obtain the approvals or permits needed to open accounts with Bank of China;
	 
	9.1.2	 	Go through the formalities of exchanging foreign currencies;
	 
	9.1.3	 	Obtain office space, office supplies, transportation and communication facilities and make
arrangements for accommodations as required, at reasonable rates;
	 
	9.1.4	 	Go through the formalities of Customs;
	 
	9.1.5	 	Obtain entry and exit visas and residence permits for Expatriate Employees who will come to
China for the performance of the Contract and for their dependents, who will visit them or
reside in China and provide assistance for their transportation and moving as well as medical
services and travel in China;
	 
	9.1.6	 	Obtain necessary permission to send abroad, if necessary, documents, data and samples for
analysis or processing during the performance of the CBM Operations; and






22











 






	9.1.7	 	Maintain liaison with central and local governments, and contact and coordinate with
departments engaged in fishing, aquatic plants, stock raising, agriculture, meteorology, ocean
shipping, civil aviation, railway, transportation, electric power communication and services
for supply bases, for relevant matters and otherwise assist the Contractor in obtaining on a
timely basis approvals necessary for the conduct of the CBM Operations under the Contract;
	 
	9.1.8	 	Lease or use warehouses, yards, terminal facilities, barges, aircrafts, pipelines and land,
etc. in the implementation of the CBM Operations; and
	 
	9.1.9	 	Facilitate the Contractor’s and Subcontractors’ registration in China.
	 
	9.2	 	In accordance with Article 15 hereof, CUCBM shall, at the request of the Contractor, assist
the Contractor with the recruitment of Chinese Personnel.
	 
	9.3	 	CUCBM shall, at the request of the Contractor, provide the Contractor with data and samples,
if any, from the Contract Area within CUCBM’s and/or its Affiliates Control, at reasonable
rates in accordance with any relevant rules and regulations and CUCBM shall also assist the
Contractor to arrange the purchase of any other data including but not limited to
environmental, hydrological, topographical and meteorological data at reasonable rates.
	 
	9.4	 	CUCBM shall, at the request of the Contractor, also assist the Contractor with matters other
than those under Articles 9.1, 9.2 and 9.3 herein, including, but not limited to, the
acquisition, at reasonable costs where applicable, of any rights of way necessary for
transportation infrastructure, and the facilitation or bringing about of the granting of all
approvals, permits and licenses related to the CBM Operations.
	 
	9.5	 	All expenses incurred in the assistance provided by CUCBM in accordance with this Article 9
shall be paid by the Contractor and shall be handled in accordance with the provisions of
Annex II-Accounting Procedure hereto.





Article 10

Work Program and Budget





	10.1	 	After the Date of Commencement of the Implementation of the Contract, the Operator shall
propose and submit to JMC the annual Work Program and budget for the remainder of the same
Calendar Year at the first regular meeting of JMC. Before the fifteenth (15th) of September of
each Calendar Year, the Operator shall complete and submit to JMC for its review an annual
Work Program and budget for the next Calendar Year except as otherwise agreed by CUCBM. JMC
shall either adopt the annual Work Program and budget as submitted or make such modifications
agreed by the Parties. The




23









 






	 	 	adopted annual Work Program and budget shall be submitted to CUCBM
for review and consent within one (l) month as of the date on which they are submitted to
JMC. Within fifteen (15) days following the receipt of the annual Work Program and
budget, CUCBM shall notify JMC in writing of its consent or dissent or any modifications
thereto with its detailed reasons. If CUCBM requests any modifications to the aforesaid
annual Work Program and budget, the Parties shall promptly hold meetings to make
modifications and any modifications agreed upon by the Parties shall be effected
immediately. In case CUCBM fails to notify JMC in writing of its consent or dissent or
any modification within fifteen (15) days, the annual Work Program and budget adopted by
JMC shall be deemed to have been consented by CUCBM. The Operator shall make its best
efforts to perform the CBM Operations in accordance with the consented annual Work
Program and budget. For reviewing Work Program and budget by JMC, the Operator shall
provide to JMC the supporting data when requested. During the exploration period, the
budgets so consented by CUCBM shall be sufficient to allow the Operator to fulfill the
Work Programs including those Work Programs under Article 7.3.1 hereof and the
obligations under the Contract.
	 
	10.2	 	The Operator may, in accordance with the following provisions, incur excess expenditures or
expenditures outside the budget in carrying out the Work Program and budget, provided that the
objectives of the consented Work Program and budget are not changed.
	 
	10.2.1	 	In carrying out an consented budget for a single item, such as the drilling of a well, the
Operator may, if necessary, incur excess expenditures of no more than ten percent (10%) of the
budgeted amount. The Operator shall report the aggregate amount of all such excess
expenditures to JMC for confirmation on a Calendar Quarter basis.
	 
	10.2.2	 	For the efficient performance of the CBM Operations, the Operator may, without consent,
undertake certain individual projects which are not included in the Work Program and budget,
for a maximum expenditure of One Hundred Thousand U.S. dollars (U.S.$100,000), but the
Operator shall, within ten (10) days after such expenditures are incurred, report to JMC for
confirmation. In case of emergency, the Operator may incur emergency expenditures for the
amount actually needed but shall report such expenditures to JMC as soon as they are made.
However, the said emergency expenditures shall not be subject to Articles 10.2.3 and 10.2.4
herein.
	 
	10.2.3	 	In the event that the aggregate of excess expenditures under Article 10.2.1 herein and
expenditures under Article 10.2.2 herein incurred in a Calendar Year cause the total
expenditures of that Calendar Year to exceed the consented annual budget, such excess shall
not exceed five percent (5%) of the consented annual budget for that Calendar Year. If the
aforesaid excess is expected to be in excess of five percent (5%) of the annual budget, the
Operator shall present its reasons therefore to JMC and obtain its approval prior to incurring
such expenditures.




24









 






	10.2.4	 	When JMC confirms the excess expenditures mentioned in Articles 10.2.1 herein, and the
expenditures mentioned in Article 10.2.2 herein:






	 	(a)	 	if expenditures or excess expenditures are determined to be reasonable,
the Operator may incur such expenditures or excess expenditures again during the
same Calendar Year, subject to Article 10.2 herein; or
	 
	 	(b)	 	if expenditures or excess expenditures are determined to be
unreasonable, the Operator shall not incur such expenditures or excess expenditures
again during the same Calendar Year and such unreasonable expenditures or excess
expenditures shall be dealt with in accordance with Article 5.4 of Annex
II-Accounting Procedure hereto. However, with respect to the joint operation
conducted by the Contractor and CUCBM specified in Article 8.8 hereof, this
provision shall not be applicable.





Article 11

Determination of Commerciality of CBM





	11.1	 	If any CBM Discovery is made within the Contract Area, the Operator shall promptly report
such discovery to JMC. If JMC or the Contractor makes a decision that a CBM Discovery is
worthy of a Pilot Development, the Operator shall submit to JMC a Pilot Development Work
Program which shall include disposal of any CBM and/or Liquid Hydrocarbons whether by sale,
flaring or otherwise and timetable for such CBM Discovery as soon as possible. Such Pilot
Development Work Program shall be worked out no later than ninety (90) days from the date of
the aforesaid decision made by JMC or the Contractor. The Pilot Development Work Program
shall, in so far as is practicable, be based on conducting the Pilot Development work
continuously, with a view to commencing operations within one hundred and eighty (180) days
from the date of the aforesaid decision made by JMC or the Contractor.
	 
	11.2	 	After the approval by JMC of the Pilot Development Work Program referred to in Article 11.1
herein, the Operator shall carry out the operations as soon as possible without unreasonable
delay in accordance with the timetable set forth in the approved Pilot Development Work
Program.
	 
	11.3	 	Unless otherwise specified in the Pilot Development Work Program, within one hundred and
eighty (180) days after the completion of the Pilot Development, the Operator shall submit to
JMC a detailed report on the evaluation of the potential commerciality of the CBM discovery
for review and discussion. Under special circumstances, the above-mentioned period may be
reasonably extended upon agreement of the Parties.
	 
	 	 	The Pilot Development report shall include the evaluation on geology, development,
engineering and economics, the Maximum Efficient Rate (MER)





25









 





	 	 	and the estimated duration
of the production period determined in accordance with the international CBM industry practice.
	 
	11.4	 	If JMC decides unanimously that a CBM Discovery is non-commercial, at the request of the
Contractor, the corresponding area covered by the CBM Discovery may be retained in the
Contract Area during the exploration period. But if, at the expiration of the exploration
period, JMC unanimously still considers the said CBM Discovery to be non-commercial, the area
covered by the CBM Discovery shall be excluded from the Contract Area. The preceding shall
not apply to a CBM Field which in the opinion of either Party has potential commercial value
but which has not been developed due to a lack of market, a shortage of consuming facilities
or lack of transportation facilities and/or inability to negotiate longterm transportation
and/or sales agreements.
	 
	 	 	Prior to the expiration of the exploration period, if any Party considers that a CBM
Discovery which has been determined to be non-commercial needs to be reappraised because
of some favorable factors, the Operator shall work out a new evaluation report on that
CBM Discovery and submit it to JMC for review and approval.
	 
	11.5	 	If the Contractor, prior to the expiration of the exploration period, advises JMC in writing
that any CBM Discovery is non-commercial, the Contractor shall be deemed to have waived its
rights of participating in the development of that CBM Field, then, CUCBM shall have the right
to solely develop such potential CBM Field.
	 
	11.6	 	Where the Parties consider a CBM Discovery to be potentially commercial, as the Operator, the
Contractor shall work out the Overall Development Program for that CBM Field. the Parties
shall negotiate to reach an agreement on the development of the said CBM Field in a manner
that shall not interfere unreasonably with the expansion of coal mining operations in the
relevant coal field. The Overall Development Program and the agreement concerning the
development shall be a supplementary document and an integral part hereof after they are
approved by the Ministry of Commerce (MOFCOM) of the People’s Republic of China and the
Department Designated by the State Council.
	 
	11.7	 	Longterm CBM, and CBM Products and Liquid Hydrocarbons transportation and sales agreements
shall be concluded prior to the Determination of Commerciality.
	 
	11.8	 	In the event of a CBM Field Straddling a Boundary or of a potentially commercial CBM
Discovery straddling a boundary of the Contract Area, CUCBM shall organize the Contractor and
the neighboring party(ies) involved, which may include CUCBM and/or it’s Affiliates, to work
out a unitized or new Overall Development Program for such Field or Pilot Development work
program for such CBM Discovery. If such area is controlled solely by CUCBM and/or its
Affiliates, then the Contract Area




26









 






	 	 	shall be extended to cover the CBM Field with the approval
of Department Designated by the State Council.
	 
	11.9	 	If a CBM Discovery without commercial value within the Contract Area and a CBM discovery
outside the Contract Area can be most economically developed as a commercial CBM Field by
common facilities jointly constructed; or if CBM discovery without commercial value within the
Contract Area, can be economically developed as a commercial CBM Field by linking it up with
existing facilities located outside the Contract Area, CUCBM shall organize the Contractor and
the neighboring party(ies) involved, which may include CUCBM and/or its Affiliates, to work
out an equitable agreement for construction or utilization and sharing the costs relative to
said facilities.
	 
	11.10	 	In Article 11 those procedures which reference the Overall Development Program, shall be
applied, by analogy in the following circumstances: additional development projects referring
to the Overall Development Program designed either to improve the producing capability of the
reservoir or to substantially increase the recoverable reserves therefrom through additional
investments. Any extension of the production period of the CBM Field due to such additional
development projects shall be subject to the related provision of Article 4.5 hereof.
	 
	11.11	 	Notwithstanding the Date of Commencement of Commercial Production or anything else to the
contrary herein, the allocation of the production from a Pilot Development shall be governed
by the principles set forth in Articles 12 and 13 hereof.





Article 12

Financing and Cost Recovery





	12.1	 	Funds required for the CBM Operations shall be raised by the Operator in accordance with Work
Programs and budgets determined pursuant to the relevant provisions of the Contract, the
provisions described in Annex II — Accounting Procedure hereto, and the provisions described
here below. The Foreign Contractor shall use the U.S. dollars or other convertible currencies
as its investment.
	 
	12.1.1	 	All the exploration costs required for Exploration Operations shall be provided solely by
the Contractor. For purpose of the Contract, all costs incurred during the extended period
described in Article 4.3 hereof shall be deemed exploration costs and shall be provided solely
by the Contractor.
	 
	12.1.2	 	The development costs required for Development Operations in each CBM Field within the
Contract Area shall be provided by CUCBM and the Contractor in proportion to their respective
participating interests: forty percent (40 %) by CUCBM and sixty percent (60 %) by the
Contractor,




27









 






	 	 	unless CUCBM applies the provisions of the second paragraph of this Article 12.1.2 herein.
	 
	 	 	In the event that CUCBM, at its option, decides not to participate in the development of
a CBM Field or decides to participate in the development of such CBM Field to an extent
of less than forty percent (40 %) of the participating interest, CUCBM shall notify the
Contractor in writing of its decision of non-participation or a specific lesser
percentage of the participating interests before the Pilot Development report is
reviewed by JMC pursuant to Article 11.4 hereof. In such case, if CUCBM does not
participate in the development of such CBM Field, the development costs therein shall be
borne solely by the Contractor, or in case CUCBM participates in the development of such
CBM Field to an extent of less than forty percent (40 %) of the participating
interests, such development costs shall be borne by the Parties in proportion to their
actual respective participating interests.
	 
	12.1.3	 	The operating costs incurred for the performance of the Production Operations of each CBM
Field before the Date of Commencement of Commercial Production shall be considered as
development costs. The operating costs so incurred after the Date of Commencement of
Commercial Production shall be paid respectively by CUCBM and the Contractor in proportion to
their participating interests of the said CBM Field.
	 
	12.1.4	 	The Parties, on each others request, shall cooperate and assist each other to facilitate the
financing of CBM Operations on the best terms and conditions available. For the purpose of
implementation of the Contract, CUCBM agrees that the Contractor may, when financing, use the
entitlement of its share of production under the Contract as a security for loans, provided
that the Contractor shall advise CUCBM in advance and the loan application therefore shall be
examined by CUCBM, and provided further that the rights and interests of CUCBM under the
Contract shall not be impaired thereby.
	 
	12.2	 	All the costs incurred in the performance of CBM Operations shall be recovered in accordance
with Annex II — Accounting Procedure hereto and the provisions described as follows:
	 
	12.2.1	 	The operating costs for any given Calendar Year actually incurred by CUCBM and the
Contractor in respect of each CBM Field pursuant to Article 12.1.3 herein, shall be recovered
in kind by the Parties out of the CBM and Liquid Hydrocarbons produced from the said CBM Field
during that Calendar Year in accordance with Annex II — Accounting Procedure hereto, after the
operating costs have been converted into a quantity of CBM and Liquid Hydrocarbons on the
basis of the CBM price and Liquid Hydrocarbons price determined in accordance with Article 14
hereof. Unrecovered operating costs shall be carried forward to the succeeding (subsequent)
Calendar Year(s).
	 
	12.2.2	 	The exploration costs incurred by the Contractor shall be recovered as follows:
	 
	 	 	After the Date of Commencement of Commercial Production of a CBM Field





28









 





	 	 	within the Contract Area, the exploration costs
incurred by the Contractor in
respect of the Contract Area shall be recovered in kind out of the CBM and Liquid
Hydrocarbons produced from any CBM Field within the Contract Area in accordance with
Article 13.2.2.2 hereof, after the exploration costs have been converted into a quantity
of CBM and Liquid Hydrocarbons based on the CBM price and Liquid Hydrocarbons price
determined in accordance with Article 14 hereof. The exploration costs shall be
recovered without any interest.
	 
	 	 	If no CBM Field is discovered within the Contract Area, the exploration costs incurred
by the Contractor shall be deemed as its loss. Under no circumstances shall CUCBM
reimburse the Contractor for such loss.
	 
	12.2.3	 	The development costs in respect of each CBM Field incurred by CUCBM and the Contractor and
Deemed Interest thereon shall be recovered as follows:
	 
	12.2.3.1	 	After the Date of Commencement of Commercial Production of any CBM Field within the
Contract Area, the development costs in respect of such CBM Field incurred by CUCBM and the
Contractor and Deemed Interest thereon calculated in accordance with Article 12.2.3.2 herein
shall be recovered in kind out of the CBM and Liquid Hydrocarbons produced from such CBM Field
in accordance with Article 13.2.2.2 hereof, after the development costs and Deemed Interest
thereon have been converted into a quantity of CBM and Liquid Hydrocarbons based on the CBM
price and Liquid Hydrocarbons price determined in accordance with Article 14 hereof.
	 
	12.2.3.2	 	Deemed Interest on the development costs incurred by CUCBM and the Contractor for each CBM
Field within the Contract Area shall be calculated at a fixed annual compound rate of nine
percent (9%) from the first day of the month following the month in which such development
costs expended by each Party to the Contract are actually received in the bank account of the
Joint Account opened by the Operator. The detailed method of such calculation shall be as
provided in Annex II — Accounting Procedure hereto.
	 
	12.2.4	 	Any CBM and Liquid Hydrocarbons extracted and delivered from a CBM Field before the Date of
Commencement of Commercial Production shall be allocated in accordance with Article 12 and
Article 13 hereof.





Article 13

CBM Production and Allocation





	13.1	 	The Operator shall, in accordance with the production profile, adjusted as the case may be,
set forth in the approved Overall Development Program for each CBM Field, work out a CBM
production plan for each CBM Field in each Calendar Year and carry out CBM production pursuant
to such plan.
	 
