Document:

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                                                                  Exhibit 10(27)

                          PRODUCTION SHARING AGREEMENT

                                     BETWEEN

                                STATE OF GEORGIA:

        STATE AGENCY FOR REGULATION OF OIL AND GAS RESOURCES IN GEORGIA,

                                  GEORGIAN OIL

                                       AND

                                CANARGO NORIO LTD

                                      DATED

                               12th December, 2000

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                                TABLE OF CONTENTS

<TABLE>
<S>                 <C>                                                                        <C>
Preamble            ...........................................................................  4
Article 1           Definitions................................................................  5
Article 2           Scope of Agreement and General Provisions.................................. 11
Article 3           Agreement Area............................................................. 13
Article 4           Agreement Term............................................................. 13
Article 5           Relinquishments............................................................ 14
Article 6           Coordination Committee..................................................... 15
Article 7           Operator Responsibility.................................................... 18
Article 8           Article not used........................................................... 19
Article 9           Procedure for Determination of Commerciality and
                    Approval of Development Plans.............................................. 19
Article 10          Annual Work Programs and Budgets........................................... 22
Article 11          Allocation of Production, Recovery of Costs and Expenses,
                    Production Sharing and Right of Export..................................... 24
Article 12          Crude Oil Valuation........................................................ 28
Article 13          Ancillary Rights of the Contractor and Operator............................ 30
Article 14          Assistance Provided by the State........................................... 31
Article 15          Measurement, Quality and Valuation of Petroleum............................ 33
Article 16          Natural Gas................................................................ 34
Article 17          Tax/Fiscal Regime.......................................................... 38
Article 18          Accounting, Financial Reporting and Audit.................................. 42
Article 19          Currency, Payments and Exchange Control.................................... 43
Article 20          Import and Export.......................................................... 44
Article 21          Export of Hydrocarbons, Transfer of Ownership
                    and Regulations for Disposal............................................... 45
Article 22          Ownership of Assets........................................................ 45
Article 23          Insurance, Environment, Health, Safety and Liability....................... 46
Article 24          Personnel.................................................................. 50
Article 25          Force Majeure.............................................................. 50
Article 26          Assignments and Guarantees................................................. 51
Article 27          Agreement Enforcement and Stabilisation and Representations
                    and Warranties............................................................. 53
</TABLE>

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<TABLE>
<S>                 <C>                                                                        <C>
Article 28          Notices and Confidentiality................................................ 55
Article 29          Termination and Breach..................................................... 57
Article 30          Dispute Resolution......................................................... 58
Article 31          Text....................................................................... 58
Article 32          Approval and Effective Date................................................ 59
ANNEX A             AGREEMENT AREA............................................................. 61
ANNEX B             LICENCE.................................................................... 62
ANNEX C             ACCOUNTING PROCEDURE....................................................... 63
ANNEX D             MINIMUM PROGRAM.............................................................78
ANNEX E             PERMIT APPLICATION FEES SCHEDULE............................................79
ANNEX F             PARENT COMPANY GUARANTEE....................................................80
ANNEX G             GEORGIAN OIL CONSENT TO TRANSFER LICENCE....................................82
</TABLE>

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PRODUCTION SHARING AGREEMENT AND LICENSES

This Agreement is made and entered into on 12th, December 2000 by and between:

(1)  State Agency for Regulation of Oil and Gas Resources in Georgia as the duly
     authorised representative of the State (as it is defined in article 1.70)
     with adequate authorization, (hereinafter referred to as "Agency") and
     National Oil Company - Georgian Oil in its capacity as the state owned oil
     company (hereinafter referred to as "Georgian Oil"), as the party of the
     first part;

(2)  as party of the second part, CanArgo Norio Ltd. (Number 111838), a company
     organised and existing under the laws of Cyprus, and its successors and
     assignees, if any, will individually be referred to as "Contractor Party"
     and collectively referred to as "Contractor"). The State Agency, Georgian
     Oil, and the Contractor may sometimes be referred to as "Party" and
     collectively as the "Parties".

                                   WITNESSETH:

WHEREAS, all Petroleum resources within the territory and under the internal
waters, territorial sea, and continental shelf of Georgia are owned by the
State;

WHEREAS, the State enters into this Agreement wishing to promote the development
of the Agreement Area and Georgian Oil and Contractor desire to join and assist
in the exploration, development and production of the potential resources within
the Agreement Area;

WHEREAS, Contractor has the requisite technical, managerial and financial
capabilities and experience to carry out Petroleum Operations stipulated in this
Agreement and desires to cooperate with the State and Georgian Oil for the
exploration and exploitation of Petroleum reserves within the Agreement Area;

WHEREAS, Georgian Oil is the current holder of the oil and gas usage licence
number 0298 in respect of the Agreement Area (hereinafter referred to as the
"Licence") and the Licence is to be reissued to CanArgo Norio Ltd.

WHEREAS the Parties and Operator have agreed that in order to promote the
development of hydrocarbon resources in Georgia and to promote international
investment in Georgia, Petroleum Operations should be carried out pursuant to
the terms of this Agreement.

WHEREAS CanArgo Norio produced and agreed with State Agency and Georgian Oil
minimum work program for petroleum operations.

NOW, THEREFORE, in consideration of the promises and the mutual covenants and
conditions herein contained, it is hereby agreed as follows:

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                                    ARTICLE 1
                                   DEFINITIONS

The following words and terms used in this Agreement shall unless otherwise
expressly specified in this Agreement have the following respective meanings:

1.1      "Accounting Procedure" means the accounting procedure set out in Annex
         "C" hereto.

1.2      An "Affiliated Company" or "Affiliate" means:

         a)       with respect to a Contractor Party: a company, corporation,
                  partnership or other legal entity:

                  i)       in which a Contractor Party owns directly or
                           indirectly more than fifty percent (50%) of the
                           shares, voting rights or otherwise has the right to
                           establish management policy; or

                  ii)      in which at least fifty percent (50%) of the shares
                           or voting rights are owned directly or indirectly by
                           a company or other legal entity, which owns directly
                           or indirectly more than fifty percent (50%) of the
                           shares, voting rights or otherwise has the right to
                           establish management policy of a Contractor Party;

         b)       with respect to the State and Georgian Oil: any legal entity
                  directly or indirectly controlled by the State or Georgian
                  Oil, respectively, or operating under their collective
                  management. For the purposes of this part of the definition,
                  the term to "control" (including the related terms
                  "controlled" or "operates under collective management") shall
                  mean with respect to any entity, having the right to carry out
                  direct or indirect supervision of such entity or to define a
                  general scope of its activity based on holding the shares
                  entitled to vote, other form of ownership, or on any other
                  grounds.

1.3      "Annex" or "Annexes" means each or all of the Annexes "A" through "G"
         attached to this Agreement and made a part hereof. In the event of a
         conflict between the provisions of an Annex and a term in the main body
         of this Agreement, the provisions of the latter shall prevail.

1.4      "Appraisal" means all works carried out by Contractor to evaluate and
         delineate the commercial character of a Discovery of Petroleum in the
         Agreement Area.

1.5      "Appraisal Program" means a work program submitted by Contractor under
         which Contractor plans to evaluate and delineate a Discovery of
         Petroleum in the Agreement Area.

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1.6      "Associated Natural Gas" means all gaseous hydrocarbons produced in
         association with Crude Oil, which Crude Oil itself can be commercially
         produced and separated therefrom.

1.7      "Available Crude Oil" means Crude Oil produced and saved from the
         Agreement Area and not used in Petroleum Operations in accordance with
         Article 11.3.

1.8      "Available Natural Gas" means Natural Gas produced and saved from the
         Agreement Area and not used in Petroleum Operations in accordance with
         Article 11.3.

1.9      "Barrel" means a quantity consisting of forty-two (42) United States
         gallons liquid measure, corrected to a temperature of sixty degrees
         (60 degrees) Fahrenheit with pressure at sea level.

1.10     "Budget" means the estimate of the expenditures, listed category by
         category, relating to Petroleum Operations and contained in any Work
         Program proposed by Contractor.

1.11     "Calendar Quarter" or "Quarter" means a period of three consecutive
         months beginning on January 1st, April 1st, July 1st and October 1st of
         each Calendar Year.

1.12     "Calendar Year" means a period of twelve (12) consecutive months
         beginning on January 1st and ending on December 31st in the same year,
         according to the Gregorian Calendar.

1.13     "Capital Expenditures" means Development Expenditures Exploration
         Expenditures and Drilling Costs.

1.14     "Commercial Discovery" means a discovery of Petroleum that the
         Contractor in its sole discretion in accordance with the provisions of
         Article 9 commits itself to develop and produce under the terms of the
         Agreement.

1.15     "Commercial Production" means regular and continuous production of
         Petroleum from a Development Area in such quantities (taking into
         account any other relevant factors) as are worthy of commercial
         development.

1.16     "Agreement" or "PSA" means this Production Sharing Agreement together
         with all attached Annexes and any variation, extension or modification
         hereto which may be agreed in writing by all the Parties.

1.17     "Agreement Area" means the area specified in Article 3 hereof and
         delineated in Annex A, as reduced or enlarged from time to time in
         accordance with the provisions of this Agreement.

1.18     "Agreement Year" means a period of twelve (12) consecutive months from
         the Effective Date within the term of the Agreement.

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1.19     "Contractor" means CanArgo (Norio) Ltd., its assignees and successors,
         as provided herein.

1.20     "Coordination Committee" means the committee composed of
         representatives of the Contractor and the State represented by Georgian
         Oil constituted in accordance with Article 6.

1.21     "Cost Recovery Petroleum" means Cost Recovery Crude Oil and Cost
         Recovery Natural Gas.

1.22     "Cost Recovery Crude Oil" is defined as set forth in Article 11.5.

1.23     "Cost Recovery Natural Gas" is defined as set forth in Article 11.5

1.24     "Costs and Expenses" comprise the Exploration Expenditures, Development
         Expenditures, Operation Expenses and Drilling Costs together with
         Finance Costs whether directly or indirectly incurred by Contractor.

1.25     "Crude Oil" means crude mineral oil, asphalten, ozopherite and all
         kinds of hydrocarbons whether in a solid, liquid or mixed state at the
         wellhead or separator or which is obtained from Natural Gas through
         condensation or extraction.

1.26     "Current Georgian Legislation" means laws, legislative acts, normative
         documents, that are effective on the Effective Date.

1.27     "Customs Duties" means all import (or export) tariffs and duties and
         other mandatory payments as stipulated by applicable laws, regulations
         or other legal measures of Georgia with respect to the import or export
         of materials, equipment, goods and any other similar items.

1.28     "Development Area" means all or any part of the Agreement Area
         specified in an approved Development Plan containing a Commercial
         Discovery.

1.29     "Development Expenditures" means all Costs and Expenses for Development
         Operations with the exception of Operation Expenses and Drilling Costs
         whether directly or indirectly incurred, including but not limited to
         training, administration, service, Finance Costs and related expenses.

1.30     "Development Plan" means the plan to be produced by Contractor in
         accordance with Article 9.6. following a declaration that Commercial
         Production may be established.

1.31     "Development" or "Development Operations" or "Development Work" means
         and includes any activities or operations associated with work to
         develop Petroleum for production and subsequently to produce and render
         Petroleum marketable for commercial sale and shall include, but not be
         limited to:

         a)       all the operations and activities under the Agreement with
                  respect to the drilling of wells, other than Exploration
                  wells, the deepening,

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                  reworking, plugging back, completing and equipping of such
                  wells, together with the design, construction and installation
                  of such equipment, pipeline or gathering lines, installations,
                  production units and all other systems relating to such wells
                  and related operations in connection with production and
                  operation of such wells as may be necessary in conformity with
                  sound oil field practices in the international Petroleum
                  industry.

         b)       all operations and activities relating to the servicing and
                  maintenance of pipelines, gathering lines, installations,
                  production units and all related activities for the production
                  and management of wells including the undertaking of
                  re-pressurising, recycling and other operations aimed at
                  intensified recovery, enhanced production and oil recovery
                  rate.

1.32     "Discovery" means a well that the Contractor determines has encountered
         Petroleum which would justify Commercial Production.

1.33     "Dollar" or "U.S.$" means the currency of the United States of America.

1.34     "Double Tax Treaty" means any international treaty or convention for
         the avoidance of double taxation of income and/or capital which is
         applicable in Georgia.

1.35     "Drilling Costs" means all expenditures whether directly or indirectly
         incurred during Exploration and Development for well drilling,
         completing and reworking operations including, but not limited to,
         labour, geological design, engineering and other Subcontractors
         (including all fees, tariffs and charges payable to any such
         Subcontractors), material and equipment consumed or lost, perforation,
         formation testing, cementing, well-logging and transportation.

1.36     "Effective Date" means the date on which this Agreement has been signed
         by all Parties and the requirements of Article 32 have been satisfied.

1.37     "Excess Associated Natural Gas" is defined as set forth in Article
         16.1.b.

1.38     "Exploration" or "Exploration Operations" means operations conducted
         under this Agreement in connection with the exploration for previously
         undiscovered Petroleum, or the evaluation of discovered reserves which
         shall include geological, geophysical, aerial and (other survey)
         activities and any interpretation of data relating thereto as may be
         contained in Exploration Work Programs and Budgets, and the drilling of
         such shot holes, core holes, stratigraphic tests, Exploratory Wells for
         the discovery of Petroleum, Appraisal wells and other related
         operations.

1.39     "Exploration Expenditures" means all Costs and Expenses for Exploration
         Operations other than Drilling Costs whether directly or indirectly
         incurred including but not limited to training, administration,
         service, Finance Costs and related expenses and overhead and study
         costs.

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1.40     "Exploratory Well" means any well drilled with the objective of
         confirming a structure or geologic trap in which Petroleum capable of
         Commercial Production in significant quantities has not been previously
         discovered.

1.41     "Field" means a Petroleum reservoir or group of reservoirs within a
         common geological structure or feature. "Field" may be an "Oil Field"
         or a "Natural Gas Field" as designated by Contractor.

1.42     "Finance Costs" or "Interest Costs" shall include all amounts of
         interest, fees and charges paid in respect of any debt incurred in
         carrying out the Petroleum Operations and any refinancing of such
         debts, providing that in the case of Affiliate debt, it shall include
         interest only to the extent that it does not exceed a rate which would
         have been agreed upon between independent parties in similar
         circumstances and such interest is not limited by which assets or
         services are purchased by the loan principal.

1.43     "Force Majeure" is defined as set forth in Article 25.2.

1.44     "Foreign Employee" is defined as set forth in Article 17.17

1.45     "Foreign Subcontractors" means Subcontractors which are organised
         outside of Georgia and under Georgian legislation are not obliged to
         establish permanent representative offices in Georgia.

1.46     "Gas Sales Agreement" is any agreement to be entered into for the sale
         of Non-associated Natural Gas and Associated Natural Gas in accordance
         with the provisions of Article 16.2.

1.47     Operator means the company defined in Article 2.8 by mutual agreement
         of the parties.

1.48     "Contractor Licence" means the "Licence" issued by the State Agency for
         Regulation of Oil and Gas Resources in Georgia, according to the
         Georgian Law.

1.49     "Joint Operating Agreement" or "JOA" means the agreement to be
         concluded between the Contractor Parties, Georgian Oil and CanArgo
         (Norio) Ltd which shall be supplementary to and consistent with the
         provisions of this Agreement and which shall regulate the terms under
         which Petroleum Operations will be conducted.

1.50     "LIBOR" means the three (3) months U.S. Dollars London Interbank fixing
         offer rate quoted daily in the London Financial Times.

1.51     "Marketing Team" is defined as set forth in Article 16.2.a.ii.

1.52     "Measurement Point" means the location specified in an approved
         Development Plan where the Petroleum is metered and delivered to the
         Parties or such other location as the Parties may agree from time to
         time prior to the submission of a Development Plan as the circumstances
         may require.

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1.53     "Month" or "Calendar Month" means a calendar month.

1.54     "Natural Gas" means Non-associated Natural Gas and Associated Natural
         Gas in their natural state.

1.55     "Natural Gas Field" means a field from which more than fifty (50)
         percent of the estimated reserves on an energy equivalency basis are
         Natural Gas at surface conditions.

1.56     "Non-associated Natural Gas" means all gaseous hydrocarbons produced
         from gas wells, and includes wet gas, dry gas and residue gas remaining
         after the extraction of liquid hydrocarbons from wet gas.

1.57     "Oil Field" means a field from which more than fifty (50) percent of
         the estimated reserves comprise Crude Oil.

1.58     "Operation Expenses" means those costs incurred in day-to-day Petroleum
         Operations, whether directly or indirectly incurred including but not
         limited to all costs, expenses and expenditures associated with the
         Production, processing and transportation to the Measurement Point of
         Petroleum, training, administration, service, payments for abandonment
         and site restoration in accordance with Article 9.8, insurance costs in
         accordance with Article 23.2. and related expenses.

1.59     "Parent Company Guarantee" means a guarantee to be issued by CanArgo
         Energy Corporation in the form annexed hereto as Annex F.

1.60     "Party" or "Parties" means the parties whose authorised representatives
         have affixed their signatures hereto.

1.61     "Payment Date" has the meaning as defined in 11.10.

1.62     "Petroleum" means Crude Oil and Natural Gas.

1.63     "Petroleum Operations" means the Exploration Operations, the
         Development Operations, Production Operations, and transportation to
         the Measurement Point and other activities related thereto carried out
         pursuant to this Agreement and the JOA.

1.64     "Petroleum Operations Account" shall have the meaning given to it in
         paragraph 4.1 of section I of the Accounting Procedure.

1.65     "Petroleum Law" means Georgian Law on Oil and Gas which came into force
         on April 16, 1999.

1.66     "Production" or "Production Operations" means operations and all
         related activities carried out for Petroleum production after the
         approval of any Development Plan, including without limitation
         extraction, injection, stimulation, treatment, transportation, storage,
         lifting, and associated operations, but does not include any storage or
         transportation beyond the Measurement Point.

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1.67     "Profit Natural Gas" is defined as set forth in Article 11.10.

1.68     "Profit Oil" is defined as set forth in Article 11.10.

1.69     "Profit Tax" is defined as set forth in Article 17.

1.70     "State" or "Government" means the Government of Georgia and all
         political or other agencies or instrumentalities or subdivisions
         thereof including but not limited to any local government or other
         representative, agency or authority, which has the authority to govern,
         legislate, regulate, levy and collect taxes or duties, grant licences,
         permits, approve or otherwise impact (whether financially or otherwise)
         directly or indirectly upon any of the Parties' rights, obligations or
         activities under the Agreement; the word "Governmental" shall be
         construed accordingly.

1.71     "Study Area" means the part of the Agreement Area which will be defined
         in a Study Program.

1.72     "Study Program" means the program to be produced and carried out by the
         Contractor in accordance with Article 9 following the conclusion that
         Commercial Production is feasible.

1.73     "Subcontractor" means any natural person or juridical entity
         Agreemented directly or indirectly by or on behalf of Contractor to
         supply goods, works or services related to this Agreement.

1.74     "Third Party" or "Third Parties" means one or more of a natural person
         or juridical entity other than a Party hereto and any Affiliate of a
         Party.

1.75     "Taxes" means all levies, duties, payments, fees, taxes or
         contributions payable to or imposed by Governmental agencies,
         Governmental subdivisions or republican, municipal or local authorities
         within the Government of Georgia.

1.76     "VAT" means Georgian value added tax.

1.77     "Withholding Tax" is defined as set forth in Article 17.19.

1.78     "Work Program" and "Work Program and Budget" means any work program and
         work program and Budget to be submitted to the Coordination Committee
         by the Contractor in accordance with the provisions of Article 10 and
         which shall set out the proposed Petroleum Operations to be carried out
         in the Agreement Area together with the associated Budget as the case
         may be.

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                                    ARTICLE 2
                    SCOPE OF AGREEMENT AND GENERAL PROVISIONS

2.1      By its approval of this Agreement the State Agency hereby ratifies the
         Contractor Licence according to the current Laws.

2.2      Subject to the terms and conditions of the Agreement, the State hereby
         in accordance with Petroleum Law grants to the Contractor the exclusive
         rights to conduct Petroleum Operations in the Agreement Area during the
         term of this Agreement.

2.3      Contractor shall be responsible to the State for the execution of such
         Petroleum Operations in accordance with the provisions of the
         Agreement.

2.4      In performing Petroleum Operations, Contractor shall provide all
         financial and technical requirements, unless otherwise provided in this
         Agreement, or agreed with Georgian Oil, and conduct all operations in
         accordance with the standards generally accepted in the international
         Petroleum industry.

2.5      Contractor shall be compensated for its services, not by way of
         reimbursement in cash of its expenditures under the Agreement, but by
         receipt of its share of Petroleum from the Agreement Area to which it
         may become entitled by way of cost recovery out of Cost Recovery
         Petroleum described in Article 11. If Petroleum produced from
         Development Areas within the Agreement Area developed by Contractor,
         Cost Recovery Petroleum under Article 11 and Profit Oil and Profit
         Natural Gas is insufficient to reimburse Contractor for Costs and
         Expenses incurred by Contractor, Contractor shall bear its own losses
         in respect of any shortfall.

2.6      This Agreement defines the Parties' rights and obligations, governs
         their mutual relations and establishes the rules and methods for the
         Exploration, Development, Production, and sharing of Petroleum between
         them. The entire interests, rights and obligations of each of the
         Parties under this Agreement shall be solely governed by the provisions
         of this Agreement.

2.7      During the period in which this Agreement is in force, all Available
         Crude Oil and Available Natural Gas resulting from Petroleum
         Operations, will be shared between Georgian Oil and the Contractor in
         accordance with the provisions of Article 11 of this Agreement

2.8      State Agency, Georgian Oil and Contractor agree that the Operator shall
         be Georgian British Oil Company Norio and may be changed by the
         Contractor with the consent of Georgian Oil and the State Agency. Such
         consent cannot be unreasonably withheld. That appointment shall be
         effective from the date hereto. The Operator shall act as the
         designated non-profit agent of Georgian Oil and Contractor for the
         conduct of Petroleum Operations in accordance with this Agreement and
         any future JOA to be entered into.

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2.9      The State has appointed the State Agency as its representative for the
         purposes set out in Article 8 of the Petroleum Law and Georgian Oil as
         its representative for the purposes set out in Article 9 of the
         Petroleum Law, with the right of substitution and removal, each to
         exercise the State functions and to perform the State obligations under
         the contract as prescribed by the Petroleum Law and to enjoy the
         benefit as herein provided. The State will give notice to Contractor of
         the appointment and removal and substitution of its representatives.
         The Contractor is entitled to assume that each State Representative has
         full authority to represent the State for those State purposes under
         the Agreement assigned to it according to the Petroleum Law, including
         those where herein specific reference is made to the State
         Representative.

