Document:

EX-10.2

Exhibit 10.2

 

 

The Supplementary Agreement

Concerning the Recovery of Additional Development Costs

under the Petroleum Contract for Development and Production of the Daan Oil Field of

Jilin Province of the People’s Republic of China by and among China National Petroleum

Corporation, MI Energy Corporation and Global Oil Corporation

This supplementary agreement is signed on 25 September, 2008 in Beijing by China National
Petroleum Corporation (hereinafter referred to as “CNPC”), MI Energy Corporation and Global Oil
Corporation (hereinafter referred to as “GOC”, and together with MI Energy Corporation,
collectively as the “Contractor”).

WHEREAS, on 16 December 1997, CNPC and GOC entered into the Petroleum Contract for Development and
Production of the Daan Oil Field of Jilin Province of the People’s Republic of China (hereinafter
referred to as the “Petroleum Contract”, which was amended by the Modification Agreement for
Petroleum Contract for Daan Oil Field, Jilin, the People’s Republic of China entered into by and
among CNPC, GOC and Microbes. Inc (hereinafter referred to as the “Microbes”) on 25 October
2000 and the Modification Agreement for Petroleum Development and Production Contract for
Daan Oil Field of Jilin, the People’s Republic of China entered into by and among CNPC, GOC,
Microbes and MI Energy Corporation on 20 December 2001), under which CNPC and the Contractor agreed
to cooperate in developing and producing the oil resources in Daan block;

WHEREAS, the Contractor has made the original ODP for Daan block according to the requirements
set forth in the Petroleum Contract (hereinafter referred to as the “Original ODP”) and such
Original ODP was approved by the Chinese government on 7 May 2004 and the implementation
thereof has been completed by MI Energy Corporation (hereinafter referred to as the
“Operator”);

Page 1

 

 

WHEREAS, the Contractor has prepared the additional ODP for Daan block according to the
requirements set forth in the Petroleum Contract (hereinafter referred to as the “First
Additional ODP”) and such First Additional ODP was approved by the Chinese government on 6
December 2007 and is under implementation by the Operator;

WHEREAS, CNPC and the Contractor desire to implement the subsequent Additional (or Adjusted)
ODP and Additional Development Operations in Daan block so as to maintain and expand the
Petroleum production in the Contract Area; and

WHEREAS, for the purpose to encourage the Contractor to make additional development
investment, CNPC and the Contractors hereby agree to confirm the method for recovering the
Additional Development Costs.

Therefore, CNPC and the Contractor confirm as follows:

	1.	 	During the remaining production period, the recovery of the Additional (or Adjusted)
Development Costs incurred under the Additional ODP, Additional Development Program or
the approved work programs and budgets by CNPC, shall refer to Article 13.2 of the
Petroleum Contract and the specific recovery method shall be as below:

	 	1.1	 	The Annual Gross Production of Crude Oil from any Oil Field within the
Contract Area in each Calendar Year during the remaining production period shall be
allocated in accordance with the following sequence and proportions:

	 	1.1.1	 	The percentages of Crude Oil as specified in paragraphs (1) and (2)
below to the Annual Gross Production of Crude Oil shall be used for payments of
the value added tax and royalty respectively and shall be paid in kind to the
relevant authorities of the Chinese government through CNPC.

	 	(1)	 	Value added tax shall be paid in accordance with relevant
regulations of the People’s Republic of China; and

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	 	(2)	 	Royalty shall be paid in accordance with relevant regulations of the People’s Republic of China.

	 	1.2.1	 	The Annual Gross Production of Crude Oil shall, after payments of the value added tax and royalty in accordance with Article 1.1.1 hereof, be first deemed as the “cost recovery oil” and shall be used for payments or cost recovery in the following sequences:

	 	1.2.1.1	 	The “cost recovery oil” shall, upon determination of its price in
accordance with Article 14 of the Petroleum Contract, be used to pay in kind for the operating costs actually incurred but unrecovered by CNPC and the Contractor.
	 
	 	1.2.1.2	 	The remainder of the “cost recovery oil” shall, after payment for the
operating costs in accordance with Article 1.2.1.1 hereof, be deemed as
“investment recovery oil”. Such “investment recovery oil” shall, upon
determination of its price in accordance with Article 14 of the Petroleum
Contract, be used for the simultaneous recovery of the Additional
Development Costs incurred by the Contractor according to this
supplementary agreement and the relevant expenses incurred by CNPC, in
proportion of twenty percent (20%) for CNPC, and eighty percent (80%) for the
Contractor. The unrecovered costs shall be carried forward to, and shall
continue to be recovered from, the “investment recovery oil” in the succeeding
Calendar Year until fully recovered.
	 
	 	 	 	If, on the expiration date of the production period as provided in Article
4.5 of the Petroleum Contract, the above mentioned costs incurred by both
Parties have not been fully recovered, the unrecovered costs shall be
deemed as loss and shall be borne by CNPC and the Contractor respectively.

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	 	1.2.2	 	After the full recovery of the Additional Development Costs according to the
above allocation sequence, the remainder of the Annual Gross Production of Crude Oil
shall be deemed as “allocable remainder oil” and shall be allocated in proportion of
fifty-two percent (52%) to CNPC and forty-eight percent (48%) to the Contractor, i.e.
at the end of a Calendar Year, after payments of the value added tax and royalty,
operating cost in accordance with the above allocation sequences and after the full
recovery of the Additional Development Costs then incurred in accordance with Article
1.2.1.2 of this supplementary agreement, the remainder of the Annual Gross Production
of Crude Oil shall be deemed as the “allocable remainder oil” and shall be allocated
in proportion of fifty-two percent (52%) to CNPC and forty-eight percent (48%) to the
Contractor.

	2.	 	Other than the newly defined terms set out below, for all definitions contained herein,
references shall be made to those as provided in the Petroleum Contract. For the purpose of
the Petroleum Contract and this supplementary agreement:

	 	2.1	 	“Additional (or Adjusted) ODP” means, after completion of the Production
Operations as required in the Original ODP approved by the Department or Unit, all
the additional (or adjusted) Development Operations (including but not limited to the
First Additional ODP) that have been approved or shall be submitted in the future for
the purpose to expand and maintain the Petroleum production, including the
Additional Development Wells and adjustment wells. Such documents shall be
prepared by the Operator, adopted upon consideration by JMC, and implemented after
submission to CNPC for review or for record.
	 
	 	2.2	 	“Additional Development Program” means the production planning documents
implemented by the Operator during the Petroleum Operations. Such documents shall
be prepared by the Operator, adopted upon consideration by JMC, and implemented
after submission to CNPC for review or for record. For the purposes of this
supplementary agreement, “Additional Development Program” means the investment

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	 	 	 	plans or programs or other production planning documents related thereto developed
after the Original ODP (including but not limited to the First Additional ODP).
	 
	 	2.3	 	“Additional Development Operation” means the operations carried out by the
Operator in accordance with the Additional (or Adjusted) ODP, Additional
Development Program or such annual work programs and budgets as approved by
CNPC, including drilling the Additional Development Wells.
	 
	 	2.4	 	“Additional Development Wells” means wells drilled under the Additional ODP and
Additional (or Adjusted) Development Program for increasing the Crude Oil
production, including but not limited to the Production Wells, injection wells, water
source wells and dry holes.
	 
	 	2.5	 	“Additional Development Costs” means, after the Development Costs arising out of
the approved Original ODP have been fully recovered, the capital expenditures
incurred when carrying out the Additional Development Operation within the
Contract Area.

	3.	 	This supplementary agreement shall be effective from the signing date until the expiration
date of the production period as provided in the Petroleum Contract.
	 
	4.	 	This supplementary agreement is written in both Chinese and English languages, and both
language versions shall have equal force and effect.
	 
	5.	 	This supplementary agreement is only a clarification and explanation to the Crude Oil
allocation under the Petroleum Contract and shall not constitute a change to the Petroleum
Contract.
	 
	6.	 	The terms of the Petroleum Contract shall remain effective.

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     This supplementary agreement is signed by authorized representatives of CNPC and the
Contractors on the above-mentioned date.

	 	 	 	 	 	 	 	 	 
	China National Petroleum Corporation (CNPC)	 	 	 	MI Energy Corporation
	 
	 	 	 	 	 	 	 	 
	By:

	 	/s/ Yan Cunzhang
	 	 	 	By:
	 	/s/ Forrest Dietrich
	 

	 	 
	 	 	 	 	 	 
	Mr. Yan Cunzhang	 	 	 	Forrest Dietrich
	General Manager	 	 	 	President of MI Energy Corporation
	PetroChina Foreign Cooperation Administration	 	 	 	On behalf of MI Energy Corporation
	Department	 	 	 	 	 	 
	PetroChina	 	 	 	 	 	 
	On behalf of CNPC	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Global Oil Corporation
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	By:
	 	/s/ Michael Tang
	 

	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Michael Tang
	 	 	 	 	 	 	Vice President of Global Oil Corporation
	 	 	 	 	 	 	On behalf of Global Oil Corporation

Page 6EX-10.3

Exhibit 10.3

 

 

PETROLEUM CONTRACT

FOR

DEVELOPMENT AND PRODUCTION

OF

THE MIAO 3 OIL FIELD

OF JILIN PROVINCE

OF

THE PEOPLE’S REPUBLIC OF CHINA

BEIJING CHINA

DECEMBER, 1997

 

 

Petroleum Contract

by and between

China National Petroleum Corporation

and

Global Oil Corporation

for

Development and Production

of

the Miao 3 Oil Field

of

Jilin Province

of

the People’s Republic of China

Beijing China

December 16th, 1997

 

 

Contents

	 	 	 
	Preamble
	 
	 	 
	Article 1

	 	Definitions
	 
	 	 
	Article 2

	 	Objective of the Contract
	 
	 	 
	Article 3

	 	Contract Area
	 
	 	 
	Article 4

	 	Contract Term
	 
	 	 
	Article 5

	 	Relinquishment of Contract Area
	 
	 	 
	Article 6

	 	Minimum Pilot Test Work Commitment and Expected Minimum Pilot Test Expenditures
	 
	 	 
	Article 7

	 	Management Organization and Its Functions
	 
	 	 
	Article 8

	 	Operator
	 
	 	 
	Article 9

	 	Assistance Provided by CNPC
	 
	 	 
	Article 10

	 	Work Program and Budget
	 
	 	 
	Article 11

	 	Preparation of the Overall Development Program
	 
	 	 
	Article 12

	 	Financing and Cost Recovery
	 
	 	 
	Article 13

	 	Crude Oil Production and Allocation
	 
	 	 
	Article 14

	 	Quality, Quantity, Price and Destination of Crude Oil
	 
	 	 
	Article 15

	 	Preference to the Employment of Chinese Personnel, Goods and Services
	 
	 	 
	Article 16

	 	Training of Chinese Personnel and Transfer of Technology
	 
	 	 
	Article 17

	 	Ownership of Assets and Data
	 
	 	 
	Article 18

	 	Associated Natural Gas
	 
	 	 
	Article 19

	 	Accounting, Auditing and Personnel Costs
	 
	 	 
	Article 20

	 	Taxation
	 
	 	 
	Article 21

	 	Insurance
	 
	 	 
	Article 22

	 	Confidentiality

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	Article 23

	 	Assignment
	 
	 	 
	Article 24

	 	Environmental Protection and Safety
	 
	 	 
	Article 25

	 	Force Majeure
	 
	 	 
	Article 26

	 	Consultation and Arbitration
	 
	 	 
	Article 27

	 	Effectiveness and Termination of the Contract
	 
	 	 
	Article 28

	 	The Applicable Law
	 
	 	 
	Article 29

	 	Language of the Contract and Working Language
	 
	 	 
	Article 30

	 	Miscellaneous
	 
	 	 
	Annexes
	 	 
	 
	 	 
	Annex I

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

	 	Accounting Procedure
	 
	 	 
	Annex III

	 	Personnel Costs
	 
	 	 
	Annex IV

	 	Training of Chinese Personnel and Transfer of Technology
	 
	 	 
	Annex V

	 	Data Control

3

 

Preamble

This Contract is entered into in Beijing on this 16th day of December 1997 by and between CHINA
NATIONAL PETROLEUM CORPORATION (hereafter abbreviated as “CNPC”), a company organized and existing
under the laws of the People’s Republic of China, having its headquarters domiciled in Beijing,
the People’s Republic of China as one part;

and

GLOBAL OIL CORPORATION, a company organized and existing under the laws of Bahamas, having its
headquarters domiciled in Perth, Australia (hereinafter referred to as the “Foreign Contractor”)
as the other part.

Witnesseth

WHEREAS, all Petroleum resources under the territory, internal waters, territorial sea, and
continental shelf of the People’s Republic of China and within the limits of national jurisdiction
of the People’s Republic of China are owned by the People’s Republic of China;

WHEREAS, CNPC shall be responsible for business matters in respect of the exploitation of land
Petroleum resources in cooperation with foreign enterprises, and for negotiating, entering into
and implementing Contracts for the exploitation of land Petroleum resources in cooperation with
foreign enterprises and to have the exclusive right to explore for, develop and produce the
Petroleum in cooperation with foreign enterprises in areas approved by the State Council for
exploitation of land Petroleum resources in cooperation with foreign enterprises in accordance
with the “Regulations of the People’s Republic of China Concerning the Exploitation of Onshore
Petroleum Resources in Cooperation with Foreign Enterprises” (hereafter referred to as the
“Petroleum Regulations”), promulgated by the State Council of the People’s Republic of China on
Oct. 7th, 1993;

WHEREAS, CNPC has performed exploration work and has had commercial discovery in the Contract
Area; and

WHEREAS, the Contractor desires and agrees to provide funds, and apply its appropriate and
advanced technology and managerial experience to cooperate with CNPC for the development and
production of Petroleum resources within the Contract Area and agrees to be subject to the laws,
decrees, and other rules

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and regulations of the People’s Republic of China in the implementation of the Contract.

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

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Article I

Definitions

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

	1.1	 	“Affiliate” means in respect of the Contractor:

	 	(a)	 	any entity in which any company comprising Contractor directly
or indirectly holds fifty percent (50%) or more of the voting rights carried by its
share capital; or
	 
	 	(b)	 	any entity which directly or indirectly holds fifty percent (50%) or more
of the aforesaid voting rights of any company comprising the Contractor; or
	 
	 	(c)	 	any other entity whose aforesaid voting rights are held by an entity
mentioned in (b) above in an amount of fifty percent (50%) or more.

	 	 	“Affiliate” means, in respect of CNPC, any subsidiary, branch, or regional corporation
of CNPC and any entity in which CNPC directly or indirectly holds fifty percent (50%)
or more of the voting rights carried by its share capital.
	 
	1.2	 	“Annual Gross Production of Crude Oil” means the total amount of Crude Oil produced from
the Oil Field within the Contract Area considered separately in each Calendar Year, less
the amount of Crude Oil used for Petroleum Operations and the amount of losses, which is
saved and measured by a measuring device at the Delivery Point as specified in Article
14.2.1 hereof.
	 
	1.3	 	“Annual Gross Production of Natural Gas” means the total amount of Natural Gas produced
from the Oil Field within the Contract Area considered separately in each Calendar Year,
less the amount of Natural Gas used for Petroleum Operations and the amount of losses,
which is saved and measured by a measuring device at the Delivery Point as specified in
Article 14.2.1 hereof.
	 
	1.4	 	“Associated Natural Gas” means all gaseous hydrocarbons produced in association with Crude
Oil from oil reservoirs, including residue gas remaining after the extraction of liquid
hydrocarbons therefrom.
	 
	1.5	 	“Calendar Quarter” means a period of three (3) consecutive Gregorian months under the
Gregorian Calendar, beginning on the first day of January, the first day of April, the
first day of July, or the first day of October.

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	1.6	 	“Calendar Year” means a period of twelve (12) consecutive Gregorian months under the
Gregorian Calendar, beginning on the first day of January and ending on the thirty-first
day of December in the same year.
	 
	1.7	 	“Chinese Personnel” means any citizen of the People’s Republic of China, including CNPC
personnel and Chinese citizens employed by the Contractor and/or the Subcontractor(s),
involved in Petroleum Operations under the Contract.
	 
	1.8	 	“Contractor” means the Foreign Contractor specified in the Preamble hereto, including
assignee(s) in accordance with Article 23 hereof.
	 
	1.9	 	“Contract Area” means a surface area demarcated with geographic coordinates for the
cooperative exploitation of Petroleum resources, and in the Contract, means the surface area
stipulated in Article 3.1 hereof.
	 
	1.10	 	“Contract Year” means a period of twelve (12) consecutive Gregorian months under the
Gregorian Calendar, within the term of the Contract, beginning on the Date of Commencement of
the Implementation of the Contract or any anniversary thereof.
	 
	1.11	 	“Crude Oil” means solid and liquid hydrocarbons in their natural state, including any liquid
hydrocarbons extracted from Natural Gas but excluding liquefied methane (CH4).
	 
	1.12	 	“Date of Commencement of Commercial Production” means the date of commencement of the
production period for Crude Oil and/or Natural Gas from the Oil Field announced by JMC in
accordance with the provisions of Article 7.2.6 hereof when the aggregate amount of Crude Oil
produced from the Oil Field from the date of submission of the Overall Development Program to
CNPC for approval has reached 20,000 tonnes and after approval by CNPC.
	 
	1.13	 	“Date of Commencement of the Implementation of the Contract” means the first day of the
month following the month in which the Contractor has received the notification from CNPC of
the approval of the Contract by the Ministry of Foreign Trade and Economic Cooperation of
the People’s Republic of China.
	 
	1.14	 	“Delivery Point” means a point or points agreed upon by the Parties for the delivery of
Petroleum located within or outside the Contract Area and specified in the Overall
Development Program.
	 
	1.15	 	“Department or Unit” means the department or unit which is authorized by the State Council
of the People’s Republic of China to be responsible for administration of the Petroleum
industry of the People’s Republic of China.