	13.2	 	The Annual Gross Production of CBM and Liquid Hydrocarbons of each




29









 






	 	 	CBM Field within the
Contract Area in each Calendar Year during the production period shall be allocated in accordance with the following sequence and
proportions:
	 
	13.2.1	 	The percentages of the Annual Gross Production of CBM and Liquid Hydrocarbons specified in
paragraphs (a) and (b) hereunder shall be used for payments of the Value Added Tax and of
Royalty respectively and shall be paid in kind to the relevant authorities of the Chinese
Government through CUCBM.






	 	(a)	 	Value Added Tax shall be paid in accordance with relevant regulations
of the People’s Republic of China; and
	 
	 	(b)	 	Royalty shall be paid in accordance with relevant regulations of the
People’s Republic of China.






	13.2.2	 	Seventy percent (70%) of the Annual Gross Production of CBM and Liquid Hydrocarbons shall be
deemed as the “cost recovery CBM and Liquid Hydrocarbons” and shall be used for payments or
for cost recovery in the following sequence:
	 
	13.2.2.1	 	Payment in kind for the operating costs actually incurred (and any abandonment costs
accrued per Article 4) but not yet recovered by the Parties pursuant to Article 12.2.1 hereof
based on the price of the said “cost recovery CBM and Liquid Hydrocarbons” determined in
accordance with Article 14 hereof.
	 
	13.2.2.2	 	The remainder of the “cost recovery CBM and Liquid Hydrocarbons” shall, after payment for
operating costs in accordance with Article 13.2.2.1 herein, be deemed as “investment recovery
CBM and Liquid Hydrocarbons”. Such “investment recovery CBM and Liquid Hydrocarbons” shall be
used for the recovery of the exploration costs in respect of the Contract Area which were
incurred and not yet recovered by the Contractor, and shall be used for the recovery of the
development costs in respect of the CBM Field itself which were incurred and not yet recovered
by CUCBM and the Contractor in accordance with Articles 12.2.2 and 12.2.3 hereof, and Deemed
Interest thereon. The method of recovery and the recovery sequence are as follows:






	 	(a)	 	Beginning in the Calendar Year during which the production of any CBM
Field within the Contract Area commences, the “investment recovery CBM and Liquid
Hydrocarbons” referred to in Article 13.2.2.2 herein, based on the price which has
been determined in accordance with Article 14 hereof, shall be paid in kind first
to the companies comprising the Contractor for the recovery of the exploration
costs which were incurred in respect of, and have not yet been recovered from, the
Contract Area.
	 
	 	 	 	The unrecovered exploration costs shall be carried forward to and recovered from
the “investment recovery CBM and Liquid




30









 






	 	 	 	Hydrocarbons” in succeeding Calendar Years
until fully recovered by the Contractor.
	 
	 	(b)	 	Beginning in the Calendar Year during which the exploration costs
incurred by the Contractor in respect of the Contract Area have been fully
recovered, the remainder of the “investment recovery CBM and Liquid Hydrocarbons”
of a CBM Field shall be used for the simultaneous recovery of the development costs
incurred and not yet recovered respectively by CUCBM and the Contractor and Deemed
Interest thereon in respect of such CBM Field in proportion to their respective
participating interests therein based on the price of such remainder of the
“investment recovery CBM and Liquid Hydrocarbons” determined in accordance with
Article 14 hereof. The unrecovered development costs and Deemed Interest thereon
shall be carried forward to and recovered from the “investment recovery CBM and
Liquid Hydrocarbons” in succeeding Calendar Years until fully recovered.
	 
	 	(c)	 	During the production period of a CBM Field, costs for an additional
development project incurred pursuant to Article 11.9 hereof and Deemed Interest
thereon shall be recovered together with the unrecovered development costs and
Deemed Interest thereon. If the development costs and Deemed Interest thereon have
been fully recovered, then costs for the said additional development project and
Deemed Interest thereon shall be recovered from the “investment recovery CBM and
Liquid Hydrocarbons” of such CBM Field referred to in Article 13.2.2.2 herein in
accordance with the provisions specified in Article 13.2 herein. The unrecovered
costs for the additional development project and Deemed Interest thereon shall be
carried forward to and recovered in succeeding Calendar Years until fully
recovered.
	 
	 	(d)	 	After the recovery of a CBM Field’s development costs and Deemed
Interest thereon and/or costs for the additional development project and Deemed
Interest thereon from the said CBM Field by the Parties, the remainder of the
“investment recovery CBM and Liquid Hydrocarbons” shall automatically be regarded
as part of the “remainder CBM and Liquid Hydrocarbons” referred to in Article
13.2.3 herein. By the date of expiration of the production period of a CBM Field
pursuant to Article 4.5 hereof, if any development costs and Deemed Interest
thereon and/or costs for the additional development project incurred in respect of
such CBM Field and Deemed Interest thereon have not yet been fully recovered, then
such unrecovered costs and Deemed Interest thereon shall be regarded as a loss, and
the Parties shall bear the loss in proportion to their respective participating
interests.






	13.2.3	 	The remainder of the Annual Gross Production of CBM and Liquid Hydrocarbons after the
allocation referred to in Articles 13.2.1 and 13.2.2 herein shall be deemed as “remainder CBM
and Liquid Hydrocarbons”. Such “remainder CBM and Liquid Hydrocarbons” shall be divided into
“share CBM and Liquid Hydrocarbons” of the Chinese side and “allocable remainder CBM and
Liquid




31









 











	 	 	Hydrocarbons”. The “allocable remainder CBM and Liquid Hydrocarbons” of
each CBM Field in each Calendar Year shall be equal to the “remainder CBM and Liquid
Hydrocarbons” of that Calendar Year multiplied by the factor (X) for each CBM Field within
the Contract Area in that Calendar Year. The factor (X) of each CBM Field in each Calendar
Year shall be determined in accordance with the following successive incremental tiers on
the basis of the Annual Gross Production of CBM and Liquid Hydrocarbons from such CBM Field
during that Calendar Year.





	 	 	 	 	 
	 
	 	 	Annual Gross Production	 	Factors (X) in Percentage
	 	 	of	 	Applicable to Each
	 	 	CBM and Liquid Hydrocarbons	 	Production Tier of
	 	 	From Each CBM Field	 	Each CBM Field Within
	 	 	(Million Cubic Meters)	 	the Contract Area
	 
	 

	 	equal to or less than 500
	 	Xl = 99 Percent ( 99%)
	 

	 	over 500       to 800
	 	X2 = 99 Percent ( 99%)
	 

	 	over 800    to 1,200
	 	X3 = 98 Percent ( 98%)
	 

	 	over 1,200 to 1,800
	 	X4 = 97 Percent ( 97%)
	 

	 	over 1,800 to 2,500
	 	X5 = 96 Percent ( 96%)
	 

	 	over 2,500 to 5,000
	 	X6 = 93 Percent ( 93%)
	 

	 	over 5,000
	 	X7= 90 Percent ( 90%)
	 






In the above table, it is assumed that each cubic meter of CBM has a heating value of
thirty-six thousand and nine hundred sixty (36,960) BTU approximately. On this basis, a
metric ton of Liquid Hydrocarbons in general will have a heating value of forty- three
(43) million BTU, or equivalent to 1,164 cubic meters of CBM. 1.0 kilo calorie is equal
to 3.97 BTU. Adjustments will be made if actual heating value exceeds or is less than
the above by ten percent (10%) or more.




An example of application in calculating the factor (X):




Assuming that there are two producing commercial CBM Fields A and B within the Contract
Area and the Annual Gross Production of CBM and Liquid Hydrocarbons from CBM Field A in
a Calendar Year is three thousand and sixty four (3,064) million cubic meters, and that
from CBM Field B is four thousand five hundred and ninety (4,590) million cubic meters,
the factor (X) of CBM Field A in that Calendar Year shall be:



	 	 	 	 	 
	 

	 	500X1 + 300X2 +400X3 + 600X4 + 700x5 + 564X
6	 	 
	X =

	 	 

	  X 100%	
	 

	 	3,064                     
              
	 	 







and the factor (X) of CBM Field B in that Calendar Year shall be:



32









 






	 	 	 	 	 
	 

	 	500X1 + 300X2 + 400X3 + 600X4 + 700X5 + 2090X
6	 	 
	X =

	 	 

	 	X 100%
	 

	 	4,590                                        	 	 







	13.2.4	 	The “allocable remainder CBM and Liquid Hydrocarbons” of each CBM Field in each Calendar
Year referred to in Article 13.2.3 herein shall be shared by the Parties in proportion to
their respective participating interests in the development costs, forty percent (40 %) for
CUCBM and sixty percent (60%) for the Contractor. In the event that CUCBM does not
participate in the development of an CBM Field within the Contract Area, the Contractor shall
obtain one hundred percent (100%) of the “allocable remainder CBM and Liquid Hydrocarbons” of
that CBM Field. In the event that CUCBM participates to an extent less than 40 percent (40 %)
in the development of an CBM Field within the Contract Area, the “allocable remainder CBM and
Liquid Hydrocarbons” of such CBM Field in that Calendar Year shall be shared by the Parties in
proportion to their actual respective participating interests in such CBM Field.
	 
	13.3	 	Pursuant to the method of allocation specified in this Article, the Contractor may obtain an
aggregate amount of CBM and Liquid Hydrocarbons consisting of the following three categories
and shall be subject to Article 1.7 of Annex II.
	 
	13.3.1	 	The total amount of CBM and Liquid Hydrocarbons as converted from the actual operating costs
paid by the Contractor in all CBM Fields in proportion to its participating interests in the
development costs stipulated in Article 13.2.2.1 hereof when recovering such costs;
	 
	13.3.2	 	The total amount of the “investment recovery CBM and Liquid Hydrocarbons” from all CBM
Fields due to the Contractor provided for in Article 13.2.2.2 herein; and
	 
	13.3.3	 	The total amount of the “allocable remainder CBM and Liquid Hydrocarbons” of all CBM Fields
due to the Contractor in accordance with Article 13.2.4 herein.





Article 14

Quality, Quantity, Price,

and Destination of CBM





	14.1	 	In accordance with Article 13.3 hereof, the Contractor may obtain the aggregate amount of
three (3) categories of the Coalbed Methane and Liquid Hydrocarbons referred to in Articles
13.3.1, 13.3.2 and 13.3.3 hereof.
	 
	14.2	 	Quality of the CBM and Liquid Hydrocarbons.




33









 






	14.2.1	 	The quality analysis of CBM and Liquid Hydrocarbons produced from each CBM Field within the
Contract Area shall be undertaken at the Delivery Point.
	 
	 	 	Such analysis shall be carried out on a sample taken by the General Administration of
Quality Supervision, Inspection and Quarantine (hereafter referred to as the “General
Administration”) or any representative agency authorized by the General Administration
pursuant to standards issued by the State Bureau of Standardization of the People’s
Republic of China or by the Department Designated by the State Council.
	 
	14.3	 	Quantity of the Coalbed Methane and Liquid Hydrocarbons.
	 
	14.3.1	 	The quantity measurement of the CBM and/or Liquid Hydrocarbons produced from each CBM Field
within the Contract Area, when being lifted, shall be made at a Delivery Point and with
measuring devices both to be agreed upon by the Parties. A relevant measuring organization of
the Chinese Government or a representative agency authorized thereby shall, at appropriate
regular intervals, calibrate all the measuring devices, conduct special testing and issue
certificates of qualification with respect thereto or confirm their qualification before the
measuring devices are put into use. The quality and quantity of the CBM and/or Liquid
Hydrocarbons delivered shall be authenticated in accordance with the commodity quality
certificate and weight certificate issued by the General Administration and such quality and
quantity shall be the basis for the accounting settlement.
	 
	14.3.2	 	If any Party to the Contract believes that the CBM or Liquid Hydrocarbons measuring devices,
sampling or analysis are inaccurate, or has any objection to the results specified in the
above mentioned certificates, on-site investigations, technical exchanges and discussions may
be conducted by the Parties to resolve the issue in a manner satisfactory to the Parties.
	 
	14.4	 	Determination of the Coalbed Methane and/or Liquid Hydrocarbons Price.
	 
	14.4.1	 	The price of various grades of the CBM and Liquid Hydrocarbons shall be expressed as a FOB
price at the Delivery Point. Determination of the CBM and Liquid Hydrocarbons price shall be
based on the actual free market price received by the Parties; and






	 	a)	 	shall be determined each Calendar Quarter by CUCBM and each Party
comprising Foreign Contractor individually; and
	 
	 	b)	 	shall be the volumetrically weighted average of the following
components:






	 	1.	 	In arm’s length transactions the actual price received.
	 
	 	2.	 	For other than arm’s length transactions, the fair market
price taking into account the prevailing market conditions.






The aforesaid price in arm’s length transactions in this Article refers to a free



34









 






market
price at which a seller sells its CBM and/or Liquid Hydrocarbons to a buyer who is
independent of the seller, but not including prices used for
government to government transactions or other fixed or controlled prices which do not
reflect the free market price, exchange or barter transactions.




The price of the CBM and Liquid Hydrocarbons produced from the Contract Area shall be
determined based on general pricing principles prevailing internationally taking into
consideration such factors as the markets, quality and quantity of the CBM and Liquid
Hydrocarbons and the prices of alternate energy resources agreed upon by the Parties
with the objective of the Parties being to obtain the best price possible.




The transportation costs to be used to determine the FOB price at the Delivery Point
shall be agreed to during the negotiation of the longterm sales and purchase agreements
and prior to the determination of commerciality and prior to the preparation and
approval by the Parties of an Overall Development Program. Such transportation costs
shall be determined in accordance with international Petroleum and CBM industry
practice.




	14.4.2	 	Where the CBM and/or Liquid Hydrocarbons produced from each CBM Field within the Contract
Area differs in quality, the prices of such CBM with different quality shall if practicable be
individually determined.
	 
	14.4.3	 	The price of the Contractor’s share of the CBM and Liquid Hydrocarbons produced from all the
CBM Fields within the Contract Area shall be denominated in Chinese RMB per cubic meter (based
on BTU basis in accordance with Article 13.2.3).
	 
	14.5	 	Terms of Payment for the Purchased CBM and Liquid Hydrocarbons, Pursuant to Article 14.6
hereof.
	 
	14.5.1	 	Before the CBM and Liquid Hydrocarbons price is determined, the time limit for payment shall
be agreed upon by the Parties through consultation in accordance with the general
international practice then prevailing.
	 
	14.5.2	 	In case any Party is in default of such payment, such Party shall pay interest on arrears of
the payment, starting from the first day of such default. The interest rate shall be the
thirty-day term London Inter-Bank Offered Rate (LIBOR) for U.S. dollars quoted by Midland Bank
in London at eleven (11:00) a.m. on the first working day following the due date of payment
plus five percent (5%).
	 
	14.6	 	Destination of the CBM and Liquid Hydrocarbons.
	 
	14.6.1	 	The destination of Contractor’s CBM, CBM Products, and Liquid Hydrocarbons obtained under
the Contract shall be at the discretion of the Contractor. The Contractor shall have the
following non-exclusive options:




35









 












	 	(1)	 	to join with and in the name of CUCBM to market a part or all of their
respective shares of CBM and Liquid Hydrocarbons and to sell such CBM and Liquid
Hydrocarbons jointly to prospective purchasers and to
achieve the maximum market price and best commercial terms for both CUCBM and the
Contractor; or
	 
	 	(2)	 	any other marketing approaches and procedures agreed by the Parties.






	14.6.2	 	Transportation costs shall be determined in accordance with Article 14.4.1 herein.
	 
	14.6.3	 	The CBM price or value shall be determined in accordance with this Article 14 with the
objective of the Parties being to produce the CBM at the MER and to obtain the best price
possible.
	 
	14.6.4	 	Unless otherwise mutually agreed, the CBM Delivery Point shall be the most economically
viable nearby pipeline having available capacity.
	 
	14.6.5	 	For the purpose of encouraging the exploration and development of CBM, CUCBM and/or its
Affiliates will, upon request of Contractor, act as a buyer to purchase all or part of
Contractor’s share of CBM and Liquid Hydrocarbons produced from the Contract Area in
accordance with the following provisions.
	 
	14.6.5.1	 	The Parties shall agree upon the volume and rates of delivery of CBM and Liquid
Hydrocarbons by Contractor and to be purchased by CUCBM and/or its Affiliates.
	 
	14.6.5.2	 	The price of CBM and other essential terms and conditions including but not limited to
Delivery Point and pipeline costs shall be determined pursuant to the provisions of Article 14
and shall unless otherwise mutually agreed be agreed upon prior to the determination of
commerciality and preparation of the Overall Development Program.
	 
	14.6.5.3	 	The Purchase of the CBM and Liquid Hydrocarbons produced from the Contract Area shall be
made at the Delivery Point, which unless otherwise mutually agreed, shall be the most
economically viable nearby Natural Gas pipeline having available capacity.
	 
	14.6.5.4	 	Unless otherwise agreed by the Contractor, payments for CBM and Liquid Hydrocarbons shall
be made in U.S. dollars in the bank account designated by Contractor.
	 
	14.6.6	 	In the case that CUCBM and/or its Affiliates have available capacity in the gas trunklines
and/or pipeline infrastructure, once a CBM transportation contract with reasonable
transportation costs determined in accordance with Article 14.4.1 has been signed by and
between CUCBM and/or its Affiliates and Contractor, Contractor shall be guaranteed access and
priority use of such trunkline and/or pipeline infrastructure and any subsequent CBM or
Natural




36









 






	 	 	Gas producer shall be subject to Contractors’ guaranteed access and priority use of
such trunkline and/or pipeline infrastructure.