                                    ARTICLE 3
                                 AGREEMENT AREA

3.1      The Agreement Area is as set out by the geographic location and
         coordinates described in Annex "A" attached hereto and delineated in
         the map which forms part thereof. The total area of the Agreement Area
         may hereafter be reduced only in accordance with the provisions of this
         Agreement.

3.2      Except as for all rights and authorisations necessary for the
         implementation of the provisions of this Agreement, no right is granted
         in favour of the Contractor or Georgian Oil to the use or disposal of
         any other natural or man-made resources or aquatic resources with the
         exception of aquatic resources used directly in Petroleum Operations in
         accordance with relevant permits which will be obtained through the
         State Agency.

                                    ARTICLE 4
                                 AGREEMENT TERM

4.1      The term of the Agreement shall be deemed to have begun on the
         Effective Date and shall continue for a total of twenty-five (25)
         consecutive Agreement Years, unless the Agreement is sooner terminated
         in accordance with Article 29 of this Agreement.

4.2      If in respect of any Development Area, Commercial Production remains
         possible beyond the initial period of 25 consecutive Agreement Years
         specified in Article 4.1 the Contractor, after giving notice to
         Georgian Oil and the State Agency at least one (1) year prior to the
         end of any such period, and

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         after obtaining approval by the Coordination Committee of a revised
         Development Plan shall be entitled to have an extension of the term of
         this Agreement with respect to such Development Area for an additional
         term of five (5) years or the producing life of the Development Area,
         whichever is lesser, subject to the approval of the State Agency, and
         such approval shall not be unreasonably withheld.

                                    ARTICLE 5
                                 RELINQUISHMENTS

5.1      Subject to Article 5.2, Contractor shall select and relinquish portions
         of the Agreement Area as follows:

         a)       at least twenty-five percent (25%) of the original Agreement
                  Area less any Development Areas, not later than five (5)
                  Agreement Years after the Effective Date of the Agreement; and

         b)       at least fifty percent (50%) of the Agreement Area less any
                  Development Areas, remaining after the relinquishment of
                  Clause 5.1(a) occurs not later than ten (10) Agreement Years
                  after the Effective Date of the Agreement; and

         c)       at least fifty percent (50%) of the Agreement Area less any
                  Development Areas remaining after the relinquishment of Clause
                  5.1(b) occurs not later than fifteen (15) Agreement Years
                  after the Effective Date of the Agreement; and

         d)       at least fifty percent (50%) of the Agreement Area less any
                  Development Areas remaining after the relinquishment of Clause
                  5.1(c) occurs not later than twenty (20) Agreement Years after
                  the Effective Date of the Agreement.

         e)       Subject to the provisions of Clause 5.1 (f), all of the
                  Agreement Area including the Development Areas not later than
                  twenty-five (25) Agreement Years after the Effective Date of
                  the Agreement; and

         f)       If and to the extent the term of this Agreement is extended
                  pursuant to the provisions of Article 4.2 then the remainder
                  of the Agreement Area not later than thirty (30) Agreement
                  Years after the Effective Date of the Agreement or the
                  producing life of the Development Areas, whichever is lesser.

         g)       Following the expiration of ten (10) years from the
                  declaration of a Development Area, all depths deeper than five
                  hundred (500) meters below the total depth of the deepest well
                  drilled within the

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                  Development Area will cease to be included in the Development
                  Area, and shall be subject to relinquishment under this
                  Article 5.

5.2      Subject to the provisions of Article 5.1(f) and 5.1(g), the Contractor
         shall not be required pursuant to Article 5.1 to relinquish any portion
         of the original Agreement Area containing a Development Area.

5.3      Unless the Agreement is earlier surrendered or terminated, the
         Contractor shall furnish the State Agency and Georgian Oil with a
         description of the boundaries of the part of the Agreement Area to be
         relinquished and retained not less than ninety (90) days in advance of
         the deadline for the relinquishment prescribed in Article 5.1.

5.4      The area designated under Article 5.3 for relinquishment shall consist
         as far as practicable of rectangular blocks bounded by lines running
         due north and south and due east and west and shall not be less than
         five (5) square kilometres. The area designated for relinquishment need
         not consist of one contiguous area.

5.5      Contractor may at any time relinquish voluntarily all or any part of
         the Agreement Area. Article 5.4 shall apply to all voluntary
         relinquishments. Any such voluntary relinquishment of less than all of
         the Agreement Area shall be credited toward any subsequent
         relinquishment obligations hereunder.

                                    ARTICLE 6
                             COORDINATION COMMITTEE

6.1      For the purpose of providing the overall supervision and direction of
         and ensuring the performance of the Petroleum Operations, Georgian Oil
         and Contractor shall establish a Coordination Committee within
         forty-five (45) days of the Effective Date.

6.2      The Coordination Committee shall comprise a maximum total of eight (8)
         members. Georgian Oil shall appoint a total of four (4) representatives
         and Contractor shall appoint four (4) representatives to form the
         Coordination Committee. Georgian Oil and Contractor shall each
         designate one of its representatives as its chief representative. All
         the aforesaid representatives shall have the right to attend and
         present their views at meetings of the Coordination Committee. Each
         representative shall have the right to appoint an alternate who shall
         be entitled to attend all meetings of the Coordination Committee but
         who shall have no vote except in the absence of the representative for
         whom he is the alternate. When a decision is to be made on any
         proposal, the chief representative from each Party shall be the
         spokesman on behalf of such Party.

                                       15

<PAGE>   16

6.3      The first Chairman of the Coordination Committee shall be the chief
         representative designated by the Contractor (or his alternate), and the
         first Vice Chairman shall be the chief representative designed by
         Georgian Oil (or his alternate). The Chairman and Vice Chairman shall
         be appointed for a term of two (2) years. Following the end of each
         such two (2) year term of appointment, the identity of the Chairman and
         the Vice Chairman shall rotate so that for the next two (2) year period
         the previous Chairman shall become Vice Chairman for the next two (2)
         years and the Vice Chairman shall become Chairman for the next two (2)
         years. The Chairman of the Coordination Committee shall preside over
         meetings of the Coordination Committee and in the absence of the
         Chairman (or his alternate), the Vice Chairman shall preside. Such
         Parties may designate a reasonable number of advisors, who may attend,
         but shall not be entitled to vote at, Coordination Committee meetings.

6.4      A regular meeting of the Coordination Committee shall be held at least
         once a Calendar Quarter. The Secretary to be designated pursuant to
         Article 6.9 shall be responsible for calling such regular meetings of
         the Coordination Committee and shall do so at the request of the
         Chairman by sending a notice to the Parties. Other meetings, if
         necessary, may be held at any time at the request of Georgian Oil or
         Contractor. In each case the secretary shall give the Parties at least
         30 days notice (or such shorter period as the Parties may agree) of the
         proposed meeting date, the time and location of the meeting.

6.5      The Parties hereby empower the Coordination Committee to:

         a)       review and examine any Work Program and Budget proposed by the
                  Contractor and any amendment thereof;

         b)       determine the Commerciality of each proposed Development
                  Operation;

         c)       review and adopt proposed Development Operations and Budgets;

         d)       approve or confirm the following items of procurement and
                  expenditures:

                  i)       approve procurement of any item within the Budget
                           with a unit price exceeding Two Hundred and Fifty
                           Thousand U.S.$ (U.S.$ 250,000) or any single purchase
                           order of total monetary value exceeding One Million
                           U.S. $ (U.S.$1,000,000);

                  ii)      approve a lease of equipment, or an engineering sub
                           Agreement or a service Agreement within the Budget
                           worth more than Five Hundred Thousand U.S. $
                           (US$500,000) in total; and

                  iii)     approve excess expenditures pursuant to Article 10.5
                           hereof and the expenditures pursuant to Article 10.6
                           hereof;

                                       16

<PAGE>   17

         e)       demarcate boundaries of a Development Area;

         f)       review and approve the insurance program proposed by the
                  Contractor and emergency procedures on safety and
                  environmental protection; in addition all programmes and
                  budgets which are in connection with environmental protection
                  should be previously agreed with the State Agency for
                  Regulation of Oil and Gas Resources in Georgia as required;

         g)       review and approve personnel policies, selection and training
                  programs for Operator. Without prejudice to the foregoing, it
                  is accepted that part of the personnel policy of Operator
                  shall be to give preference to Georgian citizens, provided
                  that the conduct of Petroleum Operations shall not be
                  affected;

         h)       discuss, review, decide and approve other matters that have
                  been proposed by either Georgian Oil, Contractor or the
                  Operator;

         i)       review and examine matters required to be submitted to the
                  State Agency;

         j)       review and discuss the development work and technological
                  regimes proposed by Contractor and Georgian Oil; and

         k)       appoint sub-committees to meet from time to time to review any
                  aspect of Petroleum Operations, which the Coordination
                  Committee thinks fit.

6.6      Decisions of the Coordination Committee shall be made by majority
         decision of the representatives present and entitled to vote. Each
         representative will have one vote. All decisions made unanimously shall
         be deemed as formal decisions and shall be conclusive and equally
         binding upon the Parties.

6.7      Georgian Oil and Contractor shall endeavor to reach agreement on all
         matters presented to the Coordination Committee. In the event that on
         any matter the Coordination Committee are unable to reach agreement and
         the Contractor is insisting that its proposal shall prevail, if
         Georgian Oil is reasonably of the view that the proposed action would
         result in serious permanent damage to that field or reservoir or
         materially reduced recovery of Petroleum over the life of the field or
         reservoir then the matter will be referred to an internationally
         recognized independent expert appointed by the Contractor and Georgian
         Oil whose decision on accepted international Petroleum Industry
         practice shall be final and binding. The costs of the expert shall be
         met by the Georgian Oil and Contractor equally and shall be recoverable
         as Costs and Expenses.

6.8      A matter which requires urgent handling may be decided by the
         Coordination Committee without convening a meeting, with the
         Coordination Committee making decisions through telexes or the
         circulation of documents.

                                       17

<PAGE>   18

6.9      The Coordination Committee shall nominate a Secretary, to record
         minutes of the meetings of the Coordination Committee, and may
         establish technical and other advisory sub-committees. The Secretary
         shall take a record of each proposal voted on and the results of such
         vote at each meeting of the Coordination Committee. Each representative
         of the Parties shall sign and be provided with a copy of such record at
         the end of such meeting. The Secretary shall provide each Party with a
         copy of the minutes of each meeting of the Coordination Committee
         within fifteen (15) days after the end of such meeting. Each Party
         shall thereafter have a period of fifteen (15) days to give notice of
         any objections to the minutes to the Secretary. Failure to give notice
         within the said fifteen (15) day period shall be deemed approval of
         those minutes. In any event the record of proposals voted on to be
         provided at the end of each meeting shall be conclusive and take
         precedence over the minutes. Approved minutes of the Coordination
         Committee shall be submitted to the State Agency.

6.10     All costs and expenses incurred with respect to the activities of the
         Coordination Committee shall be paid or reimbursed by the Contractor
         and charged to Operation Expenses in accordance with the Accounting
         Procedure.

                                    ARTICLE 7
                             OPERATOR RESPONSIBILITY

7.1      The Parties agree that the Operator shall act as the Operator for
         Petroleum Operations within the Agreement Area in accordance with
         approved Work Programs and Budgets unless otherwise stipulated in this
         Article 7.

7.2      The Operator shall have the following obligations:

         a)       to perform the Petroleum Operations reasonably, economically
                  and efficiently in accordance with directions received from
                  the Coordination Committee. It is recognised that the
                  Coordination Committee through the Operator will have
                  operating control of all Petroleum Operations, including the
                  right to authorise the appointment of the General Director and
                  Deputy Director or the Directors;

         b)       to conduct (implement) the Work Programs and Budgets approved
                  by the Coordination Committee;

         c)       to be responsible for purchasing facilities, equipment and
                  miscellaneous material and enter into subcontracts and service
                  contracts at Contractor's instruction with service providers
                  and vendors related to the Petroleum Operations, in accordance
                  with approved Work Programs and Budgets and instructions from
                  Contractor;

                                       18

<PAGE>   19

         d)       to prepare and submit for approval a personnel training
                  program and its annual budget and carry out the same as
                  approved by the Coordination Committee;

         e)       to establish and maintain complete and accurate accounting
                  records regarding its costs and expenditures for the Petroleum
                  Operations in accordance with the Accounting Procedure and
                  this Agreement;

         f)       to make necessary preparation for regular meetings of the
                  Coordination Committee, and to submit to the Coordination
                  Committee information related to the matters reviewed and
                  approved by the Coordination Committee;

         g)       to assist Contractor and Georgian Oil as requested in the
                  provision of reports to the Coordination Committee on
                  Petroleum Operations conducted under this Agreement.

7.3      Operator and its shareholders shall not be responsible for any
         activities (including Petroleum activities) affecting the Agreement
         Area prior to the Effective Date.

7.4      The Operator shall provide both Parties with copies of all relevant
         data and reports pertaining to Petroleum Operations (including but not
         be limited to geophysical, geological, technological, operational,
         accounting or other material) required by such Parties.

7.5      The Operator, Contractor and Georgian Oil agree to use their best
         endeavours to agree and execute a Joint Operating Agreement should the
         Parties consider it necessary. Any Joint Operating Agreement to be
         entered into shall be based on the Association of International
         Petroleum Negotiators Model International Joint Operating Agreement
         then current and shall be subject to, wholly consistent with and shall
         not detract from the provisions of this Agreement.

                                    ARTICLE 8
                            THIS ARTICLE IS NOT USED

                                       19

<PAGE>   20

                                    ARTICLE 9
                PROCEDURE FOR DETERMINATION OF COMMERCIALITY AND
                         APPROVAL OF DEVELOPMENT PLANS

9.1      If, at any time Contractor concludes that Commercial Production (or
         significant additional Commercial Production if Commercial Production
         has previously been established) from the Agreement Area is feasible,
         it shall notify Georgian Oil and the State Agency within forty-five
         (45) days of reaching such a conclusion.

9.2      Within forty-five (45) days of receipt of such notice, Contractor shall
         in the first instance present to the Coordination Committee for
         approval a proposed Study Program which shall be deemed approved if no
         written objections are raised by any member of the Coordination
         Committee within thirty (30) days following receipt thereof. The
         proposed Study Program shall specify in reasonable detail the appraisal
         work including seismic, drilling of wells and studies to be carried out
         and the estimated time frame within which the Contractor shall commence
         and complete the program and also appropriate budgets.

9.3      Thereafter the Contractor shall carry out the Study Program approved by
         the Coordination Committee. Within ninety (90) days after completion of
         such Study Program, the Contractor shall submit to the Coordination
         Committee a comprehensive evaluation report on the Study Program. Such
         evaluation report shall include, but not be limited to: geological
         conditions, such as structural configuration; physical properties and
         extent of reservoir rocks; pressure, volume and temperature analysis of
         the reservoir fluid; fluid characteristics, including gravity of liquid
         hydrocarbons, sulphur percentage, sediment and water percentage, and
         product yield pattern; Natural Gas composition; production forecasts
         (per well and per Field); and estimates of recoverable reserves.

9.4      Together with the submission of the evaluation report, the Contractor
         shall submit to the Coordination Committee a written declaration
         including one of the following statements:

         a)       that the Commercial Production previously notified to Georgian
                  Oil pursuant to Article 9.1 is feasible;

         b)       that such Commercial Production is not feasible (contrary to
                  the notice containing Contractor's initial expectations); or

         c)       that Commercial Production will be conditional on the outcome
                  of further specified work that the Contractor commits to carry
                  out under a further Exploration or Study Program in specified
                  areas within or outside the relevant Study Area.

                                       20

<PAGE>   21

9.5      In the event the Contractor makes a declaration under Article 9.4(c)
         above, Contractor shall be entitled to retain the relevant Study Area
         pending the completion of the further work committed under that
         Article, at which time the Contractor shall advise the Coordination
         Committee of its conclusion as to whether or not there is in fact a new
         Commercial Discovery and the provisions of Article 9.4(a) or (b) shall
         be applied accordingly.

9.6      If the Contractor declares pursuant to Article 9.4(a) that Commercial
         Production is feasible, the Contractor shall submit to the Coordination
         Committee (a) a proposed Development Plan in respect of the relevant
         Commercial Discovery (containing the matters specified in Article 9.7
         and 9.8) and (b) a proposed designation of the Development Area, both
         of which shall be subject to the Coordination Committee's approval.
         Such approval will not be unreasonably withheld or delayed, provided
         that each shall be deemed approved as submitted if no written
         objections are presented thereto by any member of the Coordination
         Committee within forty-five (45) days of receipt. Upon approval being
         granted or deemed as provided under this Article 9.6, the Contractor,
         with any requested assistance from the Operator, shall proceed promptly
         and diligently to implement the Development Plan in accordance with
         good international Petroleum industry practices, to install all
         necessary facilities and to commence Commercial Production.

9.7      The Contractor's proposed Development Plan to be submitted pursuant to
         Article 9.6 shall detail the Contractor's proposals for Development and
         operation of the Development Area. It will detail any facilities and
         infrastructure which may be required up to the Measurement Point,
         either inside or outside of the Development Area. Any Development Plan
         shall set forth production parameters, number and spacing of wells, the
         facilities and infrastructure (including proposed locations) to be
         installed for production, storage, transportation and loading of
         Petroleum, an estimate of the overall cost of the Development, and
         estimates of the time required to complete each phase of the
         Development Plan, a production forecast and any other factor that would
         affect the economic or technical feasibility of the proposed
         Development.

9.8      Any Development Plan shall also include an abandonment and site
         restoration program together with a funding procedure for such program.
         Each abandonment plan shall describe removal and abandonment measures
         deemed necessary following completion of Production from the relevant
         Development Area together with an estimate of the costs thereof. The
         abandonment plan shall provide for the removal of facilities and
         equipment used in Petroleum Operations or their in place abandonment,
         if appropriate, in the Development Area and the return of used areas to
         a condition that reasonably permits the use of such areas for purposes
         similar to those uses existing prior to the commencement of Petroleum
         Operations hereunder. All expenditures incurred in abandonment and site
         restoration shall be treated as Costs and Expenses and recoverable from
         Cost Recovery Petroleum in accordance with Article 11 and the
         Accounting Procedure. All funds collected pursuant to the funding
         procedure shall be dedicated to site restoration and abandonment and
         will be

                                       21

<PAGE>   22

         placed in a special interest bearing account by Contractor, which shall
         be held in the joint names of the State and the Contractor or their
         nominees. Contractor's responsibilities for environmental degradation,
         site restoration and well abandonment obligations, and any other
         actual, contingent, possible and potential activity associated with the
         environmental condition of the Development Area shall be limited to the
         obligation to place the funds agreed to be paid in accordance with the
         said funding procedure in the approved account in accordance with
         generally accepted international Petroleum industry practice. Deposits
         in approved accounts shall be made on a quarterly basis in arrears
         commencing with the first Calendar Quarter in which there is Available
         Petroleum. All such payments deposited by Contractor shall be treated
         as Costs and Expenses and recoverable as Operation Expenses from Cost
         Recovery Petroleum in accordance with Article 11 of this Agreement. No
         Taxes shall be imposed on any amounts paid into, received or earned by
         or held in the special interest bearing account. The State shall be
         solely responsible for the implementation of the abandonment plan.
         Allocation of relevant sources and implementation of abandonment plan
         shall be controlled by and under the rules established by the State
         Agency for Regulation of Oil and Gas Resources in Georgia.

9.9      Any significant changes to an approved Development Plan or proposals
         related to extension of a Field or for enhanced recovery projects shall
         be submitted to the Coordination Committee.

9.10     Subject to the terms of this Agreement the Contractor shall carry out,
         at its own expense and financial risk, all the necessary Petroleum
         Operations to implement an approved Development Plan. However, if, the
         Contractor in its sole discretion determines exploitation turns out not
         to be commercially profitable, the Contractor shall not be obligated to
         continue Development or Production and will in such circumstances
         submit a revised development plan that is commercially profitable to
         the Coordination Committee or relinquish the Development Area.

9.11     Where there is a perceived need recognised by the State Agency and the
         Contractor to improve the economic effectiveness of the Petroleum
         Operations by constructing and operating certain common facilities with
         other organisations (including for example roads, non-import/non-export
         pipelines, compression and pumping stations and communication lines)
         the State Agency and the Contractor shall use their best efforts to
         reach agreement between themselves and other appropriate enterprises as
         to the construction and operation of such facilities with all costs,
         tariffs and investments made by the Contractor to be recoverable as
         Operation Expenses in accordance with Article 11 of the Agreement and
         Accounting Procedure.

                                       22

<PAGE>   23

                                   ARTICLE 10
                        ANNUAL WORK PROGRAMS AND BUDGETS

10.1     Contractor shall be responsible for the procurement of installations,
         equipment and supplies and entering into contracts for the purchase of
         goods and services with Sub Contractors including Foreign Sub
         Contractors and others arising out of Petroleum Operations, all in
         accordance with approved Work Programs and Budgets. Operator shall
         assist the Contractor when requested in respect of the matters set out
         in the previous sentence, and shall implement domestic procurement
         operations as provided in Clause 7.2(c) in accordance with approved
         Work Programs and Budgets.

10.2     Contractor shall submit to a minimum Work Program and the corresponding
         Budget before the Effective Date of the Agreement; Annex D.

10.3     Before the 31st October of each Calendar Year, the Contractor shall
         prepare and submit to the Coordination Committee for its review a
         proposed annual Work Program and Budget for the next Calendar Year. If
         the Coordination Committee agrees to modifications in an annual Work
         Program and/or Budget, the Contractor shall promptly make such
         modifications to the Work Program and/or Budget and resubmit the
         modified Work Program and Budget to the Coordination Committee. The
         Coordination Committee shall approve each Work Program and Budget
         within forty five (45) days after receipt of same. If the Coordination
         Committee fails to notify the Contractor of its approval of the Work
         Program and Budget within said forty-five (45) days after its receipt,
         the annual Work Program and Budget proposed by the Contractor together
         with any modifications timely requested by the Coordination Committee,
         shall be deemed to have been approved by the Coordination Committee.

10.4     In connection with the review and approval of the annual Work Program
         and Budget, the Contractor and Operator shall submit to the
         Coordination Committee such supporting data as reasonably requested by
         the Coordination Committee.