7

 

	1.16	 	“Development Area” means a portion of the Contract Area covering the Oil Field which
has been designated for development, and delineated as such in the Overall Development
Program approved by the Department or Unit. The Development Area shall automatically
cease to be in force as of the date of approval of the Production Area by CNPC.
	 
	1.17	 	“Development Costs” means the expenses incurred for the design, construction and
installation of the equipment and facilities within the Contract Area and drilling of the
development wells, including all costs and expenses incurred in or in relation to the
conduct and administration of Development Operations and properly chargeable to the Joint
Account under the provisions of Article 5.2 of the Accounting Procedures set forth in Annex
II to this Contract.
	 
	1.18	 	“Development Operations” means operations carried out for the realization of Petroleum
production from the date of approval of the Overall Development Program for the Oil Field by
the Department or Unit, including design, construction, installation, drilling, and the
related research work as well as production activities carried out before the Date of
Commencement of Commercial Production.
	 
	1.19	 	“Development Well” means a well drilled after the date of approval of the Overall
Development Program for the Oil Field for the purpose of producing Petroleum, increasing
production or accelerating extraction of Petroleum, including production wells, injection
wells and dry holes.
	 
	1.20	 	“Expatriate Employee” means any person employed by the Contractor, Subcontractor(s), or CNPC
who is not a citizen of the People’s Republic of China. Overseas Chinese who reside abroad
and have the nationality of the People’s Republic of China and other Chinese abroad, when
they are employed by the Contractor, Subcontractor(s) or CNPC, shall also be deemed to be
Expatriate Employees within the scope of the Contract.
	 
	1.21	 	“Natural Gas” means Non-associated Natural Gas and Associated Natural Gas in their natural
state.
	 
	1.22	 	 “Oil Field” means an accumulation of Petroleum within the Contract Area composed of one or
several overlapping oil-bearing zones, within one trap or within associated traps of the
same independent geological structure, which may or may not be complicated by faulting, and
which has been determined to be of commercial value.
	 
	1.23	 	“Oil Field Straddling a Boundary” means the Oil Field extending from the Contract Area to
one or more other contract areas and/or areas in respect of which no Petroleum contracts
have been signed.
	 
	1.24	 	“Operator” means the entity responsible for the performance of the Petroleum Operations
under the Contract.

8

 

	1.25	 	“Operating Costs” means all costs and expenses incurred in or in relation to the
conduct and administration of Production Operations and properly chargeable to the Joint
Account under the provisions of Article 5.2 of the Accounting Procedure set forth in
Annex II to this Contract.
	 
	1.26	 	“Overall Development Program” means a plan prepared by the Contractor for the development
of the Oil Field which has been reviewed and adopted by JMC, confirmed by CNPC and approved
by the Department or Unit, and such plan shall include, but shall not be limited to,
recoverable reserves, the Development Well pattern, master design, production profile,
economic analysis and time schedule of the Development Operations, maximum efficient rate
(MER) determined in accordance with international petroleum industry practice, the estimated
duration of the production period, delivery point(s) and utilization program for Associated
Natural Gas, etc.
	 
	1.27	 	“Parties” means CNPC and the Contractor.
	 
	1.28	 	“Party” means either of the Parties.
	 
	1.29	 	“Petroleum” means Crude Oil and Natural Gas deposited in the subsurface and being
extracted or already extracted, including any valuable non-hydrocarbon substances produced
in association with Crude Oil and/or Natural Gas separated or extracted therefrom.
	 
	1.30	 	“Petroleum Operations” means the Pilot Test Operations, the Development Operations, the
Production Operations, and other activities related to these Operations carried out under the
Contract.
	 
	1.31	 	“Pilot Test Area” means the surface area within the Contract Area where Pilot Test
Operations are conducted in accordance with Article 3.2 hereof.
	 
	1.32	 	“Pilot Test Costs” means the expenses incurred for the completion of the Pilot Test
Operations and the activities related to the Pilot Test Operations, including the
evaluations on the detailed development geology of the reservoir(s) or pay zone(s) and the
reservoir engineering within the Contract Area, and the expenses incurred for preparation
and application for approval of the Overall Development Program and including all costs and
expenses incurred in or in relation to the conduct and administration of the Pilot Test
Operations and properly chargeable to the Joint Account under the provisions of Article 5.2
of the Accounting Procedure set forth in Annex II to this Contract.
	 
	1.33	 	“Pilot Test Operations” means studies and operations conducted for the purpose of
determining the economic efficiency for the reservoir(s) or pay zone(s) within the Contract
Area and production activities conducted within the Pilot Test Area, including side
tracking, recompletion, stimulation and injectivity test, well group pilot displacement test
and

9

 

	 	 	evaluation on development geology of the reservoir(s) or pay zone(s) and reservoir
engineering within the Contract Area.
	 
	1.34	 	“Production Area” means a surface area within the Development Area for the purpose of the
performance of the Production Operations within the said Development Area after completion of
the Development Operations, The Production Area proposed by the Operator and demarcated by JMC
shall be submitted to CNPC for approval before the Date of Commencement of Commercial
Production.
	 
	1.35	 	“Production Operations” means operations and all activities related thereto carried out for
Petroleum production of the Oil Field in the Contract Area from the Date of Commencement of
Commercial Production, such as extraction, injection, stimulation, treatment, storage,
transportation and lifting, etc.
	 
	1.36	 	“Production Year” means in respect of the Oil Field, a period of twelve (12) consecutive
Gregorian months under the Gregorian Calendar, beginning on the Date of Commencement of
Commercial Production of such Oil Field or any anniversary thereof.
	 
	1.37	 	“Subcontractor” means an entity which provides the Operator with goods or services for the
purpose of the Contract.
	 
	1.38	 	 “Third Party” means any individual or entity except CNPC, the Contractor and any of their
Affiliates.
	 
	1.39	 	“Work Program” means all types of plans formulated for the performance of the Petroleum
Operations, including plans for development and production.

10

 

Article 2

Objective of the Contract

	2.1	 	The objective of the Contract is to develop the Petroleum discovery with proved
commercial value within the Contract Area and to produce the Petroleum.
	 
	2.2	 	The Contractor shall apply its appropriate and advanced technology and managerial experience
and assign its competent experts to perform the Petroleum Operations.
	 
	2.3	 	During the performance of the Petroleum Operations, the Contractor shall transfer its
technology to the Chinese Personnel and train them in accordance with Article 16 hereof and
Annex IV — Training of Chinese Personnel and Transfer of Technology.
	 
	2.4	 	The Contractor shall bear all the costs required for the Pilot Test Operations. If the
Contractor opts to enter into development period, the Contractor shall bear all the costs
required for the Development Operations.
	 
	2.5	 	The Petroleum produced from the Oil Field within the Contract Area shall within the term of
the Contract be allocated in accordance with Articles 13 and/or 18 hereof.
	 
	2.6	 	Nothing contained in the Contract shall be deemed to confer any right on the Contractor other
than those rights expressly granted hereunder.

11

 

Article 3

Contract Area

	3.1	 	The Contract Area as of the date of signature of the Contract, covers a total area of
eighty-one (81) square kilometers, as marked out by the geographic location and the
coordinates of the connecting points of the boundary lines shown on Annex I attached hereto.
	 
	 	 	During the term of this Contract the Contractor shall have the exclusive right under and
in accordance with the provisions of this Contract to cooperate with CNPC to develop the
Oil Field and to produce Petroleum from all known reservoirs and oil bearing zones from
the surface to the base of the Yangdachengzi formation.
	 
	3.2	 	The Pilot Test Area shall be the area specified as such in the Pilot Test Program referred
to in Article 6.
	 
	 	 	Any change in the Pilot Test Area shall be proposed by the Contractor, adopted by JMC
through discussions and determined upon CNPC’s approval. During the pilot test period no
drilling activities shall be undertaken on any part of the Contract Area outside the Pilot
Test Area and CNPC shall hold such area for the Contractor until the expiration of the
pilot test period.
	 
	 	 	Within the development period and production period as specified in Article 4.4 and
Article 4.5 hereof, the Development and the Production Area shall be reduced in accordance
with Article 5 under this Contract.
	 
	3.3	 	In respect of co-operative exploration, development and production for unknown and/or
newly-discovered reservoir(s) or pay zone(s), (without affecting any rights of the Contractor
under Article 3.1) after the approval of the Department or Unit, the Parties shall hold
friendly negotiations in accordance with the principles of the Model Contract for the Risk
Exploration Blocks for the Second Round of Invitation for Bids for the Exploitation of Land
Petroleum Resources of the People’s Republic of China in Cooperation with Foreign Enterprises
and shall sign another petroleum contract after reaching agreement.
	 
	3.4	 	Except for the rights as expressly provided by the Contract, no right is granted in favor of
the Contractor to the surface area, subsurface area, lake bed, stream bed and subsoil or any
natural resources other than Petroleum existing therein, and any things under the surface
within the Contract Area.

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Article 4

Contract Term

	4.1	 	The term of the Contract shall include a pilot test period, a development period and
a production period.
	 
	4.2	 	The pilot test period, shall be two (2) consecutive Contract Years, beginning on the
Date of Commencement of Implementation of the Contract.
	 
	4.3	 	Where time is insufficient to complete the evaluation work and/or the preparation
and application for approval of the Overall Development Program before the expiration of
the pilot test period, the pilot test period as described in Article 4.2 herein shall be
extended. The period of extension shall be subject to the approval of CNPC and shall be
a reasonable period of time required to complete the above-mentioned evaluation work
and/or the preparation and application for approval of the Overall Development
Program until the Department or Unit approves or finally rejects the Overall
Development Program. The period of extension shall not exceed six(6) months unless
otherwise agreed by the Parties.
	 
	4.4	 	The development period of the Oil Field shall begin on the date of approval by the
Department or Unit of the Overall Development Program of the said Oil Field, and end on
the Date of the Commencement of Commercial Production.
	 
	 	 	The Contractor shall be bound to carry out and complete the Development Operations in
accordance with the time schedule and within the period for completion specified in
the Overall Development Program adopted by JMC confirmed by CNPC and approved by the
Department or Unit. If the Contractor breaches its obligation under this paragraph
and fails to remedy such breach within one year after written notice from CNPC
requiring it to do so then without prejudice to any of its other rights CNPC may
require the immediate cessation of Production Operations under this Contract.
	 
	 	 	The development period shall not include the time for carrying out additional
development projects in the production period in accordance with Article 11.5 hereof.
	 
	4.5	 	The production period of the Oil Field shall be twenty (20) consecutive Production
Years beginning on the Date of Commencement of Commercial Production of the said Oil
Field, unless otherwise provided in Article 4.6.1 herein or Article 25 hereof. Under
such circumstances as where the construction of the Oil Field is to be conducted on a
large scale, and the time span required therefor is long, or where separate production
of each of the multiple oil production zones of the Oil Field is required, or under other

13

 

	 	 	special circumstances, the production period thereof shall, when it is
necessary, be properly extended with the approval of the Department or Unit
	 
	4.6	 	Suspension or abandonment of production of the Oil Field

	 	4.6.1	 	Suspension of production from the Oil Field within the
production period
	 
	 	 	 	In the event that the Parties agree to suspend temporarily production
from the Oil Field which has entered into commercial production, the
Production Area covered by the Oil Field may be retained within the Contract
Area. In no event shall the period of such retention exceed two (2) years and
be extended beyond the date of the expiration of the production period of the
Oil Field except as otherwise provided in Article 25.4 hereof. The duration
of the relevant period of production suspension and the arrangement for the
maintenance operations during the aforesaid period of suspension shall be
proposed by Operator, and shall be decided by JMC through discussion. With
respect to the aforesaid Oil Field which has been suspended and retained
within the Contract Area, in the event that production is restored during the
period of such retention, the production period of that Oil Field shall be
extended correspondingly. In the event that the Parties fail to reach an
agreement on the restoration of production by the expiration of the
production suspension period decided by JMC through discussion, the Party who
wishes to restore production shall have the right to restore production
solely. The other Party may later elect to participate in production but
shall have no rights or obligations in respect of such Oil Field for the
solely restored production period.
	 
	 	4.6.2	 	Abandonment of production from the Oil Field within the production
period

	 	4.6.2.1	 	During the production period, either Party to the Contract may
propose to abandon production from the Oil Field within the Contract
Area, provided, however, that prior written notice shall be given to the
other Party to the Contract. The other Party shall make a response in
writing within ninety (90) days from the date on which the
said notice is received. If the other Party also agrees to abandon
production from the said Oil Field, then the abandonment costs shall be
paid by the Parties in accordance with their proportions stipulated in
Article 13.2 hereof in such Oil Field. The Parties shall abandon such Oil
Field in accordance with procedure agreed on by the Parties. From

14

 

	 	 	 	the date on which the abandonment is completed, the production period of
such Oil Field shall be terminated.

	 	4.6.2.2	 	If the Contractor notifies CNPC in writing of its decision to abandon
production from the Oil Field, while CNPC decides not to abandon production
from such Oil Field, then from the date on which the Contractor receives
CNPC’s written response of its aforesaid decision, namely Abandonment Date,
all of the Contractor’s rights and obligations under the Contract in respect
of the said Oil Field, including, but not limited to, the responsibilities
for payment of abandonment cost in respect of such Oil Field, shall be
terminated automatically, provided that the Contractor shall not transfer to
CNPC any of the Contractor’s debts, liabilities and obligations in respect of
the said Oil Field. In addition, the Contractor shall undertake its debts,
liabilities and obligations under the Contract prior to the Abandonment Date.
From the Abandonment Date, the production period of the said Oil Field shall
be terminated.

	4.7	 	The term of Contract shall not go beyond thirty (30) consecutive Contract Years from the
Date of Commencement of the Implementation of the Contract, unless otherwise stipulated
hereof.

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Article 5

Relinquishment of the Contract Area

	5.1	 	The Contract Area excluding the Development Area shall be relinquished on the date
of approval of the Overall Development Program.
	 
	5.2	 	The Contract Area excluding the Production Area shall be relinquished on the Date
of Commencement of Commercial Production.
	 
	5.3	 	Within ninety (90) days prior to date of each relinquishment of the Contract
Area, the Contractor shall submit to CNPC a report on the areas to be relinquished,
including a map showing the areas to be relinquished with the geographic location and
the coordinates of the connecting points of the boundary lines. The final map shall be
submitted to CNPC on or before the date of relinquishment.

16

 

Article 6

Minimum Pilot Test Work Commitment

and Expected Minimum Pilot Test Expenditures

	6.1	 	The Contractor shall prepare the pilot test program within sixty (60) days after the
Date of Commencement of the Implementation of the Contract, shall begin to perform the Pilot
Test Operations within three (3) months after the Date of Commencement of the Implementation
of the Contract and shall begin the site operation within six (6) months after the Date of
Commencement of the Implementation of the Contract unless otherwise agreed by the Parties.
	 
	6.2	 	The Contractor shall fulfill the minimum pilot test work commitment and expected minimum
pilot test expenditures in accordance with the following provisions:

	 	6.2.1	 	The minimum pilot test work commitment comprises the items as follows:

	 	(1)	 	Drilling of one (1) vertical well with footage totalling one thousand
five hundred (1500) metres;
	 
	 	(2)	 	Re-entry of two (2) existing wells for water injection
purpose subject to:

	 	•	 	CNPC having provided to the Contractor all
reasonably required available well data in respect of all previously
drilled wells in the Oil Field: and
	 
	 	•	 	The Contractor establishing to its reasonable
satisfaction the existence of wells suitable for re-entry.

	 	(3)	 	Conduct 3D seismic survey over eighty (80) square kilometers of
the Contract Area.
	 
	 	(4)	 	Complete the evaluation on the detailed development geology and
reservoir engineering for the reservoirs or pay zones to determine the optimal
method. At the expiration of the pilot test period, the above mentioned
appraisal reports shall be submitted to JMC.

	 	6.2.2	 	Prior to the expiration of the pilot test period, if the Contractor opts to
enter into development period, the Contractor shall complete formulation and
application for the approval of the Overall
Development Program.

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	 	6.2.3	 	The expected minimum pilot test expenditures shall be One Million and Five
Hundred Thousand (1,500,000) U.S. dollars.
	 
	 	6.2.4	 	During the pilot test period, the Contractor shall complete the stipulations
of Articles 6.2.1 and 6.2.3, and Article 6.2.1 shall prevail.

	6.3	 	At the expiration of the pilot test period, the Contractor shall have the
following options:

	 	(1)	 	to enter into development period; or
	 
	 	(2)	 	to terminate the Contract.

	6.4	 	If, at the expiration of the pilot test period, the actual pilot test work commitment and/or
the relevant pilot test expenditures which the Contractor has fulfilled exceed the minimum
pilot test work commitment and/or the pilot test expenditures stipulated in Articles 6.2.1 and
6.2.3 herein, the Contractor shall bear the excess part of the pilot test expenditures.
	 
	6.5	 	At the expiration of the pilot test period, if the pilot test work commitment actually
fulfilled by the Contractor is less than the minimum pilot test work commitment set forth,
regardless of whether the expected minimum pilot test expenditures are fulfilled or not
fulfilled, whether the Contractor opts to enter into the development period under Article 6.3
(1) herein or to terminate the Contract under Article 6.3 (2) herein, the Contractor shall,
within thirty (30) days from the date of the expiration of the pilot test period, pay CNPC
only any unfulfilled balance of the minimum pilot test work commitment in U.S. dollars after
it has been converted into a cash equivalent using the method provided in Annex II-Accounting
Procedure hereto. However, if the minimum pilot test work commitment for the pilot test period
is fulfilled while its expected corresponding minimum pilot test expenditures are not
fulfilled, the unfulfilled part shall be deemed as a saving and shall not be paid to CNPC.