Article 15

Preference for the Employment of the

Chinese Personnel, Goods and Services





	15.1	 	For the performance of the CBM Operations, the Contractor’s procurement of necessary goods,
leasing equipment and signature of subcontracts or other service contracts shall be subject to
relevant regulations. The Contractor shall give preference to Chinese goods, equipment and
service, provided that they are competitive in terms of price, quality and term of delivery.
	 
	15.2	 	The Contractor may give preference to the employment of Chinese Personnel in the performance
of the CBM Operations in accordance with relevant regulations. For this purpose, the
Contractor may submit in advance to CUCBM and JMC respectively a plan for the employment of
Chinese Personnel listing all the posts and number of the persons involved. CUCBM shall, at
the request of the Contractor and in accordance with the plan, provide or assist in recruiting
Chinese employee candidates for such employment. For the performance of CBM Operations, the
Contractor shall have the obligation to employ competent Chinese Personnel and to employ those
who have become qualified after being trained in accordance with the training program. The
Contractor shall give preference in employing the Chinese Personnel who have participated in
the training program provided by the Contractor.
	 
	 	 	It is agreed between CUCBM and the Contractor that total Chinese Personnel employment
levels, including the costs thereof, for the purpose of conducting CBM Operations,
including training therefore, shall always be consistent with conducting such operations
in an efficient and economic manner in accordance with good and generally accepted
international oil field practices.
	 
	 	 	All Chinese employees shall sign with the Operator employment contracts whose terms
shall cover hiring, resignation and dismissal, production and work responsibilities,
wages and bonuses, working hours and holidays, labor insurance and welfare benefits,
labor protection and labor discipline. Such contracts shall include the right of the
Operator to dismiss in accordance with the Chinese laws and regulations concerned such
employees who do not observe such contract or other rules applicable to their work.
	 
	15.3	 	The engineering design corporations under or entrusted by CUCBM shall have the right to
participate in the master designs and engineering designs made by the Contractor for the
purpose of the implementation of the Contract. Engineering design companies within the
territory of the People’s Republic of China shall be given preference in entering into the
subcontracts for the aforesaid master designs and engineering designs, provided that their
technical level, quality, price and delivery time are competitive.




37









 






	15.4	 	After the Contractor signs equipment leasing contracts, service contracts or subcontracts
with CUCBM or its Affiliates in accordance with Article 15.1 herein, the Contractor shall
endeavor to provide technical assistance to
CUCBM or its Affiliates, at the request of CUCBM, so as to enable them to meet the needs
of operations to be undertaken. The expenses so incurred shall be borne by CUCBM or its
Affiliates.





Article 16

Training of Chinese Personnel

and Transfer of Technology





	16.1	 	The Contractor agrees, in the course of the implementation of the Contract, to transfer to
CUCBM and its Affiliates, the advanced technology and managerial experience including
proprietary technology e.g. patented technology, know-how or other confidential technology,
used in the performance of the CBM Operations and the necessary data and/or information for
mastering such technology and experience, provided, however, such technology to be transferred
shall be proprietary to the Contractor and if the transfer of any of such technology is
restricted in any way during the term of the Contract, the Contractor shall, to the extent
reasonably possible, endeavor to obtain permission for the transfer of such restricted
technology. The Contractor agrees to train the CUCBM Personnel including workers, technical,
economic, managerial, legal and other professional personnel, in order to improve their
technical and/or managerial capabilities relating to CBM Operations.
	 
	16.2	 	Within ninety (90) days following the Date of Commencement of the Implementation of the
Contract, the Contractor shall, after consultation with CUCBM, complete and submit a training
and technology transfer program for a reasonable number of the CUCBM Personnel in the
exploration period and the corresponding budget to JMC for review and approval, and upon
approval by JMC, put it into practice. The Contractor shall, after consultation with CUCBM,
complete and submit training and technology transfer programs and corresponding budgets for a
reasonable number of the CUCBM Personnel in the development period and production period,
respectively, to JMC for its review and approval before the commencement of the Development
Operations and Production Operations, and upon approval by JMC, put them into practice in time
so as to have ample time in advance for such training and technology transfer.
	 
	16.3	 	The expenses and costs incurred for performing the training and technology transfer program
stipulated in this Article shall be charged to the exploration costs if such costs are
incurred before the date of approval of the Overall Development Program of the first CBM
Field, and shall be charged to the development costs if such costs are incurred after the date
of approval of the Overall Development Program of the first CBM Field, and before the Date of




38









 





Commencement of Commercial Production of the first CBM Field, or
shall be charged to the operating costs if such costs are incurred
after the Date of Commencement of Commercial Production of the first
CBM Field.

	16.4	 	In the course of the implementation of the Contract, the Parties shall have scientific and
technical cooperation and academic exchange in connection with the CBM Operations. The
relevant provisions concerning the program, participating personnel and type related to the
scientific and technical cooperation and academic exchange shall be determined by the Parties.
The expenses required by the scientific and technical cooperation and academic exchange shall
be included in the budget specified in Article 16.2 herein and charged to the Joint Account.
All inventions, experiments or research results arising from the said cooperation and academic
exchange shall be shared by and belong to the Parties who, subject to the provisions of
Article 21 hereof, shall not disclose them to any Third Party.
	 
	16.4.1	 	In the course of the implementation of the Contract, those scientific research projects
which are required by the CBM Operations but not carried out by the Parties may, with the
approval of JMC, be commissioned to, and carried out by, any Third Party. The Operator shall
enter into subcontracts or service contracts with relevant scientific research departments
within the territory of the People’s Republic of China, provided that they are competent and
competitive. The aforesaid required expenses shall be included in the budget specified in
Article 16.2 herein and charged to the Joint Account. All inventions and experimental or
research results developed from the aforesaid research projects carried out by a Third Party
delegated by the Operator shall also be shared by and belong to the Parties who, subject to
the provisions of Article 21 hereof, shall not disclose them to any other Third Parties. The
Operator shall endeavor to incorporate the provisions herein in the subcontracts or service
contracts signed with a Third Party.
	 
	16.5	 	The advanced technology and managerial experience, including proprietary technology, e.g.
patented technology, know-how or other confidential technology that the Contractor transfers
to CUCBM, shall remain the exclusive property of the Contractor and also be subject to the
confidentiality restrictions of Article 21 hereof.
	 
	16.6	 	For the purpose of the implementation of this Article 16 — Training of Chinese Personnel and
Transfer of Technology, the costs and expenditures incurred by the Contractor annually for
training of CUCBM’s Personnel and transfer of technology shall be no less than fifty thousand
($50,000) U.S. dollars during the exploration period and no less than two hundred thousand
($200,000) U.S. dollars during the development and production periods unless otherwise agreed
by the Parties.





Article 17

Ownership of Assets and Data




39









 






	17.1	 	All assets purchased, installed and constructed under the Work Program and budget for each
CBM Field within the Contract Area shall be owned by CUCBM from the date on which all the
development costs actually incurred
by the Contractor in the development period of such CBM Field have been fully recovered
or from the date on which the production period expires, even though the aforesaid costs
have not been fully recovered. The Operator shall be responsible for the acceptance
inspection or testing of the said assets and CUCBM may, as it deems necessary, send its
experts to participate in such acceptance inspection or testing. In the production
period, the Operator may use these aforesaid CUCBM-owned assets free of charge for
performing the CBM Operations. Such assets shall not be used in any operations other
than the CBM Operations or any operations by Third Parties without the consent of the
Parties.
	 
	17.2	 	Equipment and facilities which are owned by a Third Party and are either leased by the
Operator or temporarily brought into the territory of the People’s Republic of China for the
performance of the CBM Operations shall not be deemed as assets owned by CUCBM. Such equipment
and facilities may be exported from the People’s Republic of China, and CUCBM shall assist in
handling export formalities.
	 
	17.3	 	The ownership of all data, records, samples, vouchers and other original data obtained in the
course of performing the CBM Operations shall vest in CUCBM, and the disclosure thereof by
CUCBM shall be made in accordance with Article 21 hereof. However the Contractor shall,
subject to any necessary approval as may be required and Article 21 hereof, have the right to
use inside and outside the People’s Republic of China, and keep samples, copies of all data,
records and vouchers for the purposes of the CBM Operations.
	 
	17.4	 	The facilities constructed for the conduct of CBM Operations hereunder, whether located
within or outside the Contract Area, may be used for the common benefit of any and all CBM
Fields within the Contract Area (“Common Facilities”) for so long as any CBM Field in the
Contract Area is utilizing any of the Common Facilities. CUCBM and Contractor shall be
entitled to use, free of charge, excepting Operating Costs, such Common Facilities to the
extent required for CBM Operations, hereunder. Such right of use shall be permitted
regardless of whether or not the costs related to such Common Facilities have been recovered
and regardless of whether or not the production period of the relevant CBM Field on which the
Common Facilities are located has been terminated.
	 
	 	 	The operating costs of the Common Facilities will be allocated to each CBM Field in
proportion to the total Annual Gross Production of CBM and Liquid Hydrocarbon,
contribution of each CBM Field to the total Annual Gross Production of CBM and Liquid
Hydrocarbons of all the CBM Fields within Contract Area utilizing such facilities.




40









 











Article 18

Accounting, Auditing and Personnel Costs





	18.1	 	Accounting
	 
	 	 	Annex II — Accounting Procedure hereto contains the guidelines for
the Operator to keep accounting books and records and make financial
settlements. The Operator shall keep and settle the accounts for all
the financial activities in respect of the Contract Area and maintain
all the accounting books and records in accordance with Annex II -
Accounting Procedure hereto in order to accurately reflect the
exploration costs, development costs with Deemed Interest thereon and
operating costs incurred in the performance of the CBM Operations in
respect of the Contract Area, as well as quantity and monetary value
of the production and allocation of CBM. The Operator shall submit
detailed statements and relevant written reports to JMC and the
departments concerned.
	 
	18.2	 	Auditing.
	 
	18.2.1	 	Any non-Operator Party to the Contract shall have the right to audit all the Operator’s
Joint Account accounting books and records after the end of each Calendar Year and shall give
the Operator a written notice of the auditing results. The auditing shall be completed within
twenty-four (24) months after the end of each Calendar Year. In the absence of any written
notice of the exception in the auditing results given by the non-Operator Party within such
period or if the annual Joint Account accounting books and records of the Operator are not
audited by any non-Operator Party within such period, the Operator’s Joint Account accounting
books and records shall be deemed correct. A special auditing of the Operator’s Joint Account
accounting books and records may be made due to some special requirements during a Calendar
Year.
	 
	18.2.2	 	If the auditing referred to in Article 18.2.1 herein is conducted, the Operator shall be
given thirty (30) day notice prior to the date of commencement of such auditing. There shall
be no impediment to normal CBM Operations during the period of any audit.
	 
	18.2.3	 	The auditors shall be entitled to access to all relevant Joint Account records, files and
other information and may inspect such sites and facilities as necessary.
	 
	18.2.4	 	Upon receipt of a notice of the non-Operator Party’s exceptions in the auditing results, the
Operator shall use its best efforts to reply in writing and resolve these matters in due time
(no later than sixty (60) days thereafter).
	 
	18.3	 	Personnel Costs.
	 
	18.3.1	 	The personnel costs mean the remuneration and other related charges paid in




41









 






	 	 	connection with
personnel who are engaged whether temporarily or permanently in administration, management,
accounting, finance, tax, employee relations, procurement, legal affairs, computer services,
engineering, geology, geophysics, drilling and Production Operations as well as all other work
for the implementation of the Contract.
	 
	18.3.1.1	 	The salary or wages of personnel of the JMC, of the personnel in the various subordinate
bodies of the JMC, of the professional representatives referred to in Article 7.5 and of all
employees engaged in the performance of the CBM Operations shall be included in the personnel
costs as provided in Article 18.3.1 herein.
	 
	18.3.1.2	 	Personnel costs which are classified as the overhead of the superior management
organization pursuant to Article 5.2.18 of Annex II — Accounting Procedure hereto shall not be
included in the personnel costs mentioned herein.
	 
	18.3.2	 	After the Date of Commencement of the Implementation of the Contract, the Operator shall
work out a staffing plan for its organization and a personnel costs plan with respect thereto
(including a plan of personnel costs, such as basic salary or wage, overseas allowance and
area allowance, etc.) before the beginning of each Calendar Year and submit such plan with the
annual Work Program and budget to JMC for review and examination.
	 
	 	 	During the exploration period, the Operator shall submit a staffing plan for its
organization and a personnel costs plan with the annual Work Program and budget to JMC
for review and examination.
	 
	 	 	In the development period and production period, the Operator shall submit a staffing
plan for its organization and a personnel costs plan with the annual Work Program and
budget to JMC for review and approval and the Contractor shall provide to CUCBM with an
itemized plan of personnel costs of the Expatriate Employees. CUCBM shall bear the
obligation of confidentiality to such information provided by the Contractor.
	 
	 	 	The Operator shall charge the personnel costs of the Contractor’s personnel actually
incurred to the Joint Account.
	 
	 	 	CUCBM shall have the right to audit the personnel costs charged to the Joint Account,
and when CUCBM acts as the Operator, the Contractor shall also have the right to audit
such personnel costs.
	 
	18.3.3	 	The level of the salaries and wages paid to the representatives appointed by CUCBM to JMC
established in accordance with Article 7.1 hereof, the Chinese Personnel working in various
subordinate bodies of JMC established in accordance with Article 7.4 hereof, the professional
representatives assigned by CUCBM to all administrative and technical departments of the
Operator (Contractor) in accordance with Article 7.5 hereof and CUCBM’s personnel employed by
the Contractor shall be determined pursuant to the provisions of Annex III — Personnel Costs
hereto.




42









 






	 	 	The salaries and wages of the Chinese Personnel other than CUCBM personnel employed by
the Operator shall be determined through consultations and specified in the individual
employment contracts.
	 
	 	 	The settlement of all charges for the salaries and wages of CUCBM personnel mentioned in
Article 18.3.3 herein, shall be made between CUCBM and the Operator in accordance with
Annex III (Personnel Costs) hereto. CUCBM personnel shall be responsible for any and all
individual income tax due including but not limited to that due in accordance with the
provisions of the individual income tax law of the People’s Republic of China.
	 
	18.3.4	 	The Operator shall withhold the individual income tax of the Expatriate Employees it is
required to withhold and due in accordance with the provisions of the individual income tax
law of the People’s Republic of China.





Article 19

Taxation





	19.1	 	Except for the taxes and duties for which the Contractor has the statutory obligation to file
and pay for the CBM Operations, each of the companies comprising the Contractor shall pay
taxes measured by income to the Government of the People’s Republic of China subject to the
tax laws and regulations of the People’s Republic of China applicable to the Contract.
	 
	19.2	 	The Operator shall advise the Subcontractors who render services for the Contract that they
and their employees shall pay taxes to the Government of the People’s Republic of China
subject to the tax laws and regulations of the People’s Republic of China.





Article 20

Insurance





	20.1	 	The Operator shall work out an insurance program for the Exploration Operations and submit it
to JMC for review and approval within one hundred and twenty (120) days after the Date of
Commencement of the Implementation of the Contract. The Operator shall, on behalf of the
Parties, obtain the insurance contracts in accordance with such program as approved by JMC
before commencement of CBM Operations within the Contract Area.
	 
	 	 	Similar provisions shall apply in respect of Development Operations and Production
Operations.
	 
	20.2	 	All of the insurance items as approved in the insurance program shall be insured with the
insurance companies established in accordance with the laws




43









 






	 	 	of the People’s Republic of China (hereinafter referred to as Chinese insurance companies) and shall be insured in accordance
with the laws and regulations of the People’s Republic of China and on terms and conditions
competitive with the world markets.






	20.3	 	The insurance programs worked out by the Operator shall include, but not be limited to, the
following insurance covering:






	 	(a)	 	damages to and expenses of all drilling installations and equipment,
including damages to and expenses of the properties used on worksites and supply
bases for the CBM Operations, while the equipment and properties owned by Third
Party rendering services to the Operator shall be handled in accordance with
Article 20.5 herein;
	 
	 	(b)	 	damages to and expenses of any of the equipment or installations for
production, storage and transportation, and buildings in the course of construction
and installation;
	 
	 	(c)	 	damages to and expenses of the production installations, facilities,
equipment and pipelines in CBM fields;
	 
	 	(d)	 	liability to Third Parties;
	 
	 	(e)	 	liability for pollution and expenses for cleaning up in the course of
drilling and the Production Operations;
	 
	 	(f)	 	expenses for killing blowouts;
	 
	 	(g)	 	liability incurred by the Operator in hiring land drilling rigs,
vessels and aircraft serving the CBM Operations;
	 
	 	(h)	 	liability for cleaning the remains; and
	 
	 	(i)	 	losses and expenses incurred during the transportation and storage in
transit of goods shipped from different parts of the world and other areas outside
the Contract Area to the worksites.






	20.4	 	In any insurance contracts, the deductibles shall be determined by the Parties through
consultation, and losses within the deductible limits shall be borne by Parties in proportion
to their respective participating interests in the relevant operations.
	 
	20.5	 	When signing subcontracts or lease contracts, the Operator shall endeavor to require
Subcontractors and lessors to insure their risks under the relevant subcontracts or lease
contracts shall be insured with Chinese insurance companies in accordance with the laws and
regulations of the People’s Republic of China. The rates, terms and conditions of such
insurance shall be competitive with world markets for similar risks.
	 