10.5     The Contractor may, in accordance with the following provisions, incur
         expenditures in excess of the approved Budget or expenditures outside
         the approved Budget in carrying out the approved Work Program, provided
         that the objectives in the approved Work Program are not substantially
         changed:

         a)       In carrying out an approved Budget, the Contractor may, if
                  necessary, incur excess expenditures of no more than ten
                  percent (10%) of the approved Budget in any specified
                  budgetary category. The Contractor shall report quarterly the
                  aggregate amount of all such excess expenditures to the
                  Coordination Committee for confirmation.

         b)       For the efficient and as required operative performance of
                  Petroleum Operations, the Contractor may, without approval,
                  undertake certain

                                       23
<PAGE>   24

                  individual projects which are not included in the Work Program
                  and Budget, for a maximum expenditure of Two Hundred Fifty
                  Thousand U.S.$ (U.S.$250,000), but shall, within ten (10) days
                  after such expenditures are incurred, report to the
                  Coordination Committee for confirmation.

         c)       Excess expenditures under this Article 10.5 shall not exceed
                  five percent (5%) of the approved or modified total annual
                  Budget for the Calendar Year. If the aforesaid excess is
                  expected to be in excess of said five percent (5%) of the
                  total annual Budget, the Contractor shall present its reasons
                  therefor to the Coordination Committee and obtain its approval
                  prior to incurring such expenditures.

10.6     In case of emergency (as in where there is an immediate threat to life
         or property), the Contractor may incur emergency expenditures for the
         amount actually needed but shall report such expenditures to the
         Coordination Committee as soon as they are made. The said emergency
         expenditures shall not be subject to Article 10.5 above.

10.7     Petroleum Operations will only be performed in accordance with the
         approved or modified annual Work Program and Budget, otherwise they
         will not be deemed to be Costs and Expenses and will not be treated as
         Cost Recoverable.

                                   ARTICLE 11
                 ALLOCATION OF PRODUCTION, RECOVERY OF COSTS AND
                EXPENSES, PRODUCTION SHARING, AND RIGHT OF EXPORT

11.1     Contractor shall provide or procure the provision of all funds required
         to conduct Petroleum Operations under this Agreement, except as
         otherwise provided in this Agreement, and Contractor shall be entitled
         to recover its Costs and Expenses from Petroleum produced from the
         Agreement Area as provided below.

11.2     Costs and Expenses incurred directly or indirectly by Contractor prior
         to the Effective Date pursuant to the provisions of this Agreement
         including but not limited to the seismic data acquired by the
         Contractor over the Agreement Area shall be deemed to be Costs and
         Expenses for the purposes of this Agreement and shall be deemed to be
         incurred on the Effective Date and shall be recoverable from Cost
         Recovery Petroleum in accordance with the provisions of this Agreement
         provided that these Costs will be documentarily approved by the
         Coordination Committee.

                                       24

<PAGE>   25

11.3     Contractor and Operator shall have the right to use free of charge
         Petroleum produced from the Agreement Area to the extent required for
         Petroleum Operations under the Agreement. The amount of Petroleum which
         Contractor and Operator shall be entitled to use for Petroleum
         Operations shall not exceed the amount which would be expected to be
         used in accordance with international Petroleum industry practice. For
         the avoidance of doubt, the use of such Petroleum shall only be for the
         benefit of Petroleum Operations and not the personal gain of any Party.
         An appropriate paper shall also be executed for the use of such
         Petroleum.

11.4     Available Crude Oil and Available Natural Gas (hereinafter referred to
         collectively as "Available Petroleum") shall be measured at the
         applicable Measurement Point and allocated as set forth hereinafter.

11.5     Contractor and Georgian Oil shall be entitled to recover all Costs and
         Expenses incurred in respect of Petroleum Operations in a following
         manner:

         a)       Operations Expenses will firstly be recovered from the
                  Available Petroleum;

         b)       Capital Expenditures will be recovered from maximum 50% of
                  remaining Available Petroleum (hereinafter referred to as
                  "Cost Recovery Crude Oil" and "Cost Recovery Natural Gas" as
                  appropriate) following the recovery of Operations Costs.

         Costs and Expenses shall be recovered in a manner consistent with the
         Accounting Procedure and Article 11.6.

11.6     Costs and Expenses shall be recoverable from Cost Recovery Petroleum on
         a first in, first out basis (i.e. Costs and Expenses will be recovered
         according to the date they were incurred, earliest first). Recovery of
         Costs and Expenses will commence as soon as Cost Recovery Petroleum is
         available.

11.7     To the extent that in a Calendar Year outstanding recoverable Costs and
         Expenses related to the Agreement Area exceed the value of all Cost
         Recovery Crude Oil or Cost Recovery Natural Gas from the Agreement Area
         for such Calendar Year, the excess shall be carried forward for
         recovery in the next succeeding Calendar Years until fully recovered,
         but in no case after termination of the Agreement or otherwise in
         accordance with the Georgian Law.

11.8     Recovery of Costs and Expenses shall be achieved by transferring to a
         Party at the Measurement Point title to quantities of Cost Recovery
         Petroleum of equivalent value (determined in accordance with Article
         12) to the Costs and Expenses to be recovered in accordance with this
         Article 11.

11.9     To the extent that the value of Cost Recovery Petroleum received by a
         Party from the Agreement Area during a Calendar Quarter is greater or
         lesser than

                                       25

<PAGE>   26

         the Party was entitled to receive for that Calendar Quarter, an
         appropriate adjustment shall be made in accordance with the Accounting
         Procedure.

11.10    Following recovery of Costs and Expenses from Cost Recovery Petroleum
         in accordance with the provisions of this Article 11, the remaining
         Petroleum including any portion of Cost Recovery Petroleum not required
         for recovery of Costs and Expenses (hereinafter referred to as "Profit
         Oil" or "Profit Natural Gas") shall be allocated between Georgian Oil
         and the Contractor in the following proportions, over each Calendar
         Year:

         a)       Profit Oil:

         1)       before Payment Date     Georgian Oil's Share         - 50%
                                          Contractor's Share           - 50%

         2)       after Payment Date      Georgian Oil's share         - 60%
                                          Contractor's share           - 40%

         b)       Profit Natural Gas:

         1)       before Payment Date     Georgian Oil's Share         - 50%
                                          Contractor's Share           - 50%

         2)       after Payment Date      Georgian Oil's share         - 60%
                                          Contractor's share           - 40%

         Payment Date is the date when Contractor's total costs incurred for
         production of Crude Oil and Natural Gas are equal to the total of
         profit received from the sales of Cost Recovery Crude Oil, Natural Gas
         and Profit Crude Oil, Natural Gas.

11.11    Contractor shall prepare and provide Georgian Oil not less than ninety
         (90) days prior to the beginning of each Calendar Quarter a written
         forecast setting out the total quantity of Petroleum that Contractor
         estimates can be produced and saved hereunder during each of the next
         four (4) Calendar Quarters in accordance with Accepted international
         Petroleum industry practices and the Work Program established in
         accordance with Article 10.

11.12    Crude Oil shall be measured at the Measurement Point for purposes of
         the Agreement and delivered to Georgian Oil and Contractor and each
         such Party as owners shall take in kind, assume risk of loss and
         separately dispose of their respective entitlements of Cost Recovery
         Oil and Profit Oil. All Cost Recovery Natural Gas and Profit Natural
         Gas shall be sold on a jointly committed basis in accordance with
         Article 16 of this Agreement.

11.13    For the avoidance of any doubt, title to their relevant shares of
         Petroleum shall pass from the State to Georgian Oil and Contractor as
         appropriate at the Measurement Point. The Operator has no title to any
         Petroleum.

                                       26

<PAGE>   27

11.14    Georgian Oil and Contractor shall agree on procedures for taking
         volumes of Crude Oil corresponding to their respective entitlements on
         a regular basis and in a manner that is appropriate having regard to
         the respective destinations and uses of the Crude Oil, all in
         accordance with the provisions of this Agreement. If necessary Georgian
         Oil and Contractor will enter into a lifting agreement setting out the
         agreed procedures for taking volumes of Crude Oil, and such agreement
         shall comply with the principles of accepted international Petroleum
         industry practice.

11.15    Georgian Oil shall have a once only option to participate in Petroleum
         Operations as a Contractor Party for up to and including fifteen
         percent (15%) of the total Contractor participating interest as set out
         in this Article 11 under the following terms and conditions ("Option"):

         11.15.1  Georgian Oil shall have caused the Contractor Licence to have
                  been assigned solely to CanArgo Norio Ltd. Prior to the
                  signing of this Agreement.

         11.15.2  The right to exercise the Option shall accrue on the date that
                  Contractor submits the first Development Plan to the
                  Coordination Committee pursuant to Article 9.4 (a) ("Option
                  Accrual Date").

         11.15.3  Georgian Oil must exercise the Option within one hundred and
                  eighty (180) days from Option Accrual Date by giving notice in
                  writing to Contractor of its desire to do so and specifying in
                  the notice the percentage interest which it wishes to acquire.

         11.15.4  Georgian Oil's right to exercise the Option shall be subject
                  to:

                  a)       its ability to satisfy the terms of Articles 26.1 and
                           26.3 to the reasonable satisfaction of CanArgo Norio
                           Ltd.

                  b)       payment of Back Costs in accordance with Article
                           11.15.5; and

                  c)       execution of a Joint Operating Agreement in
                           accordance with Article 11.15.9.

         11.15.5  If Georgian Oil exercises the Option, then Georgian Oil will
                  become liable for payment to Contractor in U.S.$ of Costs and
                  Expenses incurred prior to the submittal of the first
                  Development Plan ("Back Costs") in proportion to the
                  percentage participating interest which it wishes to acquire.
                  Any unpaid share of Costs and Expenses for which Georgian Oil
                  is liable hereunder will accrue interest at the rate of LIBOR
                  plus five (5) percent per annum from the Option Accrual Date.
                  Back Costs must be paid in full in order for Georgian Oil to
                  acquire a participating interest. Failure by Georgian Oil to
                  satisfy all terms including payment of Back Costs within 180
                  days from the Option Accrual Date will result in the lapse of
                  the Option.

                                       27

<PAGE>   28

         11.15.6  Georgian Oil shall bear its pro rata share of Costs and
                  Expenses and other costs attributable to the Contractor
                  Parties in connection with Petroleum Operations incurred from
                  and after the date of submittal of the first Development Plan
                  in proportion to the participating interest which it acquired
                  through exercise of the Option. Upon exercise of the Option,
                  Georgian Oil shall pay all of its share of Costs and Expenses
                  and other costs attributable to the Contractor Parties in
                  connection with Petroleum Operations incurred from the Option
                  Accrual Date through the date of exercise of the Option within
                  ten (10) Days of receipt of invoice from CanArgo Norio Ltd for
                  such costs. For costs following the date of exercise of the
                  Option, if CanArgo Norio Ltd so requests, Georgian Oil shall
                  advance its share of estimated cash requirements for each
                  succeeding Month's operations based on CanArgo Norio Ltd's
                  estimate of the money to be spent in such Month. Each such
                  cash call shall be made in writing and delivered to Georgian
                  Oil not less than fifteen (15) Days before the payment due
                  date, which shall be no sooner than the first business Day of
                  the Month for which the advances are required. Georgian Oil
                  shall wire transfer its share of each such cash call to
                  CanArgo Norio Ltd on or before the due date, in the currencies
                  requested at a bank designated by CanArgo Norio Ltd. If
                  Canargo Norio Ltd does not request Georgian Oil to advance its
                  share of estimated cash requirements, then Georgian Oil shall
                  pay its share of cash expenditure for each Month within ten
                  (10) Days following receipt of CanArgo Norio Ltd's invoice.

         11.15.7  Following exercise of the Option Georgian Oil will be
                  considered a Contractor Party under the Agreement, enjoying
                  all the rights and bearing all the obligations of a Contractor
                  Party with respect to the participating interest it has
                  acquired through exercise of the Option, except as modified in
                  this Article 11.15, and shall be represented by CanArgo Norio
                  Ltd from and after exercise of the Option.

         11.15.8  The right to exercise the Option is personal to Georgian Oil
                  and is not capable of assignment by Georgian Oil to any Third
                  Party. The Option shall lapse upon any purported assignment or
                  transfer of the Option by Georgian Oil to any Third Party.

         11.15.9  Georgian Oil will, within a reasonable time after exercise of
                  the Option, enter into an operating agreement based on the
                  Association of International Petroleum Negotiators Model
                  International Joint Operating Agreement then current ("AIPN
                  Model") with CanArgo Norio Ltd which shall include terms,
                  among others, embodying at least the following principles: (i)
                  voting rights in proportion to participating interests; (ii)
                  the minimum required vote to effect a decision being at least
                  seventy-five percent (75%) of participating interests; (iii)
                  cash call and default provisions that include forfeiture of
                  interest for failure to cure; and (iv) such other terms and
                  provisions as are commonly included in international petroleum

                                       28

<PAGE>   29

                  operating agreements. If at the time that Georgian Oil
                  exercises the Option Contractor Parties have already entered
                  into a joint operating agreement based on the AIPN Model, then
                  Georgian Oil shall ratify and join in such operating
                  agreement.

         11.15.10 Georgian Oil has not exercised and shall not exercise any
                  rights it may have pursuant to Article 26.2 and shall be
                  deemed to have given its approval pursuant to Article 26.3
                  with respect to any assignment to CanArgo Norio Ltd made prior
                  to signing of this Agreement

         11.16    There are no production or other bonuses payable to the State
                  under this Agreement.

                                   ARTICLE 12
                               CRUDE OIL VALUATION

12.1     Parties agree that the value of Cost Recovery Petroleum should reflect
         the actual price received by the Contractor for the said Petroleum.
         Given that the Contractor can demonstrate that Petroleum is being sold
         to an independent third party on an arms length basis, then the Cost
         Recovery Crude Oil shall be valued as the actual revenues received by
         the Contractor for sales of Crude Oil at the Measurement Point
         (adjusted if necessary for transportation, storage and processing
         costs). If however such an independent third party sale cannot be
         demonstrated, or at the discretion of the Contractor, then the Parties
         agree that the value of the Cost Recovery Crude Oil, if sold on
         International Markets, shall be adjusted to the international market
         price for Crude Oil from time to time. In this case, for the purpose of
         determining the value of the Cost Recovery Petroleum taken and disposed
         of by the Parties and/or their assignees under this Agreement during
         each Calendar Quarter, Georgian Oil and Contractor shall, prior to the
         date of Commercial Production, agree upon the basket of Crude Oil
         freely traded in international markets and referred to in subparagraph
         a) below and the value of the Cost Recovery Petroleum shall be adjusted
         to reflect the weighted average of daily f.o.b. prices for Agreement
         term of sales from Petroleum producing countries in international
         markets for the same Calendar Quarter of such basket of crude oil, it
         being understood that the following principles will apply:

         a)       The weighted average of the basket shall be such that the
                  average gravity of the basket and the average gravity of the
                  Crude Oil produced under this Agreement are equal; and

         b)       The prices for individual referenced crude oil markers used
                  within the basket shall be based upon the numerical average of
                  a daily report of the actual price for each referenced crude
                  oil marker as published in agreed internationally recognised
                  publications; and

                                       29

<PAGE>   30

         c)       Adjustment provisions will be incorporated into the basket
                  formula to take account of transportation costs involved in
                  Crude Oil produced under this Agreement arriving at a
                  designated sales point (where the sales point is not the
                  Measurement Point) and to take account of gravity variation
                  beyond a pre-agreed range; and

         d)       Unless agreed otherwise, the last calculated weighted average
                  basket price shall serve as the provisional price for a
                  Calendar Quarter until a new price is determined.

12.2     In the event that Georgian Oil and Contractor are unable to agree upon
         the basket of Crude Oil envisaged in Article 12.1 above, or the
         principles relating thereto, then either Georgian Oil or Contractor may
         refer the question for a final, non-revisable determination by an
         independent expert designated by the UK Institute of Petroleum. Pending
         such determination, the price shall be as determined in Article 12.1(d)
         above.

12.3     Natural Gas shall be valued at the actual revenues received less
         transportation, storage, treatment, processing, marketing,
         distribution, liquefaction and all other associated costs incurred by
         Contractor beyond the Measurement Point in supplying Natural Gas to
         customers beyond the Measurement Point.

                                   ARTICLE 13
                 ANCILLARY RIGHTS OF THE CONTRACTOR AND OPERATOR

13.1     In addition to the rights to carry out Petroleum Operations within the
         Agreement Area the State and Georgian Oil shall provide or otherwise
         procure access to Contractor to all existing facilities and
         infrastructure in the Agreement Area owned by the State or Georgian Oil
         for the purpose of carrying out its Petroleum Operations during the
         term of the Agreement. Such access shall be on terms as regards access
         and tariffs no less favourable than those offered to other persons or
         entities, in addition, in any case within the Petroleum Law.

13.2     Provided that Georgian Oil and the State are submitted information
         below, the Contractor shall have the right to use, produce, reprocess
         and export all existing geoscience, engineering, environmental and
         geodetic data (including magnetic tapes and films) maps, surveys,
         reports, and studies it deems necessary to carry out Petroleum
         Operations hereunder including, but not limited to: magnetic surveys,
         seismic surveys, well logs and analysis, core analysis, well files,
         geologic and geophysical maps and reports, reservoir studies, reserve
         calculations, accurate geodetic coordinates for the location of all
         wells and seismic lines and all other pertinent data relative to the

                                       30
<PAGE>   31

         Agreement Area. In the event that any information is to be sold to any
         third party by Georgian Oil or the Contractor (consent on which is
         required from Coordination Committee and State Agency) profit shall be
         distributed in accordance with the share of Profit Oil under the
         Article 11. In addition, in accordance with the Petroleum Law.

13.3     The Contractor shall have the right to conduct all geoscience,
         engineering, environmental and geodetic studies it deems necessary to
         carry out Petroleum Operations under the Work Program. Said studies may
         include, but are not limited to: seismic surveys, magnetic surveys,
         global positioning surveys, aerial photography (obtaining relevant
         permits), collection of soil/water/oil/rock samples for scientific and
         environmental studies. Contractor shall be granted access to and/or
         permission to fly subject to obtaining appropriate consents (which will
         not be unreasonably withheld or delayed) over the Agreement Area to
         conduct said studies. Contractor shall have the right to import
         equipment and supplies necessary to conduct said studies as well as the
         right to export data, film and samples to laboratories outside the
         State to conduct such studies unless restricted by law of Georgia.

13.4     Subject to (i) prior approval by the Coordination Committee; and (ii)
         prior consent and/or permit with any necessary local administration or
         State body and relevant landowners, the Contractor and/or Operator
         shall have the right to clear the land, to dig, pierce, drill,
         construct, erect, locate, supply, operate, manage and maintain pits,
         tanks, wells, trenches, excavations, dams, canals, water pipes,
         factories, reservoirs, basins, maritime storage facilities and such,
         primary distillation units, separating units for first oil extraction,
         sulphur factories and other Petroleum producing installations, as well
         as pipelines, pumping stations, generator units, power plants, high
         voltage lines, telephone, telegraph, radio and other means of
         communication (including satellite communication systems), plants,
         warehouses, offices, shelters, personnel housing, hospitals, schools,
         premises, underwater piers and other installations, means of
         transportation, roads, bridges, and other means of transportation,
         garages, hangers, workshops, maintenance and repair shops and all the
         auxiliary services which are necessary or useful to Petroleum
         Operations or related to them and, more generally, everything that is
         or could become necessary or accessory to carry out the Petroleum
         Operations but for the avoidance of any doubt in accordance with the
         relevant law of Georgia.

13.5     The agents, employees and personnel of both Contractor and Operator, or
         Subcontractors may enter or leave the Agreement Area and have free
         access, within the scope of their functions, to all installations put
         in place by the Contractor or Operator or otherwise utilised in
         Petroleum Operations.

13.6     Subject to prior consent of any appropriate local State bodies and the
         relevant landowners the Contractor shall have the right to utilise the
         upper soil, mature timber, clay, sand, lime, gypsum and stones other
         than precious stones, and any other similar substances, necessary for
         the performance of Petroleum Operations only in accordance with
         Georgian law. The Contractor may utilise the water necessary for
         Petroleum Operations, on condition that reasonable

                                       31

<PAGE>   32

         efforts are taken to minimise potentially adverse effects on irrigation
         and navigation, and that land, houses and the watering places are not
         adversely affected.

13.7     The Contractor shall have the right to use existing pipeline and
         terminal facilities belonging to or under the control of the State or
         Georgian Oil. The State and Georgian Oil shall assist in making these
         facilities available to the Contractor on terms with regard to access
         and tariffs that are no less favourable than those available to others
         including Georgian Oil and any other State enterprise. Priority shall
         be given in the use of such pipelines and facilities to Petroleum
         produced within Georgia.

                                   ARTICLE 14
                        ASSISTANCE PROVIDED BY THE STATE

14.1     To enable the Contractor to properly carry out the Petroleum
         Operations, the State Agency shall have the obligation to assist the
         Contractor and Georgian Oil upon request to:

         a)       provide the approvals or permits needed to conduct Petroleum
                  Operations and to carry out associated business activities and
                  to open bank accounts (for both local and foreign currency) in
                  Georgia;

         b)       arrange for Foreign Exchange to be converted in accordance
                  with the principles set out in Article 19.9 of this Agreement;

         c)       use office space, office supplies, transportation and
                  communication facilities and make arrangements for
                  accommodations as required;

         d)       assist with any custom formalities;

         e)       provide entry and exit visas and work permits for employees
                  and their family members of Operator, Contractor, their
                  Affiliated companies and Foreign Subcontractors, who are not
                  citizens of Georgia, and who come to Georgia to implement the
                  Agreement and to provide assistance for their transportation,
                  travel and medical facilities whilst in Georgia;

         f)       provide necessary permits to send abroad documents, data and
                  samples for analysis or processing during the Petroleum
                  Operations;

         g)       contact and instruct appropriate departments and ministries of
                  the State and any other bodies controlled by the State to do
                  all things necessary to expedite Petroleum Operations;

                                       32

<PAGE>   33

         h)       provide permits, approvals, and land usage rights requested by
                  Contractor and/or Operator for the construction of bases,
                  facilities and installations for use in conducting Petroleum
                  Operations; and

         i)       provide to the Contractor data and samples if such data and
                  samples exist concerning the Agreement Area other than those
                  produced as a result of Petroleum Operations

14.2     The State Agency may charge as administrative fees for such assistance
         such reasonable amounts as may be customary for the provision of such
         services, but in no event shall such charges be in excess of charges
         applicable to Third Parties for comparable service or assistance. It is
         also understood that in respect to a number of matters such as the
         conversion of currency and the provision of accommodations, for
         example, the State may also have to secure the services of private
         Third Parties. All administrative fees will be in keeping with the
         schedule as set out in Annex E to this Agreement.