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Article 7

Management Organization and Its Functions

	7.1	 	For the purpose of the proper performance of the Petroleum Operations, the Parties
shall establish a Joint Management Committee (JMC) within forty-five (45) days from the date
of Commencement of the Implementation of the Contract.

	 	7.1.1	 	CNPC and the Contractor shall each appoint three (3) representatives to
form JMC, and each Party to the Contract shall designate one of its representatives
as its chief representative. Each company comprising the Contractor may appoint one
(1) representative. Either Party may replace any of its representatives, or
designate another representative as its chief representative, by a written notice
to the other Party. All the aforesaid representatives shall have the right to
present their views on the proposals at the meetings held by JMC. When a decision is
to be made on any proposal, the chief representative from each Party to the
Contract shall be the spokesman on behalf of the Party he/she represents and shall
have sole right to vote on behalf of that Party. At least one representative of
each Party must be present to constitute a quorum for meetings of the JMC.
	 
	 	 	 	The chairman of JMC shall be the chief representative designated by CNPC, and
the vice chairman shall be the chief representative designated by the
Contractor. The chairman of JMC shall preside over meetings of JMC. In his
absence, one representative present at the meeting from CNPC shall be designated
to act as the chairman of the meeting. In the absence of the vice chairman of
JMC, one representative present at the meeting from the Contractor shall be
designated to act as the vice chairman of the meeting. The Parties may,
according to need, designate a reasonable number of advisers who may attend, but
shall not be entitled to vote at, JMC meetings.
	 
	 	7.1.2	 	A regular meeting of JMC shall be held at least once every six (6) months
and other meetings, if necessary, may be held at any time at the request of any
Party to the Contract, upon giving reasonable written notice to the other Party of
the date, time and location of the meeting and the items to be discussed.

	7.2	 	The Parties shall empower JMC to:

	 	7.2.1	 	review and adopt the Work Programs and budgets proposed by the Operator
and subsequent amendments thereto;

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	7.2.2	 	review and adopt the Pilot Test program and submit it to CNPC for
confirmation;
	 
	7.2.3	 	review and adopt the appraisal reports of the development geology and reservoir
engineering for the reservoirs or pay zones within the Contract Area provided by the
Operator;
	 
	7.2.4	 	review and adopt the Overall Development Program and budget for the Oil Field and the
amendments to the budget;
	 
	7.2.5	 	approve or confirm the following items of procurement and expenditures:

	 	(a)	 	approve procurement of any item within the budget with a unit price
exceeding Five Hundred Thousand U.S. dollars (U.S. $500,000) and any single purchase
order of total monetary value exceeding Two Million U.S. dollars (U.S. $2,000,000);
	 
	 	(b)	 	approve a lease of equipment, or an engineering subcontract or a service
contract within the budget of a monetary value exceeding One Million U.S. dollars
(U.S. $1,000,000); and
	 
	 	(c)	 	confirm excess expenditures pursuant to Article 10.2.1 hereof and the
expenditures pursuant to Article 10.2.2 hereof;

	7.2.6	 	propose and announce the Date of Commencement of Commercial Production of the Oil
Field within the Contract Area;
	 
	7.2.7	 	determine the type and scope of information and data provided to any Third Party and
Affiliate in relation to the Petroleum Operations in accordance with Article 22.5 hereof;
	 
	7.2.8	 	demarcate • boundaries of the Development Area and the Production Area of the Oil Field;
	 
	7.2.9	 	review and approve the insurance program proposed by the Operator and emergency procedures
on safety and environmental protection;
	 
	7.2.10	 	review and approve personnel training programs;
	 
	7.2.11	 	review and approve minutes and/or resolutions of JMC meetings, and discuss, review, decide
and approve other matters that have been proposed by either Party to the Contract or
submitted by the expert groups pursuant to Article 7.4.2 hereof or by the Operator; and

20

 

	 	7.2.12	 	review and examine matters required to be submitted to relevant authorities of
the Chinese Government and/or CNPC for approval.

	7.3	 	Decisions of JMC shall be made unanimously through consultation. All decisions made
unanimously shall be deemed as formal decisions and shall be equally binding upon the
Parties. When matters upon which agreement cannot be reached arise, the Parties may convene
another meeting in an attempt to find a new solution thereto based on the principle of mutual
benefit.
	 
	 	 	If it is considered by the chairman and/or the vice chairman or their nominees that a
matter requires urgent handling or may be decided without convening a meeting, JMC may
make decisions through telexes, facsimiles or the circulation of documents.
	 
	7.4	 	JMC shall establish the following subordinate bodies:

	 	7.4.1	 	Secretariat
	 
	 	 	 	The secretariat shall be a permanent organization consisting of two (2)
secretaries. One secretary shall be appointed by each of the Parties. The
secretaries shall not be members of JMC, but may attend meetings of JMC as
observers. The duties of the secretariat are as follows:

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

	 	7.4.2	 	Expert Groups
	 
	 	 	 	Advisory expert groups shall be established in accordance with the requirements of
the Petroleum Operations in various periods. Each expert group shall consist of an
equal number of CNPC Personnel and the Contractor’s employees, and, with the
agreement of JMC, any other personnel. JMC shall discuss and decide upon their
establishment or dissolution, size, tasks, location of their work and the
appointment of their leaders in accordance with the requirements of their work.
The expert groups shall have the following functions:

21

 

	 	(a)	 	to discuss and study matters assigned to them by JMC and submitted by
the Operator to JMC for its review and approval and any other matter
assigned to them by JMC and to make constructive suggestions to JMC;
	 
	 	(b)	 	to have access to and observe and investigate the Petroleum
Operations conducted by the Operator at its office and operating sites as
work requires and to submit relevant reports to JMC; and
	 
	 	(c)	 	to attend meetings of JMC as observers at the request of
JMC.

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

	 	7.5.1	 	On the principle of mutual cooperation and coordination, the Operator shall
provide the professional representatives with necessary facilities and assistance to
perform office work and to observe the operating sites, etc..

22

 

	 	7.5.2	 	The number of professional representatives which CNPC shall have the
right to assign to the Operator’s administrative and technical departments under
Article 7.5 is five (5) professional representatives.

	7.6	 	When one of the companies comprising the Contractor acts as the Operator, in respect of the
items listed in the procurement plan, the procedures and provisions hereunder shall be
followed:

	 	7.6.1	 	The procurement department of the Operator shall inform the professional
representatives appointed by CNPC in charge of procurement of all the items of
procurement and specifications relating thereto.
	 
	 	7.6.2	 	The Operator shall be subject to Articles 15.1 and 15.3 hereof and reach
agreement through consultation with the professional representatives of CNPC in charge
of procurement when preparing the procurement plan in accordance with the Work Program
and budget. The professional representatives of CNPC in charge of procurement shall
work out an inventory listing the equipment and materials which can be made and
provided in China and a list of manufacturers, engineering and construction companies
and enterprises in China which can provide services and undertake subcontracting work.
	 
	 	7.6.3	 	Unless otherwise agreed upon by the Parties, the Operator shall, in general,
make procurement by means of calling for bids and shall notify at the same time
manufacturers and enterprises concerned both inside and outside China, and the work
of calling for bids shall be done within the territory of China.
	 
	 	7.6.4	 	When any procurement is to be made by means of calling for bids, the
manufacturers and enterprises in China applying for bidding which are included in a
list delivered in advance to the Operator by the professional representatives of CNPC
in charge of procurement shall be invited. The professional representatives of CNPC in
charge of procurement shall have the right to take part in the work of calling for
bids, including examination of the list of bidders to be invited, preparing and issuing
bidding documents, opening bids, evaluation of bids, and shall have the right to
consult with the Operator on the determination of award of contracts and to participate
in negotiations for subcontracts and services contracts.
	 
	 	7.6.5	 	With respect to the items of procurement by means other than calling for bids,
the Operator and the professional representatives of CNPC in charge of procurement
shall, in accordance with the provisions specified in Article 7.6.2 herein, define those
items which are to be procured in the People’s Republic of China and those items which
are to be procured abroad.

23

 

	7.7	 	All salaries, costs and expenses with respect to the staff members of the Parties in
the subordinate bodies of JMC, established in accordance with Article 7.4 herein, and
those with respect to the professional representatives of JMC referred to in Article 7.5
herein, and those with respect to the representatives of JMC referred to in Article 7.1.1
herein shall be paid by the Operator and charged to the Pilot Test Costs, the Development
Costs and Operating Costs in accordance with Annex II-Accounting Procedure hereto.
	 
	 	 	All salaries, costs and expenses with respect to the staff members of CNPC in the
subordinate bodies of JMC, the professional representatives of CNPC and the CNPC
representatives of JMC shall be paid by the Operator in accordance with Annex III -
Personnel Costs hereto.
	 
	 	 	The Operator shall provide office facilities and administrative expenses for CNPC
Personnel referred to in Article 1.2 of Annex III - Personnel Costs hereto.
	 
	7.8	 	The specific responsibilities and working procedures within JMC shall be discussed and
determined by JMC in accordance with the relevant provisions herein.
	 
	7.9	 	Notwithstanding anything contained in this Article 7 it is agreed that the JMC established
under this Article shall be comprised of the same persons and identical with the JMC
established for the purposes of the contract between the Parties for the development of the
Daan Oilfield (“the Daan Contract”) and the Secretariat, expert groups and professional
advisers appointed under this Article shall be the same as those for the purposes of the Daan
Contract.
	 
	 	 	All salaries, costs and expenses mentioned in Article 7.7 shall be apportioned between the
Daan Contract and this Contract in manner determined by the JMC and changed to the
separate Joint Accounts established for the purposes of such contracts in accordance with
such apportionment.

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Article 8

Operator

	8.1	 	The Parties agree that the Contractor shall act as the Operator for the Petroleum
Operations within the Contract Area, unless otherwise stipulated in Article 8.9 herein and
Article 30.5 hereof.
	 
	 	 	The Operator shall start to deal with the relevant matters concerning the site operation
within thirty (30) days before the commencement of the Pilot Test site Operations and the
relevant matters concerning the Development Operations within forty-five (45) days before
the beginning of the Development Operations; and shall reach agreements with CNPC’s
relevant departments respectively and jointly make corresponding arrangements.
	 
	8.2	 	The names, positions and resumes of the staff and organization chart of the Operator shall be
submitted in advance to CNPC and the appointment of the Operator’s senior staff must be
subject to the consent of CNPC.
	 
	8.3	 	The Operator shall have the following obligations:

	 	8.3.1	 	To apply the appropriate and advanced technology and managerial experience
to perform the Petroleum Operations reasonably, economically and efficiently in
accordance with sound international practice;
	 
	 	8.3.2	 	To prepare Work Programs and budgets related to the Petroleum Operations and
to carry out the approved Work Programs and budgets;
	 
	 	8.3.3	 	To be responsible for procurement of installations, equipment, and supplies
and entering into subcontracts and service contracts related to the Petroleum
Operations, in accordance with the approved Work Programs and budgets and the
applicable provisions of Articles 7.2.5, 7.6 and 10.2 hereof;
	 
	 	8.3.4	 	To prepare in advance, in accordance with Article 16 hereof, a personnel
training program and budget before the commencement of the Pilot Test Operations, the
Development Operations and Production Operations respectively, and, in accordance with
the said program and budget, to be responsible for preparing an annual personnel
training program and budget and carrying out the annual program and budget after
approval by JMC;

25

 

	 	8.3.5	 	To establish an insurance program, and to enter into and implement the
insurance contracts in accordance with Article 21 hereof;
	 
	 	8.3.6	 	To issue cash-call notices to all the Parties to the Contract to raise the
required funds based on the approved budgets and in accordance with Article 12 hereof
and Annex II-Accounting Procedure hereto;
	 
	 	8.3.7	 	To maintain complete and accurate accounting records of all the costs and
expenditures of the Petroleum Operations in accordance with the provisions of Annex
II - Accounting Procedure hereto and to keep the accounting books secure and in good
order;
	 
	 	8.3.8	 	To make necessary preparation for regular meetings of JMC, and to submit in
advance to JMC necessary information related to the matters to be reviewed and
approved by JMC;
	 
	 	8.3.9	 	To inform directly or indirectly all the Subcontractors which render
services for the Petroleum Operations in China and all the Expatriate Employees of the
Operator and of Subcontractors who are engaged in the Petroleum Operations in China
that they shall be subject to the laws, decrees, and other rules and regulations of
the People’s Republic of China;
	 
	 	8.3.10	 	To report its work to JMC as provided in Article 7.2 hereof.

	8.4	 	In the course of the performance of the Petroleum Operations, any loss arising out of the
gross negligence or willful misconduct of the Operator or the employees of the Operator shall
be borne solely by the Operator. The Operator shall make its best efforts in accordance with
international Petroleum industry practice to include provisions similar to this Article 8.4
herein in related subcontracts and service contracts.
	 
	8.5	 	In the course of the performance of the Petroleum Operations, the Operator shall handle the
information, samples or reports in accordance with the following provisions:

	 	8.5.1	 	The Operator shall provide CNPC with various information, samples and data
which are obtained in the course of the performance of the Petroleum Operations in
accordance with Articles 19 and 25 of the Petroleum Regulations and Annex V - Data
Control hereto. The ownership of all the information, samples and data shall vest in
CNPC; and the Operator shall have the right to use and handle such information,
samples and data in accordance with Annex V - Data Control hereto. The Contractor
shall have the right to obtain the copies of the aforesaid information, samples and
data. The information and data shall be reported to CNPC at the same time that the
Contractor reports

26

 

	 	 	 	them to its parent corporation. Upon receipt by the Contractor of any
report from its parent corporation concerning such information and data, a copy
of such report shall be furnished to CNPC as soon as practicable.
	 
	 	8.5.2	 	The Operator shall furnish respectively CNPC and the Contractor in a
timely manner with reports on safety, environmental protection and accidents related
to the Petroleum Operations and with financial reports prepared in accordance with
the provisions of Annex II - Accounting Procedure hereto.
	 
	 	8.5.3	 	The Operator shall, at the request of any Party to the Contract, furnish that
Party to the Contract with the following:

	 	8.5.3.1	 	procurement plans for purchasing equipment and materials, inquiries,
offers, orders and service contracts, etc.;
	 
	 	8.5.3.2	 	technical manuals, technical specifications, design criteria, design
documents (including design drawings), construction records and information,
consumption statistics, equipment inventory, spare parts inventory, etc.;
	 
	 	8.5.3.3	 	technical investigation and cost analysis reports; and
	 
	 	8.5.3.4	 	other information related to the Petroleum Operations already
acquired by the Operator in the performance of the Contract.

	8.6	 	In the course of performing the Petroleum Operations, the Operator shall abide by the
laws, decrees, standards and other rules and regulations with respect to environmental
protection and safety of the People’s Republic of China and shall endeavor in accordance
with the international Petroleum industry practice to:

	 	8.6.1	 	minimize the damage and destruction caused by the Petroleum Operations to
environments, community and ecological environment, and prevent land, forests,
vegetation, crops, buildings and other installations from being damaged and destroyed;
	 
	 	8.6.2	 	control blowouts promptly and prevent or avoid waste or loss of Petroleum
discovered in or produced from the Contract Area;
	 
	 	8.6.3	 	prevent Petroleum from flowing into low pressure formations or damaging
adjacent petroleum-bearing formations, and prevent water from flowing into
Petroleum-bearing formations through dry holes or other wells, except for the purpose
of secondary recovery; and
	 
	 	8.6.4	 	minimize the danger to personnel safety and health.

27

 

	8.7	 	With a view to efficiently conducting Work Programs approved by JMC, the Operator
may lease and/or use land with compensation therefore and to obtain rights of way subject
to Chinese laws and regulations. Any costs incurred by the Operator for this purpose shall
be respectively charged to Pilot Test Costs, Development Costs and Operating Costs having
regard to the date on which the same are actually incurred.
	 
	8.8	 	Project Management Team
	 
	 	 	For the development of the Oil Field within the Contract Area, a project management team
(hereafter referred to as “PMT”) shall be established for the development of such Oil
Field in the organization of the Operator within thirty (30) days from the date of
approval of the Overall Development Program for the said Oil Field by the Department or
Unit. PMT shall exist for the period of the development of the said Oil Field.
	 
	 	 	PMT shall comprise those personnel designated by the Parties and the number of CNPC’s
personnel shall be no less than one third (1/3) of the total number of personnel within
PMT. The Contractor shall designate a person acting as the manager of PMT, and CNPC
shall designate a person acting as the deputy manager of PMT.
	 
	 	 	PMT shall be located at the Operator’s office within the Chinese territory. The working
location(s) of the members of PMT shall be decided according to the need of the work.
	 
	 	 	The specific organization, staffing and working system of PMT and responsibilities and
competence of various positions including those of CNPC’s personnel assigned to PMT shall
be determined by the Parties through consultation prior to the approval of the Overall
Development Program for the said Oil Field.
	 
	 	 	The PMT established under this Article 8.8 shall be comprised of the same persons and
identical with the PMT established for the purposes of the Daan Contract. All costs for
the PMT shall be borne by the Operator. Such costs shall be apportioned between the Daan
Contract and this Contract in manner determined by the JMC and charged as Development
Costs separately under such contracts in accordance with such apportionment.
	 
	8.9	 	Transfer and take over of the Production Operations
	 
	 	 	Before the full recovery of the Development Costs actually incurred by the Contractor in
accordance with the Overall Development Program of the Oil Field within the Contract
Area, CNPC may, after agreement reached through consultations of JMC, take over the
Production Operations of that Oil Field, if conditions permit. After the full recovery of
the
Development Costs actually incurred by the Contractor in accordance

28

 

	 	 	with the Overall Development Program of the Oil Field within the Contract Area, CNPC shall,
at any time, have the right by giving a written notice to the Contractor to take over the
Production Operations. Both aforesaid cases shall be effected in accordance with the procedures
described hereunder.