	20.6	 	In the course of the CBM Operations, the Parties shall cover separately personnel accidental
death and injury insurance with respect to personnel assigned by them respectively. The
premiums in respect thereof shall be dealt with in the following way: the premiums for
personnel accidental death and injury insurance with respect to personnel whose costs are
charged to the Joint Account pursuant to the provisions of the Contract shall be charged to
the Joint Account, and those with respect to other personnel shall be borne respectively by
the Parties by which they are assigned.




44









 






	20.7	 	Insurance companies owned by or affiliated with any Party to the Contract, or the Parties
themselves, may reinsure relevant Chinese insurance companies who have obtain the insurance
contract by reaching an agreement with such companies if they are interested in covering any
part of the insurance program
hereof.
	 
	20.8	 	All motor vehicles used in the CBM Operations shall be insured with China’s insurance
companies in accordance with the laws and regulations of the People’s Republic of China.
	 
	20.9	 	The premiums of insurance in the exploration period and the development period shall be
charged respectively to the exploration costs and development costs while those in the
production period shall be charged to the operating costs.
	 
	20.10	 	Any claim under the insurances of the agreed insurance program charged to the Joint Account
shall be handled by the Operator and any recovery made from insurers shall be credited to the
Joint Account.





Article 21

Confidentiality





	21.1	 	CUCBM shall, in conformity with applicable laws and regulations of the Government of the
People’s Republic of China on confidentiality and by taking into account international
practice, determine in consultation with the Contractor the confidentiality periods for which
the Contract and all documents, information, data and reports related to the CBM Operations
within the Contract Area shall be kept confidential.
	 
	21.2	 	Without the written consent of the other Party, no Party to the Contract shall disclose,
during such confidentiality periods, the Contract, documents, information, data and reports
referred to in Article 21.1 herein or any other information regarded by JMC as confidential,
to any Third Party except the Third Parties specified in Article 21.5 herein and to any
Affiliate not directly connected with the implementation of the Contract, and no Party to the
Contract shall otherwise transfer, donate, sell or publish them in any way within the
confidentiality periods. However, CUCBM may furnish the following original data and
information or interpretation thereof with respect to the Contract Area to the relevant Third
Parties:






	 	(a)	 	original data and information held by CUCBM for over two (2) years; and
	 
	 	(b)	 	interpretations of original data and information, which have been held
by CUCBM for over five (5) years.




45









 












CUCBM shall require relevant Third Parties to undertake to keep confidential the
aforesaid data, information, and interpretations thereof furnished to them by CUCBM.




CUCBM shall, in conformity with relevant provisions of laws and regulations of the
People’s Republic of China and requests of relevant government departments and units,
provide them with all documents, information, data and reports as mentioned herein.




	21.3	 	During the term of the Contract and after the termination of the Contract, CUCBM shall not
disclose to any Third Party any patent, know-how or proprietary technology transferred to
CUCBM by the Contractor without the written consent of the Contractor except for any
technology, the patent of which has expired and any proprietary and confidential technology
which has entered the public domain.
	 
	21.4	 	After the termination of the Contract or after any assignment of rights and/or obligations of
the Contract under Article 22 hereof, the Contractor and any assignee shall, within the
confidentiality periods, continue to be obliged to keep confidential documents, information,
data and reports mentioned in Article 21.2 herein except for official documents and
information published with the consent of the Parties.
	 
	21.5	 	For the implementation of the Contract, CUCBM and each company comprising the Contractor may
furnish the necessary documents, information, data and reports to Affiliates related to the
CBM Operations. CUCBM and each company comprising the Contractor may, after review by JMC and
CUCBM, furnish the necessary documents, information, data and reports to the Third Party
related to the CBM Operations. The Third Parties include:
	 
	21.5.1	 	Banks or other credit institutions from which financing is sought by any Party to the
Contract for the implementation of the Contract;
	 
	21.5.2	 	Third Parties which provide services for the CBM Operations, including Subcontractors and
other service contractors; and
	 
	21.5.3	 	An assignee or assignees to whom the rights and/or obligations under the Contract may be
assigned.
	 
	21.6	 	Necessary information, documents, data and reports may be furnished by the Parties or an
Affiliate of the Parties related to CBM Operations in accordance with the laws of their home
countries to the governments and stock exchanges, provided that the Parties report to JMC in
advance.
	 
	21.7	 	CUCBM and each company comprising the Contractor when furnishing the documents, information,
data and reports to Third Parties and Affiliates as mentioned in Article 21.5 herein shall
require them to assume the confidentiality obligations as set forth herein, or shall bear full
responsibility for any violation thereof.




46









 











Article 22

Assignment





	22.1	 	Any company comprising the Contractor may, after notice in writing to CUCBM, assign part or
all of its rights and/or obligations under the Contract to any of its Affiliates after the
first phase of the Exploration Period. Such assignment, within sixty (60) days after receiving
the notice, shall be approved by CUCBM, provided that the company comprising the Contractor
who assigns, shall perform the assignment in accordance with the following provisions:






	 	(a)	 	Any company comprising the Contractor who assigns, shall submit to
CUCBM copies of a written agreement on the corresponding part of its rights and/or
obligations to be assigned;
	 
	 	(b)	 	Any company comprising the Contractor who assigns, shall guarantee in
writing to CUCBM the performance of the assigned obligations; and
	 
	 	(c)	 	No such assignment shall interfere with the performance of the CBM
Operations or affect the organizational structure.






	22.2	 	The Contractor may assign part or all of its rights and/or obligations under the Contract to
any Third Party after the first phase of the Exploration Period, provided that such assignment
shall be agreed by CUCBM in advance and approved by the Ministry of Commerce of the People’s
Republic of China. However, if the conditions offered by CUCBM are the same, CUCBM shall have
the right of first refusal in respect of such assignment to be exercised by CUCBM in writing
within sixty (60) days upon receipt of notice from the Contractor to assign to a Third Party,
unless otherwise agreed upon by the Parties.
	 
	22.3	 	Upon notice to the Contractor, CUCBM may authorize its Affiliates to implement the Contract,
but CUCBM shall remain responsible for the performance of the Contract.
	 
	22.4	 	With prior consent of the Contractor and subject to the approval of the Ministry of Commerce
of the People’s Republic of China, CUCBM may assign part of its rights and/or obligations
hereunder to any Third Party, provided that such assignment shall not interfere with the
performance of CBM Operations.





Article 23

Health, Safety and Environmental Protection





47











 






	23.1	 	In the performance of the CBM Operations, the Operator shall be subject to the laws, decrees,
regulations and standards on environmental protection and safety promulgated by the Chinese
Government and carry out the operations according to international practice. The Operator
shall make its best efforts to protect farmland, aquatic resources, forest reserves and other
natural resources, and prevent pollution and damage to the atmosphere, rivers, lakes,
groundwater, harbors, other land environments and ecological environment and secure the safety
and health of the operating personnel. The Operator shall use all reasonable endeavors to
eliminate promptly any pollution occurring as a direct result of and in the performance of the
CBM Operations and minimize its consequences. Economic losses caused by any pollution shall be
charged to the Joint Account, unless otherwise provided in Article 8.4 hereof.
	 
	23.2	 	When competent authorities under the Chinese Government assign a person to inspect
environmental protection, health and safety within the scope of the CBM Operations according
to the laws, decrees, rules and regulations of the People’s Republic of China, the Operator
shall provide all necessary facilities and assistance to enable the inspectors to carry out
such inspection smoothly.
	 
	23.3	 	In the performance of the CBM Operations in any fixed fishing net casting area and /or
aquatic breeding area, the Operator shall make prior contact with the relevant authorities of
the Chinese Government provided that upon the Operator’s request, CUCBM shall promptly assist
Operator in making such contacts.
	 
	23.4	 	Before the commencement of Exploration Operations, the Operator shall provide CUCBM with
report on the possible impact of the Exploration Operations on the health, safety and
environment and measures to be adopted. Before the end of Exploration Operations, the Operator
shall submit an assessment report to CUCBM on the impact of health, safety and environment by
the results of the Exploration Operations. The two reports shall be submitted to the relevant
Chinese authorities for their review and approval according to the Chinese laws.
	 
	 	 	The Operator shall establish and implement plans and procedures on health, safety and
environment protection during CBM Operations, and shall carry out the strict management
on its Subcontractors with respect of the health, safety and environment. The Operator
shall establish the emergency procedure and report to JMC in a promptly and accurately
manner any accident on health, safety and environment.
	 
	 	 	The above plans and procedures on health, safety and environment protection shall
form an integral part of Overall Development Program.
	 
	23.5	 	In order to ensure the provisions with respect of the health, safety and
environment protection under this Contract to be complied with, the Operator






48









 





	 	 	shall
conduct at least once in each Calendar Year a regular assessment on the
health, safety and environment protection and submit the assessment report to JMC. The
regular assessment on health, safety and environment shall be itemized as a single item
and incorporated in the Work Program and Budget. Each Party to the Contract shall have
the right to participate in such regular assessment on health, safety and environment
provided a written notice given to the Operator thirty (30) days prior to such
assessment. The expenses incurred therefore shall be charged into the Joint Account.
	 
	23.6	 	The Operator shall, subject to Article 4.6.2, after the completion of various CBM
Operations, to the extent reasonable and practicable, level or restore or reclaim the land of
the operating sites to the condition existing at the commencement of implementation of the
Contract in accordance with the relevant rules and regulations.





Article 24

Force Majeure





	24.1	 	No Party to the Contract shall be considered in default of the performance of any of its
obligations hereunder, if any failure to perform or any delay in performing its obligations is
in conformity with all the events described as follows:
	 
	 	 	The performance of any obligations hereunder is prevented, hindered or delayed because
of any event or combination of events which could not be foreseen and/or which is beyond
the control of such Party; and
	 
	 	 	Any such event or combination of events is the direct cause of preventing, hindering or
delaying of such Party’s performance of its obligations hereunder; and
	 
	 	 	When any such event or combination of events has occurred, such Party has taken all
reasonable actions to overcome any cause that prevents, hinders or delays performance of
its obligations and shall in so far as is practicable continue to perform its
obligations hereunder.
	 
	24.2	 	Notice of any event of force majeure and the conclusion thereof shall forthwith be given to
the other Party by the Party claiming force majeure.
	 
	24.3	 	In the event of force majeure, the Parties shall immediately consult in order to find an
equitable solution thereto and shall use all reasonable endeavors to minimize the consequences
of such force majeure.
	 
	24.4	 	If the CBM Operations in the Contract Area are partially or entirely suspended as a result of
the force majeure referred to in Article 24 herein, the period of the CBM Operations may be
extended by a period corresponding to such suspension. Within fifteen (15) days following the
end of each Calendar




49









 









	 	 	 	Year, the Operator shall report to JMC in writing on the suspension of
the CBM
Operations caused by force majeure, if any, during the preceding Calendar Year.
	 
	24.5	 	 	Should, however, the force majeure condition continue for a period of twenty-four (24)
consecutive months, then, in such event, Contractor shall have the option to terminate this
Contract without any further liability.
	 
	24.6	 	 	The provision of this Article 24 shall not apply in the case of default in the making of any
payment of money under the Contract.





Article 25

Consultation and Arbitration





	25.1	 	The Parties shall make their best efforts to settle amicably through consultation any dispute
arising in connection with the performance or interpretation, or validity of any provision
hereof.
	 
	25.2	 	Any dispute mentioned in Article 25.1 herein that has not been settled through such
consultation within ninety (90) days after the dispute arises may be referred to arbitration
at the request of and by either Party to the Contract. The arbitration shall be conducted in
accordance with the following provisions:
	 
	25.2.1	 	If agreed upon by the Parties, such dispute shall be referred to arbitration conducted by
the China International Economic and Trade Arbitration Commission in accordance with the
arbitration proceeding rules thereof.
	 
	25.2.2	 	If the Parties fail to reach an agreement on the arbitration arrangement mentioned in
Article 25.2.1 herein within sixty (60) days after a Party has requested in writing that a
dispute be referred to arbitration, the Parties shall establish an ad hoc arbitration tribunal
to conduct arbitration in accordance with the following provisions:
	 
	25.2.2.1	 	The ad hoc arbitration tribunal shall consist of three (3) arbitrators. The Parties shall
each appoint an arbitrator and the two (2) arbitrators so appointed shall designate a third
arbitrator. If one of the Parties does not appoint its arbitrator within sixty (60) days after
the first appointment, or if the two (2) arbitrators once appointed fail to appoint the third
within sixty (60) days after the appointment of the second arbitrator, the relevant
appointment shall be made by the Arbitration Institute of the Stockholm Chamber of Commerce,
Sweden.
	 
	25.2.2.2	 	The third arbitrator shall be a citizen of a country which has formal diplomatic relations
with both the People’s Republic of China and the home country of any of the companies
comprising the Contractor, and shall not have any economic interests or relationship with the
Parties.




50









 








	25.2.2.3	 	The place of arbitration shall be determined by the Parties through consultations or,
failing the agreement of the Parties within sixty (60) days after the
appointment of the third arbitrator, by the majority of arbitrators of the ad hoc
arbitration tribunal.
	 
	25.2.2.4	 	The ad hoc arbitration tribunal shall conduct the arbitration in accordance with the
arbitration rules of the United Nations Commission on International Trade Law (“UNCITRAL”) of
1976, as amended. However, if the above-mentioned arbitration rules are in conflict with the
provisions of this Article 25, including the provisions concerning appointment of arbitrators,
the provisions of this Article 25 shall prevail.
	 
	25.3	 	Both the Chinese and English languages shall be official languages used in the arbitrage
proceedings. All hearing materials, statements of claim or defense, awards and the reasons
supporting them shall be written in both Chinese and English.
	 
	25.4	 	Any award of the arbitration tribunal shall be final and binding upon the Parties.
	 
	25.5	 	The right to arbitrate disputes under the Contract shall survive the termination of the
Contract.





Article 26

Effectiveness and Termination of the Contract





	26.1	 	 	The Contract shall, after it is signed, be approved by the Ministry of Commerce of the
People’s Republic of China. The date of such approval shall be the effective date of the
Contract. However, the Contractor’s obligations shall begin on the Date of Commencement of
the Implementation of the Contract, as defined in Article 1, hereinabove. CUCBM shall notify
the Contractor of the said approval in writing as soon as possible.
	 
	26.2	 	 	All annexes to the Contract shall be integral parts of the Contract. If there is any
inconsistency between the provisions of the annexes and the main body of the Contract, the
main body of the Contract shall prevail. All references to the Contract thereof refer to the
main body of the Contract.
	 
	26.3	 	 	If in the course of implementation of the Contract, the Parties decide through consultation
to make amendment or supplement to any part of the Contract, a written agreement signed by the
authorized representatives of the Parties shall be required. Such written agreement shall be
subject to the approval of the Ministry of Commerce of the People’s Republic of China should
there be any significant modifications hereof. Such agreement shall be regarded as an integral
part of the Contract.
	 
	26.4	 	 	The Contract shall terminate under any of the following circumstances:




51









 






	26.4.1	 	Exercise of the Contractor’s election to terminate the Contract under Article
6.3 (c) hereof; or
	 
	26.4.2	 	Failure to discover any commercial CBM reservoir within the Contract Area by the expiration
of the exploration period or the extended exploration period granted under Article 4.3 hereof;
or
	 
	26.4.3	 	If there is only one (l) commercial CBM Field in production in the Contract Area, on
termination of the production period of such CBM Field; or
	 
	26.4.4	 	If there are two (2) or more commercial CBM Fields and/or CBM Fields in production in the
Contract Area, on termination of the production period of the CBM Field with the latest
termination date; or
	 
	26.4.5	 	At the end of the last day of the thirtieth (30th) Contract Year from the Date of
Commencement of the Implementation of the Contract unless otherwise extended pursuant to
Articles 4.5, 4.6.1, or 24.4 hereof.
	 
	26.4.6	 	Upon judgment of the court having jurisdiction, the Contractor ceases to exist in any
form.
	 
	26.5	 	Before the expiration of the first phase of the exploration period as specified in Article
4.2 hereof, the Contractor shall not propose termination of the Contract unless the Contractor
has fulfilled the minimum exploration work commitment for the first phase of the exploration
period ahead of time.
	 
	26.6	 	If any Party to the Contract commits a material breach of the Contract, the other Party to
the Contract shall have the right to demand that such breach be remedied within a reasonable
period of time. If such breach is not remedied satisfactorily within such period of time, the
complaining Party, arising from such breach shall have the right to terminate the Contract by
giving ninety (90) days written notice to the other Party. However, no Party shall be deemed
to have committed a material breach in the performance of any provision of the Contract
concerning which there is any dispute between CUCBM and the Contractor, until such time as all
disputes concerning such provision including any contention that a Party is in material
breach, have been settled as provided in Article 25 hereof. During the time of such dispute,
CUCBM and the Contractor shall continue to carry out their responsibilities pursuant to the
Contract, which shall remain in full force and effect.
	 