14.3     Notwithstanding anything in this Agreement to the contrary, Contractor
         agrees to pay the fees described in Article 14.2 to the State Agency,
         together with reimbursement to the Agency for all direct expenses
         incurred by it in preparing and making necessary applications to
         ministries, state agencies or other governmental authorities in the
         course of obtaining permits and approvals required for Contractor
         and/or Operating Company to conduct Petroleum Operations. Such direct
         expenses may include the costs of retaining experts to review or
         prepare technical submissions (e.g. environmental or engineering data),
         but in no event shall the State Agency charge for additional
         compensation, if any, to its personnel for performing such services.
         Direct expense items also shall include, but not be limited to copying
         or printing of applications and supporting data submitted to other
         governmental bodies, transportation and hall rental for public hearings
         required by laws or authorities other than those of the Agency itself,
         and similar items that the Agency cannot reasonably provide through its
         resources.

14.4     Fees and direct expenses paid under Articles 14.2 and 14.3 shall be
         treated as Costs and Expenses for the purpose of determining Cost
         Recovery Petroleum.

14.5     Contractor shall pay to the State Agency an Administrative/Licence Fee
         in the amount of US$60,000.00 for obtaining a permit for usage of oil
         and gas resources. The Administrative/Licence Fee will be paid in two
         installments each of US$30,000.00. The first installment will be paid
         on the Effective Date and the second installment will be paid on the
         first anniversary of the Effective Date.

                                       33

<PAGE>   34

                                   ARTICLE 15
                 MEASUREMENT, QUALITY AND VALUATION OF PETROLEUM

15.1     All Petroleum produced, saved and not used in the Petroleum Operations
         in accordance with Article 11.3 shall be measured at the Measurement
         Point approved in the Development Plan.

15.2     The Measurement Point shall be the very final facility among all
         facilities the cost of which is included as a Cost and Expense
         recoverable from Cost Recovery Petroleum under the Agreement.

15.3     All Petroleum shall be measured in accordance with standards generally
         acceptable in the international Petroleum industry. All measurement
         equipment shall be installed, maintained and operated by the Operator.
         The installed measurement equipment will have certificates of Georgian
         state standards organization. The Contractor and Georgian Oil and the
         State Agency shall be entitled periodically to inspect the measuring
         equipment installed and all charts and other measurement or test data
         at all reasonable times. The accuracy of measuring equipment shall be
         verified by tests at regular intervals and upon request by either
         party, Georgian Oil and the State Agency or the Contractor, using means
         and methods generally accepted in the international Petroleum industry
         by the state standard organisation of Georgia.

15.4     Should a meter malfunction occur, Operator shall immediately have the
         meter repaired, adjusted and corrected and following such repairs,
         adjustment or correction shall have it tested or calibrated to
         establish its accuracy. Upon the discovery of metering error, Operator
         shall have the meter tested immediately and shall take the necessary
         steps to correct any error that may be discovered and after each case
         approval of the state standard of Georgia on using the meter is
         necessary.

15.5     In the event a measuring error is discovered, Contractor and Georgian
         Oil shall use all reasonable efforts to determine the correct
         production figures for the period during which there was a measuring
         error and correct previously used readings. Contractor shall submit to
         the Coordination Committee and the State Agency a report on the
         corrections carried out. In determining the correction, Contractor
         shall use, where required, the information from other measurements made
         inside or outside the Development Area. If it proves impossible to
         determine when the measuring error first occurred, the commencement of
         the error shall be deemed to be the point in time halfway between the
         date of the previous test and the date on which the existence of the
         measuring error was first discovered.

15.6     All measurements for all purposes in this Agreement shall be adjusted
         to standard conditions of pressure at sea level and temperature at
         sixty degrees Fahrenheit (60 degrees F).

                                       34

<PAGE>   35

                                   ARTICLE 16
                                   NATURAL GAS

16.1     Associated Natural Gas

         a)       Associated Natural Gas produced within the Agreement Area
                  shall be used primarily for purposes related to the Production
                  Operations and production enhancement including, without
                  limitation, oil treating, gas injection, gas lifting and power
                  generation.

         b)       Based on the principle of full utilisation of the Associated
                  Natural Gas and with no impediment to normal production of the
                  Crude Oil, any Development Plan shall include a plan of
                  utilisation of Associated Natural Gas. If there is any excess
                  Associated Natural Gas remaining in any Oil Field after
                  utilisation pursuant to Article 16.1.a) above (hereafter
                  referred to as "Excess Associated Natural Gas"), the
                  Contractor shall carry out a feasibility study regarding the
                  commercial utilisation of such Excess Associated Natural Gas.

                  i)       If Georgian Oil and Contractor agree that Excess
                           Associated Natural Gas has no commercial value, then
                           Operator shall act under the plan approved by
                           Coordination Committee, so that not to interfere with
                           normal oil production. Besides, in order to avoid any
                           doubt, both the plan and the Operator's activities
                           under the plan shall exclude pollution and correspond
                           to relevant standards effective in Georgia, which
                           shall be agreed with the State Agency for Regulation
                           of Oil and Gas Resources in Georgia.

                  ii)      If Georgian Oil and Contractor agree that Excess
                           Associated Natural Gas has commercial value, they
                           will endeavour to enter into gas sales agreement(s)
                           and/or other commercial and/or technical arrangements
                           with Third Parties required to develop such Natural
                           Gas. Investments in the facilities necessary for
                           production, transportation and delivery of Excess
                           Associated Natural Gas shall be made by the
                           Contractor. The construction of facilities for such
                           Production and utilisation of the Excess Associated
                           Natural Gas shall be carried out at the same time as
                           the Development Operations, or at any time as may be
                           agreed to by the Parties.

                  iii)     If either Georgian Oil or Contractor considers that
                           Excess Associated Natural Gas has commercial value
                           while the other considers that Excess Associated
                           Natural Gas has no commercial value, the one who
                           considers Excess Associated Natural Gas to have
                           commercial value may utilise such Excess Associated
                           Natural Gas, at its own cost and expense and

                                       35

<PAGE>   36

                           without impeding the Production of Crude Oil and
                           without affecting the shares of Crude Oil and Natural
                           Gas otherwise to be allocated under the other
                           provisions of this Agreement, but if such Excess
                           Associated Natural Gas is not so utilised at any time
                           or from time to time, then such Excess Associated
                           Natural Gas shall be disposed of by the Operator in
                           accordance with Article 16.1 b) i).

         c)       The price of Associated Natural Gas produced from the
                  Agreement Area shall be determined by Georgian Oil and
                  Contractor based on general pricing principles taking into
                  consideration such factors as sales prices of internationally
                  transported gas delivered in Western Europe, quality and
                  quantity of the Associated Natural Gas (including the
                  equivalent substitute energy value) and the economics of
                  Development. Unless otherwise agreed, Georgian Oil and
                  Contractor shall participate in all gas sales agreements
                  entered into for the sale of Associated Natural Gas produced
                  from the Agreement Area in proportion to their Article 11
                  allocation rights. Gas sales prices shall be denominated in
                  U.S.$. If gas sales are carried out in the local Georgian
                  market, sales price shall be denominated in local currency, in
                  accordance with exchange rate of US$ into local currency
                  determined by the National Bank of Georgia at the moment of
                  gas sale.

         d)       Investments made in conjunction with the utilisation of both
                  Associated Natural Gas and Excess Associated Natural Gas,
                  together with investments incurred after approval of a
                  Development Plan in carrying out feasibility studies on the
                  utilisation of Excess Associated Natural Gas, shall be charged
                  to Operation Expenses.

16.2     Non-associated Natural Gas

         a)       When any Non-associated Natural Gas is discovered within the
                  Agreement Area, Georgian Oil and Contractor shall implement a
                  program regarding the Appraisal and possible development and
                  marketing of the Non-associated Natural Gas in the domestic
                  and international markets. This program shall include the
                  following principles:

                  i)       After Non-associated Natural Gas has been discovered
                           within the Agreement Area, the Contractor shall
                           present to the Coordination Committee, a report,
                           including, without limitation, an initial estimate of
                           the boundaries of the Non-associated Natural Gas
                           reservoir and a range of recoverable reserves.

                  ii)      The decision period for commitment by Contractor to
                           an Appraisal Program shall be as soon as is practical
                           in all the circumstances but shall not be longer than
                           three (3) months from the submission of the discovery
                           report. During this

                                       36

<PAGE>   37

                           decision period, the Coordination Committee will form
                           a Marketing Team whose goal will be to conduct
                           preliminary market studies and analyse the potential
                           markets for the Non-associated Natural Gas. During
                           this decision period, Contractor will report to the
                           Coordination Committee at regular intervals on the
                           progress and results of the technical evaluation of
                           moving forward with an Appraisal Program. Within the
                           said decision period, Contractor will make its
                           election whether or not to commit to an Appraisal
                           Program for the Non-associated Natural Gas.

                  iii)     If the Contractor commits to an Appraisal Program for
                           the Non-associated Natural Gas reservoir, delineation
                           and review of the potential of the Non-associated
                           Natural Gas reservoir will continue for a period not
                           longer than three (3) months from the submission of
                           the discovery report. During the review and Appraisal
                           periods, Contractor shall maintain all rights and
                           interests in the relevant portion of the Agreement
                           Area.

                  iv)      The expenses incurred by the Contractor in carrying
                           out the said review, evaluation and Appraisal Program
                           and the expenses incurred by the Marketing Team
                           representatives in conducting the preliminary market
                           studies and analysing the markets for the
                           Non-associated Natural Gas shall be charged to
                           Operation Expenses and are recoverable from Cost
                           Recovery "Natural Gas".

         b)       Following the completion of the Appraisal Program and review
                  of the potential of the discovery, Contractor shall submit an
                  appraisal report to the Coordination Committee. If the
                  Coordination Committee decides that the Discovery is
                  commercial, the Parties shall agree on a Development Plan. The
                  Parties shall also endeavour to finalise Gas Sales
                  Agreement(s) and other agreements necessary for the
                  commercialisation of such Non-associated Natural Gas.

         c)       The price of the Non-associated Natural Gas produced from the
                  Agreement Area shall be determined based on general pricing
                  principles, taking into consideration such factors as
                  representative sales prices of internationally transported
                  volumes delivered to distributors and end users in Western
                  Europe, quality and quantity of the Natural Gas (including the
                  equivalent substitute energy) and the economics of the
                  Development of such Natural Gas. Unless otherwise agreed,
                  Georgian Oil and Contractor shall participate in all Gas Sales
                  Agreements entered into for the sale of Non-associated Natural
                  Gas produced from the Agreement Area in proportion to their
                  Article 11 allocation rights. Sales Agreement prices shall be
                  denominated in U.S.$. In case if gas sale is carried out in
                  local market, sales price shall be denominated in local
                  currency, in accordance with exchange rate of

                                       37

<PAGE>   38

                  US$ into local currency determined by the National Bank of
                  Georgia at the moment of gas sale.

         d)       The production period of any Gas Field within the Agreement
                  Area shall be a period equal to the production period of the
                  Agreement.

         e)       Recognizing the needs of the local Georgian gas market, the
                  State shall have the right to take in-kind the State's share
                  of the Non-Associated Profit Natural Gas and the Excess
                  Associated Profit Natural Gas, at its own costs and expense,
                  from the Measurement Point. Such election to take in-kind
                  shall indicate the volumes to be taken, and shall be made
                  prior to the submission of a Development Plan by the
                  Contractor. In the event of such election, the State and
                  Contractor acknowledge that the State shall not act to
                  displace the Contractor from the available domestic Natural
                  Gas market, and that the Contractor will make available
                  transportation, if any, for the State's share on a pro-rata
                  basis at a fee that will allow Contractor to recoup only that
                  share of its Costs and Expenses attributable to such
                  transportation of State' share. The State shall not exercise
                  its right to take in-kind the State's share of Profit Natural
                  Gas in the event that the Contractor has contracted to sell or
                  is in negotiations to sell Natural Gas internally in Georgia.

16.3     Contractor may participate in the installation and operation of the
         pipeline(s) required to transport Natural Gas produced from the
         Agreement Area to the market for such Natural Gas and share in any
         revenues generated from the use of said pipeline(s) by others. If
         Contractor participates in the installation and operation of such
         pipeline(s), the installation and operation of such pipeline(s) shall
         be included in a Development Plan and Petroleum Operations under this
         Agreement. Any such investment shall be recoverable from Cost Recovery
         "Natural Gas".

16.4     If the State, any state-owned company or other entity, or Georgian Oil
         provides Natural Gas transportation services to Contractor, then the
         tariffs charged to Contractor for such services shall be
         non-discriminatory, and in no case will exceed the tariffs charged to
         other entities.

                                   ARTICLE 17
                                TAX/FISCAL REGIME

17.1     This Article shall apply to each Contractor Party individually.

17.2     Subject to Current Georgian Legislation each Contractor Party, Foreign
         Employee and Operator shall be entitled to full and complete exemption
         from all Taxes prior to or after the Effective Date of this Agreement
         except as otherwise provided for in this Agreement.

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<PAGE>   39

17.3     It is acknowledged that Double Tax Treaties will have effect to give
         relief from Taxes to, but not limited to, Contractor, Contractor
         Parties, Foreign Subcontractors and Foreign Employees in accordance
         with the provisions of such Double Tax Treaties, but not otherwise.

17.4     Each Contractor Party shall be subject to "Profit Tax" Chapter II,
         Article 5, "Mineral Usage Tax" Chapter X of the Taxation Code of
         Georgia.

17.5     Each Contractor Party shall be subject to the Profit Tax for the
         duration of the Agreement, at a rate determined by the Law per calendar
         year in accordance with taxable base defined in Article 17.8. As for
         Mineral Usage Tax, the tax rate will be five (5) percent.

17.6     Georgian Oil, its successors or assignees will assume, pay and
         discharge, in the name and on behalf of each Contractor Party, that
         Contractor Party's Profit Tax liability and Mineral Usage Tax liability
         for a Calendar Year calculated in accordance with this Article 17 out
         of Georgian Oil's share of Profit Oil and Profit Natural Gas for that
         Calendar Year. The Georgian Oil Profit Oil and Profit Natural Gas share
         as determined by Article 11 of this Agreement will include an amount
         equal in value to all of the Contractor Parties' Profit Tax and Mineral
         Usage Tax liabilities.

17.7     The obligation to assume, pay and discharge each Contractor Party's
         payment of Profit Tax and Mineral Usage Tax (and only these taxes) set
         out above by Georgian Oil in accordance with the provisions of Article
         17.6 shall fulfill the entire tax liability of each Contractor Party,
         except for the VAT on local sales and taxes established on salaries of
         hired physical persons by law, taking into account that no social taxes
         apply to foreign physical persons by law.

17.8     The calculation of the taxable base (balance profit/(loss)) for each
         Contractor Party for a Calendar Year shall be as follows:

         a)       The taxable base (balance profit/(loss)) for each Contractor
                  Party shall be determined as the total of each such Contractor
                  Party's sales revenues from Cost Recovery Petroleum, Profit
                  Oil and Profit Natural Gas acquired by that Contractor Party
                  pursuant to Article 11 of this Agreement reduced by, (i) the
                  Contractor Party's sales revenues from Cost Recovery Petroleum
                  and (ii) the Contractor Party's share of costs and the
                  Contractor Party's own costs incurred during a Calendar Year
                  in respect of Petroleum Operations which are not included in
                  Costs and Expenses determining Cost Recovery Petroleum in
                  Article 11 of this Agreement and (iii) any loss calculated in
                  accordance with Article 17.9 of this Agreement.

         b)       Sales revenues from Cost Recovery Petroleum shall be defined
                  as the value of the volumes of Cost Recovery Petroleum, taken
                  and disposed of by the Contractor Party and/or their assignees
                  under this Agreement during a Calendar Year and determined by
                  applying the principles of

                                       39
<PAGE>   40

                  valuation set out in Article 12 of this Agreement. Sales
                  revenues from Profit Oil and Profit Natural Gas shall be
                  defined as the value of the volumes of Profit Oil and Profit
                  Natural Gas taken and disposed of by the Contractor Party
                  and/or their assignees under this Agreement during a Calendar
                  Year.

                  Profit Oil volumes will be valued at the actual price received
                  at the Measurement Point where actually sold at the
                  Measurement Point. Where Profit Oil volumes are not sold at
                  the Measurement Point, they shall be valued at the actual
                  price received at the sales point less transportation and
                  other associated costs incurred by the Contractor Party in
                  transporting such Profit Oil from the Measurement Point to the
                  actual sales point.

         c)       For the purposes of this Article 17 and specifically for the
                  purposes of calculating the taxable base of a Contractor Party
                  in accordance with this Article 17.8 and Article 17.9, Costs
                  and Expenses incurred by a Contractor Party prior to the
                  Effective Date of this Agreement be deemed to have been
                  incurred on the Effective Date of this Agreement, provided
                  such Costs and Expenses are proved by relevant documents and
                  are proved by Coordination Committee.

         d)       For the purposes of calculating the taxable base of a
                  Contractor Party in accordance with this Article 17.8 and
                  Article 17.9, sales revenues related to Petroleum Operations
                  and costs incurred in respect of Petroleum Operations shall be
                  determined both in U.S.$ and in local currency. Sales revenues
                  in currency other than the U.S.$ and costs incurred in
                  currency other than the U.S.$ shall be translated into U.S.$
                  in accordance with the principles set out in Article 19.9 of
                  this Agreement.

17.9     If in calculating the taxable base of a Contractor Party the total sum
         of deductions, represented by sales revenues from Cost Recovery
         Petroleum and costs incurred in respect of Petroleum Operations which
         are not included in Costs and Expenses in determining Cost Recovery
         Petroleum in Article 11 of this Agreement, exceed sales revenues from
         Cost Recovery Petroleum, Profit Oil and Profit Natural Gas in any
         Calendar Year, the resulting loss (balance loss) may be carried forward
         by a Contractor Party to the following Calendar Year and to subsequent
         Calendar Years, one at a time in chronological order, and shall be
         deductible in full and without restriction in computing such Contractor
         Party's taxable base in such Calendar Year(s) until such time as the
         loss is wholly offset against such Contractor Party's taxable base or
         in accordance with the Tax Code. Provided, such losses are documented
         and approved by Coordination Committee.

17.10    Each Contractor Party shall maintain its tax books and records both in
         local currency and in U.S.$. The calculation of the taxable base for
         each Contractor Party will be carried out in accordance with Article
         17.8 d) of this Agreement.

                                       40

<PAGE>   41

         The payment of the Profit Tax and Mineral Usage Tax will be carried out
         in local currency, unless otherwise provided by Georgian Legislation

17.11    The Profit Tax return for each Contractor Party shall be prepared and
         submitted as follows:

         I.       Each Contractor Party shall prepare a Profit Tax return in
                  local currency and in U.S.$ for each Calendar Year and submit
                  it to Georgian Oil by 15 February following the Calendar Year,
                  so that Georgian Oil can submit a Contractor Party's Profit
                  Tax return to the relevant Tax authority within terms
                  established by the Law.

         II.      The Profit Tax return shall be prepared based on Contractor
                  books and accounts of Petroleum Operations as described in
                  Article 18 of this Agreement which Contractor is required to
                  maintain in local currency and in U.S.$ in accordance with the
                  Accounting Procedure attached hereto as Annex C.

17.12    Proper official assessments of a Contractor Party's Profit Tax
         liability for each Calendar Year, and proper official receipts shall be
         issued by the proper tax authorities and shall state the date and
         amount and other particulars customary in Georgia for such receipts and
         the currency in which the Profit Tax was paid.

17.13    Georgian Oil shall furnish to each Contractor Party the proper official
         receipts that evidence official payment by Georgian Oil of that
         Contractor Party's Profit Tax liability for a Calendar Year by 15 April
         following the Calendar Year.

17.14    Georgian Oil shall not credit, directly or indirectly, Contractor
         Parties' Profit Tax payments against Georgian Oil's tax or any other
         payments to the Government or the treasury of Georgia required from
         Georgian Oil.

17.15    Georgian Oil shall assume, pay and discharge any penalties, interest,
         fines or similar levies for late payment of a Contractor Party's Profit
         Tax and/or Mineral Usage tax liabilities in respect of any Calendar
         Year.

17.16    The State will notify each Contractor Party within one (1) month of the
         Effective Date of this Agreement of the tax authority office ("the Tax
         Authority") which is to be located in Tbilisi and be responsible for
         and administer the implementation of the provisions of this Agreement
         including but not limited to the filing of a Contractor Party's Profit
         Tax return for each Calendar Year, the issuing of official assessments
         and receipts evidencing the payment of each Contractor Party's Profit
         Tax and Mineral Usage Tax liabilities, any audit in respect of any
         Calendar Year of a Contractor Party's Profit Tax and Mineral Usage Tax
         return and any other payment, liability or procedures in respect of any
         other Taxes.

17.17    Employees of the Contractor, Contractor Parties, their Affiliates and
         Subcontractors, and those employees assigned by Contractor to Operator
         who

                                       41

<PAGE>   42

         are not citizens of Georgia ("Foreign Employees") shall be liable to
         Georgian personal income tax imposed by the State in accordance with
         the Tax Code. A Foreign Employee will continue to be subject to the
         provisions of any applicable Double Tax Treaty.

17.18    Foreign Employees who perform work in Georgia and their employers that
         would otherwise be covered by and subject to social insurance, pension
         fund contributions and similar payments under the social security
         system of Georgia will be exempt from those payments.

17.19    The only Taxes, duties, fees or other charges to be levied by the State
         or by any other Governmental entity on a Foreign Subcontractor in
         connection with Petroleum Operations pursuant to this Agreement shall
         be a tax to be withheld by any person or other legal entity making
         revenue payments to a Foreign Subcontractor in the currency in which
         the payment is made (the "Withhold Tax"). The Withhold Tax shall be
         calculated in accordance with Georgian Law, provided that at the moment
         of concluding the Agreement it was 4 (four) percent.

17.20    VAT shall be imposed as follows:

         a)       Goods, works and services supplied directly or indirectly to
                  or by a Contractor Party or its Affiliates, Operator or a
                  Foreign Subcontractor for the purpose of Petroleum Operations
                  shall be exempt from VAT, save that the Contractor shall
                  charge VAT (at the then current rate but not exceeding twenty
                  (20%) per cent on Petroleum sold locally within Georgia which
                  is not intended for export.

         b)       All imports including but not limited to goods, equipment,
                  works, services, loans and other forms of financing acquired
                  by a Contractor Party or its Affiliates, Operator, their
                  Subcontractors or their agents for the purpose of Petroleum
                  Operations shall be exempt from VAT and from excise duty on
                  oil products.

         c)       Import and re-export of goods for personal use by Foreign
                  Employees and family members will not be subject to VAT
                  according to current Georgian Law.

         d)       Exports of Petroleum by each Contractor Party or its agents
                  shall be exempt from VAT with credit (zero per cent rate).

         e)       All re-exports by a Contractor Party or its Affiliates,
                  Subcontractors or their agents of goods, works and services
                  supplied for the purposes of Petroleum Operations including
                  but not limited to re-export of goods temporarily imported
                  into Georgia for the purposes of Petroleum Operations shall be
                  exempt from VAT with credit (zero per cent rate).