	 	8.9.1	 	The Contractor acting as the Operator shall submit a transfer plan of the Production
Operations to CNPC and JMC respectively within sixty (60) days following the date of
receiving the written notice from CNPC. Such transfer plan shall include, but not be limited
to, a list of various posts to be taken over by CNPC, a schedule of transfer by stages,
inventories of the relevant facilities and equipment and an inventory of all documents,
manuals, data and information necessary for the Production Operations. Where the transfer of
some of the Production Operations involves any Third party, the Contractor acting as the
Operator shall consult with CNPC in advance and propose a solution thereto in the transfer
plan, however, this situation shall not be taken by the Contractor acting as the Operator as
an excuse to delay and hinder the transfer of the Production Operations.
	 
	 	 	 	JMC shall, within thirty (30) days after receiving the said plan, review and approve it.
	 
	 	8.9.2	 	CNPC shall, within sixty (60) days from the date of receiving the transfer plan of the
Production Operations approved by JMC, submit to the Contractor and JMC respectively the
lists and resumes of CNPC’s personnel who will take over the posts. The personnel named in the
lists shall be persons who have been trained by the Contractor in accordance with the
provisions set forth in Article 16 hereof or personnel who are considered by CNPC to be
competent. Within one hundred and eighty (180) days from the date of receiving CNPC’s lists
of the personnel who will take over the posts, the Contractor acting as the Operator shall
arrange for such personnel to undergo step by step practical training for the posts to be
taken over by them and shall assist CNPC to administer a qualification test for such
personnel.
	 
	 	8.9.3	 	Within three hundred and thirty (330) days from the date of receiving the written notice
from CNPC, the Contractor acting as the Operator shall submit to JMC a report on the
completion of preparations for the transfer of the Production Operations. Such report shall
include the results of the qualification test for CNPC’s personnel who will take over the
Production Operations and shall be confirmed by JMC within thirty (30) days after the receipt
of the said report. The transfer of the Production Operations shall begin on the date when
JMC makes such confirmation.

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	 	8.9.3.1	 	When the completion of preparations for the transfer of the
Production Operations is confirmed by JMC, the Contractor acting as the
Operator shall, in accordance with the transfer schedule by stages, transfer
to CNPC’s take-over personnel control of all facilities and equipment related
to the Production Operations in the Oil Field, and all documents, manuals,
data and information regarding the use and operation of such facilities and
equipment, so that CNPC’s personnel are able to manage and handle such
facilities and equipment.
	 
	 	8.9.3.2	 	If JMC believes that preparations for the transfer of the Production
Operations have not been completed and sets another deadline for the completion
of preparations for the transfer of the Production Operations, the preparations
for the transfer shall be completed prior to the deadline and the transfer shall
begin thereafter.

	 	8.9.4	 	The transfer in respect of the accounting and financial aspects shall be handled in
accordance with Annex II-Accounting Procedure hereto.
	 
	 	8.9.5	 	During the preparation for the transfer of the Production Operations and in the course of
the actual transfer, the Contractor acting as the Operator shall perform the functions and
obligations provided for in Articles 8.3, 8.4, 8.5 and 8.6 herein in respect of the Oil Field
undergoing the transfer of the Production Operations, until the date when CNPC has completely
assumed control of and taken over the Production Operations of the Oil Field. Thereafter, the
functions and obligations of the Operator provided for in Articles 8.3, 8.4, 8.5 and 8.6
herein shall be by analogy applicable to CNPC.
	 
	 	8.9.6	 	After CNPC has taken over the Production Operations and become the Operator of the Oil
Field, the Contractor shall still have the obligation, pursuant to Article 2 hereof, to
provide CNPC with the relevant technical and personnel training assistance, and the costs
incurred thereby shall be charged to the Operating Costs in accordance with the provisions of
Annex II-Accounting Procedure hereto.
	 
	 	8.9.7	 	When CNPC takes over the Production Operations in the Oil Field, the CNPC personnel employed
by the Contractor acting as the Operator for the Production Operations of the said Oil Field
shall be transferred to CNPC’s employment. If CNPC needs to retain the services of any of the
Expatriate Employees employed by the Contractor acting as the Operator or the Contractor still
needs to

30

 

	 	 	 	keep some of CNPC personnel in its employment, an agreement shall be reached through
consultation between the Parties prior to the transfer.
	 
	 	8.9.8	 	The expenses incurred in the transfer and takeover of the Production Operations shall be
charged to the Operating Costs.

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Article 9

Assistance Provided by CNPC

	9.1	 	To enable the Contractor to carry out expeditiously and efficiently the Petroleum
Operations, CNPC shall have the obligation to assist the Contractor at its request to:
	 
	9.1.1	 	obtain the approvals or permits needed to open accounts with Bank of China;

	 	9.1.2	 	go through the formalities of exchanging foreign currencies;
	 
	 	9.1.3	 	obtain office space, office supplies, transportation and communication
facilities and make arrangements for accommodation as required;
	 
	 	9.1.4	 	go through the formalities of Customs;
	 
	 	9.1.5	 	obtain entry and exit visas for the Expatriate Employees who will come to
China for the performance of Contract and for their dependents who will visit them or
reside in China for a long period and provide assistance for their transportation and
moving as well as medical services and travel in China;
	 
	 	9.1.6	 	obtain necessary permission to send abroad, if necessary,
documents, data and samples for analysis or processing during the performance of the
Petroleum Operations; and
	 
	 	9.1.7	 	contact and coordinate with departments engaged in fishing, aquatic
product, stock raising, agriculture, meteorology, ocean shipping, civil aviation,
railway, transportation, electric power, communication and services for supply
bases, etc., for relevant matters and otherwise assist the Contractor in obtaining
on a timely basis approvals necessary for the conduct of the Petroleum Operations
under the Contract;
	 
	 	9.1.8	 	lease or use warehouses, yards, terminal facilities, barges, aircraft,
pipelines and land, etc. in the implementation of the Petroleum Operations; and
	 
	 	9.1.9	 	facilitate Contractor’s and the Subcontractors’ registration in China.

	9.2	 	In accordance with Article 15 hereof, CNPC shall, at the request of the Contractor,
assist the Contractor with the recruitment of Chinese Personnel.

32

 

	9.3	 	CNPC shall, at the request of the Contractor, sell to the Contractor data and
samples concerning the Contract Area other than those produced as a result of Petroleum
Operations hereunder in accordance with any relevant rules and regulations and CNPC shall
also assist the Contractor to arrange the purchase of any environmental, hydrological,
meteorological data, etc. from the relevant departments in China.
	 
	9.4	 	CNPC shall, at the request of the Contractor, also assist the Contractor with matters other
than those under Articles 9.1, 9.2 and 9.3 herein if possible.
	 
	9.5	 	All expenses incurred in the assistance provided by CNPC in accordance with this Article 9
shall be paid by the Contractor and shall be handled in accordance with the provisions of
Annex II - Accounting Procedure hereto. The Contractor shall pay to CNPC Eighty Thousand
(80,000) U.S. dollars per year during pilot test period for assistance provided by CNPC and
such annual fee shall be payable by installments of Forty Thousand (40,000) U.S. dollars on
June 1st and December lst in each year.

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Article 10

Work Program and Budget

	10.1	 	After the Date of Commencement of the Implementation of the Contract, the Operator
shall propose and submit to JMC the annual Work Program and budget for the remainder of the
same Calendar Year at the first regular meeting of JMC. Before the fifteenth (15th) of
September of each Calendar Year, the Operator shall complete and submit to JMC for its review
an annual Work Program and budget for the next Calendar Year except otherwise agreed by CNPC.
JMC shall either adopt the annual Work Program and budget as submitted or make such
modifications agreed by the Parties. The adopted annual Work Program and budget shall be
submitted to CNPC for review and approval within one (1) month as of the date on which they
are submitted to JMC. Within fifteen (15) days following the receipt of the annual Work
Program and budget, CNPC shall notify JMC in writing of its approval or disapproval or any
modifications thereto with its detailed reasons. If CNPC requests any modifications to the
aforesaid annual Work Program and budget, the Parties shall promptly hold meetings to make
modifications and any modifications agreed upon by the Parties shall be effected immediately.
In case CNPC fails to notify JMC in writing of its approval or disapproval or any
modification within fifteen (15) days, the annual Work Program and budget adopted by JMC
shall be deemed to have been approved by CNPC. The Operator shall make its best efforts to
perform the Petroleum Operations in accordance with the approved or modified annual Work
Program and budget.
	 
	 	 	As required for reviewing Work Program and budget by JMC, the Operator shall submit to JMC
the supporting data as detailed as possible.
	 
	10.2	 	The Operator may, in accordance with the following provisions, incur excess expenditures or
expenditures outside the budget in carrying out the Work Program and budget, provided that
the objectives of the approved Work Program and budget are not changed.

	 	10.2.1	 	In carrying out an approved budget for a single item, such as the drilling of a well,
the Operator may, if necessary, incur excess expenditures of no more than ten percent
(10%) of the budgeted amount. The Operator shall report quarterly the aggregate
amount of all such excess expenditures to JMC for confirmation.
	 
	 	10.2.2	 	For the efficient performance of the Petroleum Operations, the Operator may, without
approval, undertake certain individual projects which are not included in the Work
Program and budget, for a maximum expenditure of One Hundred Thousand U.S. Dollars
(U.S. $100,000), but the Operator shall, within ten (10) days after such expenditures
are incurred, report to JMC for

34

 

	 	 	 	confirmation. In case of emergency, the Operator may incur emergency expenditures for the
amount actually needed but shall report such expenditures to JMC as soon as they are made.
However, the said emergency expenditures shall not be subject to Articles 10.2.3 and
10.2.4 herein.
	 
	 	10.2.3	 	In the event that the aggregate of excess expenditures under Article 10.2.1 herein and
expenditures under Article 10.2.2 herein incurred in a Calendar Year cause the total
expenditures of that Calendar Year to exceed the approved annual budget, such excess shall
not exceed five percent (5%) of the approved annual budget for that Calendar Year. If the
aforesaid excess is expected to be in excess of five percent (5%) of the annual budget, the
Operator shall present its reasons therefore to JMC and obtain its approval prior to
incurring such expenditures.
	 
	 	10.2.4	 	When JMC confirms the excess expenditures mentioned in Articles 10.2.1 herein, and the
expenditures mentioned in 10.2.2 herein:

	 	(a)	 	if expenditures or excess expenditures are determined to be reasonable, the
Operator may incur such expenditures or excess expenditures again during the same
Calendar Year, subject to Article 10.2 herein; or
	 
	 	(b)	 	if expenditures or excess expenditures are determined to be unreasonable,
the Operator shall not incur such expenditures or excess expenditures
again during the same Calendar Year and such unreasonable expenditures or excess
expenditures shall be dealt with in accordance with Article 5.4 of Annex II-Accounting
Procedure hereto.

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Article 11

Preparation of the Overall

Development Program

	11.1	 	During the pilot test period, if the Operator opts to enter into the development
period, the Operator shall complete the preparation of the Overall Development Program and
report to JMC and CNPC for confirmation. CNPC shall report the Overall Development Program of
the Oil Field to Department or Unit for approval as soon as possible.
	 
	11.2	 	Prior to the submission of the Overall Development Program, the Operator shall submit to
CNPC the report of oil in place of the Oil Field and the Environment Impact Statements,
which shall be entrusted to and prepared by a qualified organization. The aforesaid reports
and the statements shall be submitted to the competent authorities of the Chinese Government
through CNPC for review and approval.
	 
	11.3	 	The Operator shall perform the Development Operations in accordance with the Overall
Development Program of the Oil Field approved by the Department or Unit. If the Contractor
acting as the Operator, without adequate justification, fails to commence such Development
Operations within ninety (90) days after the date of approval of the Overall Development
Program of the Oil Field by the Department or Unit, or if an unreasonable delay caused
unilaterally by the Contractor acting as the Operator results in a suspension or a halt of
ninety (90) continuous days in the Development Operations of the Oil Field, CNPC has the
right to request the Contractor to resume the Development Operations within a period of time
set forth by CNPC; and if the Development Operations fail to be resumed within such period,
CNPC has the right to request the Contractor to give up all its rights in the said Oil
Field. If CNPC so requests the Contractor, pursuant to the provisions of this Article 11.3
herein, to give up all of its rights in the said Oil Field, the Contractor shall waive all
of its rights in the said Oil Field from the date of receipt by the Contractor of the
written notice in that regard from CNPC.
	 
	11.4	 	In the event of the Oil Field Straddling a Boundary, CNPC shall arrange for the Contractor
and the neighboring parties involved to work out a unitized Overall Development Program for
such Oil Field and to assist to negotiate the relevant provisions thereof.
	 
	11.5	 	The procedures specified in this Article 11 shall be applied, by analogy, to determination
of additional development projects in the Oil Field within the Contract Area during the
production period, such projects being designed as a supplementary to and/or an adjustment
of the existing Overall Development Program for such Oil Field.

36

 

	11.6	 	If the Parties deem that it is necessary to have appraisal trial production for
preparation of the Overall Development Program for the Oil Field within Contract Area, the
Parties shall reach a written agreement through negotiation on terms and conditions of
appraisal trial production which shall be attached hereto as a supplementary document.

37

 

Article 12

Financing and Cost Recovery

	12.1	 	Funds required for the Petroleum Operations shall be raised by the Operator in accordance
with Work Programs and budgets determined pursuant to the relevant provisions of the Contract,
the provisions described in Annex II - Accounting Procedure hereto, and the provisions
described here below.

	 	12.1.1	 	All the Pilot Test Costs required in the Pilot Test Area shall be provided solely by
the Contractor. However, the costs required for the fulfillment of the minimum pilot
test work commitment shall be deemed as the equity capital of the Contractor.
	 
	 	12.1.2	 	All the Development Costs required in the Oil Field within the Contract Area shall be
provided solely by the Contractor.
	 
	 	12.1.3	 	The Operating Costs incurred for the performance of the
Production Operations of the Oil Field before the Date of
Commencement of Commercial Production shall be considered as
Development Costs. The Operating Costs so incurred after the Date of
Commencement of Commercial Production shall be paid respectively by CNPC and
the Contractor in accordance with the Parties’ proportion of the “investment
recovery oil” stipulated in Article 13.2.2.2, namely in proportion of twenty
percent (20%) by CNPC and eighty percent (80%) by the Contractor. After
the “investment recovery oil” changes into the “allocable remainder
oil”, the Operating Costs shall be paid respectively by CNPC and the
Contractor in accordance with the Parties’ proportion of the “allocable
remainder oil” stipulated in Article 13.2.3, namely in proportion of
fifty-two percent (52%) by CNPC and forty-eight (48%) by the Contractor.
However, the Parties agree that CNPC’s Operating Costs shall be firstly paid
by the Contractor for CNPC and the said proportion of the Operating Costs to
be recovered by CNPC pursuant to Article 13.2.2.1 under this Contract shall
be recovered by the Contractor.
	 
	 	12.1.4	 	For the purpose of implementation of the Contract, CNPC shall agree that the
Contractor may, when financing, use the entitlement of its share of production under
the Contract as a security for loans, provided that the Contractor shall apply to CNPC
in advance and the application therefor shall be examined by CNPC, and provided
further that the rights and interests of CNPC under the Contract shall not be impaired
thereby.

38

 

	12.2	 	The Operating Costs for any given Calendar Year actually incurred by CNPC and
the Contractor in respect of the Oil Field after the Date of Commencement of Commercial
Production pursuant to Article 12.1.3 herein, shall be recovered in kind by the Parties out
of the Crude Oil produced from the said Oil Field during that Calendar Year in accordance
with Annex II - Accounting Procedure hereto, after the Operating Costs have been converted
into a quantity of Crude Oil on the basis of the Crude Oil price determined in accordance
with Article 14 hereof. Any such Operating Costs which are unrecovered in any Calendar
year shall be carried forward to the succeeding Calendar Year(s).
	 
	12.3	 	The Pilot Test Costs and the Development Costs incurred by the Contractor in accordance with
Article 12.1.1 and 12.1.2 hereof, and all the costs (hereinafter referred to as
Pre-development Costs) spent by CNPC for exploring and proving the commerciality of the
Petroleum discovery within the Contract Area and for the wells drilled and surface production
facilities constructed therein before the date of signing of the Contract, shall be recovered
in kind out of the Crude Oil produced from such Oil Field by the Contractor and CNPC in
accordance with Article 13.2.2.2 hereof, after the Pilot Test Costs, Development Costs and
Pre-development Costs have been converted into a quantity of Crude Oil based on the Crude Oil
price determined in accordance with Article 14 hereof.
	 
	12.4	 	If the Contractor fails to enter into the Development Period after Pilot Test Costs incurred
for the pilot test, the Pilot Test Costs incurred by the Contractor shall be deemed as its
loss. Under no circumstances CNPC shall reimburse the contractor for such loss.

39

 

Article 13

Crude Oil Production and Allocation

	13.1	 	The Operator shall, in accordance with the production profile, adjusted as the case may
be, set forth in the Overall Development Program for the Oil Field as approved by the
Department or Unit, work out a Crude Oil production plan for the Oil Field in each Calendar
Year and carry out Crude Oil production pursuant to such plan.
	 
	13.2	 	The Annual Gross Production of Crude Oil of the Oil Field within the Contract Area in each
Calendar Year during the production period shall be allocated in accordance with the following
sequence and proportions:

	 	13.2.1	 	The percentages of the Annual Gross Production of Crude Oil specified in paragraphs
(a) and (b) hereunder shall be used for payments of the Value Added Tax and of Royalty
respectively and shall be paid in kind to the relevant authorities of the Chinese
Government through CNPC.

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

	 	13.2.2	 	The Annual Gross Production of Crude Oil shall, after payment for Value Added Tax and
Royalty in accordance with Article 13.2.1 herein, be firstly deemed as the “cost
recovery oil” and shall be used for payment or for cost recovery in the following
sequence:

	 	13.2.2.1	 	Payment in kind for the Operating Costs actually incurred but not yet
recovered by the Parties pursuant to Article 12.1.3 hereof after the price of
the said “cost recovery oil” has been determined in accordance with Article 14
hereof.
	 