	26.7	 	Notwithstanding the abovementioned provisions, after receiving the notice in
writing by CUCBM specifying the default and the subsequent failure of the Contractor to cure
the default within ninety (90) days, CUCBM shall have the right to terminate the Contract
in case the Contractor, fails to perform any of the following obligations:
	 
	26.7.1	 	Payment of the signature fee pursuant to Article 29.5 hereof; or




52









 







	26.7.2	 	Fulfillment of the minimum exploration work commitment and expected
minimum exploration expenditures of each year for any phase of the exploration period as
provided in Article 6.2 hereof, or
	 
	26.7.3	 	Payment on schedule of the assistance fee pursuant to Article 5.2.14.3 of the Annex II
attached hereto, payment on schedule of the personnel costs and other expenses pursuant to
Article 18.3.1 hereof and Annex III attached hereto as well as training of the Chinese
Personnel pursuant to Article 16.6 hereof.





Article 27

The Applicable Law





	27.1	 	 	The validity, interpretation and implementation of the Contract shall be governed by the laws
of the People’s Republic of China. Failing the relevant provisions of the laws of the People’s
Republic of China for the interpretation or implementation of the Contract, the principles of
the applicable laws widely used in CBM resources countries acceptable to the Parties shall be
applicable.
	 
	27.2	 	 	If a material change occurs to the Contractor’s economic benefits after the effective date of
the Contract due to the promulgation of new laws, decrees, rules and regulations or any
amendment to the applicable laws, decrees, rules and regulations of the People’s Republic of
China, including any local governments, the Parties shall consult promptly and make necessary
revisions and adjustments to the relevant provisions of the Contract in order to maintain the
Contractor’s normal economic benefits hereunder.





Article 28

Language of Contract and Working Language





	28.1	 	 	The text of the Contract, annexes and supplementary documents attached hereto shall be
written in both Chinese and English, and both versions shall have equal force and effect.
	 
	28.2	 	 	The Parties agree that both Chinese and English shall be used as working languages. After the
effective date of the Contract, technical documents and information concerning the CBM
Operations hereunder including Work Programs and Budgets shall, in general, be written in
English except for technical documents and information available previously and received from
Third Parties.
	 
	 	 	 	Unless otherwise agreed by CUCBM, in consultation with the Contractor, documents and
information in respect of administration shall be written in both Chinese and English.
Forms for production and other reports and records shall be printed with headings in
both Chinese and English and may be filled




53









 













	 	 	out in either Chinese or English.





Article 29

Miscellaneous





	29.1	 	All notices and documents required hereunder shall be deemed to have been properly given and
delivered to either Party to the Contract only when received.
	 
	29.2	 	Notices and documents shall be delivered by hand or sent by mail, registered airmail,
facsimile or cable to the address hereunder specified:




Address of China United CBM Corporation, Ltd.:



China United Coalbed Methane Corporation, Ltd.

A88, Anwai Ave., Beijing 100011

P.R. China

Tel: 86-10-6429-7887

Fax: 86-10-6429-1881

For the attention of:

Mr.



Address of the representative of the Contractor:



Pacific Asia Petroleum LtdNo. B-118 Jianguo Ave

The Exchange Building

Beijing. 100022 China



Tel.: 86-10- 6567-5587

Fax: 86-10- 6567-5587 (extension:8002)



For the attention of: Jamie Tseng





	29.3	 	Either Party to the Contract may change its address or representative by a written notice to
the other Party to the Contract.
	 
	29.4	 	Companies comprising the Contractor have the following percentages of participating interests
as of the effective date of the Contract:
	 
	 	 	Pacific Asia Petroleum Ltd., one hundred percent (100%)
	 
	 	 	Subject to Article 29.6 herein, the rights and obligations of each company




54









 






	 	 	comprising
the Contractor hereunder may, as between themselves, be varied by the operating
agreement between such companies and the Contractor shall
advise CUCBM in writing of any expected variation and, thereafter, of the actual
variation. If such variation leads to the transfer of the operatorship, or the companies
comprising the Contractor have made a decision to change the Operator, the Operator
referred to in Article 8.1 hereof may be replaced after obtaining a written consent from
CUCBM.
	 
	29.5	 	The Contractor shall pay CUCBM a signature fee of three hundred thousand U.S. dollars (US $
300,000 ) in accordance with the following schedule, and such signature fee shall, in no case,
be charged to the Joint Account, nor be deemed recoverable costs.
	 
	(a)	 	One hundred fifty thousand U.S. dollars (US $ 150,000)within thirty (30) days from
the effective date of the Contract;
	 
	(b)	 	One hundred fifty thousand U.S. dollars (US $ 150,000) within thirty (30) day of
commencement of the first development period entered into by Contractor.
	 
	29.6	 	Companies comprising the Contractor signing the Contract with CUCBM agree to undertake the
obligations of the Contractor under the Contract jointly and severally.
	 
	29.7	 	Whenever alternative interpretations of the Contract are possible subject to Article 27.1
hereof, CUCBM and the Contractor agree that preference shall be given to interpretations that
will facilitate and promote the intent of the Contract.
	 
	29.8	 	It is the express and agreed intention of CUCBM and the Contractor that the terms and
conditions of the Contract shall be applied, and that the grant of any consents required
hereunder shall be given by the Parties in a manner and under conditions which are at all
times reasonable and in line with international CBM industry practice.
	 
	29.9	 	No waiver by any Party of any one or more defaults by another Party in the performance of the
Contract shall operate or be construed as a waiver of any preceding or future default or
defaults by the same Party, whether of a like or of a different character. Except as expressly
provided in this Contract, no Party shall be deemed to have waived, released or modified any
of its rights under the Contract unless such Party has expressly stated, in writing that it
does waive, release or modify such right.




In witness whereof, THIS CONTRACT is signed in Beijing by the authorized representatives of the
Parties hereto on the first above-mentioned date.




	 	 	 	 	 	 	 	 
	CHINA UNITED CBM CORPORATION, LTD.
	 	Pacific Asia Petroleum Inc.
	 
	 	 	 	 	 	 
	By:

	 	/s/ Sun Maoyun
	 	By:
	 	/s/ Frank C. Ingriselli
	 

	 	 
	 	 	 	 
	 

	 	Sun Maoyun
	 	 	 	Frank C. Ingriselli






55









 








Annex I



Geographical Location and Coordinates of the Connecting Points of the Boundary Lines of the
Contract Area




1









 








Annex II




Accounting Procedure




Contents




	 	 	 	 	 	 	 
	 	 	Article	 	 
	 
	 	 	 	 	 	 
	 

	 	 	1	 	 	General Provisions
	 
	 	 	 	 	 	 
	 

	 	 	2	 	 	Definitions
	 
	 	 	 	 	 	 
	 

	 	 	3	 	 	Cash Calls
	 
	 	 	 	 	 	 
	 

	 	 	4	 	 	Accounting and Management of Material
	 
	 	 	 	 	 	 
	 

	 	 	5	 	 	Expense Accounting
	 
	 	 	 	 	 	 
	 

	 	 	6	 	 	Recovery of Costs and Deemed Interest
	 
	 	 	 	 	 	 
	 

	 	 	7	 	 	Accounting Reports
	 
	 	 	 	 	 	 
	 

	 	 	8	 	 	Audit
	 
	 	 	 	 	 	 
	 

	 	 	9	 	 	Transfer Procedure of the Joint Account






2









 






Annex II

Accounting Procedure




Article 1

General Provisions





	1.1	 	This Accounting Procedure is an integral part of the Contract.
	 
	 	 	The definitions set forth in Article 1 of the Contract are equally
applicable to this Accounting Procedure. The definitions and
provisions in this Accounting Procedure have the same force and effect
as those in the Contract. If the provisions in this Accounting
Procedure are in conflict with those in the Contract, the provisions
in the Contract shall prevail.
	 
	1.2	 	Purpose: The purpose of this Accounting Procedure is to establish equitable control methods
for determining charges and credits applicable to the CBM Operations according to the relevant
provisions of the Contract, including the guidelines for accounting settlements in respect of
managing funds and materials, financing and Accounting Records, and for compiling accounting
statements.
	 
	 	 	The Operator shall neither gain nor lose in relation to the other Parties to the
Contract by means of the fact that it acts as the Operator.
	 
	1.3	 	Accounting methods: The double-entry accrual method of accounting shall be used in this
Accounting Procedure.
	 
	1.4	 	Working language: Chinese or both Chinese and English shall be used as the working languages
for the Accounting Records and analyses of financial conditions in respect of the Joint
Account, at the Operator’s option.
	 
	1.5	 	Currency for accounting: U.S. dollars shall be the unit of currency for accounting in the
Joint Account and shall be the currency for the investments and reimbursements under the
Contract. In case currencies other than U.S. dollars are used to carry out business
activities, the relevant bank accounts and other current asset and current liability accounts
shall be kept both in U.S. dollars and in the currencies used.
	 
	1.6	 	Currency translation: For the purpose of accounting, currency translation entered into the
Joint Account shall be made in accordance with following guidelines:
	 
	 	 	The rate of exchange to be used for the conversion into U.S. dollars of cash calls
received in Renminbi shall be the mid-rate of exchange applicable to any individual or
commercial entity quoted by the People’s Bank of China at 11:00 a.m. on the date of
receipt of such cash in the Operator’s bank account(s). If the relevant date is a
non-business day of the People’s Bank of




3









 






	 	 	China, the rate quoted on the previous business day by the People’s Bank of China shall
apply.
	 
	 	 	All other transactions recorded in the Joint Account which are made in Renminbi shall be
translated into and recorded in U.S. dollars at the rate of exchange as quoted above
on the last business day of the previous month, while those transactions which are made
in currencies other than Renminbi and U.S. dollars shall be recorded in U.S. dollars at
the actual cost in U.S. dollars of effecting the transaction.
	 
	 	 	Neither CUCBM nor the companies comprising the Contractor shall experience an exchange
gain or loss, at the expense or benefit of the other Party.
	 
	 	 	The Operator shall make its best efforts to minimize any exchange loss.
	 
	 	 	All gains or losses from currency conversion or translation shall be recorded in the
Joint Account.
	 
	1.7	 	Foreign exchange business: foreign exchange business related to the CBM Operations shall be
made in accordance with relevant regulations for foreign exchange control and rules for the
implementation of such regulations of the People’s Republic of China, provided that the
Contractor can:
	 
	1.7.1	 	Open and maintain bank accounts, both inside and outside of the People’s Republic of China
as may be required for CBM Operations agreed upon by CUCBM, as provided in Article 3 of this
Accounting Procedure.
	 
	1.7.2	 	Buy and sell foreign exchange at the official foreign exchange rate applicable to all and
any individual or commercial entity quoted by the State Administration of Foreign Exchange
Controls of the People’s Republic of China.
	 
	1.7.3	 	Retain and freely dispose of Renminbi or foreign exchange generated hereunder, but
Contractor must remit back to the People’s Republic of China the amounts needed to pay taxes
when they are due and payable according to the tax laws and regulations of the People’s
Republic of China, and other obligations when due and payable in the People’s Republic of
China.
	 
	 	 	Remit abroad the foreign exchange proceeds from Contractor’s sales of CBM and Liquid
Hydrocarbons sold in the People’s Republic of China, but Contractor must pay taxes when
due and payable according to the tax laws and regulations of the People’s Republic of
China.
	 
	1.7.4	 	Make disbursements directly from internationally recognized bank accounts inside or outside
of the People’s Republic of China for payments of salaries and wages of Expatriate Employees,
purchased materials and various items of labor and service charges from Affiliates of
Contractor and foreign Subcontractors to carry out the CBM Operations as specified in the
Contract,




4









 






	 	 	after taxes are withheld according to the provisions of the tax laws and regulations of
the People’s Republic of China.
	 
	1.7.5	 	Transfer Renminbi according to the needs of the CBM Operations between Renminbi currency
accounts opened within the People’s Republic of China.
	 
	1.7.6	 	Deposit foreign exchange receipts in the Bank of China in the original currency and such
deposits need not be converted to Renminbi until needed.
	 
	1.7.7	 	Remit abroad excess foreign exchange or Renminbi, after reconversion to foreign exchange,
advanced or generated by the investing Parties and not expended or not to be expended and held
by the Contractor for the investing parties in proportion to the extent of their respective
percentage interests in such excess, provided that CUCBM’s share of such excess shall be
returned to CUCBM.
	 
	1.8	 	Accounting Records and Statements
	 
	1.8.1	 	All Accounting Records related to the CBM Operations shall be established and maintained by
the Operator within the territory of the People’s Republic of China.
	 
	1.8.2	 	All vouchers, accounts, books and statements shall be prepared in accordance with the CBM
Operations Accounting System established by CUCBM and the Contractor through consultation
pursuant to the Accounting Regulations of the People’s Republic of China for Enterprises with
Foreign Investment.
	 
	1.8.3	 	Annual accounting statements and important accounting books, including asset records, cash
or bank journals, general and subsidiary ledgers, balance sheets, and annual gross CBM
production allocation statements shall be maintained for the term of the Contract as specified
in Article 4.7 of the Contract, or for any further period if required by the laws and
regulations of the People’s Republic of China. Other accounting vouchers and books shall be
kept for fifteen (15) years. Quarterly and monthly statements shall be maintained for five (5)
years.
	 
	 	 	Upon the expiration of the custody period, a list shall be made of the accounting files
which are to be disposed of. Disposal of the accounting files shall only be made after
the consent of CUCBM. The list of the accounting files disposed of shall be maintained
with the annual accounting statements.




5









 











Article 2

Definitions



The terms used in this Accounting Procedure shall have the definitions ascribed to them as follows:





	2.1	 	“Accounting Records” means all accounting books, source documents, original vouchers,
approved documents, analytical data, work papers and accounting statements maintained for the
CBM Operations.
	 
	2.2	 	“Accounting System” means the CBM Operations Accounting System prepared by CUCBM and the
Contractor through consultation pursuant to the Accounting Regulations of the People’s
Republic of China for Enterprises with Foreign Investment, specifying the accounting titles to
be used by the Operator and instructions for implementation, forms and contents of various
accounting statements and their preparation methods, including a material classification
section, a definition of Controllable Material, standards for itemizing assets and the
provisions for fixed asset accounting.
	 
	2.3	 	“Material” means materials, tools, facilities, equipment and consumables procured, leased or
otherwise acquired and held for the CBM Operations.
	 
	2.4	 	“Joint Account” means accounts established by the Operator for the implementation of the
Contract to record all debts and credits related to the CBM Operations.
	 
	2.5	 	“Controllable Material” means the Material referred to in the Accounting System described in
Article 2.2 of this Accounting Procedure.
	 
	2.6	 	“LIBOR” means the seven-day term London Inter-Bank Offered Rate for U.S. dollars for similar
amounts to the sums in question, quoted by Midland Bank in London at 11:00 a.m. on the first
business day of the relevant period. If the Midland Bank is unable or fails to supply such
daily quotation, that of Barclays Bank International Ltd. will be used, and failing this,
National Westminster Bank PLC’s quotation will be used.
	 
	2.7	 	“Investing Party” means any party that is contributing the funds for the CBM Operations in
accordance with its participating interest determined pursuant to the relevant provisions of
the Contract.




6









 











Article 3

Cash Calls





	3.1	 	Except as otherwise provided in the Contract, the Contractor shall provide all the
exploration costs for the Exploration Operations according to the provision of Article 12.1.1
of the Contract and all the Investing Parties shall provide the development costs for the
Development Operations in proportion to their respective participating interests as provided
in Article 12.1.2 of the Contract. In accordance with each approved annual budget, the
Operator shall issue monthly cash call notices to each Investing Party to provide the Operator
with funds to cover the planned expenditures of the next month. Whether or not the cash call
notices for the exploration costs are to be issued shall be at the option of the Operator.
	 
	3.2	 	Development Operations cash call and default.
	 
	3.2.1	 	According to the needs of the CBM Operations, the Operator shall regularly issue monthly
cash call notices within the amount of approved annual budget to request each Investing Party
to respectively make advances as specified by the Operator. The Operator shall, before twenty
(20) days prior to the commencement of each month, issue cash call notices for the development
costs and each Investing Party shall provide its percentage share of funds according to the
requirement and within the time limit specified in the cash call notice. However the payment
due date specified in the cash call notices shall not be earlier than the first working day of
the month for which cash is called. Each Investing Party shall transfer its percentage share
of funds to the Operator’s bank account(s) established by the Operator particularly for the
CBM Operations. Such bank account(s) will be interest bearing account(s) if possible. Such
interest shall be credited directly to the respective CUCBM and Contractor accounts as
applicable, in accordance with their respective percentage of participating interest.
	 
	 	 	Any excessive advances made by each Investing Party for any month shall be adjusted in
the next cash call.
	 
	 	 	In case that the Operator, owing to the needs of the Development Operations, has to
incur expenditures which are unforeseen in the cash call for any month, written notices
shall be issued to all the Investing Parties who shall finance their own shares for
additional amount within ten (10) days following the receipt of the written notice.
	 
	3.2.2	 	Interest shall be paid by CUCBM or the companies comprising Contractor failing to pay its
share of funds on the due date specified in the cash call at LIBOR on the delinquent date plus
five percent (5%) on the delinquency of less than one (1) month and thereafter at the average
LIBOR rate ruling throughout each subsequent month plus five percent (5%), such interest being
compounded on a monthly basis throughout the period of the delinquency. The non-defaulting
party or parties shall make up the delinquent portion on




7









 






	 	 	behalf of the defaulting party or parties. When the defaulting party or parties pay cash
to meet both the delinquent portion and accrued interest thereon, the Operator shall
reimburse the non-defaulting party or parties who made up the delinquent portion.
	 