                                       42

<PAGE>   43

                                   ARTICLE 18
                    ACCOUNTING, FINANCIAL REPORTING AND AUDIT

18.1     Contractor shall maintain books and accounts of Petroleum Operations in
         accordance with the Accounting Procedure attached hereto as Annex C.
         These shall be maintained in local currency of Georgia and in U.S.$ in
         accordance with generally accepted international Petroleum industry
         accounting principles. All books and accounts which are made available
         to Georgian Oil or to the State Agency in accordance with the
         provisions of the Accounting Procedure shall be prepared both in the
         Georgian and English languages.

18.2     The Accounting Procedure specifies the procedure to be used to verify
         and establish promptly and finally Contractor's Costs and Expenses
         under Article 11 of this Agreement.

18.3     Sales revenues, expenditures, financial results, tax liabilities, and
         loss carry-forwards of each Contractor Party shall be determined in
         accordance with the rules, rights, and obligations set forth in this
         Agreement in so far as such sales revenues, expenditures, financial
         results, tax liabilities, and loss carry-forwards are related to
         Petroleum Operations under this Agreement.

18.4     To the extent that Georgian Oil incurs Costs and Expenses which are
         recoverable from Cost Recovery Petroleum in accordance with Article 11,
         Georgian Oil shall maintain separate books and accounts. These books
         and accounts shall be maintained in local currency of Georgia and in
         U.S.$, in the Georgian language and the English language and shall be
         in accordance with generally accepted international Petroleum industry
         accounting principles. Prior to Georgian Oil commencing to incur Costs
         and Expenses an accounting procedure which establishes the method for
         accounting for Georgian Oil's participation in the funding of Petroleum
         Operations shall be agreed and approved by Coordination Committee. The
         Contractor and the State Agency shall have the right to audit the books
         and accounts maintained by Georgian Oil.

18.5     On annual basis Contractor shall submit to Georgian Oil and Agency an
         internationally recognized audit's report on Costs and Expenses
         incurred, that under Article 11 should be compensated by Cost Recovery
         Petroleum, the report shall also include profit calculation pursuant to
         provisions of Article 17 of this Agreement. Agency and/or Georgian Oil
         shall have the right to audit the books and accounts maintained by
         Contractor.

                                       43

<PAGE>   44

                                   ARTICLE 19
                     CURRENCY, PAYMENTS AND EXCHANGE CONTROL

19.1     Contractor and each Contractor Party, and their Affiliates and Operator
         shall have the right to open, maintain, and operate Foreign Exchange
         bank accounts both in and outside of Georgia and local currency bank
         accounts inside Georgia. Such operations performed in Georgia will
         comply with Petroleum Law and Current Georgian Legislation.

19.2     Contractor and each Contractor Party, and their Affiliates shall have
         the right to transfer all funds received in and converted to Foreign
         Exchange in Georgia without payment of Taxes, fees, duties or imposts
         to bank accounts outside Georgia in accordance with Petroleum Law and
         Current Georgian Legislation.

19.3     Contractor and each Contractor Party, and their Affiliates shall have
         the right to hold, receive and retain outside Georgia and freely use
         all funds received and derived from Petroleum Operations by them
         outside Georgia without any obligation to repatriate or return the
         funds to Georgia, including but not limited to all payments received
         from export sales of Contractor Parties' share of Petroleum and any
         sales proceeds from an assignment of their interest in this Agreement.

19.4     Contractor and each Contractor Party, and their Affiliates, and
         Operator have the right to import into Georgia funds required for
         Petroleum Operations under this Agreement in Foreign Exchange.

19.5     Contractor and each Contractor Party, and their Affiliates shall have
         the right to pay outside of Georgia for goods, works and services of
         whatever nature in connection with the conduct of Petroleum Operations
         under this Agreement without having first to transfer to Georgia the
         funds for such payments.

19.6     Whenever such a need arises Contractor and each Contractor Party and
         their Affiliates, and Operator shall be entitled to purchase local
         currency with Foreign Exchange and covert local currency into Foreign
         Exchange in accordance with provisions stipulated in legislation.

19.7     Contractor and each Contractor Party, and their Affiliates shall have
         the right to pay outside Georgia principal and interest on loans used
         for funding Petroleum Operations without having to first transfer to
         Georgia the funds for such payment.

19.8     Contractor and each Contractor Party and their Affiliates, and Operator
         shall have the right to pay, wages, salaries, allowances and benefits
         of their foreign personnel working in Georgia in Foreign Exchange
         partly or wholly outside Georgia.

                                       44

<PAGE>   45

19.9     Conversions of currency shall be recorded at the rate actually
         experienced in that conversion. Expenditures and sales revenues in
         currency other than the U.S.$ shall be translated to U.S.$ at the rates
         officially published by National Bank of Georgia at the close of
         business on the first business day of the current month.

                                   ARTICLE 20
                                IMPORT AND EXPORT

20.1     Contractor, each Contractor Party and Affiliates and their agents and
         Operator shall have the right to import into, export and re-export from
         Georgia in accordance with Petroleum Law and the existing Georgian Law
         in force on the date this Agreement is signed.

20.2     Contractor, each Contractor Party and Affiliates and their agents shall
         have the right to sell any materials or equipment or goods which were
         used in Petroleum Operations provided that such items are no longer
         needed for Petroleum Operations and the costs of such items have not
         been and are not intended to be included as Costs and Expenses
         recoverable from Cost Recovery Petroleum. Contractor party and
         Affiliates shall be solely liable for and shall indemnify Georgian Oil
         and the State Agency from all Taxes, if any, (including but not limited
         to VAT) due or which may become due on any such sales.

20.3     Contractor, each Contractor Party, their customers and their carriers
         shall have the right to export the share of Petroleum on behalf of
         Contractor or each Contractor Party in accordance with Petroleum Law
         and the existing Georgian Law in force on the date this Agreement is
         signed.

20.4     Foreign Employees and family members of Contractor and its Affiliates,
         its agents and Foreign Subcontractors, shall have the right to import
         into and re-export from Georgia household goods and personal property
         at any time in accordance with Georgian Law.

                                       45

<PAGE>   46

                                   ARTICLE 21
                       EXPORT OF HYDROCARBONS, TRANSFER OF
                     OWNERSHIP, AND REGULATIONS FOR DISPOSAL

21.1     The Contractor, Contractor Parties, any purchaser from such parties and
         their respective carriers shall, for the duration of this Agreement,
         have the right to export from any export point selected by the
         Contractor for such purpose, the share of Petroleum to which the
         Contractor is entitled under this Agreement provided that access to
         such export point is not restricted generally on the grounds of safety
         or national security and/or legislative acts of Georgia. Access to
         export points shall be given to the above parties on a non
         discriminatory basis and at rates no less favourable than those
         available to Georgian Oil, or granted to others by the State or
         Georgian Oil.

21.2     The transfer of title to each Contractor Party and Georgian Oil of its
         share of Petroleum shall be effective upon the lifting of that share by
         such Party at the Measurement Point or, at the Parties' option, at some
         other point, proved by Coordination Committee.

21.3     The Contractor and Georgian Oil shall each be entitled to designate (at
         their own cost) an employee, independent company or consultant who
         shall check the liftings of Petroleum from the Measurement Point or at
         such other point as may be designated in accordance with Article 21.2.

21.4     If one of the Parties is unable to lift its share of Petroleum in due
         time, with the result that Petroleum Operations may be interfered with
         or in any way disrupted, then after giving such notice as is practical
         in the circumstances any other Party may dispose of it, and
         subsequently give back to such Party an equivalent amount of Petroleum
         (taking into account any costs incurred).

                                   ARTICLE 22
                               OWNERSHIP OF ASSETS

22.1     Ownership of any asset, whether fixed or moveable, acquired by or on
         behalf of Contractor in connection with Petroleum Operations hereunder
         shall vest in the State without consideration if (1) both the costs of
         such asset have been recovered by Contractor under this Agreement, and
         (2) either the Agreement has come to an end or, if earlier, when the
         asset is no longer required for Petroleum Operations by the Contractor.
         The Contractor shall enjoy continued free, exclusive and unrestricted
         use of all assets at no cost or loss of benefit to the Contractor until
         the termination of this Agreement or if earlier until they are no
         longer required for Petroleum Operations. The Contractor shall bear the

                                       46
<PAGE>   47

         custody and maintenance of such assets and all risks of accidental loss
         or damage thereto while they are required for Petroleum Operations,
         provided however that all costs necessary to operate, maintain and
         repair such assets and to replace or repair any damage or loss shall be
         recoverable as Operation Expenses from Cost Recovery Petroleum in
         accordance with the provisions of Article 11.

22.2     Whenever Contractor relinquishes any part of the Agreement Area, all
         moveable property located within the portion of the Agreement Area so
         relinquished may be removed to any part of the Agreement Area that has
         been retained for use in Petroleum Operations.

22.3     The provisions of Article 22.1 and 22.2 shall not apply to materials or
         other property that are rented or leased to Contractor, its Affiliates
         or Operator or which belong to employees of Contractor, its Affiliates
         or Operator.

                                   ARTICLE 23
              INSURANCE, ENVIRONMENT, HEALTH, SAFETY AND LIABILITY

23.1     Contractor shall obtain and maintain such types and amounts of
         insurance for the Petroleum Operations as are reasonable and such that
         they comply with Georgian Law and accepted international Petroleum
         industry practice and standards.

23.2     The insurance which may be obtained may cover:

         a)       destruction and damage to any property held for use during
                  Petroleum Operations and classified as fixed capital and/or
                  leased or rented property and/or interests in pipelines
                  operated by the Contractor;

         b)       destruction of Crude Oil in storage;

         c)       liability to Third Parties;

         d)       liability for pollution and expenses for cleaning up in the
                  course of Petroleum Operations;

         e)       expenses for wild well control;

         f)       liability incurred by the Contractor in hiring land drilling
                  rigs, vessels and aircraft serving the Petroleum Operations;
                  and

         g)       losses and expenses incurred during the transportation and
                  storage in transit of goods shipped from areas outside the
                  Agreement Area.

                                       47
<PAGE>   48

23.3     In any insurance agreements, the amount for which the Contractor itself
         is liable (the "deductible amount") shall be reasonably determined
         between the Contractor and the insurer and such deductible amount shall
         in the event of any insurance claim be considered as Costs and Expenses
         of Petroleum Operations recoverable from Cost Recovery Petroleum.

23.4     It is understood that, in order to meet their insurance obligations,
         insurance providers used by Contractor may conclude reinsurance and
         co-insurance agreements with any other insurance enterprises and
         organisations.

23.5     Notwithstanding the other provisions of this Agreement, the Contractor
         shall indemnify and hold harmless the State and Georgian Oil against
         all losses, damages and liability arising under any claim, demand,
         action or proceeding brought or instituted against the State or
         Georgian Oil by any employee of the Contractor or any Subcontractor or
         dependent thereof, for personal injuries, industrial illness, death or
         damage to personal property sustained in connection with, related to or
         arising out of the performance or non-performance of this Agreement
         regardless of the fault or negligence in whole or in part of any entity
         or individual; provided, however, that such losses, damages and
         liabilities are not caused by or do not arise out of the performance or
         non-performance of this Agreement by the State and/or Georgian Oil, and
         the State and/or Georgian Oil shall indemnify and hold the Contractor
         (including for this purpose any Affiliate, the Operating Company and
         all Subcontractors) harmless against all such damage, losses and
         liabilities.

23.6     The Contractor (including for this purpose any Affiliate, the Operating
         Company and all Subcontractors) shall indemnify the State and Georgian
         Oil for all loss or damage suffered by the State or Georgian Oil
         arising out of the Contractor's Petroleum Operations if such Petroleum
         Operations were not in accordance with Good Oilfield Practices or
         applicable laws, rules and regulations and, notwithstanding the
         foregoing, for any loss or damage to the environment or any cultural or
         national monument arising out of conduct of the Petroleum Operations;
         provided, however, that the Contractor (including for this purpose any
         Affiliate, the Operating Company and all Subcontractors) shall have no
         liability hereunder if and to the extent any loss and damage is caused
         by or arises out of any breach of this Agreement (and any other
         agreements that may be entered into by and between the Contractor, the
         State or Georgian Oil in respect of the Petroleum Operations) or breach
         of duty by the State or Georgian Oil. Notwithstanding the foregoing,
         the Contractor (including for this purpose any Affiliate, the Operating
         Company and all Subcontractors) shall not be liable to the State or
         Georgian Oil for any punitive or exemplary damages or any other
         indirect or consequential damages.

23.7     The Contractor shall not be responsible to the State or Georgian Oil
         for, and shall bear no cost, expense or liability of the State or
         Georgian Oil for, any claim, damage or loss to the extent such claim,
         damage or loss does not arise out of a failure to conduct Petroleum
         Operations as provided in Article 23.6. In amplification of the
         foregoing, the Contractor shall not be responsible for any
         environmental condition or damage existing in the Agreement Area prior

                                       48
<PAGE>   49

         to the commencement of Petroleum Operations or caused by a Force
         Majeure event during the term of this Agreement. Existing environmental
         conditions will be evidenced by an independent Third Party
         environmental baseline study of existing environmental conditions to be
         commissioned by the Contractor, at its own cost and expense (which
         shall be included as Costs and Expenses for the purposes of determining
         Cost Recovery Petroleum, subject to prior approval by the Coordination
         Committee) and shall be completed prior to the commencement of the
         relevant Petroleum Operations in accordance with Good Oilfield
         Practices and the environmental laws of Georgia. Such baseline study
         shall be submitted to the State Agency and shall be incorporated in the
         Environmental Impact Assessment to be prepared by the Contractor in
         accordance with the environmental laws of Georgia for the purpose of
         obtaining a permit for Petroleum Operations from the State Agency,
         which permit and any other permits, authorizations and consents which
         are or may be applicable under the laws of Georgia, shall not be
         unreasonably withheld. State Agency agrees to provide Contractor with
         all authorizations, permits, certificates and other documents necessary
         for Petroleum Operations. If in the course of the Petroleum Operations,
         the State provides other areas for Contractor's activities, then new
         environmental baseline studies shall be included in the Development
         Plan that includes these areas. The State and Georgian Oil shall
         indemnify the Contractor against any claim, damage or loss arising from
         such pre-existing environmental condition or damage, subject however,
         to the Contractor having taken reasonable and appropriate precautions
         in conducting Petroleum Operations, it being understood that in
         pursuing Petroleum Operations the Contractor has assumed the risk of
         working in the Agreement Area, and provided, further, that such
         indemnification shall not extend to any natural pre-existing condition.

23.8     In conducting Petroleum Operations, the Contractor shall operate
         according to Good Oilfield Practices and use best endeavors to minimize
         potential disturbances to the environment, including the surface,
         subsurface, sea, air, flora, fauna, other natural resources and
         property. The order of priority for actions shall be protection of
         life, environment and property.

23.9     The Contractor shall take all necessary steps to respond to, and shall
         promptly notify the State Agency of, all emergency and other events
         (including explosions, leaks and spills), occurring in relation to the
         Petroleum Operations which are causing or likely to cause material
         environmental damage or material risk to health and safety. Such notice
         shall include a summary description of the circumstances and steps
         taken and planned by the Contractor to control and remedy the
         situation. The Contractor shall provide such additional reports to the
         State Agency as are necessary in respect of the effects of such events
         and the course of all actions taken to prevent further loss and to
         mitigate deleterious effects.

23.10    In the event of emergency situations as set forth in 23.9, above, at
         the request of the Contractor, the State, without prejudice and in
         addition to any indemnification obligations the State may have
         hereunder, shall assist the Contractor, to the extent possible, in any
         emergency response, remedial

                                       49
<PAGE>   50

         or repair effort by making available any labor, materials and equipment
         in reasonable quantities requested by the Contractor which are not
         otherwise readily available to the Contractor and by facilitating the
         measures taken by Contractor to bring into Georgia personnel, materials
         and equipment to be used in any such emergency response or remedial or
         repair effort. Contractor shall reimburse the State's reasonable and
         necessary costs incurred in such efforts, which reimbursed amounts
         shall be considered Costs and Expenses.

23.11    The Contractor shall not be liable to the State, Georgian Oil or Third
         Parties for any damages caused by contamination entering the Agreement
         Area as a result of State, Georgian Oil or Third Party activities
         beyond or within the boundaries of the Agreement Area. The State shall
         be legally and financially responsible for any loss, damage and
         liability, including remediation of environmental conditions which may
         be required for safe conduct of the Petroleum Operations, caused by the
         State's or Georgian Oil's activities beyond or within the Agreement
         Area.

23.12    The Contractor shall not be liable for any loss or damage, including
         but not limited to spillage, explosion, contamination or similar
         environmental damage, in respect of any storage facilities, pipelines
         or means of transportation which are not under the direct possession
         and control of the Contractor or its Affiliates or its Subcontractors
         or the Operating Company. In addition to the foregoing, the Contractor
         shall not be liable for any damage whatsoever in respect of the State
         share of Petroleum, storage or transportation thereof once Georgian Oil
         has taken custody of the State share of Petroleum.

23.13    The State shall make best efforts to ensure the safety and security of
         the Contractor's property and personnel in Georgia and to protect them
         from loss, injury and damage resulting from war (declared or
         undeclared), civil conflict, sabotage, blockade, riot, terrorism,
         unlawful commercial extortion, or organized crime. Notwithstanding
         anything to the contrary contained herein, Contractor acknowledges and
         agrees that the obligations undertaken by the State in this Article
         23.13 are no greater than the general obligations of the State towards
         citizens of Georgia in respect to the perils named above. Furthermore,
         Contractor agrees that it shall have no claim for legal or equitable
         relief for failure of the State to comply with the provisions of this
         Article 23.13, except as may be permitted by law.

23.14    Except as set forth in Article 29 hereof, it is understood and agreed
         that the State shall not seek or declare any cancellation or
         termination of this Agreement and/or the License as a result of the
         occurrence of any emergency event described in this Article 23.

                                       50
<PAGE>   51

                                   ARTICLE 24
                                   PERSONNEL

  24.1   Contractor shall be entitled to bring foreign personnel into Georgia in
         connection with the performance of Petroleum Operations. The entry into
         Georgia of such personnel is hereby authorised, and the State
         authorised body shall issue at the Contractor's request the required
         documents, such as entry and exit visas, work permits and residence
         cards. At Contractor's request, the State shall facilitate all
         immigration formalities at the points of exit and entry into Georgia
         for the employees and family members of the Contractor, its Affiliates,
         Subcontractors, Operator, agents and brokers. The Contractor (or
         Operator on its behalf) shall contact the appropriate offices of the
         State to secure the necessary documents, and to satisfy the required
         formalities.

24.2     The employees working within the scope of Petroleum Operations shall be
         placed under the authority of the Contractor, its Affiliates, its
         Subcontractors, agents or brokers or the Operator each of which shall
         act individually in their capacity as employers. The works, hours,
         wages, and all other conditions relating to their employment shall be
         determined by the relevant employer of such employees. In relation to
         employees who are citizens of Georgia their employment shall be in
         accordance with Georgian law. To the extent that any expatriate
         personnel are engaged under a Agreement subject to Georgian law, that
         Agreement shall comply with the provisions of Georgian law. The
         Contractor, its Affiliates, its Subcontractors, agents or brokers
         however, shall enjoy full freedom in the selection and assignment of
         their employees.

                                   ARTICLE 25
                                  FORCE MAJEURE

25.1     If as a result of Force Majeure, Contractor is rendered unable, wholly
         or in part, to carry out its obligations under this Agreement, other
         than the obligation to pay any amounts due, then the obligations of
         Contractor, so far as and to the extent that the obligations are
         affected by such Force Majeure, shall be suspended during the
         continuance of any inability so caused, but for no longer period.
         Contractor shall notify the Parties of the Force Majeure situation
         within seven (7) days of becoming aware of the circumstances relied
         upon and shall keep Georgian Oil and the State Agency informed of all
         significant developments. Such notice shall give reasonably full
         particulars of the said Force Majeure, and also estimate the period of
         time which Contractor will probably require to remedy the Force
         Majeure. Contractor shall use all reasonable diligence to remove or
         overcome the Force Majeure situation as quickly as possible in an
         economic manner. The period of any such non-performance or delay,
         together with such period as may be necessary for the

                                       51
<PAGE>   52

         restoration of any damage done during such delay, shall be added to the
         time given in this Agreement for the performance of any obligation
         dependent thereon (and the continuation of any right granted) and to
         the term of this Agreement.

25.2     For the purposes of this Agreement, "Force Majeure" shall mean a
         circumstance which is irresistible or beyond the reasonable control of
         Contractor, or any other hindrance of Contractor's performance not due
         to its fault or negligence and shall be in accordance with the
         provision of the Petroleum Law.

                                   ARTICLE 26
                           ASSIGNMENTS AND GUARANTEES

26.1     No assignment, mortgage or charge or other encumbrance shall be made by
         a Party of its rights obligations and interests arising under this
         Agreement other than in accordance with the provisions of this Article
         26. Any purported assignment made in breach of the provisions of this
         Article 26 shall be null and void.

26.2     Save in the case of any assignment made pursuant to the provisions of
         Articles 26.4, 26.5 and 26.6 the following shall apply. Any Party
         wishing to assign all or part of its rights and interests hereunder or
         in any circumstances where there is deemed to be an assignment, the
         Party wishing to make the assignment shall first give written notice to
         the other Parties specifying the proposed terms and conditions of the
         assignment.

         Following receipt of those terms and conditions, for a period of thirty
         (30) days each Party shall have the preferential right to match the
         terms and conditions of the proposed assignment or deemed assignment.
         This right may be exercised by any Party giving written notice of its
         intention to match the relevant terms and conditions (the "Acceptance")
         and thereafter the relevant Parties shall negotiate all necessary
         documentation in good faith. If within a further period of ninety (90)
         days from receipt of the Acceptance the relevant parties have not
         reached final agreement the Party seeking to assign may within a
         further period of thirty (30) days complete an assignment to a Third
         Party on the same terms and conditions. For the avoidance of doubt any
         assignment to a Third Party shall be subject to the assigning Party and
         the Third Party complying with the provisions of this Article 26.