	 	13.2.2.2	 	The remainder of the “cost recovery oil” shall, after payment for
Operating Costs in accordance with Article 13.2.2.1 herein be deemed as
“investment recovery oil”. Such “investment recovery oil” pursuant to the
Crude Oil price determined in accordance with Article 14 shall be used for the
simultaneous recovery of the Pilot Test Costs and the Development Costs
incurred by the Contractor and the Pre-development Costs spent by CNPC
stipulated in accordance with Articles 12.1.1, 12.1.2 and 12.3 in
proportion of twenty percent (20%) by the CNPC and eighty percent (80%) by
Contractor. The unrecovered costs

40

 

	 	 	 	of the Parties shall be carried forward to and recovered from the
“investment recovery oil” in succeeding Calendar Years until fully
recovered. The date that the said Pilot Test Costs and Development Costs
incurred for the entire completion of the Development Operations set
forth in the Overall Development Program have been fully recovered by
the Contractor shall be deemed as the date that the aforesaid
Pre-development Costs have been recovered by CNPC. By the date of
expiration of the production period pursuant to Article 4.5 hereof, if
the said costs incurred by the Parties have not been fully recovered,
then such unrecovered costs shall be regarded as a loss and the Parties
shall respectively bear the loss.

	 	13.2.3	 	In any Calendar Year after all Pilot Test Costs and Development Costs
incurred by the Contractor to that time have been recovered, the remainder of the
Annual Gross Production of Crude Oil after the allocation referred to in Articles
13.2.1 and 13.2.2 herein (hereinafter referred to as “allocable remainder oil”)
shall be allocated in proportion of CNPC fifty-two percent (52%), the Contractor
forty-eight percent (48%).

	13.3	 	CNPC and each company comprising the Contractor shall, throughout the entire contract term,
have the right and obligation, in each Calendar Quarter, to lift and take, and separately
dispose of their respective full shares of all Crude Oil produced, and determined pursuant to
Articles 13.2.2 and 13.2.3 herein.
	 
	 	 	In the event that the Crude Oil production of the Oil Field is reduced because CNPC or any
company comprising the Contractor does not lift and take its full share of Crude Oil or
lifts nothing, then, such reduction in Crude Oil production shall not affect the total
amount of Crude Oil due to each of the other Parties or the amounts of Crude Oil available
to be lifted and disposed of by each of the other Parties as provided in Article 13.4 (c)
herein.
	 
	13.4	 	A Crude Oil lifting procedure shall be agreed upon by the Parties no later than six (6)
months prior to the Date of Commencement of Commercial Production of the Oil Field within the
Contract Area, and shall include, but not be limited to:

	 	(a)	 	the Operator’s notification of Crude Oil production to CNPC and each company
comprising the Contractor;
	 
	 	(b)	 	notification by CNPC and each company comprising the Contractor of its
expected offtake to the Operator;

41

 

	 	(c)	 	the Operator’s notification to CNPC and each company comprising the Contractor
of the final Crude Oil lifting schedule prepared by the Crude Oil lifting
coordination group in accordance with Article 13.5 herein, which shall be binding
on CNPC and each company comprising the Contractor;
	 
	 	(d)	 	limitation and calculation of overlift and underlift of CNPC and each
company comprising the Contractor; and provisions to ensure timely and ratable
lifting of Crude Oil;
	 
	 	(e)	 	determination of allowable operational tolerance on lifting; and
	 
	 	(f)	 	other terminal procedures as may be required to reflect the particular
circumstances.

	13.5	 	For the purpose of implementing the procedures as described in Article 13.4 herein, CNPC and
each company comprising the Contractor shall jointly set up a Crude Oil lifting coordination
group consisting of representatives, one each appointed by CNPC and each company
comprising the Contractor, with the representative of CNPC as the Chairman, and one
representative of the Contractor as the Vice-Chairman. Such group shall be responsible for the
preparation of Crude Oil lifting plans for each Calendar Year, for Calendar Quarter and for
calendar month and shall also be responsible for the reasonable and unified arrangements and
adjustments of the aforesaid Crude Oil lifting plans through close contact with any operator
in charge of the storage and loading facilities.
	 
	13.6	 	The Contractor shall have the right to export from China all Crude Oil which it obtains as
set forth in Article 13.2.2 and 13.2.3 herein. The Contractor shall obtain, with the
assistance of CNPC, any export license or other permit that may be required in order for the
Contractor to export from China all Crude Oil which it obtains as set forth in Article 13.2.2
and 13.2.3 herein.
	 
	13.7	 	At the expiration of the pilot test period, if the Contractor opts to terminate the Contract,
the amount of Crude Oil extracted from the Oil Field during the pilot test period shall be
allocated in proportion of CNPC seventy percent (70%), the Contractor thirty percent (30%); if
the Contractor opts to enter into the development period, the amount of Crude Oil extracted
from the Oil Field during the pilot test period shall be allocated in accordance with Article
13.2 herein. The amount of Crude Oil extracted from the Oil Field within the Contract Area
from the date of the approval of the Overall Development Program to the Date of Commencement
of Commercial Production shall be allocated in accordance with Article 13.2 herein.

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Article 14

Quality, Quantity, Price and

Destination of Crude Oil

	14.1	 	Quality of the Crude Oil

	 	14.1.1	 	The quality analysis of Crude Oil produced from the Oil Field within the Contract
Area shall be undertaken at the Delivery Point. Such analysis shall be carried out on
a sample taken by the State Bureau of Import and Export Commodities Inspection
(hereinafter referred to as the “Bureau”) or any representative agency authorized by
the Bureau pursuant to standards issued by the State Bureau of Standardization of the
People’s Republic of China or by the Department or Unit.
	 
	 	14.1.2	 	The Crude Oil quality analysis referred to in Article 14.1.1 above shall include
the following:

	 	(a)	 	density at 20 degree centigrade, in grams per cubic
centimeter;
	 
	 	(b)	 	sulphur content, in weight percentage;
	 
	 	(c)	 	water content, in weight percentage; and
	 
	 	(d)	 	basic sediment content, in weight percentage.

	14.2	 	Quantity of the
Crude Oil

	 	14.2.1	 	The quantity measurement of the Crude Oil produced from the Oil Field within the
Contract Area, when being lifted, shall be made at a Delivery Point and with measuring
devices both to be agreed upon by the Parties. A relevant measuring organization of the
Chinese Government or a representative agency authorized thereby shall, at appropriate
regular intervals, calibrate all the measuring devices, conduct special testing and
issue certificates of qualification with respect thereto or confirm their qualification
before the measuring devices are put into use. The quality and quantity of the Crude
Oil delivered shall be authenticated in accordance with the commodity quality
certificate and weight certificate issued by the Bureau and such quality and quantity
shall be the basis for the accounting settlement.
	 
	 	14.2.2	 	If any Party to the Contract believes that the Crude Oil measuring devices, sampling
or analysis are inaccurate, or has any objection to the results specified in the above
mentioned certificates, on-site investigations, technical exchanges and discussions may
be

43

 

	 	 	 	conducted by the Parties to resolve the issue in a manner satisfactory to
the Parties.

	14.3	 	Determination of the Crude Oil Price

	 	14.3.1	 	The price of various grades of the Crude Oil shall be expressed as an FOB price at
the Delivery Point. Determination of the Crude Oil price shall be made with reference
to the prevailing price in arm’s length transactions of similar quality crude oil on
the main world oil markets and the adjustment in such price shall be made in
accordance with such determinants as the quality of the Crude Oil, the terms of
delivery, transportation, payment and other terms.
	 
	 	 	 	The aforesaid price in arm’s length transactions in this Article refers to a price
at which a seller sells its crude oil to a buyer who is independent of the seller,
but not including the prices used by them for government to government transactions
which do not reflect international oil market price, Crude Oil exchange, or barter
transactions.
	 
	 	14.3.2	 	Subject to the agreement of Parties, where the Crude Oil produced from the Oil Field
within the Contract Area differs in grades, the prices of such Crude Oil with different
quality will be individually determined.
	 
	 	14.3.3	 	The price of the Crude Oil produced from the Oil Field within the Contract Area shall
be denominated in U.S. dollars per metric ton. However, if an international currency
other than the U.S. dollar prevails on the main world oil markets as the pricing unit of
Crude Oil, the Parties may also use that international currency therefor upon mutual
agreement.
	 
	 	14.3.4	 	Procedure for the Determination of the Crude Oil Price

	 	14.3.4.1	 	The Crude Oil price shall be determined once each Calendar Quarter. In case
the crude oil price prevailing on most world oil markets fluctuates, CNPC and
the Contractor each shall have the right to propose, at any time, that a new
Crude Oil price be negotiated and determined.
	 
	 	14.3.4.2	 	The Contractor shall, no later than forty-five (45) days prior to the
commencement of any Calendar Quarter, notify CNPC of its proposed price for
Crude Oil to be lifted in such Calendar Quarter (for the purpose of this Article
hereafter referred to as the said Calendar Quarter).

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	 	14.3.4.3	 	CNPC shall notify the Contractor of its decided price within ten (10) days
after the receipt of the aforesaid proposed price notified by the Contractor. In the
absence of a different price notified by CNPC to the Contractor within ten (10) days
after the receipt of the aforesaid notification, the proposed price notified by the
Contractor as referred to in Article 14.3.4.2 herein shall be applied to the Crude Oil
to be lifted in the said Calendar Quarter.
	 
	 	14.3.4.4	 	The Contractor shall, within five (5) days following its receipt of notice of a price
decided by CNPC, state to CNPC whether the price is acceptable. If it is acceptable, then the
said decided price shall be regarded as the price agreed upon by the Parties for the said
Calendar Quarter. If it is not acceptable, the Parties shall, within ten (10) days, carry out
further negotiation in an amicable manner to determine the price for the said Calendar
Quarter.
	 
	 	14.3.4.5	 	In the event that the Parties still cannot reach an agreement on the Crude Oil price
for the said Calendar Quarter through further negotiations by the Parties, the
Contractor may lift the Crude Oil in accordance with the quota specified for the said
Calendar Quarter in Article 13.2 hereof, and the Crude Oil price for the preceding Calendar
Quarter shall apply provisionally to the Crude Oil of such quota and the payment shall be
made accordingly. Then, the Parties shall negotiate further on the Crude Oil price for the
said Calendar Quarter, taking into account relevant independent and non-proprietary market
data on Third Party sales of crude oil in substantial quantities on the main world oil
markets, adjusted for quality, transportation and other applicable differentials. The Parties
shall each take into account the information supplied and discussed and attempt to agree
on a Crude Oil price based upon such information by the end of the said Calendar
Quarter.

	 	(1)	 	In the event that the Parties still cannot reach an agreement in Crude Oil
price by the end of the said Calendar Quarter, then the Crude Oil price shall be
the weighted average FOB price of the Crude Oil of the same or similar quality
sold by CNPC and/or the Contractor to a Third Party or Third Parties and produced
in the said Calendar Quarter from the Oil Fields described hereafter, adjusted for
such differences as the quality, delivery, transportation, payment and other
terms, but excluding the government to government transactions which do

45

 

	 	 	 	not reflect international oil market price, crude oil exchange or barter
transactions.
	 
	 	 	 	The application of the above-mentioned price of Crude Oil sold to a Third Party or
Third Parties shall be in the following sequence:

	 	(i)	 	Firstly, the price, calculated and determined in accordance with
the above-mentioned stipulations, of the Crude Oil produced from the Oil Field
in the Contract Area and sold to a Third Party or Third Parties shall be
applied;
	 
	 	(ii)	 	In the event no sales mentioned in paragraph (i) above
were made in the said Calendar Quarter, the price, calculated and determined in
accordance with the above-mentioned stipulations, of the crude oil produced from
the oil fields of other contract areas for Chinese-foreign cooperative
exploitation of petroleum resources and sold to a Third Party or Third Parties
shall be applied.

	(2)	 	In the event there are no such Third Party sales of the Crude Oil as referred to in Article
14.3.4.5(1) herein during the said Calendar Quarter, then the Crude Oil price for the said
Calendar Quarter shall be equal to the same Crude Oil price of the preceding Calendar
Quarter adjusted by the differences in the arithmetic average of the average daily selling
price for a basket of three or more internationally traded crude oils in the said Calendar
Quarter compared with that for such basket of crude oils for the preceding Calendar Quarter.
The adjusted price shall be the Crude Oil price for the said Calendar Quarter. The crude
oils selected for the basket shall each be similar in quality to the Crude Oil from the
Contract Area and chosen from different countries and shall have prices which reflect the
conditions of the main world oil markets and shall be mutually agreed by the Parties in the
Overall Development Program. Any crude oil selected for the basket may be substituted at any
time by another crude oil upon agreement by the Parties.

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	 	(3)	 	If the Parties are unable to agree on a Crude Oil
price for a Calendar Quarter in which Crude Oil is first produced and
delivered from or the production of Crude Oil is restored in the Oil
Field in the Contract Area, then the Crude Oil for the Calendar
Quarter shall be priced and/or paid in accordance with the arithmetic
average price of the prices finally proposed by the Parties in the
Calendar Quarter. Based on the Crude Oil price agreed upon by the
Parties for the succeeding Calendar Quarter, the Crude Oil price for
the Calendar Quarter shall be determined by adjusting retroactively
by the difference between the arithmetic average prices of the basket
of the Crude Oils for the Calendar Quarter and the succeeding
Calendar Quarter in accordance with the calculation method referred
to in Article 14.3.4.5 (2) herein.

	 	14.3.4.6	 	If, due to the delayed announcement of crude oil prices by the main world
oil-producing countries or the main world oil markets, or if, as agreed by CNPC and
the Contractor, an unstable main world oil market exists, then, the period for the
determination of the price referred to in Article 14.3.4.2 herein may be extended to
the end of the said Calendar Quarter in question.
	 
	 	14.3.4.7	 	If the Crude Oil prices in the international oil markets or the Crude Oil prices
quoted in the main oil-producing countries change materially, then the Parties will
meet and agree to adjust the Crude Oil price retrospectively. The period for such
retrospective adjustment shall not exceed the previous Calendar Quarter.

	14.3.5	 	The Crude Oil for each Calendar Quarter due to CNPC pursuant to Article 13 hereof shall be
converted into an amount of money in the currency utilized pursuant to Article 14.3.3 herein
based on the Crude Oil price for that Calendar Quarter finally determined in accordance with
the aforesaid provisions specified in Article 14.3 herein and such amount of money shall be
entered into the Joint Account as of the date on which such Crude Oil is lifted.

	14.3.6	 	The Crude Oil for each Calendar Quarter due to the Contractor pursuant to Article 13 hereof
shall be converted into an amount of money in the currency utilized pursuant to Article 14.3.3
herein based on the Crude Oil price for that Calendar Quarter finally determined in accordance
with the aforesaid provisions specified in Article 14.3 herein and such amount of money shall
be entered into the Joint Account as of the date on which the Crude Oil is lifted.

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14.4 Destination of the Crude Oil

	 	14.4.1	 	The destination of Contractor’s Crude Oil obtained under the Contract shall be at
the discretion of the Contractor, except as stipulated in Article 14.4.2 herein.
	 
	 	14.4.2	 	In accordance with the decisions of the Chinese Government, CNPC shall notify the
Contractor of any prohibited destinations which infringe on the political interests of
the People’s Republic of China. The Contractor shall not deliver the Crude Oil to the
prohibited destinations as notified.

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Article 15

Preference to the Employment of the

Chinese Personnel, Goods and Services

	15.1	 	For the performance of the Petroleum Operations, the Contractor’s procurement of
necessary goods, leasing equipment and signature of subcontracts or other service contracts
shall be subject to Article 22 of the Petroleum Regulations. The Contractor shall give
preference to Chinese goods, equipment and service provided that they are competitive in
terms of price, quality and term of delivery.
	 
	15.2	 	The Contractor shall give preference to the employment of Chinese Personnel in the
performance of the Petroleum Operations in accordance with Articles 18 and 22 of the
Petroleum Regulations. For this purpose, the Contractor shall submit in advance to CNPC and
JMC respectively a plan for the employment of Chinese Personnel listing all the posts and
number of the persons involved. CNPC shall, in accordance with the plan, provide or assist in
recruiting Chinese employee candidates for such employment. For the performance of Petroleum
Operations, the Contractor shall have the obligation to employ competent Chinese Personnel.
The Contractor shall give preference in employing the Chinese Personnel who have participated
in the training program provided by the Contractor.

	15.3	 	The engineering design corporations under or entrusted by CNPC shall have the right to
participate in the master designs and engineering designs made by the Contractor for the
purpose of the implementation of the Contract. Engineering design companies within the
territory of the People’s Republic of China shall be given preference in entering into the
subcontracts for the aforesaid master designs and engineering designs, provided that their
technical level, quality, price and delivery time are competitive.

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

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Article 16

Training of Chinese Personnel

and Transfer of Technology

	16.1	 	Contractor agrees, in the course of the Petroleum Operations, to transfer to CNPC and
its Affiliates, the advanced technology and managerial experience including proprietary
technology e.g. patented technology, know-how or other confidential technology, etc. used in
the performance of the Petroleum Operations and the necessary data and/or information for
mastering such technology and experience in accordance with Article 18 of the Petroleum
Regulations, provided, however, that such technology to be transferred shall be proprietary
to the Contractor and if the transfer of any of such technology is restricted in any way
during the term of the Contract, the Contractor shall, to the extent reasonably possible,
endeavor to obtain permission for the transfer of such restricted technology. The Contractor
agrees to train the Chinese Personnel including workers, technical, economic, managerial,
legal and other professional personnel, in order to improve their technical and/or managerial
capabilities. Details of training of Chinese Personnel and transfer of technology are
described in Annex IV — Training of Chinese Personnel and Transfer of Technology hereto.