	 	 	All amount advanced by the non-defaulting party or parties plus accrued interest not
reimbursed by the defaulting party shall constitute a debt due from the defaulting party
or parties to the non-defaulting party or parties who shall be entitled to all remedies
at law and equity. The Operator, or any non-defaulting party, if the Operator is a
defaulting party, on behalf of the non-defaulting party or parties is entitled to take
and sell the defaulting party’s or parties’ share of the Annual Gross Production of CBM
and Liquid Hydrocarbons and apply the proceeds of the sale of such CBM and Liquid
Hydrocarbons against all sums due and payable by the defaulting party or parties
including accrued interest. Any excess funds remaining from such proceeds after
deduction of all amounts due, including interest and the costs, charges and expenses
incurred by the Operator, or any non-defaulting party, if the Operator is a defaulting
party, in connection with such sale, shall be paid over to the defaulting party. Any
deficiency remaining due after deducting the proceeds of any such sale shall remain an
obligation of the defaulting party or parties and may be collected as any other debt.
	 
	3.3	 	Each monthly cash call notice shall clearly indicate the following information:
	 
	3.3.1	 	Annual development costs to be shared by each Investing Party as shown in the approved
annual budget.
	 
	3.3.2	 	Amount of funds advanced by each Investing Party at the end of the month prior to the month
in which the cash call notice is prepared and the actual expenditures and the actual balance
(i.e. funds unused) recorded in the Joint Account, accompanied by the bank statements related
to the Joint Account for the previous month.
	 
	3.3.3	 	Amount of funds to be called from each Investing Party in the month for which the funds will
be used and the estimated amounts of funds to be called in the following two (2) months.
	 
	3.3.4	 	The date when funds are to be provided, the amount of funds, currency, account number, name
of the account, the recipient bank and its address.
	 
	3.3.5	 	Where applicable, the participating Parties shall pay their participating interest share of
such invoice, via wire transfer, within thirty (30) days of receipt of such invoice (“due
date”). In the event a Party falls to pay such participating interest share by such due date,
the Parties shall be subject to the provisions of Article 3.2.2 of the Annex II and the other
provision of the Contract.
	 
	3.4	 	On the Date of Commencement of Commercial Production of any CBM Field, any development
investment for the CBM Field advanced by the Investing




8









 






	 	 	Parties which has not been expended or
will not be expended shall be returned
to each of the Investing Parties in proportion to its share.
	 
	3.5	 	In accordance with Article 12.1.3 of the Contract, the cash for the Production Operations
undertaken by the Parties jointly and approved by JMC shall be provided by all the Investing
Parties to the Contract in proportion to their respective participating interests in the
development costs and shall bear no Deemed Interest. Based on the needs of the Production
Operations, the Operator may make timely adjustment of the amount of cash to be provided by
all the Investing Parties to the Contract. The Operator shall issue quarterly cash call
notices to call for cash for the Production Operations. In proportion to its share, each
Investing Party shall respectively provide advances on a monthly basis in accordance with the
requirement and within the time limit specified in the cash call notice of the current month.
The default provision specified in Article 3.2 of this Accounting Procedure shall also apply
to any cash calls for Production Operations.
	 
	 	 	In case that the Operator, owing to the needs of the Production Operations, has to incur
expenditures which are unforeseen in the cash call for any month, written notices with
explanations shall be issued to all the Investing Parties who shall finance their own
            shares for additional amount within ten (10) days following the receipt of such written
notice.
	 
	3.6	 	According to the requirement of the CBM Operations, the Operator shall indicate in any cash
call notice the U.S. dollar equivalent of the total cash called. The Operator shall also
specify the amounts of Renminbi and U.S. dollars required as estimated to make payment. CUCBM
shall provide the advance of its own share either in Renminbi or in Renminbi and U.S. dollars
with respect to the amounts called for by the Operator, but CUCBM’s funding in Renminbi shall
not exceed the total amount of Renminbi as indicated and called for by the Operator in any
cash call notice. The Contractor shall provide the advance of its own share in U. S. dollars.
	 
	3.7	 	Provisions for recording the sources of funds:
	 
	3.7.1	 	Funds for exploration costs, development costs and operating costs, when received, pursuant
to each cash call shall be credited against the relevant accounts of the Investing Parties in
the Joint Account.
	 
	3.7.2	 	In case CUCBM decides to develop a CBM Field for its sole account pursuant to Article 11.5
of the Contract, or undertakes any other operation for its sole account, the funds required
shall be financed and accounted for separately.
	 
	3.7.3	 	In accordance with Article 6.3 of the Contract, if the Contractor opts to terminate the
Contract as provided in Article 6.3 (c) of the Contract or if the phase is the last phase of
the exploration period, the Contractor shall, within thirty (30) days from the date of its
decision to terminate the Contract or thirty (30) days from the date of the expiration of the
exploration period, pay CUCBM in U.S. dollars the unfulfilled balance of the minimum
exploration




9









 






	 	 	work commitment (or of the new commitment) for the exploration phase,
converted into cash. The detailed method by which the unfulfilled balance of the minimum
exploration work commitment is converted into U.S. dollars is that the actual average
unit cost of the last portion of a seismic line shot under the Contract or of the last
well drilled, excluding the abnormal drilling costs such as those of the sidetrack,
fishing, severe loss of mud circulation, etc. (i.e. U.S. dollars/kilometer of seismic
line; U.S. dollars/meter of drilling footage), is multiplied by the unfulfilled amount
of the minimum exploration work commitment. The formula for such calculation is as
follows:
	 
	 	 	I = Ac X Pu

in which:
	 
	 	 	I = converted cash amount of the unfulfilled balance of the minimum exploration work
commitment;
	 
	 	 	Ac = actual average unit cost of the last portion of a seismic line shot or of the last
well drilled; and
	 
	 	 	Pu = the unfulfilled amount of the minimum exploration work commitment (The unfulfilled
amount of the seismic line shot is the difference between the kilometers specified in
Article 6.2 of the Contract and actual kilometers shot. The unfulfilled footage of an
unfulfilled Wildcat is the designed total depth of the Wildcat specified in accordance
with Article 6.2 of the Contract).





Article 4

Accounting and Management of Material





	4.1	 	Procurement of Material:
	 
	 	 	The procurement of Material shall be implemented in accordance with
the procedure specified in Articles 15.1 and 7.6 of the Contract. In
order to prevent overstocking of Material, the Operator shall use all
reasonable best efforts to ensure that the procurement of Material
shall be made in accordance with the Material procurement plans and
that the quality of Material conforms to specifications and prices are
fair and reasonable. The Operator does not warrant the Materials
furnished beyond, or back of, the supplier’s or manufacturer’s
guarantee.
	 
	4.2	 	Costs of procuring Material:
	 
	 	 	The costs of Material purchased shall be the invoice prices less
discounts plus related transportation and other expenses, including
expenses for freight to the destination, insurance premiums
commensurate with the Material covered, fees of forwarding agents,
duties, fees, handling expenses from shipside to and within any water
or land terminal warehouse or yard, and any other reasonable expenses
actually paid and expenses of inland transportation.




10









 






	4.3	 	The provisions and procedures of Article 15.1 and Article 7.6 of the Contract and the
following provisions shall be applied for pricing Material furnished from the stocks of the
Parties and/or their Affiliates for use in the CBM Operations:






	 	(1)	 	New Material:
	 
	 	 	 	New Material shall be priced on the basis of current market value plus expenses in
moving such Material directly to the job-site where Material is used.
	 
	 	(2)	 	Used Material:






	 	(a)	 	Material which is in sound and serviceable condition
and is suitable for reuse without reconditioning shall be priced by the
Parties, and the ceiling price shall not exceed seventy-five percent (75%)
of the current market value of new Material.
	 
	 	(b)	 	Material which, after being reconditioned, will be
further serviceable for its original function shall be priced by the
Parties, and the ceiling price shall not exceed fifty percent (50%) of the
current value of new Material.
	 
	 	(c)	 	Used Material which cannot be classified as (a) or (b)
above shall be priced by the Parties through discussions at a value
commensurate with its use.
	 
	 	(d)	 	If the Operator wishes to use a method other than the
above for pricing used Material, such other method shall be agreed upon in
advance by the Parties through consultations.






	4.4	 	Price determination and leasing expense calculation method for properties purchased or leased
from other contract areas:
	 
	 	 	The Operator may lease equipment and facilities and purchase Material and fuel from
other contract areas within the People’s Republic of China. The Operator shall charge
the leasing expenses or purchase price as agreed upon by the Operator and its suppliers.
Such leasing expenses or purchase prices shall not exceed those currently prevailing in
similar contract areas.
	 
	4.5	 	For certain Material which is in short supply in the world markets and difficult to procure
at published market prices and the lack of which will hinder normal operations, the Operator
may, after the approval of JMC, purchase such Material urgently needed by the CBM Operations
and charge actual purchase costs to the Joint Account.
	 
	4.6	 	Disposal of Equipment and Material:




11









 







	 	 	The Operator shall not dispose of or sell Material with book value exceeding
Twenty Thousand U.S. dollars (U.S. $20,000) without the prior consent of the Parties.
The Operator shall use all reasonable endeavor to minimize losses in the disposal of or
sales of such Material.
	 
	 	 	Sales of properties to Third Parties or Affiliates shall be recorded in accordance with
actual sales income. No guaranty or warranty for Material sold or disposed of under this
Article shall be given by the Operator to any purchaser.
	 
	4.7	 	Accounting for Material:
	 
	 	 	The costs of Material which is procured by the Operator and is
directly used at the job-site shall be charged to the respective
accounts of exploration costs, development costs or operating costs at
actual purchase prices (as defined in Article 4.2 herein) and on the
basis of the use of Material. Should such Material subsequently be
used for other purposes, the relevant charges shall be transferred
from the original cost accounts to the appropriate cost accounts.
	 
	 	 	Material for general use which is first stored in warehouses shall be
subject to inventory control procedures. The quantities, unit prices
and total value shall be recorded for Material in inventory using
perpetual inventory methods. Material in stock shall be priced at
purchase costs and the Operator, upon the commencement of or during
the Contract period, has the freedom to choose one of the following
pricing methods such as FIFO, weighted average method and moving
average method, etc. for Material to be transferred out of the stock.
Accounts for inventory Material shall be regarded as exploration
costs, development costs or operating costs and shall be recovered in
accordance with Article 12.2 of the Contract.
	 
	 	 	At the request of any non-Operator, the Operator shall furnish to the
non-Operator a detailed statement of Controllable Material.
	 
	 	 	The Operator shall conduct physical inventory of Material in
warehouses prior to the annual final accounts or whenever depending
upon the actual situation. The Operator shall give a written notice to
JMC sixty (60) days before the date of proposed physical inventory in
order to allow time for participation by the non-Operators and failure
to participate by any non-Operator in the physical inventory shall be
regarded as approval of the physical inventory conducted by the
Operator.
	 
	 	 	If any gain or loss is found as a result of the physical inventory,
the Operator shall compile a detailed statement of the gain or loss
and attach to it an explanation for the gain or loss, which shall be
submitted to JMC for examination and approval.
	 
	4.8	 	In accordance with Article 17.1 of the Contract, the Operator shall exercise strict control
over the fixed assets of the CBM Operations and set up accounts and record cards, and shall
conduct physical inventory of the fixed assets at 




12









 








	 	 	the year-end or whenever depending upon the
actual situation to make sure that the book records, card records and physical fixed assets are in conformity. In case
that any damage or loss arises to the fixed assets, the Operator shall determine the
reasons and submit them to JMC for examination and approval.





Article 5

Expense Accounting





	5.1	 	Rules for accounting
	 
	5.1.1	 	According to the provisions of Articles 12.1.1, 12.1.2 and 12.1.3 of the Contract, all
development costs and operating costs of the Parties as well as the Contractor’s exploration
costs shall be recorded in the Joint Account separately.
	 
	 	 	The Operator shall establish and maintain three separate accounts, namely:
	 
	5.1.1.1	 	Exploration costs account,
	 
	5.1.1.2	 	Development costs account
	 
	5.1.1.3	 	Operating costs account
	 
	 	 	In which all charges and costs as classified pursuant to Articles
5.2 and 5.3 of this Accounting Procedure shall be reflected.
	 
	5.1.2	 	If either CUCBM or the Contractor, in accordance with Article 11.5, or Article 12.1.2 of the
Contract, makes the decision to develop a CBM Field for its sole account or to undertake any
other operation for its own account, the relevant costs shall be accounted for separately.
	 
	5.1.3	 	All items related to the CBM Operations such as discounts, deductions, allowances, interest
income, gains from various services, indemnities from insurance and other miscellaneous income
by the Operator, shall be credited to the relevant costs accounts.
	 
	5.1.4	 	All direct services or research work (including personnel) provided by the superior
organizations or Affiliates of CUCBM or of the Contractor and by the Third Parties for the CBM
Operations shall be subject to the advance work order procedures on the basis of the annual
budget or of the approval by JMC and shall be charged to the Joint Account after verification
of relevant invoices.
	 
	 	 	The work order procedure shall be established through consultations at JMC meetings by
both Parties within three (3) months as of the Date of Commencement of the
Implementation of the Contract. The rates charged for
direct services or research work
(including personnel cost) provided by the




13









 







	 	 	 superior organization or Affiliates of CUCBM
or of the Contractor shall be
competitive when compared with the rates of similar services furnished by the Third
Parties. The Operator shall, in accordance with Article 15 of the Contract, give
priority to use direct services of research work (including personnel) provided by
CUCBM.
	 
	5.2	 	Cost items:
	 
	 	 	The following items shall be chargeable to the Joint Account at
Operator’s net cost.
	 
	5.2.1	 	Subcontractor charges:
	 
	 	 	The charges paid to Subcontractors in accordance with contracts
signed between the Operator and Subcontractors.
	 
	5.2.2	 	Personnel expenses:
	 
	 	 	The contents and control of personnel expenses shall be as stipulated
in Article 18.3 of the Contract.
	 
	5.2.3	 	Travel and living expenses:
	 
	 	 	Travel and living expenses paid according to Article 18 of the
Contract to the personnel involved in the CBM Operations.
	 
	5.2.4	 	Material expenses:
	 
	 	 	Expenses paid in accordance with Article 4 of this Accounting
Procedure to purchase Material for use in the CBM Operations.
	 
	5.2.5	 	Relocation and transportation expenses:
	 
	 	 	Relocation and transportation expenses for the personnel involved in
the CBM Operations to be relocated into or out of the People’s Republic of
China and transferred from job-sites to job-sites within the People’s Republic
of China.
	 
	5.2.6	 	Maintenance, repair and leasing expenses:
	 
	 	 	Expenses for maintenance, repair or replacement of the properties
used in the CBM Operations and the leasing expenses paid for leased properties
and equipment.
	 
	5.2.7	 	Insurance premiums:
	 
	 	 	Necessary net payment made for the insurance of the CBM Operations
and related costs and expenses, including deductibles paid in the event of loss
pursuant to Article 20.4 of the Contract.




14









 







	5.2.8	 	Legal expenses:
	 
	 	 	In order to protect the interests of Parties, all costs or expenses
paid for attorney’s fees, litigation or investigation, including expenses in
securing evidences, mediation and settlements. The expenses for handling legal
matters incurred for the interests of any Party to the Contract shall be borne
solely by such Party.
	 
	5.2.9	 	Taxes:
	 
	 	 	All taxes paid according to the tax laws of the People’s Republic of
China, except for the income taxes, value added tax based on production and
royalty to be paid by the companies comprising the Contractor or CUCBM and
individual income tax to be paid by employees and withheld by Operator and
other related costs.
	 
	5.2.10	 	Energy expenses:
	 
	 	 	All costs in respect of fuel, electricity, heat, water or other
energy used and consumed for the CBM Operations.
	 
	 	 	The costs of CBM and Liquid Hydrocarbons produced and used in the
same CBM Field (provided that the Parties have the same interest in such
Fields) within the Contract Area by the Operator for the performance of the
Development Operations and the Production Operations or for well stimulation or
for maintaining the reservoir pressure shall not be charged. However, the
costs of transporting such CBM or Liquid Hydrocarbons to their points of use
shall be charged under this item.
	 
	5.2.11	 	Field office facility charges:
	 
	 	 	The costs and expenses of establishing, maintaining and operating any
offices, camps or housing facilities necessary for the performance of job-site
operations, including a share of the costs of any office used by staff
directing such operations (calculated by apportioning office costs and expenses
on the basis of space occupied by such staff).
	 
	5.2.12	 	Communication charges:
	 
	 	 	The costs of acquiring, leasing, installing, operating, repairing and
maintaining communication systems, including radio and microwave facilities
between the Contract Area and the base facilities.
	 
	5.2.13	 	Ecological and environmental protection charges:
	 
	 	 	The charges for any measures undertaken for the CBM Operations within
the Contract Area as required by relevant statutory regulations formulated by
the authorities concerned or pursuant to the programs agreed by the Parties.




15









 







	5.2.14	 	Service charges:
	 
	5.2.14.1	 	Technical service charges:
	 
	 	 	The charges paid for services, such as rock specimen analysis, CBM or
Liquid Hydrocarbons quality tests, geological evaluation, data processing,
design and engineering, well site geology, drilling supervision, special
research programs and other technical services.
	 
	5.2.14.2	 	General service charges:
	 
	 	 	Professional consultant charges incurred for the common interests of
both Parties and charges for other services to obtain original data needed for
CBM Operations from outside sources, except legal service.
	 
	5.2.14.3	 	CUCBM’s assistance charges:






	 	 	(a)	 	The charges for the assistance provided by CUCBM for the Contractor to
carry out the CBM Operations in accordance with Article 9 of the Contract.
	 