26.3     A Contractor Party may assign all or part of its rights, obligations
         and interests arising from this Agreement to a Third Party provided
         that the Third Party:

                                       52
<PAGE>   53

         a)       has the technical and financial ability to perform the
                  obligations to be assumed by it under the Agreement; and

         b)       as to the interest assigned to it, accepts and assumes all of
                  the terms and conditions of the Agreement.

         Any such assignment shall be subject to the prior written consent of
         the State Agency which consent shall not be unreasonably withheld or
         delayed. By way of clarification, and not in limitation of the
         foregoing provisions of this Article 26.3, the State shall not be
         considered to be acting unreasonably in declining to consent to any
         such assignment if the assignment to such proposed assignee is deemed
         contrary to State interests, as evidenced by a writing to that effect
         signed by the President, the State Minister, State Chancellor, or the
         Minister of Foreign Affairs or Defense or there is an act of Parliament
         to that effect.

         If within thirty (30) Days following notification of an intended
         assignment, accompanied by a copy of the proposed deed of assignment
         and related documentation with respect to the proposed assignee,
         including certified financial statements and other evidence to the
         State's reasonable satisfaction of the matters set forth in Article
         26.3 and such documentation, which shall include evidence of the
         identity of owners of the assignee, provided in the case of a company
         the stock of which is registered on a recognized stock exchange, a copy
         of the documents identifying the significant owners, as such concept is
         defined or used in the applicable laws pursuant to which such company
         registered its stock, will satisfy the foregoing requirements, and its
         direct and indirect parent companies, including the identity of the
         owners of the ultimate parent, subject to the foregoing proviso, as may
         be reasonably necessary for the State, and as requested by the State,
         to make a determination of the State interests as described above, the
         State has not given its written decision concerning such assignment,
         then it shall be deemed that the State has declined to give such
         consent; provided that thereafter if upon the further written request
         of the Contractor for a written decision, the State has not given a
         written response of any kind within fifteen (15) Days after such
         further request, then the assignment shall be deemed approved and the
         State shall execute an assignment, in a form acceptable to the State,
         accepting such assignment. This second request from the Contractor
         shall cite the provisions of this paragraph and the Contractor shall
         obtain confirmation from the State that the request has been received.
         In the event of the transfer of rights and obligations under the
         Agreement and License to a Third Party, Contractor shall pay all costs
         associated with such transfer incurred by the Agency and any tax or
         charge due on such transfer under Georgian Legislation.

26.4     A Contractor Party may assign all or part of its rights, obligations
         and interests arising from this Agreement to another Contractor Party
         or Affiliate, without prior consent of the State or Georgian Oil,
         provided that any such Affiliate:

         a)       has the technical and financial ability to perform the
                  obligations to be assumed by it under the Agreement; and

                                       53
<PAGE>   54

         b)       as to the interest assigned to it, accepts and assumes all of
                  the terms and conditions of the Agreement.

26.5     Each reference in this Agreement to the Contractor shall be treated as
         including each assignee to which an assignment has been made pursuant
         to this Article 26. Each reference in this Agreement to Georgian Oil
         shall be treated as including each assignee to which an assignment has
         been made by Georgian Oil pursuant to this Article 26.

26.6     Georgian Oil may assign all or part of its rights, obligations and
         interests arising from this Agreement (including all or part of its
         right to lift a share of Profit Oil) to a wholly owned Affiliate with
         the prior consent of the Contractor and the State Agency provided that
         any such Affiliate:

         a)       has the technical and financial ability to perform the
                  obligations to be assumed by it under the Agreement; and

         b)       as to the interest assigned to it, accepts and assumes all of
                  the terms and conditions of the Agreement.

         Georgian Oil shall give prior notice to the Contractor and the State
         Agency to any assignment under this Article 26.6.

26.7     The State may assign all or part of its rights, obligations, and
         interests arising form this Agreement (including all or part of its
         right to lift its share of Profit Oil) to a Third Party, provided, that
         any such Third Party accepts and assumes all of the terms and
         conditions of this Agreement as to the interest so assigned. The State
         shall notify Contractor of such assignment within thirty (30) days of
         the effective date of such transfer.

26.8     Subject to the approval of the State Agency in the event of there being
         any proposed assignment in accordance with the terms of this Article 26
         then to the extent of the interest assigned the assignor shall be
         released from all further obligations and liabilities arising under the
         Agreement after the effective date of the assignment. The assignee
         shall thereafter be liable for the obligations arising from such
         interest in the Agreement except to the extent provided in the
         Agreement.

                                   ARTICLE 27
                  AGREEMENT ENFORCEMENT AND STABILISATION, AND
                         REPRESENTATIONS AND WARRANTIES

27.1     In the course of performing the Petroleum Operations, the Operator and
         the Parties shall be subject to all applicable laws, decrees, rules and
         regulations.

                                       54
<PAGE>   55

27.2     The State agrees and commits to Contractor, for the duration of this
         Agreement, to maintain the stability of the legal, tax, financial,
         minings, customs and economic import and export conditions of this
         Agreement in accordance with Article 27 of the Petroleum Law.

27.3     The Parties agree to cooperate in every possible way in order to
         achieve the objectives of this Agreement. The State and its
         subdivisions shall facilitate the exercise of Contractor's activities
         by granting it all decrees, permits, resolutions, licenses and access
         rights and making available to it all appropriate existing facilities
         and services under the control of the State or Georgian Oil so that the
         Parties may derive the greatest benefit from Petroleum Operations for
         their own benefit and for the benefit of Georgia.

27.4     If at any time after this Agreement has been signed there is a change
         in the applicable laws, regulations or other provisions effective
         within Georgia which to a material degree adversely affect the economic
         position of the Contractor or any Contractor Party hereunder, the terms
         and conditions of this Agreement shall be altered so as to restore the
         Contractor to the same overall economic position as that which the
         Contractor would have been in had this Agreement been given full force
         and effect without amendment.

27.5     If the Contractor believes that its economic position has been
         adversely affected, under Article 27.4 it may give notice to the State
         and to Georgian Oil describing how its position has been so affected
         and the Parties shall thereafter promptly meet with a view to reaching
         agreement on the remedial action to be taken. If matters have not been
         resolved within 90 days or as otherwise agreed the matter may be
         referred to arbitration by any Party in accordance with the provisions
         of Article 30.

27.6     The State within Georgian Law and its capacities warrants to the
         Contractor as follows:

         a)       The State has taken the appropriate steps necessary to
                  authorise State Agency for Regulation of Oil and Gas Resources
                  in Georgia and Georgian Oil to execute this Agreement on
                  behalf of the State and has the power to do so;

         b)       The signatory to this Agreement on behalf of the State (in
                  each of its capacities hereunder) is duly authorised to bind
                  State Agency for Regulation of Oil and Gas Resources in
                  Georgia and Georgian Oil;

         c)       State Agency for Regulation of Oil and Gas Resources in
                  Georgia and Georgian Oil have been legally vested by the State
                  with the necessary power to authorise Petroleum Operations in
                  the Agreement Area and to compensate the Contractor by
                  allocating to it a share of the Petroleum produced in
                  accordance with the terms of this Agreement.

         d)       Upon completion of the matters and procedures set out in
                  Article 32 there is no other entity or authority whose
                  approval or authorisation

                                       55
<PAGE>   56

                  is required to permit the Contractor to enjoy and enforce its
                  rights hereunder.

27.7     CanArgo Norio Ltd., represents and warrants that:

       27.7.1      It possesses the technical expertise and financial resources
                   to fulfill the obligations of Contractor under this
                   Agreement;

       27.7.2      The execution, delivery and performance by CanArgo Norio Ltd.
                   of this Agreement are within the corporate powers of CanArgo
                   Norio Ltd.;

       27.7.3      CanArgo Norio Ltd., has obtained all corporate consents,
                   approvals, authorizations and resolutions in accordance with
                   its corporate statutes and the applicable laws to empower
                   CanArgo Norio Ltd., to execute this Agreement, to undertake
                   all of the obligations of Contractor hereunder.

                                   ARTICLE 28
                           NOTICES AND CONFIDENTIALITY

28.1     Except as otherwise specifically provided, all notices authorised or
         required between the Parties by any of the provisions of this
         Agreement, shall be in writing in Georgian and English and delivered in
         person or by registered mail or by courier service or by any electronic
         means of transmitting written communications which provides
         confirmation of complete transmission, and addressed to such Parties as
         designated below. The originating notice given under any provision of
         this Agreement shall be deemed delivered only when received by the
         Party to whom such notice is directed, and the time for such Party to
         deliver any notice in response to such originating notice shall run
         from the date the originating notice is received. The second or any
         responsive notice shall be deemed delivered when received. "Received"
         for purposes of this Article with respect to written notice delivered
         pursuant to this Agreement shall be actual delivery of the notice to
         the address of the Party to be notified specified in accordance with
         this Article. Each Party shall have the right to change its address at
         any time and/or designate that copies of all such notices be directed
         to another person at another address, by giving written notice thereof
         to all other Parties. The addresses for service of notices on each of
         the parties is as follows:-

                                       56
<PAGE>   57

         CanArgo Norio Limited
         Po Box 119, Commerse House
         Les Banques, St. Peter Port
         Guernsey, British Isles

         Attention:         Chairman
         Fax:               + 44 1481 729 982

         The State Agency for Regulation of Oil and Gas Resources of Georgia
         Kazbegi Avenue 45
         Tbilisi 380077
         Georgia

         Attention: Head of Agency
         Fax:       +995 32 253311

         Georgian National Oil Company "Georgian Oil"
         Georgia, Tbilisi 380015
         Kostava St. N65

         Attention:        General Director
         Fax:              + 99532 33 30 32

28.2     Subject to the provisions of the Agreement, the Parties agree that all
         information and data acquired or obtained by any Party in respect of
         Petroleum Operations shall be considered confidential and shall be kept
         confidential and not be disclosed during the term of the Agreement to
         any person or entity not a Party to this Agreement, except:

         a)       To an Affiliate, provided such Affiliate maintains
                  confidentiality as provided herein;

         b)       To a governmental agency or other entity when required by the
                  Agreement;

         c)       To the extent such data and information is required to be
                  furnished in compliance with any applicable laws or
                  regulations, or pursuant to any legal proceedings or because
                  of any order of any court binding upon a Party;

         d)       To prospective or actual Contractors, consultants and
                  attorneys employed by any Party where disclosure of such data
                  or information is essential to such Contractor's, consultant's
                  or attorney's work;

         e)       To a bona fide prospective transferee of a Party's
                  participating interest (including an entity with whom a Party
                  or its Affiliates are conducting

                                       57
<PAGE>   58

                  bona fide negotiations directed toward a merger, consolidation
                  or the sale of a majority of its or an Affiliate's shares);

         f)       To a bank or other financial institution to the extent
                  appropriate to a Party arranging for funding;

         g)       To the extent that any data or information which, through no
                  fault of a Party, becomes a part of the public domain.

28.3     Disclosure as pursuant to Article 28.2(d), (e), and (f) shall not be
         made unless prior to such disclosure the disclosing Party has obtained
         a written undertaking from the recipient party to keep the data and
         information strictly confidential for at least three (3) years and not
         to use or disclose the data and information except for the express
         purpose for which disclosure is to be made.

                                   ARTICLE 29
                             TERMINATION AND BREACH

29.1     At any time, if in the opinion of Contractor, circumstances do not
         warrant continuation of the Petroleum Operations, Contractor may, by
         giving written notice to that effect to State Agency for Regulation of
         Oil and Gas Resources and Georgian Oil, relinquish its rights and be
         relieved of its obligations pursuant to this Agreement except for
         Contractor's obligations to complete the Minimum Work Program, except
         such rights and obligations as related to the period prior to such
         relinquishment. Neither this Agreement nor any of the rights granted
         hereunder nor the Operator Licence may be terminated as a result of any
         act or omission of Operator save in the case where Operator has carried
         out an act or omitted to do something at the specific request of the
         Contractor and Operator has previously advised the Contractor prior to
         carrying out the act or omitting to do something that to carry out that
         act or to omit to do the relevant thing may result in this Agreement
         being terminated.

29.2     Without prejudice to the provisions stipulated in Article 29.1 above,
         this Agreement may only be terminated by the State in its entirety by
         giving ninety (90) days advance written notice thereof to all Parties,
         when and only if a material breach of Agreement is alleged to have been
         committed by Contractor and, provided that conclusive evidence thereof
         has been found by prior arbitration as stipulated in Article 30.

                                       58
<PAGE>   59

                                   ARTICLE 30
                               DISPUTE RESOLUTION

30.1     The Parties hereby consent to submit to the International Centre for
         Settlement of Investment Disputes any dispute in relation to or arising
         out of this Agreement for settlement by arbitration pursuant to the
         Convention on the Settlement of Investment Disputes between States and
         Nationals of Other States.

30.2     The Parties agree that, for the purposes of Article 25(1) of the
         Convention, any dispute in relation to or arising out of this Agreement
         is a legal dispute arising directly out of any investment, and this
         article has force only if all the requirements of Article 30.1 are
         followed.

30.3     For the purposes of Article 25(2) of the Convention, it is agreed that,
         CanArgo Norio Limited is a national of Great Britain, and shall be
         treated as a national of that state for the purposes of the Convention.

30.4     A Party need not exhaust administrative or judicial remedies prior to
         commencement of arbitrage proceedings.

30.5     Any arbitrage tribunal constituted pursuant to this Agreement shall
         apply the provisions of this Agreement as supplemented and interpreted
         by general principles of the laws of Georgia and England as are in
         force on the Effective Date. In case these principles are in conflict
         with each other, Georgian Law shall prevail.

                                   ARTICLE 31
                                      TEXT

31.1     This Agreement shall be executed in three (3) originals in the Georgian
         language and three (3) originals in the English language, which will be
         duly certified by a competent authorized body selected by the State
         Agency, and each of which shall have equal legal force and effect;
         provided however that in case of dispute, conflict, or arbitration the
         English version shall (after the Georgian version has been reviewed and
         its provisions have been discussed in good faith) be used as the
         authentic version to determine the rights and obligations of the
         Parties which shall be determined by reference solely to the English
         version of this Agreement.

                                       59
<PAGE>   60

                                   ARTICLE 32
                           APPROVAL AND EFFECTIVE DATE

32.1    This Agreement shall enter into force and effect in its entirety on the
        Effective Date. The Effective Date shall be the date on which the
        following conditions have been fulfilled:

        32.1.1    The State Agency issues the License to CanArgo Norio Ltd;
                  Annex B. A copy of the letter from Georgian Oil to the State
                  Agency notifying it of its consent to transfer the Licence to
                  CanArgo Norio Ltd is attached as Annex G to this Agreement.

        32.1.2    Georgian Oil has obtained the consent or approval from the Tax
                  Inspectorate for Georgian Oil (or its successors or assigns)
                  to assume, pay and discharge, in the name and on the behalf of
                  Contractor, Contractor's entire Profit Tax liability and
                  Mineral Usage Tax liability for each Agreement Year.

        32.1.3    The Administrative/Licence Fee set forth in Article 14.5 and
                  any other outstanding fees or sums then due and owing by
                  Contractor or the Operating Company to the State, if any, have
                  been paid by Contractor.

        32.1.4    A duly executed copy of the Parent Company Guarantee has been
                  delivered the State Agency.

        32.1.5    The Contractor will notify the State Agency and Georgian Oil
                  in writing that the Contractor is satisfied that this
                  Agreement and Licence have been executed and are in full force
                  and effect in accordance with the requirements of all Georgian
                  laws, rules, approvals and regulations.

32.2    Notwithstanding any other provision of this Agreement to the contrary,
        including, but not limited to Article 29, if after the expiration of one
        (1) year from the date of the execution of this Agreement by all
        Parties, the Effective Date, as determined by provisions of Article
        32.1, has not occurred, then the License and this Agreement shall
        terminate and neither shall be of any further force and effect.

  By execution hereof, the State Agency for Regulation of Oil and Gas Resources
  in Georgia, acting in its capacity as the sovereign representative of Georgia,
  pursuant to the Law of Georgia on Oil and Gas, enacted 16 April 1999 and as
  successor to Georgian Oil ("Saknavtobi") in such capacity, joins as a Party to
  the foregoing Production Sharing Agreement as amended, and consents to the
  provisions thereof.

                                       60
<PAGE>   61

Signed and sealed this 12th day of December, 2000 in three (3) versions in
Georgian and English.

 For State Agency For Regulation of Oil           For CanArgo Norio Ltd.
      and Gas Resources in Georgia                      President
        Head of the State Agency

            /s/G. Itonishvili                          /s/D. Robson
    --------------------------------         --------------------------------
             G. Itonishvili                              D. Robson

        For "National Oil Company
              "Georgian Oil"
             General Director

           /s/G. Makharadze
    --------------------------------
            G. Makharadze

                                       61
<PAGE>   62

                                                                         ANNEX A

                  Map 1 - XIc & Kumisi License Blocks, Georgia

                                       62
<PAGE>   63

                                                                         ANNEX B

<PAGE>   64

                                                                         ANNEX C

                              ACCOUNTING PROCEDURE
                                    SECTION I
                               GENERAL PROVISIONS

1.       PURPOSE

         The accounting procedures included in this Accounting Procedure
         establish a framework of accounting principles as generally accepted
         within the international Petroleum industry. The purpose of this
         Accounting Procedure is to establish a fair and equitable method for
         accounting for Petroleum Operations under the Agreement.

         The purpose of this Accounting Procedure is not to define Costs and
         Expenses for the purposes of determining Cost Recovery Petroleum or to
         define what costs will be deductible in the calculation of Profit Tax.
         Costs and Expenses are defined in Article 11 of the Agreement.
         Calculation procedure for the taxable base and Profit Tax is set forth
         in Article 17 of the Agreement.

2.       DEFINITIONS

         For the purpose of this Accounting Procedure the following terms shall
         have the following meanings:

         "Accounting Procedure" shall mean the accounting principles, practices
         and procedures set forth in this Annex C.

         "Accepted Accounting Practices" shall mean accounting principles,
         practices and procedures generally accepted and recognised in the
         international Petroleum industry.

         "Cash Accounting Basis" shall mean the basis of accounting which
         records the effect of transactions and events on financial conditions
         and income when they are settled in cash.

         "Material and Equipment" means property, including without limitation
         all exploration, appraisal and development facilities together with
         supplies and equipment, acquired and held for use in Petroleum
         Operations.

         "Controllable Material" means all materials, equipment physical assets,
         consumables and other stocks and inventory acquired and held for use in
         Petroleum Operations. A list of types of such Controllable Material
         shall be furnished to Georgian Oil and the State Agency upon request.

                                       64

<PAGE>   65

         The words and phrases defined in the Agreement but not defined above
         shall have the same meaning in this Accounting Procedure as is given to
         them in the Agreement.

3.       AUDITS

         Georgian Oil and the State Agency shall have the right to inspect and
         audit Contractor's books, accounts and records relating to Petroleum
         Operations under the Agreement for the purpose of verifying that the
         Costs and Expenses charged to the Petroleum Operations Account comply
         with the terms and conditions of the Agreement and this Accounting
         Procedure. Such books, accounts and records shall be available in
         Georgia at all reasonable times for inspection subject to thirty (30)
         days notice by duly authorised representatives of Georgian Oil and the
         State Agency, including outside independent auditors. Audits shall be
         conducted in such a manner as not to interfere unduly with ongoing
         operations. All costs associated with the audit will be the sole
         responsibility of Georgian Oil. Georgian Oil and the State Agency shall
         have a period of twenty-four (24) months after the end of each Calendar
         Year in which to audit and verify costs and expenses, volumes and value
         of Petroleum and arithmetic calculations. Any exception by Georgian Oil
         shall be communicated to the Contractor with each disputed charge
         specified, with supporting rationale, within thirty (30) days after the
         completion of the particular audit. If the Contractor and Georgian Oil
         are unable to agree on any item or adjustment, the issue will be
         resolved in accordance with the dispute resolution procedures contained
         in Article 30 of the Agreement. All accounts of Petroleum Operations
         for any Calendar Year shall conclusively be presumed to be true and
         correct twenty-four (24) months following the end of any such Calendar
         Year, unless, within the said twenty-four (24) month period Georgian
         Oil expresses any exception thereto in writing to the Contractor.

4.       CONTRACTOR'S BOOKS

4.1      The Contractor shall maintain in English in U.S.$ and on a Cash
         Accounting Basis books and accounts for Petroleum Operations. Such
         books and accounts shall be kept in accordance with Accepted Accounting
         Practices and the provisions of the Agreement and this Accounting
         Procedure ("Petroleum Operations Account"). The documentation required
         to support such books and accounts shall be the documentation as
         specified in this Accounting Procedure. If no documentation is
         specified then the documentation required shall be the documentation
         reasonably acceptable and recognised in the international Petroleum
         industry.

4.2      All U.S.$ expenditures shall be charged in the amount expended.
         Expenditures incurred in currencies other than U.S.$ shall be
         translated into U.S.$ as per Article 19.11 of the Agreement. A record
         shall be kept of the exchange rates used in translating expenditures
         incurred in currencies other than U.S.$. Any gain or loss resulting
         from the exchange of currencies required for Petroleum Operations and
         any fees or other banking charges

                                       65

<PAGE>   66

         levied in connection with such exchange of currencies or any gain or
         loss resulting from translation of expenditures and sales revenues in
         accordance with the provisions of Article 19.11 shall be included in
         Costs and Expenses and recoverable from Cost Recovery Petroleum and
         credited or charged to the Petroleum Operations Account.

4.3      Contractor shall maintain books and accounts relating to Petroleum
         Operations for four (4) years following the end of the Calendar Year to
         which they relate.

5.       PRECEDENCE OF DOCUMENTS

         In the event of any inconsistency or conflict between the provisions of
         this Accounting Procedure and the provisions of the Agreement treating
         the same subject differently, the provisions of the Agreement shall
         prevail.

6.       REVISION OF ACCOUNTING PROCEDURE

         This Accounting Procedure may be revised from time to time by mutual
         written agreement Georgian Oil and Contractor with the approval of the
         State Agency.

7.       ARBITRATION PROCEDURES

         Any dispute in relation to or arising out of this Accounting Procedure
         shall, unless settled by agreement among the Parties be submitted to
         arbitration in accordance with Article 30 of the Agreement.

8.       OPERATOR

         To the extent that Operator is to incur Costs and Expenses on behalf of
         Contractor, Contractor will advance Operator funds necessary to settle
         such liabilities. Operator shall provide Contractor a projection of
         cash expenditures no later than the tenth (10th) day of the month for
         funding requirements for the following month. Contractor may then
         advance funds to Operator no later than the last business day of the
         month preceding the month the funds are being advanced for. Such cash
         advances will be deducted from actual expenditures for the month with
         any over or short position carried forward to the next month.