	16.2	 	Within ninety (90) days following the Date of Commencement of the Implementation of the
Contract, the Contractor shall, after consultation with CNPC, complete and submit a training
and technology transfer program for the Chinese Personnel in the pilot test period and the
corresponding budget to JMC for review and approval, and upon approval by JMC, put it into
practice. The Contractor shall, after consultation with CNPC, complete and submit training and
technology transfer programs and corresponding budgets for the Chinese Personnel in the
development period and the production period, respectively, to JMC for its review and approval
before the commencement of the Development Operations and Production Operations, and upon
approval by JMC, put them into practice in time so as to have ample time in advance for such
training and technology transfer.

	16.3	 	The purpose, requirement, fields of specialization, scope of personnel, specific job
categories, type, method, etc. in respect of training of Chinese Personnel and transfer of
technology shall be determined in Annex IV — Training of Chinese Personnel and Transfer of
Technology hereto.

	16.4	 	The expenses and costs incurred for performing the training and technology transfer program
stipulated in this Article shall be borne by the Contractor.

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	16.5	 	In the course of the implementation of the Contract, the Parties shall have
scientific and technical cooperation and academic exchange in connection with the
Petroleum Operations. The relevant provisions concerning the plan, participating personnel
and type related to the scientific and technical cooperation and academic exchange shall
be determined by the Parties. The expenses required by the scientific and technical
cooperation and academic exchange shall be included in the budget specified in Article
16.2 herein and charged to the Joint Account. All inventions, experiments or research
results arising from the said cooperation and academic exchange shall be shared by and
belong to the Parties who, subject to the provisions of Article 22 hereof, shall not
disclose them to any Third Party.
	 
	 	 	In the course of the implementation of the Contract, those scientific research
projects which are required by the Petroleum Operations but not carried out by the Parties
may, with the approval of JMC, be commissioned to, and carried out by, any Third Party.
The Operator shall enter into subcontracts or service contracts with relevant scientific
research departments within the territory of the People’s Republic of China, provided that
they are competent and competitive. The aforesaid required expenses shall be included in
the budget specified in Article 16.2 herein and charged to the Joint Account. All
inventions and experimental or research results developed from the aforesaid research
projects carried out by a Third Party delegated by the Operator shall also be shared by
and belong to the Parties who, subject to the provisions of Article 22 hereof, shall not
disclose any of them to any other Third Parties. The Operator shall endeavor to
incorporate the provisions herein in the subcontracts or service contracts signed with a
Third Party.

	16.6	 	The advanced technology and managerial experience, including proprietary technology, e.g.
patented technology, know-how or other confidential technology that the Contractor transfers
to CNPC, shall remain the exclusive property of the Contractor and also be subject to the
confidentiality restrictions of Article 22 hereof.

	16.7	 	For the purpose of the implementation of Article 16 herein and Annex IV — Training of Chinese
Personnel and Transfer of Technology hereto, the costs and expenditures incurred by the
Contractor annually for training of Chinese Personnel and transfer of technology shall be
Ninety Thousand (90,000) U.S. dollars during the pilot test period; the costs and expenditures
incurred by the Contractor annually for training of Chinese Personnel and transfer of
technology shall be One Hundred and Fifty Thousand (150,000) U.S. dollars during the
development period and the production period, unless otherwise agreed by the Parties.

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Article 17

Ownership of Assets and Data

	17.1	 	All assets purchased, installed and constructed under the Work Program and budget for
the Oil Field within the Contract Area shall be owned by CNPC from the date on which all the
Development Costs actually incurred by the Contractor to the date of the entire completion of
the Development Operations set forth in the Overall Development Program have been fully
recovered, or from the date on which the production period expires, even though the aforesaid
costs have not been fully recovered, or from the date on which the pilot test period expires,
if the Contractor opts to terminate the Contract at the expiration of the pilot test period.
The Operator shall be responsible for the acceptance inspection or testing of the said assets
and CNPC may, as it deems necessary, send its experts to participate in such acceptance
inspection or testing. Such assets shall not be used in any operations other than the
Petroleum Operations or any operations by Third Parties without the consent of the Parties.

	17.2	 	Equipment and facilities which are owned by a Third Party and are either leased by the
Operator or temporarily brought into the territory of the People’s Republic of China for the
performance of the Petroleum Operations shall not be deemed as assets owned by CNPC. Such
equipment and facilities may be exported from the People’s Republic of China, and CNPC shall
assist in handling export formalities.

	17.3	 	The ownership of all of the data, records, samples, vouchers, and other original data
obtained in the course of performing the Petroleum Operations shall vest in CNPC. For the
purpose of implementation of the Contract, the availability and sale of all the data related
to the Contract owned by CNPC required by the Contractor shall be made through CNPC.

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Article 18

Associated Natural Gas

	18.1	 	Associated Natural Gas

	 	18.1.1	 	The Associated Natural Gas produced from the Oil Field within the Contract Area shall
be primarily used for purposes related to the operations of production and production
enhancement of Oil Field such as gas injection, gas lifting and power generation.
	 
	 	18.1.2	 	Based on the principle of full utilization of the Associated Natural Gas and
with no impediment to normal production of the Crude Oil, the Overall
Development Program of the Oil Field shall include a plan of utilization of the
Associated Natural Gas. If there is any excess Associated Natural Gas in the
Oil Field after utilization pursuant to Article 18.1.1 herein (hereafter
referred to as “excess Associated Natural Gas”), the Operator shall carry out a
feasibility study regarding the utilization of such excess Associated
Natural Gas of such Oil Field. Such feasibility study, if carried out
before the Development Operations of the Oil Field, shall be included as
part of the feasibility study on the development of the Oil Field. With
respect to the Oil Field already under commercial production, if
a further feasibility study on the utilization of its excess Associated Natural
Gas is required, such study shall be carried out by the Operator and a
report thereon shall be submitted to JMC for review and discussion. If
the Parties decide to utilize the excess Associated Natural Gas of the Oil
Field, the construction of facilities for such utilization and the production
of the excess Associated Natural Gas shall be carried out at the same
time as the Oil Field construction and production.

	 	18.1.2.1	 	If the Parties agree that the excess Associated Natural Gas of the Oil Field
has no commercial value, then such gas shall be disposed of by the Operator subject
to relevant regulations concerning the environmental protection, provided that
there is no impediment to normal production of the Crude Oil.
	 
	 	18.1.2.2	 	If any Party to the Contract considers unilaterally that the excess Associated
Natural Gas of the Oil Field has commercial value, such gas may be utilized by that
Party at its own expense without affecting timing and optimal development of the
Oil Field concerned, the amount of “cost recovery oil” and “allocable
remainder oil” due to the other Party to the Contract which does not invest in such
utilization.

53

 

	 	18.1.2.3	 	If the Parties agree that excess Associated Natural Gas of the Oil Field
has commercial value, the Contractor shall make further investment in its utilization,
and the aforesaid new investment shall not affect either the proportion of “cost
recovery oil” by the Parties stipulated in Article 13.2.2 hereof or the proportion of
the “allocable remainder oil” by the Parties stipulated in Article 13.2.3 hereof. If the
Parties disagree on the commercial utilization of such excess Associated Natural Gas of
that Oil Field, they shall, guided by the principle of mutual benefit, carry out further
negotiations to reach an agreement in writing.

	 	 	 	If the Parties fail to reach agreement through negotiations, CNPC shall reserve the right to
dispose of the excess Associated Natural Gas of the said Oil Field unilaterally. If CNPC
decides to utilize the said excess Associated Natural Gas, the Contractor shall have the
right to join in the utilization of the said excess Associated Natural Gas within three (3)
years after the facilities for utilizing the said excess Associated Natural Gas are completed
unilaterally by CNPC in accordance with an Associated Natural Gas utilization program
formulated by CNPC. If the Contractor decides in writing to participate in the utilization of
the said excess Associated Natural Gas within the three (3) years mentioned above, then, the
Contractor shall pay CNPC an amount of money, in addition to the cost spent by CNPC on the
said utilization of excess Associated Natural Gas up to the date of Contractor’s submission
of the written notice to CNPC. Such amount shall be equal to two times (200%) of the
foregoing costs for utilization of the excess Associated Natural Gas and such amount of money
shall not be charged into the Joint Account and shall not be deemed the recoverable costs.
Thereafter, the costs to be incurred in such utilization of excess Associated Natural Gas
shall be provided by the Contractor solely in accordance with the provisions herein.
	 
	 	 	 	If the Contractor decides, after the three (3) years mentioned above, not to participate in
the utilization of the excess Associated Natural Gas, the Contractor shall be deemed to have
waived all its rights to use the said excess Associated Natural Gas.
	 
	 	18.1.3	 	Expenses incurred in the utilization of the Associated Natural Gas of the Oil Field as
stipulated in Article 18.1.1 herein, and those incurred in carrying out a feasibility study
on the utilization of the excess Associated Natural Gas after commencement of commercial
production of the Oil Field referred to in Article 18.1.2 herein shall be charged to the
Development Costs of the Oil Field.

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	 	 	 	Royalty and Value Added Tax of the production or the excess Associated Natural Gas shall be
paid to the Chinese Government through CNPC.
	 
	 	 	 	All remaining excess Associated Natural Gas after the deduction of Value Added Tax and
Royalty shall be allocated to CNPC and the Contractor by analogy in accordance with the
proportion stipulated in Article 13 herein.

	18.2	 	If CNPC unilaterally utilizes the excess Associated Natural Gas of the Oil Field and
requires to apply the Contractor’s appropriate and advanced technology and managerial
experience, the Parties shall negotiate terms and conditions related thereto and the Operator
shall carry out the operations if an agreement is reached on such terms and conditions.

55

 

Article 19

Accounting, Auditing and Personnel Costs

	19.1	 	Accounting
	 
	 	 	Annex II — Accounting Procedure hereto contains the guidelines for the Operator to keep
accounting books and records and make financial settlements. The Operator shall keep and
settle the accounts for all the financial activities in respect of the Contract Area and
maintain all the accounting books and records in accordance with Annex II — Accounting
Procedure hereto in order to accurately reflect the Pilot Test Costs and the Development
Costs thereon and Operating Costs incurred in the performance of the Petroleum Operations in
respect of the Contract Area, as well as quantity and monetary value of the production and
allocation of Crude Oil and excess Associated Natural Gas. The Operator shall submit detailed
statements and relevant written reports to JMC and the departments concerned.
	 
	19.2	 	Auditing

	 	19.2.1	 	Any Party to the Contract shall have the right to audit all the Operator’s Joint
Account accounting books and records after the end of each Calendar Year and give the
Operator a written notice of the auditing results. The auditing shall be completed
within twenty-four (24) months after the end of each Calendar Year. In the absence of
any written notice of the exception to the auditing results given by such Party within
such period or if the annual Joint Account accounting books and records of the Operator
are not audited by any non-Operator Party within such period, the Operator’s Joint
Account accounting books and records shall be deemed correct. A special auditing of the
Operator’s Joint Account accounting books and records may be made due to some special
requirements during a Calendar Year.
	 
	 	19.2.2	 	If the auditing referred to in Article 19.2.1 herein is conducted, the Operator shall
be given thirty (30) days’ notice prior to the date of commencement of such auditing.
There shall be no impediment to normal Petroleum Operations during the period of any
audit.
	 
	 	19.2.3	 	The auditors shall be entitled to access to all relevant Joint Account records, files
and other information and may inspect such sites and facilities as necessary.
	 
	 	19.2.4	 	Upon receipt of a notice of any Party’s exceptions to the auditing results, the
Operator shall resolve these matters in due time (no later than sixty (60) days
thereafter).

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	19.3	 	Personnel Costs

	 	19.3.1	 	The personnel costs mean the remuneration and other related charges paid on the basis
of the working time spent by personnel who are engaged in administration, management,
accounting, finance, tax, employee relations, procurement, legal affairs, computer
services, engineering, geology, geophysics, drilling and Production Operations as well as
all other work for the implementation of the Contract.

	 	19.3.1.1	 	The salaries or wages of personnel in various subordinate bodies of JMC and of
all employees engaged in the performance of the Petroleum Operations shall be
included in the personnel costs as provided in Article 19.3.1 herein.
	 
	 	19.3.1.2	 	Personnel costs which are classified as the overhead of the superior management
organization pursuant to Article 5.2.18 of Annex II — Accounting Procedure hereto
shall not be included in the personnel costs mentioned herein.

	 	19.3.2	 	After the Date of Commencement of the Implementation of the Contract, the Operator
shall work out a staffing plan for its organization and a personnel costs plan with
respect thereto (including an itemized plan of personnel costs, such as basic salary or
wage, overseas allowance and area allowance, etc.) before the beginning of each Calendar
Year and submit such plan with the annual Work Program and budget to JMC for review and
approval.
	 
	 	 	 	The Contractor shall provide CNPC with an itemized information of personnel costs of the
Expatriate Employees, CNPC shall bear the obligation of confidentiality to such
information provided by the Contractor.
	 
	 	 	 	The Operator shall charge the personnel costs of the Contractor’s personnel actually
incurred to the Joint Account. CNPC shall have the right to audit the personnel costs
charged to the Joint Account.
	 
	 	19.3.3	 	The settlement of all charges for the salaries and wages of CNPC personnel mentioned in
the second paragraph of Article 7.7 hereof shall be made between CNPC and the Operator,
and CNPC personnel shall be responsible for all individual income tax in accordance with
the provisions of the individual income tax law of the People’s Republic of China.
	 
	 	19.3.4	 	In the pilot test period and the development period, the level of the salaries and
wages and other related charges paid to the Expatriate Employees shall be made by the
Contractor through consultation with CNPC. After the Date of Commencement of
Commercial

57

 

	 	 	 	Production of the Oil Field, the level of the salaries and wages and other related charges
paid to the Expatriate Employees shall be discussed and agreed by the Parties. The Operator’s
employees shall pay any individual income tax due in accordance with the provisions of the
individual income tax law of the People’s Republic of China.

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Article 20

Taxation

	20.1	 	The Contractor shall pay taxes to the Government of the People’s Republic of China
subject to the tax laws and regulations of the People’s Republic of China.
	 
	20.2	 	The Operator shall advise the Subcontractors who render services for the Contract that they
and their employees shall pay taxes to the Government of the People’s Republic of China
subject to the tax laws and regulations of the People’s Republic of China.

59

 

Article 21

Insurance

	21.1	 	The Operator shall work out an insurance program for the Pilot Test Operations and submit
it to JMC for review and approval within one hundred and twenty (120) days after the Date of
Commencement of the Implementation of the Contract. The Operator shall, on behalf of the
Parties, obtain the insurance contracts in accordance with such program as approved by JMC
before commencement of Petroleum Operations within the Contract Area.
	 
	 	 	Similar provisions shall apply in respect of Development Operations and Production
Operations.
	 
	21.2	 	All of the insurance items as approved in the insurance program shall be insured with the
People’s Insurance Company of China or other insurance companies established within the
territory of the People’s Republic of China.
	 
	21.3	 	The insurance programs worked out by the Operator shall include, but not be limited to, the
following insurance covering:

	 	(a)	 	damages to and expenses of all drilling installations and equipment, including
damages to and expenses of the properties used on worksites and supply bases for the
Petroleum Operations, while the equipment and properties owned by Third Party rendering
services to the Operator shall be handled in accordance with Article 21.5 herein;
	 
	 	(b)	 	damages to and expenses of any of the equipment or installations for production,
storage and transportation, and buildings in the course of construction and installation;
	 
	 	(c)	 	damages to and expenses of the Crude Oil and/or Natural Gas production
installations, facilities, equipment and pipelines;
	 
	 	(d)	 	liability to Third Parties;
	 
	 	(e)	 	liability for pollution and expenses for cleaning up in the course of drilling and
the Production Operations;
	 
	 	(f)	 	expenses for killing blowouts;
	 
	 	(g)	 	liability incurred by the Operator in hiring land drilling rigs, vessels and
aircraft serving the Petroleum Operations;
	 
	 	(h)	 	liability for cleaning the remains; and

60

 

	 	(i)	 	losses and expenses incurred during the transportation and storage in transit of
goods shipped from different parts of the world and other areas outside the Contract
Area to the worksites.

	21.4	 	In any insurance contracts, the deductibles shall be determined by the Parties through
consultation, and losses within the deductible limits shall be borne by Parties in their
respective proportions stipulated in Article 13.2 in the relevant operations.
	 
	21.5	 	When signing subcontracts or lease contracts, the Operator shall endeavor to require
Subcontractors and lessors to insure their risks under the relevant subcontracts with the
People’s Insurance Company of China or other insurance companies as mentioned in Article 21.2
hereof and ask these Subcontractors or lessors to contact the People’s Insurance Company of
China or other insurance companies as mentioned in Article 21.2 hereof for arrangement of the
necessary insurance.
	 
	21.6	 	In the course of the Petroleum Operations, the Parties shall cover separately personnel
accidental death and injury insurance with respect to personnel assigned by them
respectively. The premiums in respect thereof shall be dealt with in the following way: the
premiums for personnel accidental death and injury insurance with respect to personnel whose
costs are charged to the Joint Account pursuant to the provisions of the Contract shall be
charged to the Joint Account, and those with respect to other personnel shall be borne
respectively by the Parties by which they are assigned.
	 
	21.7	 	Insurance companies owned by or affiliated with any Party to the Contract, or the Parties
themselves, may reinsure the People’s Insurance Company of China or other insurance companies
as mentioned in Article 21.2 herein by reaching an agreement with such company if they are
interested in covering any part of the insurance program hereof.
	 
	21.8	 	All motor vehicles used in the Petroleum Operations shall be insured with the People’s
Insurance Company of China or other insurance companies as mentioned in Article 21.2 hereof.
	 