	 	 	(b)	 	For all assistance to be provided by the head office organization of
CUCBM to the Contractor in the course of the Exploration, CUCBM shall charge an
administrative fee of fifty thousand U.S. dollars (US $ 50,000 ) for each Calendar
Year. If the whole process of the Exploration Operations conducted for any CBM
Field in any Calendar Year is less than twelve (12) calendar months, the
administrative fee for such Calendar Year shall be calculated in proportion to the
actual calendar month(s) spent thereon (if the actual time spent thereon in any
calendar month is less than thirty (30) days, the calculation shall be made based
on a full calendar month). The aforesaid administrative fee shall be paid
respectively on June 1st and December 1st each Calendar Year, with twenty five
thousand U.S. dollars (US $ 25,000 ) for each time.
	 
	 	 	(c)	 	For all assistance to be provided by the head office organization of
CUCBM to the Contractor in the course of the Development Operations and the
Production Operations before the implementation of a Joint Operating Agreement by
the Parties, CUCBM shall charge an administrative fee of two hundred thousand U.S.
dollars (U.S. $200,000) for each Calendar Year. If the whole process of the
Development Operations conducted for any CBM Field in any Calendar Year is less
than twelve (12) calendar months, the administrative fee for such Calendar Year
shall be calculated in proportion to the actual calendar month(s) spent thereon (if
the actual time spent thereon in any calendar month is less than thirty (30) days,
the calculation shall be made based on a full calendar month). The aforesaid
administrative fee shall be paid respectively on June 1st and December 1st each
Calendar Year, with one hundred thousand U.S.






16











 






	 	 	     dollars (U.S. $100,000) for each time.
	 
	5.2.15	 	Damages and losses to the assets:
	 
	 	 	All costs and expenses necessary for the repair, replacement or supplement of the
assets resulting from damages or losses incurred by fire, flood, storm, theft or
any other force majeure causes, excluding the losses specified in Article 8.4 of
the Contract which shall be borne by the Operator alone.
	 
	5.2.16	 	Personnel training costs:
	 
	 	 	Costs incurred for personnel training pursuant to Article 16 of the
Contract-Training of Chinese Personnel and Transfer of Technology.
	 
	5.2.17	 	Miscellaneous expenses:
	 
	 	 	Any reasonable miscellaneous expenses needed for the CBM Operations excluded in
the above items of expenses, such as bank charges, books, stationery and
conference expenses as well as other reasonable expenses.
	 
	5.2.18	 	Overhead:
	 
	 	 	Overhead refers to the indirect costs for the managerial and operational services
provided by the Operator’s superior management organizations for the CBM
Operations, including management, administration, accounting, treasury, inter
company audit, tax, legal matters, procurement, employee relations, financing, the
collection of economic data and costs for general consultation on such planning,
design, research and operational activities, etc. to the extent that these are not
chargeable under Article 5.1.4 of this Accounting Procedure. The overhead for the
Exploration Operations shall be calculated in accordance with the following tiers
and based on the sum of the total actual costs from Article 5.2.1 through Article
5.2.17 and Article 5.2.19 of this Accounting Procedure, but not including CUCBM’s
assistance charges under Article 5.2.14.3 of this Accounting Procedure.




17









 












	 	 	 	 	 
	Direct Costs for Exploration	 	Percentage Rate	 
	(U.S. $/Year)
	 	 	%	 
	 
	 	 	 	 
	First Tier: 0 to 5,000,000
	 	 	5	%
	 
	 	 	 	 
	Second Tier: 5,000,001 to 15,000,000
	 	 	3	%
	 
	 	 	 	 
	Third Tier: 15,000,001 to 24,000,000
	 	 	2	%
	 
	 	 	 	 
	Fourth Tier: over 24,000,000
	 	 	1	%







	 	 	The overhead rates for the Development Operations shall be agreed upon by the Parties
through discussions at the time when the development budget is being prepared. However,
direct costs for development shall not include investments on special items of
construction which shall include, but not be limited to, gas processing facilities,
terminal loading and other facilities of which the overhead rates shall be agreed upon
through discussions between the Parties at the time when the development budget is being
made.
	 
	 	 	When the first budget is prepared for the Calendar Year of Commencement of Commercial
Production from each CBM Field, the overhead rates for production period and its related
calculation method shall be agreed upon through discussions between the Parties.
	 
	 	 	The costs and expenses for offices established by the Operator within the Chinese
territory which are not specifically dedicated to the CBM Operations shall be allocated
by the Operator to the CBM Operations within the Contract Area or to other beneficiary
Parties, including the Contractor, on the basis of actual service time recorded, or may
be allocated by other methods agreed upon by the Parties. The amount of allocation
charged to the CBM Operations within the Contract Area shall be included in the cost
item of Article 5.2.19 of this Accounting Procedure. The costs and expenses incurred by
the offices established by the Operator and its superior organizations outside the
Chinese territory (excluding costs and expenses chargeable under Article 5.1.4 of this
Accounting Procedure) has been included in the overhead and shall not be again charged
to the Joint Account.
	 
	 	 	On the last working day of each month, the Operator shall make provision into the Joint
Account for the overhead fees for the current month, calculated on the basis of
cumulative actual expenditure for the Calendar Year to that date and payment shall be
made from the Joint Account on the last working day of the following month. The final
adjustment of the overhead shall be made at the end of the Calendar Year in respect to
any difference between the actual payment by the Joint Account and the total overhead
for that Calendar Year calculated on the annual cumulative actual investment expenditure
at the end of such year. Any excess shall be refunded and deficiencies made good.
	 
	5.2.19	 	General and administrative expenses:




18









 













	 
	 	 	General and administrative expenses refer to the administrative
expenses incurred for any offices established by the Operator
within the Chinese territory and for JMC and its subordinate bodies
for the performance of the CBM Operations not otherwise directly
chargeable pursuant to Article 5.2 of the Accounting Procedure in
accordance with the provisions of the Contract. Such expenses
shall be classified according to minor accounts.
	 
	5.2.20	 	The fees for exploration and mining rights:
The fees for exploration and mining rights refer to the two sorts
of fees which CUCBM pays the relevant department of State for
owning CBM exploration right of the Contract Area and CBM mining
right of the Development Area within the Contract Area, and which
shall be respectively considered as the exploration costs and
development costs (or operating costs). The Contractor shall
transfer the specified fee to the bank account of CUCBM within
thirty days from the date on receipt of the written notice for the
payments of the exploration right fee or mining right fee from
CUCBM.
	 
	5.3	 	Except as otherwise provided in this Accounting Procedure, the allocation of common costs and
expenses for each item of operations shall be charged in proportion to the exploration costs,
development costs and operating costs actually incurred in each month.
	 
	5.4	 	With respect to the expenditures or excess expenditures as mentioned in Article 10.2.4 (b) of
the Contract which are determined by JMC to be unreasonable, JMC will form a joint team for
further investigation to determine whether they shall be charged to the Joint Account or shall
be borne by the Operator alone before the year-end final closing of accounts.





Article 6

Recovery of Costs and Deemed Interest





	6.1	 	According to the provisions of Article 12.2.2 of the Contract, the exploration costs shall
bear no interest.
	 
	6.2	 	The calculation of Deemed Interest on the development costs:
	 
	 	 	Deemed Interest on the development costs shall be calculated at the
specified rate from the first day after the month in which the
development funds of any of the Investing Parties have been received
in the Operator’s bank account for the Joint Account in accordance
with the provisions of Article 12.2.3.2 of the Contract.
	 
	 	 	There are three hundred and sixty-five (365) days in each Calendar
Year for the interest calculation and the interest shall be compounded
once each Calendar Year on December 31st based on actual number of
days eligible for the interest.




19









 









	 	 	Worked Example

Development costs— US $100 received on tenth of March


US $100 received on twentieth of March

The aggregate amount received in March is US $200.
	 
	 	 	Deemed interest shall be calculated from the first of April through
the end of such Calendar Year with a total number of two hundred and
seventy-five (275) days.





	 	 	 	 	 	 	 	 	 
	 

	 	Formula:
Interest = US $200 X 9%

X	 	 	275	 	 	 
	 

	 	 	 	365



	 	 	 
	 

	 	 	 	 		 	 	 







	 	 	At the end of the year interest is added to the capital and interest
thereon accrues until cost recovery is fully achieved, “i. e.,”
interest is compounded at year end.
	 
	6.3	 	Recovery of exploration costs, development costs with Deemed Interest thereon and operating
costs.
	 
	6.3.1	 	In accordance with the provisions of Article 12.2.2 of the Contract, the exploration costs
shall be recovered from the CBM Fields within the Contract Area which have been developed and
are producing and in which development the Contractor has participated.
	 
	6.3.2	 	In accordance with the provisions of Articles 12.2.1, 12.2.3.1 and 12.2.3.2 of the Contract,
the principal of development costs and Deemed Interest thereon and operating costs,
respectively, of each CBM Field shall be recovered only from the production of each respective
CBM Field.
	 
	6.3.3	 	As at the date of completing sale of CBM, CBM Products, or Liquid Hydrocarbons the Operator
shall make separate records into Joint Account for the appropriate reimbursement of the
principal of the exploration costs, development costs with Deemed Interest thereon and
operating costs respectively in accordance with Article 12.2 of the Contract. Written notices
shall be sent by the Operator to CUCBM and the Investing Parties at the same time.
	 
	6.4	 	In accordance with the provisions of Article 18.1 of the Contract, the Operator shall
establish complete books for recording the volume and value of CBM and/or Liquid Hydrocarbons,
precisely reflecting the production and the disposal of the CBM and/or Liquid Hydrocarbons
within the Contract term.
	 
	6.5	 	CBM and Liquid production in each Calendar Year for each CBM Field within the production
period shall be accounted according to the allocation proportions specified in Article 13 of
the Contract and at the CBM and Liquid Hydrocarbons price determined pursuant to Article 14.4
of the Contract.




20









 











Article 7

Accounting Reports





	7.1	 	The Operator shall provide relevant accounting reports and statements based on the Accounting
System to CUCBM and each company comprising the Contractor. Monthly reports shall be submitted
within thirty (30) days after the end of each month, quarterly reports within forty-five (45)
days after the end of each Calendar Quarter and annual reports within forty-five (45) days
after the end of each Calendar Year. Monthly, quarterly and annual reports shall be submitted
in accordance with requirements and formats specified in the Accounting System.
	 
	7.2	 	Any Investing Party to the Contract may require the Operator to allow its staff to have
access to the Joint Account Accounting Records relating to the application of expenses in the
stipulated custody period, upon giving thirty (30) days notice but such access shall not
unduly hinder the Operator’s normal operations.





Article 8

Audit





	8.1	 	Audits shall be carried out in accordance with Article 18.2 of the Contract.
	 
	8.2	 	The expenses of audits by any non-Operator shall be borne by the non-Operator which conducts
the audit. The expenses for any joint audits conducted by more than one non-Operators shall be
allocated in proportion to their respective participating interests in the development costs.





Article 9

Transfer Procedure for the Joint Account





	9.1	 	When the Exploration Operations are successful and the Contract Area enters the development
period, the Operator shall conduct an inventory and check of all the properties and accounts
for CUCBM. When each CBM Field within the Contract Area goes from development into production,
or when the Contractor terminates the Contract, an inventory and check of all properties and
accounts shall be conducted.
	 
	 	 	If the Contract Area has entered into the development period or the production period,
the Operator (after taking an inventory of all properties taken by all Investing
Parties) shall make a proposal to JMC for its approval listing the remaining equipment
and Materials needed for the CBM Operations for the following period and which shall be
carried forward to the next period in book values in the Joint Account. The Operator
shall be responsible for the disposal




21









 







	 	 	of the equipment and materials not needed for the CBM Operations, the gains or losses
derived from such disposal shall be allocated in accordance with the share of each
Investing Party in proportion to the overall investment amount of all Investing Parties
and be adjusted against the original accounts.
	 
	 	 	If the Contract terminates, the method of an inventory to all of the remaining equipment
and Materials shall be the same as mentioned above, and the gains and losses derived
from such disposal shall be adjusted against the accounts of the original Investing
Party in accordance with the above mentioned methods.
	 
	9.	 	In accordance with the provisions of Article 8.7 of the Contract, when the Joint Operators
Group (JOG) pursuant to Article 8.8.1 herein becomes the Operator of all the said CBM Fields
within the Contract Area, the former Operator shall transfer to JOG all of the Accounting
Records relating to the Joint Account.
	 
	9.	 	Upon the termination of the Contract, the Operator shall transfer all the relevant vouchers,
books and statements over to CUCBM for custody.
	 
	9.4	 	In conducting the transfer of the accounting books and inventory and check of all the
properties in accordance with the provisions of this Accounting Procedure, the implementation
procedure for the transfer and verification, the accounting files to be transferred and
accounting matters to be settled as well as other details shall be agreed upon through
consultation in advance between the Operator and CUCBM. The transfer procedure shall be
completed within the time period agreed upon by the Parties. Thereafter, owing to the needs of
any Investing Party to the Contract, CUCBM shall allow that Party’s staff access to the
Accounting Records within the relevant Accounting Records custody period and provide them with
duplicates, if necessary.




22









 












Annex III




Personnel Costs




Table of Contents




	 	 	 
	Article	 	Description
	1	 	General Provisions

	 
	2	 	Employment of CUCBM Personnel

	 
	3	 	Salaries and Wages of Personnel

	 
	4	 	Other Expenses

	 
	5	 	Settlement of Personnel Costs







23









 






Annex III

Personnel Costs




Article 1

General Provisions





	1.1	 	This Annex is an integral part of the Contract. The definitions set forth in Article 1 of the
Contract are applicable to this Annex. If the provisions in this Annex are in conflict with
those in the Contract, the provisions of the Contract shall prevail.
	 
	1.2	 	The provisions in this Annex with respect to personnel costs shall only be applicable to the
following personnel:






	 	(1)	 	representatives of JMC appointed by CUCBM referred to in Article 7.1
of the Contract;
	 
	 	(2)	 	personnel of CUCBM in the subordinate bodies of JMC referred to in
Article 7.4 of the Contract;
	 
	 	(3)	 	professional representatives assigned by CUCBM to the Operator’s
(Contractor’s) organizations referred to in Article 7.5 of the Contract; and
	 
	 	(4)	 	personnel furnished by CUCBM to the Contractor for employment (not
including personnel recruited by CUCBM for the Contractor) referred to in Article 2
hereof.






	1.3	 	Personnel costs referred to in this Annex shall include salaries and wages of personnel
specified in Article 3 hereof and other expenses specified in Article 4 hereof.
	 
	1.4	 	There is a table attached to this Annex, i.e. Table of Salary and Wage Standards of CUCBM
Personnel.
	 
	1.5	 	All salaries, costs and expenses with respect to the staff members of CUCBM in the
subordinate bodies of JMC, the CUCBM professional representatives and the CUCBM
representatives of JMC to be paid and charged during the development period and production
period shall be determined by the Parties through consultation.




24









 












Article 2

Employment of CUCBM Personnel





	2.1	 	The Contractor shall employ the Chinese Personnel in accordance with Article 15.2 of the
Contract.
	 
	2.1.1	 	When employing the Chinese Personnel, the Contractor shall submit to CUCBM a personnel
employment plan, which shall specify specialties, number of personnel necessary to be
employed, and such requirements as to technique, experience and education, with respect to the
personnel to be employed.
	 
	2.1.2	 	CUCBM shall, within sixty (60) days from the date on which it receives the personnel
employment plan submitted by the Contractor, notify the Contractor in a written form of the
following:






	 	 	(1)	 	names and specialties of employee candidates which will be furnished by
CUCBM, as well as their health conditions, working experience and education; and
	 
	 	 	(2)	 	specialties and number of employee candidates to be recruited by
CUCBM for the Contractor and provided by the Chinese organizations other than
CUCBM, as well as recruitment arrangements with respect thereto.






	2.1.3	 	The employee candidates furnished and recruited by CUCBM for the Contractor shall be
employed by the Contractor only when they have passed tests conducted by the Contractor or
become qualified after being trained by the Contractor. The Contractor shall notify CUCBM in
writing of the name list of the employee candidates whom it has decided to employ and whom it
has decided not to employ promptly after the tests or training have been conducted. The
Contractor shall explain the reason to CUCBM with respect to the employee candidates whom it
has decided not to employ. CUCBM shall promptly furnish or recruit additional employee
candidates.
	 
	2.2	 	The employment contract(s) shall be signed by the Parties for employment of personnel
furnished by CUCBM who have passed the tests conducted by the Contractor or become qualified
after being trained by the Contractor. The said employment contract(s) shall include
provisions with respect to employees, such as employment, dismissal, resignation, production
and working assignments, salaries or wages and other expenses, awards and penalties, working
time and vacations, labor insurance and welfare, labor protection and labor discipline. In
addition, the Parties shall work out specific stipulations with regard to the term of the
employment contract(s), conditions of termination and modification of employment contract(s),
responsibilities in the case of violation of the contract, and rights and obligations of the
Parties.
	 
	2.3	 	The Contractor shall notify CUCBM in writing thirty (30) days before




25









 






	 	 	dismissing or replacing any personnel furnished by CUCBM and employed by the Contractor.
	 
	 	 	However, in the case of defalcation and other serious offense, the Contractor has the
right to immediately terminate the employment contract of such personnel and will
promptly advise CUCBM of the reason for such action.