                                       66

<PAGE>   67

                                   SECTION II
                        COSTS, EXPENSES AND EXPENDITURES
                                 DIRECT CHARGES

         The Contractor shall charge the Petroleum Operations Account for all
         costs and expenses whether directly or indirectly incurred necessary to
         conduct Petroleum Operations under this Agreement. For the purposes of
         this Accounting Procedure costs and expenses incurred directly or
         indirectly by a Contractor Party and its Affiliated Companies prior to
         the Effective Date of this Agreement shall be deemed to be incurred on
         the Effective Date of this Agreement. Chargeable costs and expenses
         shall include, but not be limited to:

2.1      LICENSES, PERMITS

         All costs, if any, attributable to the acquisition, maintenance,
         renewal or relinquishment of licenses, permits, Agreementual and/or
         surface rights acquired for Petroleum Operations and any bonuses paid
         in accordance with the Agreement when paid by Contractor if and to the
         extent provided by law.

         Documentation requirements: Copy of Agreement or payment request
         documentation indicating purpose of payment, amount of payment and
         recipient of payments.

2.2      SALARIES, WAGES AND RELATED COSTS

2.2.1    Gross salaries and wages in respect of employees of Contractor and its
         Affiliates who are in Georgia directly engaged in Petroleum Operations
         whether temporarily or permanently assigned.

         Documentation requirements: Copy of timesheet indicating project or
         area worked during time period.

2.2.2    Gross salaries and wages in respect of employees of Contractor and its
         Affiliates outside of Georgia directly engaged in Petroleum Operations
         whether temporarily or permanently assigned, and not otherwise covered
         in Section 2.7.2.

         Documentation Requirements: Copy of timesheet indicating project or
         area worked during time period.

2.2.3    Salaries and wages, including everything constituting the employees'
         total compensation. To the extent not included in salaries and wages,
         the Petroleum Operations Account shall also be charged with the cost to
         Contractor and its

                                       67

<PAGE>   68

         Affiliates of payroll taxes, holiday, vacation, sickness, disability
         benefits, living and housing allowances, travel time, bonuses, and
         other similar allowances in accordance with Contractor and its
         Affiliates usual practice, as well as costs to Contractor and its
         Affiliates for employee benefits, including but not limited to employee
         group life insurance, group medical insurance, hospitalisation,
         retirement, and other benefit plans of a like nature applicable to
         labour costs of Contractor and its Affiliates.

         Documentation Requirements: Copy of records indicating Contractor or
         its Affiliates payment to or on behalf of employee. These records will
         be made available only during the conduct of an audit in accordance
         with the provisions of paragraph 3 of Section I of this Accounting
         Procedure.

2.2.4    Expenditures or contributions made pursuant to assessments imposed by
         the State or any Governmental authority which are applicable to the
         Contractor and its Affiliates costs of salaries and wages under
         paragraph 2.2 of this section II of this Accounting Procedure including
         but not limited to payroll taxes and social insurance contributions.

         Documentation Requirements: Copy of records indicating Contractor or
         its Affiliates payment to the State or Governmental authority on behalf
         of employee.

2.2.5    Expenses ((including related travel costs) which are considered
         reasonable in accordance with Contractor's and its Affiliates usual
         practice) of those employees whose salaries and wages are chargeable to
         the Petroleum Operations Account under paragraphs 2.2.1 and 2.2.2 of
         this Section II and for which expenses the employees are reimbursed
         under the usual practice of Contractor and its Affiliates.

         Documentation Requirements:  Copy of expense reimbursement request
         documents.

2.2.6    Gross salaries and wages, pensions, benefits and other related costs
         (together with attributable office costs) of those employees of the
         Contractor and its Affiliates not solely engaged in the conduct of
         Petroleum Operations shall be apportioned to the Petroleum Operations
         and the Contractor's other activities based on the percentage time
         worked on the Petroleum Operations or other activities multiplied by
         the total cost of the employee for the time period.

         Documentation Requirements: Copy of timesheet indicating project or
         area worked during period.

2.3      EMPLOYEE RELOCATION COSTS

2.3.1    Except as provided in Section 2.3.3, Contractor or its Affiliates cost
         of employees' relocation to or from the Agreement Area vicinity or
         location where the employees will reside or work, whether permanently
         or temporarily

                                       68
<PAGE>   69

         assigned to the Petroleum Operations. If such employee works on other
         activities of the Contractor in addition to Petroleum Operations, such
         relocation costs shall be charged to the other activities based on the
         percentage time expected to be worked on other activities multiplied by
         the employee relocation costs.

         Documentation Requirements: Copy of expense payment requests to or on
         behalf of employee.

2.3.2    Such relocation costs shall include transportation of employees and
         their family, personal and household effects of the employee and their
         family, transit expenses, and all other related costs in accordance
         with Contractor and its Affiliates usual practice.

         Documentation Requirements: Copy of payment requests to or on behalf of
         employee.

2.3.3    Relocation costs from the vicinity of the Agreement Area to another
         location classified as a foreign location by Contractor shall not be
         chargeable to the Petroleum Operations Account unless such foreign
         location is the point of origin of the employee.

         Documentation Requirements: Copy of payment requests to or on behalf of
         employee.

2.4      OFFICES, CAMPS AND MISCELLANEOUS FACILITIES

         All costs of maintaining any offices, sub-offices, camps warehouses,
         housing, and other facilities of the Contractor and/or Affiliates
         directly serving the Petroleum Operations either within Georgia or
         elsewhere. If such facilities serve operations in addition to the
         Petroleum Operations the costs shall be allocated to the properties
         served on an equitable basis approved by the Parties.

         Documentation Requirements: Copy of invoice, payment request document
         or Agreement indicating purpose of payment, amount of payment,
         recipient of payment and date goods and/or services were received.

2.5      MATERIAL AND EQUIPMENT

         Cost, net of any discounts taken by Agreement, of Material and
         Equipment purchased or furnished by Contractor whether directly or
         indirectly. Such costs shall include, but are not limited to, export
         brokers' fees, taxes, transportation charges, loading, unloading fees,
         export and import duties and licence fees associated with the
         procurement of Material and Equipment and in-transit losses, if any,
         not covered by insurance. So far as it is reasonably practical and
         consistent with efficient and economical operation, such Material

                                       69

<PAGE>   70

         and Equipment shall be purchased for, and the cost thereof charged to
         the Petroleum Operations Account.

         Documentation Requirements: Copy of invoice, payment request document
         or Agreement indicating purpose of payment, amount of payment,
         recipient of payment and date goods and/or services were received.

2.6      EXCLUSIVELY OWNED EQUIPMENT AND FACILITIES OF CONTRACTOR AND AFFILIATES

         Charges for exclusively owned equipment, facilities and utilities of
         Contractor and its Affiliates at costs or rates not to exceed the
         average cost or rates of non-affiliated Third Parties then prevailing
         for Contractor for like equipment, facilities, and utilities for use.
         Exclusively owned equipment leased to the Petroleum Operations lost or
         damaged beyond repair may be charged at replacement cost plus
         transportation costs to deliver like equipment to the location where
         the like equipment will be used.

         Documentation Requirements: Copy of invoice, payment request document
         or Agreement indicating purpose of payment, amount of payment,
         recipient of payment and date goods and/or services were received.
         Additionally, documentation as to how the average commercial cost or
         rates were determined are required.

2.7      SERVICES

2.7.1    The cost of services provided by Third Parties, Contractor and
         Affiliates of Contractor other than those services covered by Section
         2.7.2. Such charges for services by Contractor and Contractor's
         Affiliates shall not exceed those currently prevailing if performed by
         Third Parties, considering quality and availability of services.

         Documentation Requirements: Copy of invoice, payment request document
         or Agreement indicating purpose of payment, amount of payments,
         recipient of payment and date services were performed.

2.7.2    The cost of services performed by Contractor and Contractor's
         Affiliates technical and professional staffs not located within
         Georgia.

         Documentation Requirements: Copy of timesheet indicating project or
         area worked during period.

         The charges for such services shall not exceed those currently
         prevailing if performed by Third Parties, considering the quality and
         availability of such services.

         Examples of such services include, but are not limited to, the
         following:

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<PAGE>   71

                  Geologic studies and interpretation
                  Seismic data processing
                  Well log analysis, correlation and interpretation
                  Laboratory services
                  Well site geology
                  Project engineering
                  Source rock analysis
                  Petrophysical analysis
                  Geochemical analysis
                  Drilling supervision
                  Development evaluation
                  Accounting and professional services
                  Other data processing

         Costs shall include salaries and wages of such technical and
         professional personnel, lost time, governmental assessments, employee
         benefits, and expenses which are considered reasonable in accordance
         with Contractor and its Affiliates usual practice. Costs shall also
         include all support costs necessary for such technical and professional
         personnel to perform such services, such as, but not limited to, rent,
         utilities, administration, support staff, drafting, telephone and other
         communications expenses, computer support, supplies, and depreciation.

2.8      INSURANCE

         Premiums paid for insurance required by law or the Agreement to be
         carried for the benefit of the Petroleum Operations. If the insurance
         is for the benefit of operations in addition to the Petroleum
         Operations the premiums paid shall be allocated to the operations
         covered on an equitable basis.

         Documentation Requirements: Copy of invoice, payment request document
         or Agreement indicating purpose of payment, amount of payment,
         recipient of payment and period of coverage.

2.9      DAMAGES AND LOSSES TO PROPERTY

2.9.1    All costs or expenditures necessary to replace or repair any damages,
         losses incurred by fire, flood, storm, theft, accident, or any other
         cause. Operator shall maintain written documentation of damages or
         losses

         Documentation Requirements: Copy of invoice, payment request document
         or Agreement indicating purpose of payment, amount of payment,
         recipient of payment.

2.9.2    Expenditures incurred in the settlement of all losses, claims, damages,
         judgments, and other expenses for the account of Petroleum Operations.

                                       71

<PAGE>   72

         Documentation Requirements: Copy of invoice, payment request document
         or Agreement indicating purpose of payment, amount of payment,
         recipient of payment.

2.10     LITIGATION AND LEGAL EXPENSES

         The costs and expenses of litigation and legal services necessary for
         the protection of the Petroleum Operations under this Agreement as
         follows:

2.10.1   Legal Services necessary or expedient for the protection of the
         Petroleum Operations, and all costs and expenses of litigation,
         arbitration or other alternative dispute resolution procedure,
         including but not limited to lawyers' fees and expenses, court costs,
         cost of investigation of procuring evidence, together with all
         judgments obtained against the Parties or any of them arising from the
         Petroleum Operations, except for disputes arising under Article 30 of
         this Agreement.

         Documentation Requirements: Copy of invoice, payment request document
         or Agreement indicating purpose of payment, amount of payments,
         recipient of payment and date services were performed.

2.10.2   If the Parties hereunder shall so agree, actions or claims affecting
         the Petroleum Operations hereunder may be handled by the legal staff of
         a Contractor Party or its Affiliates; and a charge commensurate with
         the similar costs of providing and furnishing such services rendered
         may be made, but no such charges shall be made until the service and
         the charge has been approved by the Parties.

         Documentation Requirements: Copy of timesheet indicating project or
         area worked during period.

2.11     TAXES AND DUTIES

         All State or Governmental Taxes, duties, assessments and charges, of
         every kind and nature (except for the Profit Tax and Mineral Usage Tax
         determined in accordance with the provisions of Article 17 of the
         Agreement), assessed or levied upon or in connection with the Petroleum
         Operations. If Contractor or an Affiliate is subject to income or
         withholding tax as a result of services performed for Petroleum
         Operations under the Agreement, its charges for such services may be
         increased by the amount of such taxes incurred.

         Documentation Requirements: Copy of records indicating Contractor's
         payment to governmental authority, purpose of payment, amount of
         payment and recipient of payment.

                                       72

<PAGE>   73

2.12     FINANCE COSTS

         All Finance Costs.

         Documentation Requirements: Copy of loan document, amount of principal
         and interest paid, any arrangement or other fees and lending
         institution.

2.13     SALE AND SALVAGE OF MATERIALS PREVIOUSLY CHARGED TO PETROLEUM
         OPERATIONS

         Proceeds from the sale or salvage of Material and Equipment previously
         charged to Petroleum Operations will be credited to the Petroleum
         Operations less any expenses associated with the disposition of the
         Material and Equipment. Material and Equipment transferred to
         Contractor or an Affiliate will be credited to the Petroleum Operations
         at fair market value.

         Documentation Requirements: Copy of sales agreement indicating amount
         recovered, parties to agreement, date of sale of Material and Equipment
         and a description.

2.14     ABANDONMENT AND SITE RESTORATION

         Any costs and expenditures in relation to abandonment and site
         restoration and any payments in accordance with the funding procedure
         described in Article 9.8 of the Agreement and Section VII of this
         Accounting Procedure shall be charged to the Petroleum Operations
         Account.

         Documentation Requirements: Copy of invoice, payment request document
         indicating purpose of payment, amount of payment, recipient of payment,
         if applicable copy of any schedule indicating funding requirements for
         abandonment and site restoration.

2.15     ENERGY EXPENSES

         All costs of fuel, electricity, heat, water or other energy used for
         Petroleum Operations.

         Documentation Requirements: Copy of invoice, payment request document
         or Agreement indicating purpose of payment, amount of payments,
         recipient of payment.

2.16     COMMUNICATION CHARGES

         The costs of acquiring, leasing, installing, operating, repairing and
         maintaining communications systems.

                                       73

<PAGE>   74

         Documentation Requirements: Copy of invoice, payment request document
         or Agreement indicating purpose of payment, amount of payments,
         recipient of payment.

2.17     COORDINATION COMMITTEE

         All costs and expenditures incurred with respect to the activities of
         the Coordination Committee pursuant to Article 6 of the Agreement.

         Documentation Requirements: Copy of invoice, payment request document
         indicating purpose of payment, amount of payments, recipient of
         payments.

2.18     CREDITS

         The Contractor will credit to the Petroleum Operations Account the net
         proceeds of the following transactions:

2.18.1   The net proceeds of any successful insurance claim in connection with
         Petroleum Operations where the claim is with respect to operations or
         assets which were insured and where the insurance premiums with respect
         thereto have been charged to the Petroleum Operations Account.

2.18.2   The net proceeds of any successful claim in connection with Petroleum
         Operations where the costs and expenditures relating to the subject of
         the claim have been charged to the Petroleum Operations Account.

2.19     OTHER EXPENDITURES

         Any other costs and expenditures incurred by Contractor and its
         Affiliates for the necessary and proper conduct of the Petroleum
         Operations in accordance with approved Work Program and Budget and not
         covered in this Section II or in Section III, of this Accounting
         Procedure.

         Documentation Requirements: Documentation reasonably acceptable and
         recognised in the international Petroleum industry to support those
         costs or expenditures.

                                       74

<PAGE>   75

                                   SECTION III
                                INDIRECT CHARGES

3.1      PURPOSE

         Contractor shall charge an administration overhead to the Petroleum
         Operations Account for the cost of indirect services and related office
         costs of Contractor and its Affiliates not otherwise provided in this
         Accounting Procedure. For the purposes of this Accounting Procedure
         costs and expenses incurred directly or indirectly by a Contractor
         Party and its Affiliated Companies prior to the Effective Date of this
         Agreement shall be deemed to be incurred on the Effective Date of this
         Agreement. Indirect costs chargeable under this Section III represent
         the cost of general administration and support services provided by the
         Contractor and its Affiliates outside of Georgia for the indirect
         benefit of Petroleum Operations. Such support will include the services
         and related office costs of personnel performing administrative, legal,
         treasury, tax and employee relations, provision of expertise and other
         non-technical functions which can not be specifically identified or
         attributed to particular projects. No cost or expenditure included
         under Section II of this Accounting Procedure shall be included or
         duplicated under this Section III.

3.2      AMOUNT

         The charge under Section 3.1 will be charged at rates on total annual
         expenditures attributable to Petroleum Operations as follows:

                               ANNUAL EXPENDITURES

         U.S$ 0 to U.S.$10,000,000 of expenditures per Calendar Year = 5%

         Excess above U.S.$10,000,000 of expenditures per Calendar Year =3%

3.3      CHANGES

         The indirect charges provided for in this Section III may be amended
         periodically by mutual agreement between Georgian Oil and Contractor
         if, in practice, these charges are found to be insufficient or
         excessive.

                                       75

<PAGE>   76

                                   SECTION IV
                                   INVENTORIES

4.1      PERIODIC INVENTORIES, NOTICE AND REPRESENTATION

         At reasonable intervals as agreed with Georgian Oil, inventories shall
         be taken by Contractor of all Controllable Material, which shall
         include materials and physical assets. Written notice of intention to
         take inventory shall be given by Contractor to Georgian Oil; at least
         thirty (30) days before any inventory is to begin so that Georgian Oil
         may be represented when any inventory is taken. Failure of Georgian Oil
         to be represented at an inventory shall bind Georgian Oil to accept the
         inventory taken by Contractor who shall in that event furnish Georgian
         Oil with a copy thereof.

4.2      RECONCILIATION AND ADJUSTMENT OF INVENTORIES

         Reconciliation of inventory shall be made by Contractor and Georgian
         Oil and a list of overages and shortages shall be jointly determined by
         Contractor and Georgian Oil, and the inventory accordingly adjusted by
         Contractor.

                                    SECTION V
                                FINANCIAL REPORTS

5.1      ACCOUNTS OF PETROLEUM OPERATIONS

         Contractor shall submit to Georgian Oil and the State Agency by March
         15 following each Calendar Year accounts for that Calendar Year of the
         Petroleum Operations prepared in accordance with this Accounting
         Procedure.

5.2      STATEMENT FOR RECOVERY OF COSTS AND OF COST RECOVERY PETROLEUM

         The Contractor shall, render to Georgian Oil and the State Agency as
         promptly as practical but not later than forty five (45) days after the
         end of the last Calendar Quarter in which the date of commencement of
         Commercial Production first occurs, and not later than forty five (45)
         days after the end of each succeeding Calendar Quarter a Calendar
         Quarter Cost Recovery report and Calendar Quarter Profit Petroleum
         division report showing:

         (i)      Recoverable Costs and Expenses carried forward from the
                  previous Calendar Quarter, if any;

                                       76
<PAGE>   77

         (ii)     Recoverable Costs and Expenses incurred during the Calendar
                  Quarter;

         (iii)    Total recoverable Costs and Expenses for the Calendar Quarter
                  (sum of (i) plus (ii));

         (iv)     Volume and value of Cost Recovery Petroleum taken and
                  separately disposed of by Contractor for the Calendar Quarter;

         (v)      Amount of Costs and Expenses actually recovered for the
                  Calendar Quarter;

         (vi)     Amount of recoverable Costs and Expenses to be carried forward
                  into the succeeding Calendar Quarters if any;

         (vii)    Excess, if any, of the value of Cost Recovery Petroleum taken
                  and separately disposed of by Contractor over recoverable
                  Costs and Expenses for the Calendar Quarter;

         (viii)   The value and volume of Petroleum produced, used in Petroleum
                  Operations, available for lifting and actually lifted by
                  Parties during the Calendar Quarter; and

         (ix)     Profit Petroleum allocated to each Contractor Party and
                  Georgian Oil during the Calendar Quarter.

5.3      PAYMENTS

         If such statement shows an amount due to Georgian Oil, payment of that
         amount shall be made in U.S.$ by Contractor to Georgian Oil with the
         rendition of such statement.

                                   SECTION VI
                           CONTROL AND MAJOR ACCOUNTS

6.1      COST RECOVERY CONTROL ACCOUNT
         Contractor will establish a cost recovery control account and an
         offsetting Agreement account to control therein the amount of cost
         remaining to be recovered, if any, and the amount of cost recovered.

                                       77
<PAGE>   78

6.2      MAJOR ACCOUNTS

         For the purpose of classifying costs, expenses and expenditures for
         cost recovery, costs, expenses and expenditures shall be recorded in
         major accounts including but not limited to the following:

         (a)      Exploration Expenditures

         (b)      Development Expenditures, other than Operation Expenses

         (c)      Operation Expenses

         Any other necessary sub-accounts shall be used. All Costs and Expenses,
         regardless of classification, shall be recovered as per Article 11 of
         the Agreement.

                                   SECTION VII
                        ABANDONMENT AND SITE RESTORATION

         The Development Plan shall also include an abandonment and site
         restoration program together with a funding procedure for such program.
         All funds collected pursuant to the funding procedure shall be
         indicated to site restoration and abandonment and will be placed in a
         special interest bearing account by Contractor which shall be held in
         the joint names of the State and the Contractor or their respective
         nominees, or its designee. Contractor's responsibilities for
         environmental degradation, site restoration and well abandonment
         obligations, and any other actual contingent and potential activity
         associated with the environmental status of the Development Area shall
         be limited to the obligation to place the necessary funds in the
         approved account. All expenditures incurred in abandonment and site
         restoration including but not limited to all payments deposited by
         Contractor in the special interest bearing account shall be treated as
         Costs and Expenses in accordance with Article 11 and Article 9.8 of the
         Agreement and chargeable to the Petroleum Operations Account.

                                       78

<PAGE>   79

                                                                         ANNEX D

                              MINIMUM WORK PROGRAM

Work Program for the Agreement Area, Norio-Satkhenisi Area Block XIc and Kumisi
Block, includes minimal obligatory seismic program and program for future works
which is divided into two phases. Works planned for first two phases are given
below.

PHASE 1 - prior to Effective Date and during year 1

         1.       Acquire 173 kilometers of seismic data (acquired prior to
                  Effective Date)
         2.       Process acquired seismic data
         3.       Geological and geophysical evaluation of the Agreement Area

                                                              Cost: US$1,400,000

PHASE 2 - year 1

Drill one well to test prospective horizons

                                                        Cost: up to US$5,000,000

Works planned for Phases 1 and 2 comprise the minimum Work Program and Budget as
required under Article 10.2 of this Agreement.