	21.9	 	The premiums of insurance in the pilot test period and the development period shall be
charged to the Pilot Test Costs and the Development Costs and while those in the production
period shall be charged to the Operating Costs.
	 
	21.10	 	Any claim under the insurance of the agreed insurance program charged to the Joint Account
shall be handled by the Operator and any recovery made from insurers shall be credited to the
Joint Account.

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Article 22

Confidentiality

	22.1	 	CNPC shall, in conformity with applicable laws and regulations of the Government of the
People’s Republic of China on confidentiality and by taking into account international
practice, determine the confidentiality periods for which the Contract and all documents,
information, data and reports related to the Petroleum Operations within the Contract Area
shall be kept confidential.
	 
	22.2	 	Without the written consent of the other Party, no Party to the Contract shall disclose,
during such confidentiality periods, the Contract, documents, information, data and reports
referred to in Article 22.1 herein or any other information regarded by JMC as confidential,
to any Third Party except the Third Parties specified in Article 22.5 herein and to any
Affiliate not directly connected with the implementation of the Contract, and no Party to the
Contract shall otherwise transfer, donate, sell or publish them in any way within the
confidentiality periods. However, if the Department or Unit decides to invite any Third Party
to conduct cooperative exploration and development of Petroleum in the sedimentary basin in
which the Contract Area is located and/or other adjacent areas, CNPC may furnish the
following original data and information or interpretation thereof with respect to the
Contract Area to the relevant Third Parties:

	 	(a)	 	original data and information held by CNPC for over two (2) years; and
	 
	 	(b)	 	interpretations to the original data and information held by CNPC for over three
(3) years.

	 	 	CNPC shall require relevant Third Parties to undertake to keep confidential the aforesaid
data, information, and interpretations thereof furnished to them by CNPC.
	 
	 	 	CNPC shall, in conformity with relevant provisions of laws and regulations of the People’s
Republic of China and requests of relevant government departments and units, provide them
with all documents, information, data and reports as mentioned herein.
	 
	22.3	 	During the term of the Contract and after the termination of the Contract, CNPC shall not
disclose to any Third Party any patent, know-how or proprietary technology transferred to
CNPC by the Contractor without the written consent of the Contractor except for any
technology, the patent of which has expired and any proprietary and confidential technology
which have entered the public domain.

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	22.4	 	After the termination of the Contract or after any assignment of rights and/or
obligations of the Contract under Article 23 hereof, the Contractor and any assignee shall,
within the confidentiality periods, continue to be obligated to keep confidential documents,
information, data and reports mentioned in Article 22.2 herein except for official documents
and information published with the consent of the Parties.
	 
	22.5	 	For the implementation of the Contract, CNPC and each company comprising the Contractor may,
after review by JMC and CNPC, furnish the necessary documents, information, data and reports
to Third Parties and Affiliates related to the Petroleum Operations. The Third Parties and
Affiliates include:

	 	22.5.1	 	banks or other credit institutions from which financing is sought by any Party to the
Contract for the implementation of the Contract;
	 
	 	22.5.2	 	Third Parties and Affiliates which provide services for the Petroleum Operations,
including Subcontractors and other service contractors; and
	 
	 	22.5.3	 	an assignee or assignees to whom the rights and/or obligations under the Contract may
be assigned.

	22.6	 	Necessary information, documents, data and reports may be furnished by the Parties in
accordance with the laws of their home countries to the governments and stock exchanges,
provided that the Parties report to JMC in advance.
	 
	22.7	 	CNPC and each company comprising the Contractor when furnishing the documents, information,
data and reports to Third Parties and Affiliates as mentioned in Article 22.5 herein shall
require them to assume the confidentiality obligations as set forth herein, or shall bear
full responsibility for any violation thereof.

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Article 23

Assignment

	23.1	 	The Contractor may assign part or all of its rights and/or obligations under the Contract to
any of its Affiliates with the prior consent of CNPC and in accordance with the following
provisions:

	 	(a)	 	The Contractor shall submit to CNPC copies of a written agreement on the
corresponding part of its rights and/or obligations to be assigned;
	 
	 	(b)	 	The Contractor shall guarantee in writing to CNPC the performance of the assigned
obligations; and
	 
	 	(c)	 	No such assignment shall interfere with the performance of the Petroleum
Operations or affect the organizational structure.

	23.2	 	The Contractor may assign part or all of its rights and/or obligations under the Contract to
any Third Party, provided that such assignment shall be agreed by CNPC in advance and
approved by the Ministry of Foreign Trade and Economic Cooperation of the People’s Republic
of China. However, CNPC shall have the right of first refusal in respect of such assignment
provided that the conditions offered by CNPC are comparable.
	 
	23.3	 	CNPC may authorize its Affiliates to implement the Contract, but CNPC shall remain
responsible for the performance of the Contract.
	 
	23.4	 	CNPC may assign part of its rights and/or obligations thereunder to a Chinese Government
controlled Third Party, provided that prior written consent of the Government of the People’s
Republic of China shall be obtained. CNPC shall guarantee the performance of the assigned
obligations and that such assignment shall not interfere with the performance of Petroleum
Operations.

64

 

Article 24

Environmental Protection and Safety

	24.1	 	In the performance of the Petroleum Operations, the Operator shall be strictly subject to
the laws, decrees, regulations and standards on environmental protection and safety
promulgated by the Chinese Government and carry out the operations according to international
practice. The Operator shall make its best efforts to protect farmland, aquatic resources,
forest reserves and other natural resources, and prevent pollution and damage to the
atmosphere, rivers, lakes, ground water, harbors, other land environments and ecological
environment and secure the safety and health of the operating personnel. The Operator shall
use all reasonable endeavors to eliminate promptly any pollution occurring in the performance
of the Petroleum Operations and minimize its consequences. Economic losses caused by any
pollution shall be charged to the Joint Account, unless otherwise provided in Article 8.4
hereof.
	 
	24.2	 	When competent authorities under the Chinese Government assign a person to inspect
environmental protection and safety within the scope of the Petroleum Operations according to
the laws, decrees, rules and regulations, the Operator shall provide all necessary facilities
and assistance to enable the inspectors to carry out such inspection smoothly.
	 
	24.3	 	In the performance of the Petroleum Operations in any fixed fishing net casting area and/or
aquatic breeding area, the Operator shall make prior contact with the relevant authorities of
the Chinese Government.
	 
	24.4	 	Before the commencement of Pilot Test Operations the Operator shall provide CNPC with
documentation on the possible impact by the Pilot Test Operations on the environment and
measures to be adopted to prevent pollution.
	 
	24.5	 	The Operator shall, after the completion of various Petroleum Operations, level, restore or
reclaim the land of the operating sites in accordance with the relevant local rules and
regulations.

65

 

Article 25

Force Majeure

	25.1	 	No Party to the Contract shall be considered in default of the performance of any of its
obligations hereunder, if any failure to perform or any delay in performing its obligations is
in conformity with all the events described as follows:
	 
	 	 	The performance of any obligations hereunder is prevented, hindered or delayed because of
any event or combination of events which could not be foreseen and/or which is beyond the
control of such Party;
	 
	 	 	Any such event or combination of events is the direct cause of preventing, hindering or
delaying of such Party’s performance of its obligations hereunder; and
	 
	 	 	When any such event or combination of events has occurred, such Party has taken all
reasonable actions to overcome any cause that prevents, hinders or delays performance of its
obligations and shall in so far as is practicable continue to perform its obligations
hereunder.
	 
	25.2	 	Notice of any event of force majeure and the conclusion thereof shall forthwith be given to
the other Party by the Party claiming force majeure.
	 
	25.3	 	In the event of force majeure, the Parties shall immediately consult in order to find an
equitable solution thereto and shall use all reasonable endeavors to minimize the
consequences of such force majeure.
	 
	25.4	 	If the Petroleum Operations in the Contract Area are partially or entirely suspended as a
result of the force majeure referred to in Article 25.1 herein, the period of the Petroleum
Operations may be extended by a period not exceeding the corresponding period of such
suspension. Within fifteen (15) days following the end of each Calendar Year, the Operator
shall report to JMC in writing on the suspension of the Petroleum Operations caused by force
majeure, if any, during the preceding Calendar Year.
	 
	25.5	 	The provisions of this Article 25 shall not apply in the case of default in the making of
any payments of money.

66

 

Article 26

Consultation and Arbitration

	26.1	 	The Parties shall make their best efforts to settle amicably through consultation
any dispute arising in connection with the performance or interpretation of any
provision hereof.
	 
	26.2	 	Any dispute mentioned in Article  26.1  herein that has not been settled
through such consultation within ninety (90) days after the dispute arises may be
referred to arbitration at the request of and by either Party to the Contract. The
arbitration shall be conducted in accordance with the following provisions:

	 	26.2.1	 	If agreed upon by the Parties, such dispute shall be referred to arbitration
conducted by the China International Economic and Trade Arbitration Commission
in accordance with the arbitration  proceeding rules thereof.
	 
	 	26.2.2	 	If the Parties fail to reach an agreement on the arbitration arrangement
mentioned in Article 26.2.1 herein, the Parties shall establish an ad hoc
arbitration tribunal to conduct arbitration in accordance with the following
provisions:

	 	26.2.2.1	 	The ad hoc arbitration tribunal shall consist of three (3)
arbitrators. The Parties shall each appoint an arbitrator and the two
arbitrators so appointed shall designate a third arbitrator. If one of
the Parties does not appoint its arbitrator within sixty (60) days
after the first appointment, or if the two arbitrators once appointed
fail to appoint the third within sixty (60) days after the appointment
of the second arbitrator, the relevant appointment shall be made by
the Arbitration Institute of the Stockholm Chamber of Commerce,
Sweden.
	 
	 	26.2.2.2	 	The third arbitrator shall be a citizen of a country which
has formal diplomatic relations with both the People’s Republic of
China and the home country of any of companies comprising the
Contractor, and shall not have any economic interests or
relationship with the Parties.
	 
	 	26.2.2.3	 	The place of arbitration shall be determined by the Parties through
consultations or, failing the agreement of the Parties within sixty
(60) days after the appointment of the third arbitrator, by the
majority of arbitrators of the ad hoc arbitration tribunal.
	 
	 	 26.2.2.4 	 	The ad hoc arbitration tribunal shall conduct the

67

 

	 	 	 	arbitration in accordance with the arbitration rules of the
United Nations Commission on International Trade Law (“UNCITRAL”) of
1976. However, if the above-mentioned arbitration rules are in conflict
with the provisions of this Article 26, including the provisions
concerning appointment of arbitrators, the provisions of this Article  26
shall prevail.

	 26.3 	 	Both the Chinese and English languages shall be official languages used in the arbitral
proceedings. All hearing materials, statements of claim or defense, awards and the reasons
supporting them shall be written in both Chinese and English.
	 
	 26.4 	 	Any award of the arbitration tribunal shall be final and binding upon the Parties.
	 
	26.5	 	The right to arbitrate disputes under the Contract shall survive the termination of the
Contract.

68

 

Article 27

Effectiveness and Termination of the Contract

	27.1	 	After it is signed, the Contract shall be approved by the Ministry of Foreign
Trade and Economic Co-operation of the People’s Republic of China. The date of such
approval shall be the effective date of the Contract. However, the Contractor’s
obligations shall begin on the Date of Commencement of the Implementation of the
Contract, as defined in Article I, herein above. CNPC shall notify the Contractor of
the said approval in writing as soon as possible.
	 
	27.2	 	All annexes to the Contract shall be regarded as integral parts of the
Contract. If there is any inconsistency between the provisions of the annexes and
the main body of the Contract, the main body of the Contract shall prevail. All
references to the Contract hereof refer to the main body of
the Contract.
	 
	27.3	 	If in the course of implementation of the Contract, the Parties decide
through consultation to make amendment or supplement to any part of the Contract, a
written agreement signed by the authorized representatives of the Parties shall be
required. Such written agreement shall be subject to the approval of the Ministry of
Foreign Trade and Economic Co-operation of the People’s Republic of China
should there be any significant modifications hereof. Such agreement shall be
regarded as an integral part of the Contract.
	 
	27.4	 	The Contract shall terminate under any of the following circumstances:

	 	27.4.1	 	The Contractor opts to terminate the Contract in accordance with Article
6.3 (2) herein; or
	 
	 	27.4.2	 	On the termination date of the production period of the Oil Field in accordance with
Articles 4.5 and 4.6.2 hereof; or
	 
	 	27.4.3	 	At the end of the last day of the thirtieth (30th) Contract Year from the
Date of Commencement of the Implementation of the Contract, unless otherwise
stipulated hereof.

	27.5	 	If either Party to the Contract commits a material breach of the Contract,
the other Party to the Contract shall have the right to demand that such breach be
remedied within a reasonably specified period of time. If such breach is not
remedied within such period of time, the complaining Party shall have the right to
terminate the Contract by giving ninety (90) days’ written notice to the defaulting
Party. However, such material breach of the Contract and unremedied material breach
shall have been judged by a final award of arbitration in accordance with Article 26
hereof.

69

 

Article 28

The Applicable Law

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

70

 

Article 29

Language of Contract and Working Language

	29.1	 	The text of the Contract, annexes and supplementary documents attached hereto shall be
written in both Chinese and English, and both versions shall have equal force and effect.
	 
	29.2	 	The Parties agree that both Chinese and English shall be used as working languages. After
the effective date of the Contract, technical documents and information concerning the
Petroleum Operations hereunder shall, in general, be written in English except for
technical documents and information available previously and received from Third Parties.
	 
	 	 	Unless otherwise agreed by CNPC, documents and information in respect of administration
shall be written in both Chinese and English. Forms for production and other reports and
records shall be printed with headings in both Chinese and English and may be filled out
in either Chinese or English.

71

 

Article 30

Miscellaneous

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

	 	 	 
	Address of

	 	Address of
	CNPC:

	 	GLOBAL OIL CORPORATION:
	 
	 	 
	Liu Pu Kang
	 	 
	 
	 	 
	Beijing 100724, P.R.China

	 	Mezzanine Level,
	 

	 	15 William Street, Perth,
	 

	 	Australia 6000
	 
	 	 
	P. O. Box 766

	 	Postal: GPO Box G420
	 

	 	Perth, Australia 6001
	 
	 	 
	Tel: 86-10-62096007

	 	Tel: 61-89-320-1886
	 
	 	 
	Fax: 86-10-62096006

	 	Fax: 61-89-322-1505
	 
	 	 
	For the attention of:

	 	For the attention of:
	Mr. Zeng Xing Qiu

	 	Mr. F. D. Magnus

	30.3	 	Either Party to the Contract may change its address or representative by a written
notice to the other Party to the Contract.
	 
	30.4	 	For the implementation of the Contract, each company comprising the Contractor shall
register with the State Administration for Industry and Commerce of the People’s Republic
of China in accordance with the
relevant provisions of the said State Administration for Industry and
Commerce and shall obtain the necessary approval from CNPC.
	 
	30.5	 	Companies comprising the Contractor have the following percentage participating
interests as of the effective date of the Contract:

•      Global Oil Corporation           One Hundred Percent (100%)

	 	 	Subject to Article 30.7, the rights and obligations of each company comprising the
Contractor may, as between themselves, be varied by the

72

 

		 	operating agreement between such companies and the Contractor shall advise CNPC in
writing of any expected variation and thereafter, of the actual variation.
	 
	 	 	If such variation leads to the transfer of operatorship, or the companies comprising
the Contractor have made a decision to change the Operator, the Operator referred to
in Article 8.1 hereof may be replaced after obtaining a written consent from CNPC.

	30.6	 	The Contractor shall pay CNPC a signature fee of Three Hundred Thousand
(300,000) U.S. Dollars as follows:

	 	•	 	One Hundred and Fifty Thousand (150,000) U.S. dollars within
thirty (30) days from the Effective Date of the Contract,
	 
	 	•	 	One Hundred and Fifty Thousand (150,000) U.S. dollars at the
end of the pilot test period.

	 	 	Such signature fee shall, in no case, be charged to the Joint Account, nor be
deemed recoverable costs.
	 
	30.7	 	Companies comprising the Contractor signing the Contract with CNPC agree to
undertake the obligations of the Contractor under the Contract jointly and severally.

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

	 	 	 	 	 	 	 	 	 
	CHINA  NATIONAL PETROLEUM	 	GLOBAL OIL CORPORATION	 	 
	CORPORATION(CNPC)	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	By:

	 	/s/ Zeng Xing Qiu
 

	 	By:
	 	/s/ Frank Douglas Magnus
 

	 	 
	 
	 	 	 	 	 	 	 	 
	Mr. Zeng Xing Qiu	 	Mr. Frank Douglas Magnus	 	 
	Vice President	 	President	 	 
	China National Oil and Gas	 	 	 	 	 	 
	Exploration and Development Corporation	 	 	 	 	 	 

73

 

Annex I

Geographical Location and Coordinates of

Connecting Points of the Boundary Lines

of the Contract Area

1

 

ANNEX 1: Geographic Location and Coordinates of the Connected Points
of the Boundary Lines of the Miao 3 Contract Area

(1) Geographic
Location of Miao 3 Contract Area

 

 

	 	(2)	 	
	 
	 	(2)	 	Coordinates of the Connected Points of the Boundary Lines of the Miao 3 Block

	 	 	 	 	 
		 		 	
	Connected Points	 	East Longitude	 	North Latitude
	A
	 	124°34'21"
	 	45°23'08"
	 	 	 	 	 
	B
	 	124°37'30"
	 	45°23'08"
	 	 	 	 	 
	C
	 	124°37'30"
	 	45°17'37"
	 	 	 	 	 
	D
	 	124°35'14"
	 	45°17'37"
	 	 	 	 	 
	E
	 	124°35'14"
	 	45°16'45"
	 	 	 	 	 
	F
	 	124°31'39"
	 	45°16'45"
	 	 	 	 	 
	G
	 	124°31'39"
	 	45°21'40"
	 	 	 	 	 
	H
	 	124°34'21"
	 	45°21'40"
	 	 	 	 	 

 

 

Annex II

Accounting Procedure

Contents

Article 1      General Provisions

Article 2       Definitions

Article 3       Cash Calls

Article 4      Accounting and Management of Material

Article 5       Expense Accounting

Article  6        Recovery of Costs

Article 7       Accounting Reports

Article 8       Audit

Article 9       Transfer Procedure of the Joint Account

4

 

Annex II

Accounting
Procedure

Article 1

General Provisions

	1.1	 	This Accounting Procedure is an integral part of the Contract.
	 
	 	 	The definitions set forth in Article 1 of the Contract are equally applicable to this
Accounting Procedure. The definitions and provisions in this Accounting Procedure
have the same force and effect as those in the Contract. If the provisions in this
Accounting Procedure are in conflict with those in the Contract, the provisions in
the Contract shall prevail.
	 