Article 3

Salaries and Wages of Personnel





	3.1	 	Salaries and wages of the personnel referred to in Article 1.2 hereof (hereinafter referred
to as “CUCBM Personnel”) shall be dealt with in accordance with the following provisions:
	 
	3.1.1	 	CUCBM Personnel shall be divided into two parts, i.e. personnel of JMC and employees.
Personnel of JMC shall fall into two categories and employees shall fall into five categories.
The salaries and wages of the personnel in each category shall be classified as three levels.
The levels of the personnel in each category shall be determined in accordance with the number
of years of working experience they have. Those who have less than three (3) years of working
experience shall be determined as Level One; those who have three (3) to ten (10) years of
working experience shall be determined as Level Two; and those who have more than ten (10)
years of working experience shall be determined as Level Three. The salary and wage standards
with respect to Levels One, Two and Three of each category of personnel are specified in the
Table of Salary and Wage Standards of CUCBM Personnel.
	 
	3.1.2	 	The salary and wage standards specified in the Table of Salary and Wage Standards of CUCBM
Personnel are expressed in U.S. dollars of the same year when this Contract is signed, and
shall be increased by 6% from January 1st every year.
	 
	3.1.3	 	The salary and wage standards of personnel at each level in each category specified in the
Table of Salary and Wage Standards of CUCBM Personnel divided by twenty-one point five (21.5)
shall be the daily salary and wage standards of personnel at such level in such category.
	 
	3.2	 	Those CUCBM Personnel who have worked for a full Calendar Month or twenty (20) working days
in a Calendar Month shall be paid in accordance with the monthly salary and wage standards;
those CUCBM personnel who have worked for less than twenty (20) working days in a Calendar
Month shall be paid in accordance with the daily salary and wage standards in Article 3.1.3.
	 
	3.3	 	CUCBM’s chief representative of JMC shall always be paid in accordance with the salary and
wage standards with respect to representatives of JMC. Other CUCBM’s representatives of JMC
shall be paid, for the period in which




26









 






	 	 	he or she attends JMC meetings, in accordance with the
salary and wage
standards with respect to representatives of JMC. If any professional representative
(including the secretary) of CUCBM or any CUCBM expert working in expert group(s) is
concurrently a representative of JMC (other than CUCBM’s chief representative of JMC),
then he or she shall be paid, for the period in which he or she attends JMC meetings, in
accordance with the salary and wage standards with respect to representatives of JMC,
and for the rest of the period in accordance with the salary and wage standards with
respect to his or her actual post, i.e. the professional representatives (including the
secretary) shall be paid in accordance with the salary and wage standards with respect
to the professional representatives, and CUCBM experts working in expert group(s) shall
be paid in accordance with salary and wage standards with respect to the employees
specified in the Table of Salary and Wage Standards of CUCBM Personnel.
	 
	3.4	 	The initial determination and any subsequent modification with respect to any post and level
of representatives of JMC appointed by CUCBM, secretaries, experts and professional
representatives of CUCBM shall be made by CUCBM in accordance with the number of years of
working experience and capabilities they have.
	 
	 	 	The levels of the personnel furnished by CUCBM and employed by the Contractor shall be
determined in accordance with Article 3.1.1 herein, the posts of such personnel shall be
determined by the Contractor on the basis of assessment, and the subsequent promotion
and demotion with respect to the posts or levels of such personnel shall be determined
by the Contractor. The aforesaid personnel shall be paid in accordance with the salary
and wage standards corresponding to their new posts from the month following the month
in which their posts or levels are promoted or demoted.
	 
	3.5	 	The working time of the secretary, professional representatives and experts assigned by CUCBM
to the subordinate bodies of JMC shall be determined in accordance with the working system of
JMC. However, the professional representatives of CUCBM shall work for no more than five (5)
days per week and eight (8) hours per day.





Article 4

Other Expenses





	4.1	 	CUCBM Personnel shall be paid, in addition to the salaries and wages as stipulated in Article
3 hereof, the following expenses:
	 
	4.1.1	 	Expenses for working meals and other miscellaneous personal expenses based on 21.5 average
working days per Calendar Month are as follows:
	 
	 	 	Three hundred and one U.S. dollars (U.S. $301.00 ) each month for working meals and
other miscellaneous personal expenses for each CUCBM Personnel.




27









 






	 	 	Those CUCBM Personnel who have worked for the full Calendar Month shall be paid in
accordance with the monthly expenses for working meals and other miscellaneous expenses;
those CUCBM Personnel who have worked for less than the full Calendar Month shall be
paid in accordance with the daily expenses for working meals and other miscellaneous
personal expenses.
	 
	4.1.2	 	Home leave and expenses for visiting family:
	 
	4.1.2.1	 	Any CUCBM Personnel who work in the Contract Area for the performance of the Contract and
whose cumulative working time in one(1) Calendar Year reaches six (6 ) Calendar Months may
enjoy a thirty (30) day home leave with pay.
	 
	4.1.2.2	 	Standards of home leave expenses for CUCBM Personnel:
	 
	 	 	Two Hundred U.S. dollars (U.S. $200) for each CUCBM personnel each
time whose home is in the province(s) in which the Contract Area
locates.
	 
	 	 	Three Hundred and Fifty U. S. dollars (U.S. $350) for each CUCBM
Personnel each time whose home is outside the province(s) in which
the Contract Area locates.
	 
	 	 	If the work is performed, at the request of JMC, in the province outside the Contract
Area, two hundred US dollars (U.S. $200) for each CUCBM Personnel each time whose home
is in the same province in which the work place is located and three hundred fifty US
dollars (U.S. $350) for each CUCBM Personnel each time whose home is outside the
province in which the work place is located.
	 
	4.1.3	 	Premiums for accidental personal injury and death insurance and the expenses incurred in
dealing with injuries or death of CUCBM Personnel, which shall include:






	 	(a)	 	premiums for accidental personal injury and death insurance calculated
in accordance with insured amount and insurance premium rate with respect to CUCBM
Personnel in each category; and
	 
	 	(b)	 	expenses actually incurred in dealing with injuries or death in the
event that accidental injuries to or death of CUCBM Personnel occur.






	4.1.4	 	Administrative expenses for CUCBM Personnel and expenses for CUCBM personnel on business
trips.
	 
	4.1.5	 	Lodging expenses for CUCBM Personnel working for the purpose of performance of the CBM
Operations during the period when they are not local residents there.
	 
	4.2	 	In the event that commodity prices or transportation fees increase, the




28









 






	 	 	standards of expenses
referred to in Article 4.1.1 herein shall be adjusted
equitably through consultation by the Parties.





Article 5

Settlement of Personnel Costs





	5.1	 	Salaries and wages of personnel stipulated in Article 3 hereof and the expenses stipulated in
Articles 4.1.1, 4.1.2 and 4.1.3 hereof shall all be settled by the Operator with CUCBM. Those
payments shall all be settled and paid by the Operator within fifteen (15 ) days from the
last working day of every month. If the Operator has provided CUCBM Personnel with working
meals and transportation, no expenses specified in Article 4.1.1 hereof shall be paid to
CUCBM.
	 
	5.2	 	The expenses referred to in Article 4.1.4 and Article 4.1.5 hereof shall be provided by the
Operator or reimbursed based on receipts, bills or vouchers.




29









 











Table of Salary and Wage Standards of CUCBM Personnel




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Monthly Salary and Wage
	 	 	 	 	Ordinal	 	 	 	Standard (USD)
	Category	 	No.	 	Personnel	 	Level One	 	Level Two	 	Level Three
	JMC	 	 	1	 	 	Representative of JMC
appointed by CUCBM
	 	 	2,500	 	 	 	3,500	 	 	 	4,500	 
	 	 	 	 	 	2	 	 	Professional
Representative (Including
Secretary)
	 	 	2,000	 	 	 	2,600	 	 	 	3,500	 
	Employee	 	 	1	 	 	Senior Technical Personnel
	 	 	2,000	 	 	 	2,600	 	 	 	3,500	 
	 	 	 	 	 	2	 	 	Middle Level Technical
Personnel
	 	 	1,500	 	 	 	2,000	 	 	 	2,300	 
	 	 	 	 	 	3	 	 	Ordinary Technical
Personnel
	 	 	1,000	 	 	 	1,200	 	 	 	1,400	 
	 	 	 	 	 	4	 	 	Ordinary Administrative
Personnel
	 	 	800	 	 	 	1,000	 	 	 	1,200	 
	 	 	 	 	 	5	 	 	Technical Worker and
Automobile Driver
	 	 	700	 	 	 	800	 	 	 	1,000	 





(Note: the above standards shall be increased by 6 % from January 1st every year.




30









 








Annex IV




Data Control




Table of Contents




	 	 	 
	Article	 	Description
	 	 	 

	1	 	General Provisions

	 	 	 

	2	 	Ownership of the Data

	 	 	 

	3	 	Control and Use of the Data

	 	 	 

	4	 	Scope of the Data Provided for CUCBM







1









 






Annex IV

Data Control




Article 1

General Provision



This Annex IV is an integral part of the Contract. The definitions set forth in Article 1 of the
Contract are equally applicable to this Annex. If the provisions in this Annex are in conflict with
those in the Contract, the provisions in the Contract shall prevail.




Article 2

Ownership of the Data





	2.1	 	The ownership of all of the data, records, vouchers and other original data obtained and/or
acquired by the Contractor in the implementation of the Contract shall vest in CUCBM.
	 
	2.2	 	The ownership and right of use of cores, rock samples and other samples obtained and/or
acquired by the Contractor from the Contract Area shall vest in CUCBM.
	 
	2.3	 	Within the validity period of the Contract, after the termination of the Contract and after
the contractor assigns its rights and obligations, no data, information and samples mentioned
in Articles 2.1 and 2. 2 hereof shall be disclosed in any way to a Third Party except as
stipulated in Articles 3.4 and 3.5 hereof or be transferred, donated, exchanged, sold, or
published in any form without the permission in writing of CUCBM.





Article 3

Control and Use of the Data





	3.1	 	The management and use of data shall be governed by the principles of the Regulations on the
Management of Geological Data of the People’ Republic of China
	 
	 	 	During the implementation of the CBM Operations, the Contractor shall be responsible to
keep in good order, all the data, information and samples stipulated in Articles 2.1 and
2.2 hereof within the territory of the People’s Republic of China and shall furnish CUCBM
in a timely manner with such data, information and samples for use and turn them over to
CUCBM in a step-by-step or phase-by-phase manner.
	 
	 	 	If the Contractor terminates the Contract, the catalog and the materials of the
data, information and samples stipulated in Articles 2.1 and 2.2 hereof shall be
all handed over to CUCBM within 30 days prior to the termination of the Contract.




2









 






	3.2	 	The Contractor shall have the right to use or duplicate the data and information mentioned in
Article 2.1 hereof and use samples referred to in Article 2.2 hereof within and outside China
and the results of research, interpretation, analysis and chemical examination shall be
submitted or reported to CUCBM in a timely manner. The Contractor shall not use the
above-mentioned data, information and samples for purposes other than those related to the
implementation of the Contract.
	 
	3.3	 	Any shipment abroad for use of the original data and information (such as original magnetic
tapes, original recordings, etc.) referred to in Article 2.1 hereof and of the samples
referred to in Article 2.2 hereof shall be subject to the consent in writing of CUCBM. Unless
otherwise agreed by CUCBM, the size of any piece of core or amount of any batch of rock
cuttings and samples to be shipped abroad shall not be greater than one half (1/2) of the
total size or amount of the original piece or batch. The original data and information shipped
abroad shall, upon completion of the use or duplication thereof, be shipped in a timely manner
back to and be kept in China.
	 
	3.4	 	If, for the purpose of implementation of the Contract, the Contractor need to provide the
data and information for such Third Parties as banks or other credit institutions,
Subcontractors and potential assignees to which the rights and interests under the Contract
are assigned, the type and scope of the data and information to be provided shall be subject
to review by CUCBM and the Contractor shall obtain from such Third Parties a written
undertaking that they shall have the obligation to keep the provided data and information
confidential.
	 
	3.5	 	The Contractor may provide such data and information as may be requested by their parent
corporations or Affiliates relating to the implementation of the Contract or by securities and
exchange organizations or the governments of the Contractor’s home countries, subject to the
prior reporting thereof to CUCBM. The Contractor shall inform the aforesaid parent
corporations or Affiliates which receive the data and information that they shall be obligated
to keep such data and information confidential and shall request the security and exchange
organizations or the governments of their home countries to keep such data and information
confidential subject to international practice.
	 
	3.6	 	Release of the data and information to the press shall be subject to the consultation and
agreement between the Parties.





Article 4

Scope of the Data Provided for CUCBM



In carrying out the CBM Operations, the Contractor shall provide CUCBM with data and
information with two (2) copies for each, including, but not limited to the following:





3









 










	4.1	 	Overall programs and plans of operations and information and documents of designs of an
individual project:
	 
	4.1.1	 	Overall and phased exploration program of the Contract Area;
	 
	4.1.2	 	Annual operational plans for exploration;
	 
	4.1.3	 	 Early development programs, Overall Development Programs and adjusted development
programs of CBM Fields;
	 
	4.1.4	 	Annual and separate operational designs of geophysical survey;
	 
	4.1.5	 	Designs for single well drilling and for single well production testing of exploratory
wells;
	 
	4.1.6	 	Plans for production and production testing of wells and CBM Fields;
	 
	4.1.7	 	The content and general schedules of engineering project;
	 
	4.1.8	 	Basic designs of engineering projects (e.g. CBM and water treatment facilities, modules
and pipelines);
	 
	4.1.9	 	Annual and monthly operational progress charts for engineering projects;
	 
	4.1.10	 	Procurement plans and schedules for engineering projects;
	 
	4.1.11	 	Test-run and commissioning schedules for engineering projects.
	 
	4.2	 	Information and documents on the progress of all operations:
	 
	4.2.1	 	Daily (weekly), monthly and annual reports on geophysical survey;
	 
	4.2.2	 	Daily, monthly and annual reports on well drilling and production testing;
	 
	4.2.3	 	Daily, monthly and annual reports on production testing and production of wells and CBM
Fields;
	 
	4.2.4	 	Monthly and annual reports on operational progress of engineering projects;
	 
	4.2.5	 	Other operational progress reports;
	 
	4.2.6	 	Operational rules and unpatented technical manuals of CBM operations.
	 
	4.3	 	Original data and information of CBM Operations:
	 
	4.3.1	 	Original magnetic tapes, original records, data, seismic sections, drawings and other
relevant data and information of geophysical surveys;




4









 






	4.3.2	 	Original records, data, drawings and other relevant data and information of geochemical
survey;
	 
	4.3.3	 	Original records, data, drawings, samples and other relevant information of geophysical
work, well drilling, mud, mud logging, wireline logging, well testing, cementing, fracturing,
well completion, dewatering and production and workover operations;
	 
	4.3.4	 	Original records, data, drawings and other relevant information of production testing,
production, injection and stimulation of wells and CBM Fields;
	 
	4.3.5	 	Original records, data and automatic recording cards of CBM metering;
	 
	4.3.6	 	Original data and recording cards of CBM transportation, storage and marketing;
	 
	4.3.7	 	All the samples (including cores, cuttings, CBM, Liquid Hydrocarbons, and water samples
and mud samples) and results of analysis and chemical examination thereon;
	 
	4.3.8	 	Data on physical properties of pay zones;
	 
	4.3.9	 	Data on environment, hydrology and meteorology.
	 
	4.3.10	 	All original data provided for in this Article 4.3 shall be kept and stored under conditions
guaranteed to preserve the data and data quality, all of which data shall be made available to
Contractor when requested.
	 
	4.4	 	Basic information of engineering projects:
	 
	4.4.1	 	Instructions on design calculations and detailed design drawings of engineering
projects;
	 
	4.4.2	 	Technical specifications and standards of design, manufacture and installation, safety
rules, environmental protection rules and operational rules;
	 
	4.4.3	 	Construction records of individual projects and order slips on design and construction
alterations;
	 
	4.4.4	 	Project commissioning drawings and manuals and original records or reports on project
acceptance.
	 
	4.5	 	Summary reports on operational results and reports on specialized research and
comprehensive study of each CBM Operation:
	 
	4.5.1	 	Reports on locations of geophysical survey, geochemical survey, well drilling and other
operations;
	 
	4.5.2	 	Operational reports on data processing and interpretation of geophysical and geochemical
survey;




5









 






	4.5.3	 	Summary reports on drilling geology;
	 
	4.5.4	 	Summary reports on production testing;
	 
	4.5.5	 	Reports on physical properties study of CBM reservoirs and reports on reservoir
simulations and analyses;
	 
	4.5.6	 	Summary reports on geological structure drilling, reserves calculations of CBM and
reports on feasibility study on CBM Field geology, development, engineering and economic
evaluations;
	 
	4.5.7	 	Reports on specialized and comprehensive studies on problems arising in the course of
CBM Field exploration and development;
	 
	4.5.8	 	Reports on experiment and research for engineering designs.
	 
	4.6	 	Data and information on economic and planning:
	 
	4.6.1	 	General budgets for basic development plans of CBM Field and calculation basis thereon;
	 
	4.6.2	 	Data on production of CBM, output value and productivity of CBM Field;
	 
	4.6.3	 	Geophysics survey, well drilling work and budgets of CBM Field, as well as economic,
technical and energy consumption data and information;
	 
	4.6.4	 	Data on production, marketing, distribution and transportation of production from CBM
Field;
	 
	4.6.5	 	Information on investment and financing and accounting for engineering projects;
	 
	4.6.6	 	Other financial data specified in the Accounting Procedure of the Contract.






6