                                       79
<PAGE>   80

                                                                         ANNEX E

                        PERMIT APPLICATION FEES SCHEDULE

<TABLE>
<CAPTION>
APPLICATION TYPE                                                                                FEE U.S.$
----------------                                                                                ---------
<S>                                                                                            <C>
Application for Permit to Drill                                                                   200.00
Application to Plug and Abandon a Well                                                            100.00
Application to Temporarily Abandon a Well                                                         100.00
Application for Geophysical Permit (by distance, US$200 + US$0.25/km)                             200.00
Miscellaneous Required Filings (well completion reports, production reports, etc.)                 25.00
Application for Offshore Construction Permit                                                      500.00
Application for Treated Water Discharge Permit                                                    200.00
Application for Waste Disposal Permit                                                             250.00
Application for Injection (Disposal) Well Permit                                                  250.00
Application for Gas Flaring Permit                                                                250.00
Public Hearing Required by Non-Agency Law (e.g. EIA)                                              100.00
Application for Pipeline Permit (by distance, US$500 + US$0.25/km)                                500.00
Application for Onshore Facilities Permit (<0.5 ha - US$100; 0.5 ha - 1 ha                        100.00
US$200; 1 ha - 5 ha US$400; >5 ha US$600)                                                       - 600.00
Instituting Eminent Domain Proceedings on behalf of Contractor                                  1,000.00
Copies per page                                                                                     1.00
Certification/Authentication per document                                                           2.50
</TABLE>

                                       80

<PAGE>   81

                                                                         ANNEX F

GUARANTEE DATED 12 DECEMBER 2000 BY

1        CanArgo Energy Corporation having its registered office at 32 Lookerman
         Square, Suite L-100, City of Dover, County of Kent, Delaware 19904 USA
         (the "Guarantor");

in favour of

2        The State of Georgia represented by the Joint Stock National Oil
         Company - Georgian Oil and the State Agency for Regulation of Oil and
         Gas Resources in Georgia (the "State").

WHEREAS

A        CanArgo Norio Limited (a company in which the Guarantor is interested)
         has entered into a Production Sharing Agreement dated 12 December 2000
         (the "Agreement") in relation to the Norio-Satkhenisi Area Block XIc
         and Kumisi Block.

B        The Agreement contains a Minimum Work Program which the Contractor (as
         defined in the Agreement) is contracted to perform.

C        The Guarantor has agreed to enter into this Agreement in respect of the
         obligations of the Contractor to perform the Minimum Work Program under
         the Agreement.

NOW THEREFORE IT IS AGREED AS FOLLOWS:

         1        DEFINITIONS

                  Defined terms in this Guarantee shall have the meaning
                  attributed to them in the Agreement save as where otherwise
                  specified herein.

         2        GUARANTEE

         2.1      The Guarantor guarantees to the State the due and punctual
                  performance and observance by the Contractor (or the Operator
                  in accordance with the terms of the Agreement) of the Minimum
                  Work Program. For the avoidance of doubt the provisions of
                  this guarantee do not extend beyond the obligation to perform
                  or procure the performance of the Minimum Work Program.

         2.2      If the Contractor does not perform any obligation referred to
                  in clause 2.1 in accordance with the terms of the Agreement
                  and following a period of

                                       81
<PAGE>   82

                  thirty (30) days after the State has given written notice to
                  the Contractor and the Guarantor of such default in accordance
                  with the terms of the Agreement the default has not been
                  rectified, the Guarantor shall, subject to clause 2.3, perform
                  that obligation or procure performance of that obligation,
                  immediately on demand.

         2.3      The State shall not enforce the Guarantee against the
                  Guarantor unless and until it has demanded payment of the
                  relevant amount or performance of the relevant obligation from
                  the Contractor.

         3        NO PREJUDICE TO THE CONTRACTOR'S RIGHTS

                  For the avoidance of doubt, the existence of this Guarantee
                  does not prejudice the Contractor's rights expressly conferred
                  under the Agreement or any related document. The Guarantor
                  shall be entitled to the same pleas and defences against the
                  State as the Contractor under the Agreement.

         4        CHOICE OF LAW

                  This Guarantee shall be governed by and interpreted in
                  accordance with English law and the parties hereto hereby
                  submit to the non-exclusive jurisdiction of the courts in
                  England.

     Signed by David Robson and J F R Hammond              /s/J F R Hammond
     For CanArgo Energy Corporation                        /s/David Robson

     Signed by the State Agency for
     Regulation of Oil and Gas Resources in Georgia        /s/Gia Itonishvili

     Signed by Joint Stock National
     Oil Company - Georgian Oil                            /s/G. Makharadze

                                       82<PAGE>   1

                                                                  Exhibit 10(28)

                            SHARE EXCHANGE AGREEMENT

         This Share Exchange Agreement [the "Agreement"] is entered into and
effective as of November 10, 2000 by and between Argonaut Oil and Gas Limited, a
Cyprus corporation ["Argonaut"], CanArgo Energy Corporation, a Delaware
corporation ["CanArgo"], and the shareholders of Argonaut [the "Argonaut
Shareholders"].

                                    RECITALS

A.       Argonaut is the owner of an undivided 28.7% interest in and to Georgian
         American Oil Refinery Company Ltd., a corporation formed and operated
         under the laws of the Republic of Georgia ["GAOR"]. Pursuant to the
         Foundation Agreement and Charter of GAOR, Argonaut is entitled to
         receive shares of stock in GAOR as evidence of its ownership interest
         in GAOR. However, to date, GAOR has not issued or delivered such shares
         to Argonaut. Nor has GAOR issued or delivered shares of its stock to
         its other owners. Argonaut's ownership interest in GAOR, and its right
         to receive shares of GAOR stock as evidence of such ownership interest,
         are referred to collectively below as the "Interest".

B.       Argonaut desires to transfer the Interest to CanArgo, and CanArgo
         desires to acquire the Interest from Argonaut, solely in exchange for
         shares of the common stock of CanArgo [the "CanArgo Common Stock"].

C.       The transfer of the Interest from Argonaut to CanArgo is subject to the
         other owners of GAOR consenting to such transfer, which shall be
         considered a condition subsequent to the execution of this Agreement.

                                   PROVISIONS

         In consideration of the foregoing Recitals and the parties' respective
representations, warranties and covenants set forth below, the parties agree as
follows:

         1. Exchange. For and in consideration of the issuance and delivery by
CanArgo of one million one hundred and sixty four thousand three hundred and
fifty six (1,164,356) shares [the "CanArgo Shares"] of CanArgo Common Stock,
Argonaut hereby assigns, transfers and conveys to CanArgo, and CanArgo hereby
accepts, the Interest. The transfer of the Interest to CanArgo shall be deemed
to occur as of 12:01 a.m., Eastern Standard time, on the date first written
above. Argonaut hereby nominates and designates the Argonaut Shareholders to
receive the CanArgo Shares on Argonaut's behalf. In this regard, CanArgo shall
issue and deliver the CanArgo Shares directly to the individual Argonaut
Shareholders (in the amounts specified on the signature page of this Agreement)
immediately after the transfer of the Interest to CanArgo.

<PAGE>   2

CanArgo hereby nominates CanArgo Petroleum Products Limited as its nominee to
receive the Interest.

         2. Representations, Warranties and Disclosure(s). The parties
represent, warrant and disclose the following:

            (a) Argonaut represents and warrants to and for the benefit of
CanArgo that, to the best of Argonaut's current knowledge and without further
research or investigation, immediately prior to the transfer of the Interest to
CanArgo (i) Argonaut will not be in default, nor after notice or lapse of time
or both would Argonaut have been in default, under the GAOR Charter or
Foundation Agreement; (ii) Argonaut has not previously transferred to any other
party or encumbered, voluntarily or involuntarily, all or any part of the
Interest; (iii) subject to the matters set forth in this Agreement and
applicable law, Argonaut holds title to the Interest, and will transfer the
Interest to CanArgo, free and clear of any mortgages, liens, charges,
encumbrances or title defects of any nature whatsoever; and (iv) subject to the
matters set forth in this Agreement and applicable law, CanArgo shall receive
good and marketable title to the Interest.

            (b) CanArgo represents and warrants to and for the benefit of
Argonaut and the Argonaut shareholders that (i) the CanArgo Shares are fully
paid for, are not assessable and are not subject to any resale or transfer
restrictions or limitations except as provided by applicable law; (ii) the
CanArgo Shares have been issued to Argonaut from authorized but unissued CanArgo
Common Stock and have not been encumbered, voluntarily or involuntarily, by
CanArgo; (iii) subject to the matters set forth in this Agreement and applicable
law, CanArgo will deliver the CanArgo Shares free and clear of any mortgages,
pledges, liens, charges, encumbrances or title defects of any nature whatsoever;
(iv) subject to the matters set forth in this Agreement and applicable law, the
Argonaut Shareholders will receive good and marketable title to CanArgo Shares.

            (c) Each party represents and warrants to and for the benefit of the
other party that, subject to the conditions expressed in Recital C above; (i)
the execution and delivery of this Agreement by such party and the consummation
by such party of the transactions contemplated by this Agreement will not
violate any statute or law or any judgement, decree, order, regulation or rule
of any court or governmental authority by which such party is bound or the
charter, bylaws or other instruments under which such party is formed and its
activities are governed; (ii) this Agreement has been duly authorized, executed
and delivered by such party; and (iii) this Agreement constitutes a valid and
binding agreement of such party and is enforceable against such party in
accordance with the terms hereof (subject to applicable bankruptcy laws and
similar laws granting relief to debtors or affecting the rights of creditors,
and the equitable powers of court with proper jurisdiction).

            (d) Subject to the representations and other matters set forth in
this Agreement, Argonaut and the Argonaut Shareholders are accepting the CanArgo
Shares, and CanArgo is accepting the Interest, on an AS IS, WHERE IS basis with
all faults and defects.

            (e) In connection with the proposed issuance of the CanArgo Shares,
Argonaut and the Argonaut Shareholders hereby acknowledge, represent and warrant
to and covenant and agree with CanArgo that:

                                       2

<PAGE>   3

            (i) Argonaut's Shareholders are "accredited investors", as defined
in Rule 501 of Regulation D promulgated under the United States Securities Act
of 1933, as amended (the "Securities Act"). The Argonaut Shareholders are
acquiring the CanArgo Shares for their own account and not for the account or
benefit of any other person. The CanArgo shares will be acquired by the Argonaut
Shareholders in good faith for investment and not with a view to the
distribution thereof. The Argonaut Shareholders do not presently intend to sell
or otherwise dispose of all or any part of the CanArgo Shares and do not now
have in mind the sale or other disposition of all or any part of the CanArgo
Shares upon the occurrence or nonoccurrence of any predetermined event.

            (ii) The Argonaut Shareholders are willing and able to bear the
economic risk of an investment in the CanArgo Shares, and the Argonaut
Shareholders have adequate means of providing for current needs and reasonably
anticipated contingencies and have no need for liquidity in such investment. In
making these statements, the Argonaut Shareholders have taken into account that
(i) they may have to hold the CanArgo Shares for an indefinite period and (ii)
they could experience a complete loss of their investment in the CanArgo Shares.
By reason of the business and financial experience of the Argonaut Shareholders,
they have such knowledge, sophistication and experience in business and
financial matters to enable them to evaluate the merits and risks of the
investment in the CanArgo Shares.

            (iii) Argonaut and the Argonaut Shareholders:

               (A) have carefully read and considered CanArgo's Joint Management
Information Circular and Proxy Statement/Prospectus dated 9 June 1998, 10 June
1999, 15 August 2000 and 20 September 2000 (the "Prospectus"), Quarterly Reports
on Form 10-Q for the three month periods ended 31 March 2000 and 30 June 2000,
Current Report on From 8-K dated on or about 20 July 2000, 28 July 2000, 24
August 2000 and 7 September 2000, in each case as filed with the Securities and
Exchange Commission and, where appropriate, as amended to date, and Press
Releases dated 9 May 2000, 11 May 2000, 19 May 2000, 5 June 2000, 6 June 2000,
28 June 2000, 20 July 2000, 24 July 2000, 26 July 2000, 1 August 2000, 14 August
2000, 16 August 2000, 18 August 2000, 31 August, 2000, 11 September 2000, 22
September 2000, 29 September 2000, 11 October 2000, and 19 October 2000
[collectively, the "Disclosure Documents"], receipt of which is hereby
acknowledged by Argonaut and the Argonaut Shareholders; understand and have
evaluated the risks of an investment in the CanArgo Shares; and have relied on
no information supplied by or on behalf of CanArgo other than the information
contained in such Disclosure Documents;

               (B) have been given the opportunity to ask questions of CanArgo
and its management concerning CanArgo, the CanArgo Shares, and other matters
pertaining to this investment, in order for Argonaut and the Argonaut
Shareholders to evaluate the merits and risks of an investment in the CanArgo
Shares, and Argonaut and the Argonaut Shareholders have received satisfactory
written responses to all such questions, if any;

               (C) confirm that the CanArgo Shares were not offered to Argonaut
or the Argonaut Shareholders by way of any general solicitation or advertising
and at no time was Argonaut or the Argonaut Shareholders presented with or
solicited by means of any leaflet, public promotional meeting, circular, radio
or television advertisement, newspaper or magazine article, or other written
material; and

                                       3

<PAGE>   4

               (D) acknowledge that neither the Securities and Exchange
Commission nor any state securities commission or regulatory authority has
passed upon or endorsed the merits of the CanArgo Shares.

            (iv) Since the offer and sale of the CanArgo Shares have not been
registered under the Securities Act in reliance upon Section 4(2) among other
provisions of the Securities Act and the rules and regulations promulgated under
the Securities Act, the Argonaut Shareholders will only offer or resell the
CanArgo Shares in compliance with the provisions of all applicable securities
laws and regulations. The CanArgo Shareholders will offer or resell the CanArgo
Shares only if the CanArgo Shares are registered under the Securities Act or an
exemption from such registration is available. Unless such registration has been
effected or such an exemption is available, CanArgo shall not permit the
transfer of the CanArgo Shares.

            Argonaut and the Argonaut Shareholders understand and agree that
CanArgo may take such reasonable steps as it deems appropriate to ensure
compliance with the offer, resale and other restrictions on transfer contained
in this Agreement or arising under applicable securities laws, including
instituting "stop transfer" instructions with respect to the CanArgo Shares and
endorsing restrictive legends, such as the following, on certificates
representing the CanArgo Shares:

         The shares represented by this Certificate have not been registered
         under the Securities Act of 1933, as amended (the "Securities Act") and
         are "restricted securities" as that term is defined in Rule 144 under
         the Securities Act. The Shares may not be offered for sale, sold or
         otherwise transferred except pursuant to an effective registration
         statement under the Securities Act or pursuant to an exemption from
         registration under the Securities Act, the availability of which is to
         be established to the satisfaction of the Issuer.

         The Argonaut Shareholders further agree that they will not transfer
CanArgo Shares to any person under circumstances in which such CanArgo Shares
remain restricted securities, as defined in Rule 144 issued under the Securities
Act, in the hands of such transferee without first obtaining for the benefit of
CanArgo and transmitting to CanArgo the written undertaking (in form
satisfactory to CanArgo) of such transferee to observe the obligations of the
Argonaut Shareholders pursuant to this subsection (e)(iv) of this Section 2.

            (f) In connection with the proposed transfer to it of the Interest,
CanArgo hereby acknowledges, represents and warrants to and covenants and agrees
with Argonaut and the Argonaut Shareholders that:

               (i) CanArgo is an "accredited investor", as defined in Rule 501
of Regulation D promulgated under the Securities Act, by reason of CanArgo being
a corporation with total assets in excess of $5,000,000 not formed for the
specific purpose of acquiring the Interest. CanArgo is acquiring the Interest
for CanArgo's own account and not for the account or benefit of any other
person. The Interest will be acquired by CanArgo in good faith for investment
and not with a view to the distribution thereof. CanArgo does not presently
intend to sell or otherwise dispose of all or any part of the Interest upon the
occurrence or nonoccurrence of any predetermined event.

                                       4

<PAGE>   5

            (ii) CanArgo is willing and able to bear the economic risk of an
investment in the Interest, and CanArgo has adequate means of providing for
current needs and reasonably anticipated contingencies and has no need for
liquidity in such investment. In making these statements, CanArgo has taken into
account that (i) CanArgo may have to hold the Interest for an indefinite period
and (ii) CanArgo could experience a complete loss of CanArgo's investment in the
Interest. By reason of the business and financial experience of CanArgo and its
officers and directors, CanArgo has such knowledge, sophistication and
experience in business and financial matters to enable CanArgo to evaluate the
merits and risks of the investment in the Interest.

            (iii) Since the offer and sale of the Interest has not been
registered under the Securities Act in reliance upon Section 4(2) among other
provisions of the Securities Act and the rules and regulations promulgated under
the Securities Act, CanArgo will only offer or resell the Interest in compliance
with the provisions of all applicable securities laws and regulations. CanArgo
will offer or resell the Interest only if the Interest is registered under the
Securities Act or an exemption from such registration is available.

            (iv) CanArgo is already an owner of GAOR, and has ready access to
the management and books and records of GAOR, and is familiar with the business
operations and financial condition of GAOR. CanArgo is acquiring the Interest in
exchange for the CanArgo Shares as part of a plan of reorganization.

            (v) CanArgo:

               (A) understands and has evaluated the risks of an investment in
the Interest; and has relied on no information supplied by or on behalf of
Argonaut other than the information set forth in representations and warranties
by Argonaut in this Agreement;

               (B) has been given the opportunity to ask questions of GAOR and
its management concerning GAOR, the Interest, and other matters pertaining to
CanArgo's investment in the Interest, in order for CanArgo to evaluate the
merits and risks of an investment in the Interest, and CanArgo has received
satisfactory written responses to all such questions, if any; and

               (C) acknowledges that neither the Securities and Exchange
Commission nor any state securities commission or regulatory authority has
passed upon or endorsed the merits of the Interest.

         3. Indemnification. Argonaut shall indemnify, defend, protect and hold
harmless CanArgo from and against any and all claims, suits, causes of action,
liabilities, losses, damages and related costs and expenses (including
litigation costs and attorney fees) to the extent caused by the breach of this
Agreement by Argonaut or the Argonaut Shareholders or the breach of any of their
respective representations or warranties set forth in this Agreement. However,
Argonaut's and the Argonaut Shareholder's aggregate liability with respect to
any claim for indemnification shall never exceed an amount computed as (i) the
fair market value of the CanArgo Shares held by them, on the date a claim is
asserted hereunder, plus (ii) the net proceeds (or the fair market value of the
consideration) received by them, respectively, from the arms-length sale,
exchange or other

                                       5
<PAGE>   6

disposition of CanArgo Shares prior to such date, plus (iii) the fair market
value of CanArgo Shares disposed of by them, respectively, prior to such date
other than in arms-length transactions, with such value measured on the date or
dates of such dispositions, less (iv) all amounts previously paid by them,
receptively, as indemnification hereunder.

         CanArgo shall indemnify, defend, protect and hold harmless Argonaut and
the Argonaut Shareholders from and against any and all claims, suits, causes of
action, liabilities, losses, damages and related costs and expenses (including
litigation costs and attorney fees) to the extent caused by the breach of this
Agreement by CanArgo or the breach of any of CanArgo's representations or
warranties set forth in this Agreement. However, CanArgo's aggregate liability
with respect to any claim for indemnification shall never exceed US $1,257,505.

         4. Board Approval. Upon the request of any party, each corporate party
shall deliver to the others a certified copy of resolutions adopted by its board
of directors approving the terms and conditions of this Agreement and
authorizing one or more of its executive officers to execute and enter into this
Agreement on behalf of such party.

         5. Miscellaneous.

            5.1 This Agreement shall be governed by the laws of the State of
Delaware applicable to agreements executed, delivered in and wholly performed in
such state without reference to its choice of laws principles.

            5.2 Subject to applicable limitation of actions periods (statutes of
limitations), all representations, warranties and covenants contained in this
Agreement shall survive the execution of this Agreement and shall continue in
full force and effect until two (2) years after the date of this Agreement.

            5.3 If any provision of this Agreement is for any reason and to any
extent determined to be invalid or unenforceable, such provision shall, if
possible, be deemed modified to the minimum extent necessary to render it valid
and enforceable, and the remainder of this Agreement will remain in full force
and effect.

            5.4 This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.

            5.5 Any terms or provisions of this Agreement may be amended, and
the observance of any term of this Agreement may be waived, only by a writing
signed by the party to be bound thereby. The waiver by any party of any breach
or default hereunder shall not be deemed a waiver of any other default or
breach, whether of a similar or dissimilar nature.

            5.6 All notices and other communications under this Agreement shall
be in writing and shall be given by delivery in person, by facsimile, by
registered or certified mail (postage prepaid and return receipt requested), or
by courier or overnight delivery service addressed to the party

                                       6

<PAGE>   7

to which it is directed at its principal executive offices. Notice shall be
deemed given upon actual receipt.

            5.7 Each of the parties shall bear its own expenses incurred in
connection with the negotiation, preparation and consummation of this Agreement.

            5.8 This Agreement may not be assigned by any party without the
prior written consent of the other parties, except for assignments by operation
of law. Except as expressly provided otherwise in this Agreement, this Agreement
is not intended to confer any rights or benefits upon any person not a party
hereto. Subject to the foregoing, this Agreement shall be binding on, and shall
inure to the benefit of, the parties hereto and their respective successors and
permitted assigns.

            5.9 This Agreement constitutes the entire understanding and
agreement of the parties with respect to the subject matter hereof and
supersedes all prior and contemporaneous agreements and understandings, written
or oral, regarding the Interest and the CanArgo Shares.

            5.10 In the event of any litigation between the parties concerning
this Agreement, the prevailing party in such litigation shall be entitled to
recover all of its related and reasonable costs and expenses, including attorney
fees, from the party which does not prevail, regardless of whether or not
recovery of such costs, expenses and/or fees is provided for by statute.

            As confirmation of the above, the parties have executed and entered
into this Share Exchange Agreement as of the date first written above.

                                                             CanArgo Shares
CanArgo Energy Corporation        Argonaut Shareholders      to be received

By: /s/David Robson                         /s/ Eugene C. Kozlowski    327,184
   ----------------------------------       --------------------------
Name: David Robson                          Eugene C. Kozlowski
     --------------------------------
Title: Chief Executive Officer
      -------------------------------       /s/ Gregg S. Kozlowski     327,184
                                            --------------------------
                                            Gregg S. Kozlowski

Argonaut Oil and Gas Ltd.

                                            /s/ H.MikeFreeny           365,708
By: /s/ Eugene C. Kozlowski                 --------------------------
   ----------------------------------       H. Mike Freeny
Name: Eugene C. Kozlowski
     --------------------------------
Title: President
      -------------------------------       /s/ John A. Lyddon         144,380
                                            --------------------------
                                            John A. Lyddon

         The above Share Exchange Agreement is hereby consented to by the
following owners and founders of Georgian American Oil Refinery Company Ltd.

Georgian Oil                                Georgian-British Oil Service Company

By: /s/Gia Makaradze                        By: /s/Shaikh Bakhtadze
   ----------------------------------          -----------------------
Name: Gia Makaradze                         Name: Shaikh Bakhtadze
     --------------------------------            ---------------------

                                       7

<PAGE>   8

Title: General Director                     Title: General Director
      -------------------------------             --------------------

8

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