	1.2	 	Purpose:
	 
	 	 	The purpose of this Accounting Procedure is to establish equitable control methods
for determining charges and credits applicable to the Petroleum Operations according
to the relevant provisions of the Contract, including the guidelines for accounting
settlements in respect of managing funds and materials, financing and Accounting
Records, and for compiling accounting statements.
	 
	1.3	 	Accounting methods:
	 
	 	 	The double-entry method of accounting shall be used in this Accounting Procedure.
	 
	1.4	 	Working language:
	 
	 	 	Chinese or both Chinese and English shall be used as the working languages for the Accounting
Records and analyses of financial conditions
in respect of the Joint Account, at the Operator’s option.
	 
	1.5	 	Currency for accounting:
	 
	 	 	U.S. dollars shall be the unit of currency for accounting in the Joint Account and
shall be the currency for the investments and reimbursements under the Contract. In
case currencies other than U.S. dollars are used to carry out business activities,
the relevant bank accounts and other current asset and current liability accounts
shall be kept both in U.S. dollars and in the currencies used.

5

 

	1.6	 	Currency translation:
	 
	 	 	For the purpose of accounting, currency translation entered into the Joint Account
shall be made in accordance with following guidelines:
	 
	 	 	The rate of exchange to be used for the conversion into U.S. dollars of cash calls
received in Renminbi shall be the arithmetic average of buying and selling rates of
exchange applicable to any individual or commercial entity quoted by Bank of China at
11:00 a.m. on the date of receipt of such cash in the
Operator’s bank account(s). If
the relevant date is a non-business day of the Bank of China, the rate quoted on the
previous business day by the Bank of China shall apply.
	 
	 	 	All other transactions recorded in the Joint Account which are made in Renminbi shall be
translated into and recorded in U.S. dollars at the rate of exchange as quoted above on the last
business day of the previous month, while those transactions which are made in currencies other
than Renminbi and U.S. dollars shall be recorded in U.S. dollars at
the actual cost in U.S.
dollars of effecting the transaction.
	 
	 	 	Neither CNPC nor the companies comprising the Contractor shall experience an
exchange gain or loss, at the expense or benefit of the other Party.
	 
	 	 	The Operator shall make its best efforts to minimize any exchange loss.
	 
	 	 	All gains or losses from currency conversion or translate shall be recorded
in the Joint Account.
	 
	1.7	 	Foreign exchange business:
	 
	 	 	Foreign exchange business related to the Petroleum Operations shall be made in
accordance with “Regulations for Exchange Control of the People’s Republic of China”
and “Rules for the Implementation of Exchange Control Regulation Relating to
Enterprises with Overseas Chinese Capital, Enterprises with Foreign Capital, and
Chinese and Foreign Joint Ventures.”
	 
	1.8	 	Accounting Records and statements:

	 	1.8.1	 	All Accounting Records related to the Petroleum Operations shall
be established and maintained by the Operator within the territory of the
People’s Republic of China.
	 
	 	1.8.2	 	All vouchers, accounts, books and statements shall be prepared
in accordance with the Petroleum Operations Accounting System established by
CNPC and the Contractor through consultation pursuant to the Accounting
Regulations of the People’s Republic of China for Enterprises with Foreign
Investment.

6

 

	 	1.8.3	 	Annual accounting statements and important accounting books, including asset
records, cash or bank journals, general and subsidiary ledgers, balance sheets, and annual
gross oil production allocation statements shall maintained for the term of the Contract
as per Article 4.7 of the Contract, or for any further period if required by the laws and
regulations of the People’s Republic of China. Other accounting vouchers and books shall
be kept for fifteen (15) years. Quarterly and monthly statements shall be maintained for
five (5) years.
	 
	 	 	 	Upon the expiration of the custody period, a list shall be made of the accounting files
to be disposed of. Disposal of the accounting files shall only be made after the approval
of CNPC. The list of the accounting files disposed of shall be maintained with the annual
accounting statements.

7

 

Article 2

Definitions

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

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

8

 

Article 3

Cash Calls

	3.1	 	Except as otherwise provided in the Contract, the Contractor shall solely provide
all the Pilot Test Costs and all the Development Costs according to the provisions of
Articles 12.1.1 and 12.1.2 of the Contract. In accordance with each approved annual
budget, the Operator shall issue monthly cash call notices to each company comprising
the Contractor to provide the Operator with funds to cover the planned expenditures of
the next month. Whether or not the cash call notices for the Pilot Test Costs are to be
issued shall be at the option of the Operator.
	 
	 3.2 	 	Development Operations cash call and default

	 	3.2.1	 	According to the needs of the Petroleum Operations, the Operator
shall regularly issue monthly cash call notices within the amount of
approved annual budget to request each company comprising the Contractor to
respectively make advances as specified by the Operator. The Operator shall,
before twenty (20) days prior to the commencement of each month, issue cash call
notices for the Development Costs and each company comprising the Contractor
shall provide its percentage share of funds according to the
requirement and within the time limit specified in the cash call notice.
However the payment due date specified in the cash call notices shall not be
earlier than the first working day of the month for which cash is called. Each
company comprising the Contractor shall transfer its percentage share of funds to
the Operator’s bank account(s) established by the Operator particularly for the
Petroleum Operations. Such bank account(s) will in all cases be interest bearing
account(s).
	 
	 	 	 	Any excessive advances made by each company comprising the Contractor for any
month shall be adjusted in the next cash call.
	 
	 	 	 	In case that the Operator, owing to the needs of the Development Operations, has to
incur expenditures which are unforeseen in the cash call for  any  month, written notices shall be
issued to all the companies comprising the Contractor who shall finance their own shares for
additional amount within ten (10) days following the receipt of the written notice.
	 
	 	3.2.2	 	Interest shall be paid by each company comprising the Contractor
failing to pay its share of funds on the due date specified in the cash call
at LIBOR on the delinquent date plus five percent (5%) on the delinquency of
less than one (1) month and thereafter at the average LIBOR rate ruling
throughout each subsequent month

9

 

	 	 	 	plus five percent (5%), such interest being compounded on a monthly basis
throughout the period of the delinquency. The non-defaulting party or parties
shall make up the delinquent portion on behalf of the defaulting party or
parties. When the defaulting party or parties pay cash to meet both the
delinquent portion and accrued interest thereon, the Operator shall reimburse
the non-defaulting party or parties who made up the delinquent portion.
	 
	 	 	 	All amount advanced by the non-defaulting party or parties plus accrued interest not reimbursed
by the defaulting party shall constitute a debt due from the defaulting party or parties to the
non-defaulting party or parties who shall be entitled to all remedies at law and equity. Any
non-defaulting party shall on behalf of the non-defaulting party or parties be entitled to take
and sell the defaulting party’s or parties’ share of the Annual Gross Production of Crude Oil and
apply the proceeds of the sale of such Crude Oil against all sums due and payable by the
defaulting party or parties including accrued interest. Any excess funds remaining from such
proceeds after deduction of all amounts due, including interest and the costs, charges and
expenses incurred by non-defaulting party, in connection with such sale, shall be paid over to
the defaulting party. Any deficiency remaining due after deducting the proceeds of any such sale
shall remain an obligation of the defaulting party or parties and may be collected as any other
debt.

	3.3	 	Each monthly cash call notice shall clearly indicate the
following information:

	 	3.3.1	 	Annual Development Costs to be shared by each
company comprising the Contractor as shown in the approved annual budget.
	 
	 	3.3.2	 	Amount of funds advanced by each company comprising the
Contractor at the end of the month prior to the month in which the cash call
notice is prepared and the actual expenditures and the actual balance (i.e. funds
unused) recorded in the Joint Account, accompanied by the bank statements related
to the Joint Account for the previous month.
	 
	 	3.3.3	 	Amount of funds to be called from each company comprising the Contractor in the month
for which the funds will be used and the estimated amounts of funds to be called in the following
two (2) months.
	 
	 	3.3.4	 	The date when funds are to be provided, the amount of funds,
currency, account number, name of the account, the recipient bank and its
address.

10

 

	3.4	 	On the Date of the entire completion of the Development Operations set forth in
the Overall Development Program, any development investment for the Oil Field
advanced by the company comprising the Contractor which has not been expended or
will not be expended shall be returned to each of the companies in proportion to its
share.
	 
	3.5	 	The cash for the Production Operations undertaken by the Parties jointly and
approved by JMC shall be provided by all the Investing Parties to the Contract
according to Article 12.1.3 of the Contract, but the Contractor shall, in accordance
with Article 12.1.3 of the Contract, pay for CNPC the Operating Costs which shall be
payable by CNPC. Based on the needs of the Production Operations, the Operator may make
timely adjustment of the amount of cash to be provided by all the Investing Parties to
the Contract. The Operator shall issue quarterly cash call notices to call for cash
for the Production Operations. In proportion to its share, each Investing Party
shall respectively provide advances on a monthly basis in accordance with the
requirement and within the time limit specified in the cash call notice of the current
month.
	 
	 	 	In case that the Operator, owing to the needs of the Production Operations, has to
incur expenditures which are unforeseen in the cash call for any month, written
notices with explanations shall be issued to all the Investing Parties who shall
finance their own shares for additional amount within ten (10) days following the
receipt of such written notice.
	 
	3.6	 	According to the requirement of the Petroleum Operations, the Operator shall
indicate in any cash call notice the U.S. dollar equivalent of the total cash called. The
Operator shall also specify the amounts of Renminbi and U.S. dollars required as
estimated to make payment.
	 
	3.7	 	Provisions for recording the sources of funds:

	 	3.7.1	 	Funds for Pilot Test Costs, Development Costs and Operating Costs,
when received, pursuant to each cash call shall be credited against the relevant
accounts of the Investing Parties in the Joint Account.
	 
	 	3.7.2	 	In case either Party to the Contract decides to develop excess
Associated Natural Gas for its sole account pursuant to Article 18.1.2.3 of the
Contract, or undertakes any other operation for its sole account, the funds
required shall be financed and accounted
for separately.
	 
	 	3.7.3	 	The Contractor shall, within twenty (20) days after the date of
submission to CNPC of a written notice expressing its decision to participate in
the utilization of the excess Associated Natural Gas of an Oil Field undertaken
solely by CNPC, pay CNPC in cash the amounts stipulated in Article 18.1.2.3 of
the Contract.

11

 

	 	3.7.4	 	In accordance with Article  6.5 of  the Contract, at the expiration of the pilot test
period, if the pilot test work commitment actually fulfilled by the Contractor is less than
the minimum pilot test work commitment  set  forth, regardless of whether the expected
minimum pilot test expenditures are fulfilled or not fulfilled, whether the Contractor opts
to enter into the development under Article  6.3  (I) of the Contract or to terminate the
Contract under Article 6.3(II) of the Contract the Contractor shall, within thirty (30)
days from the date of the expiration of the pilot test period pay CNPC in U.S. dollars the
unfulfilled balance of the minimum pilot test work commitment stipulated in the pilot test
period, converted into cash. The detailed method by which the unfulfilled balance of the
minimum pilot test work commitment is converted into U.S. dollars is that the actual
average unit cost of the last portion of the work under the Contract or of the last well
drilled, excluding the abnormal drilling costs such as those of the fishing, severe loss of
mud circulation, etc. is multiplied by the unfulfilled amount of the minimum pilot test
work commitment. The formula for such calculation is as follows:
	 
	 	 	 	I = Ac x Pu
	 
	 	 	 	in which:

	 	I = 	 	 converted cash amount of the unfulfilled balance of the minimum pilot
test work commitment;
	 
	 	Ac = 	 	 actual average unit cost of the last portion of work or of the last well
drilled (if there is no average unit cost, the estimated unit costs or expenses in
the pilot test program shall be applied for calculating); and
	 
	 	Pu = 	 	 the unfulfilled amount of the minimum Pilot Test work commitment (The
unfulfilled amount of the work is the difference between the work specified in
Article 6.2.1 of the Contract and actual work).

12

 

Article 4

Accounting and Management of Material

	4.1	 	Procurement of Material:
	 
	 	 	The procurement of Material shall be implemented in accordance with the procedure
specified in Articles 15.1 and 7.6 of the Contract. In order to prevent overstocking of
Material, the Operator shall use all reasonable best efforts to ensure that the
procurement of Material shall be made in accordance with the Material procurement plans
and that the quality of Material conforms to specifications and prices are fair and
reasonable. The Operator does not warrant the Materials furnished beyond, or back of,
the supplier’s or manufacturer’s guarantee.
	 
	4.2	 	Costs of procuring Material:

	 
	 	 	The costs of Material purchased shall be the invoice prices
less discounts plus related transportation and other expenses, including expenses for freight to the
destination, insurance premiums commensurate with the Material covered, fees of
forwarding agents, duties, fees, handling expenses from shipside to and within any
water or land terminal warehouse or yard, and any other reasonable expenses actually
paid and expenses of inland transportation.
	 
	4.3	 	The provisions and procedures of Article 15.1 and Article 7.6 of the Contract and
the following provisions shall be applied for pricing Material furnished from the
stocks of the Parties and/or their Affiliates for use in the Petroleum Operations:

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

	 	(A)	 	Material which is in sound and serviceable condition and is
suitable for reuse without reconditioning shall be priced by the
Parties, and the ceiling price shall not exceed seventy-five percent
(75%) of the current market value of new Material;
	 
	 	(B)	 	Material which, after being reconditioned, will be further serviceable
for its original function shall be priced by the

13

 

	 	 	 	Parties, and the ceiling price shall not exceed  fifty  percent
(50%) of the current value of new Material;
	 
	 	(C)	 	Used Material which cannot be classified as (A) or
(B) above shall be priced by the Parties through discussions at a value
commensurate with its use;
	 
	 	(D)	 	If the Operator wishes to use a method other than
the above for pricing used Material, such other method shall be agreed
upon in advance by the Parties through consultations.

	4.4	 	Price determination and leasing expense calculation method for properties
purchased or leased from other contract areas;
	 
	 	 	The Operator may lease equipment and facilities and purchase Material and fuel from other contract
areas within the People’s Republic of China. The Operator shall charge the leasing expenses or
purchase price as agreed upon by the Operator and its suppliers. Such leasing expenses or purchase
prices shall not exceed those currently prevailing in similar contract areas.
	 
	4.5	 	For certain Material which is in short supply in the world markets and difficult to
procure at published market prices and the lack of which will hinder normal operations,
the Operator may, after the approval of JMC, purchase such Material urgently needed by the
Petroleum Operations and charge actual purchase costs to the Joint Account.
	 
	4.6	 	Disposal of Equipment and Material:
	 
	 	 	The Operator shall not dispose of or sell Material with book value exceeding Ten
Thousand U.S. dollars (U.S. $10,000) without the prior consent of the Parties. The
Operator shall use all reasonable endeavor to minimize losses in the disposal of or
sales of such Material.
	 
	 	 	Sales of properties to Third Parties or Affiliates shall be recorded in accordance with actual
sales income. No guaranty or warranty for Material sold or disposed of under this Article
shall be given by the Operator to any purchaser.
	 
	4.7	 	Accounting for Material:
	 
	 	 	The costs of Material which is procured by the Operator and is directly used at the
job-site shall be charged to the respective accounts of Pilot Test Costs, Development
Costs or Operating Costs at actual purchase prices (as defined in Article 4.2 herein )
and on the basis of the use of Material. Should such Material subsequently be used
for other purposes, the relevant charges shall be transferred from the original cost
accounts to the appropriate cost accounts.

14

 

	 	 	Material for general use which is first stored in warehouses shall be subject to
inventory control procedures. The quantities, unit prices and total value shall be recorded
for Material in inventory using perpetual inventory methods. Material in stock shall be
priced at purchase costs and the Operator, upon the commencement of or during the Contract
period, has the freedom to choose one of the following pricing methods such as FIFO,
weighted average method and moving average method, etc. for Material to be transferred out
of the stock. Accounts for inventory Material shall be regarded as Pilot Test Costs,
Development Costs or Operating Costs.
	 
	 	 	At the request of any Party of the Contract, the Operator shall furnish to such Party a
detailed statement of Controllable Material.
	 
	 	 	The Operator shall conduct physical inventory of Material in warehouses prior to the
annual final accounts or whenever depending upon the actual situation. The Operator shall
give a written notice to JMC sixty (60) days before the date of proposed physical
inventory in order to allow time for participation by each Party of the Contract and
failure to participate by any Party of the Contract, the physical inventory shall be
regarded as approval of the physical inventory conducted by the Operator.
	 
	 	 	If any gain or loss is found as a result of the physical inventory, the Operator shall
compile a detailed statement of the gain or loss and attach to it an explanation for the
gain or loss, which shall be submitted to JMC for examination and approval.
	 
	4.8	 	In accordance with Article 17.1 of the Contract, the Operator shall exercise strict control
over the fixed assets of the Petroleum Operations and set up accounts and record cards, and
shall conduct physical inventory of the fixed assets at the year-end or whenever depending
upon the actual situation to make sure that the book records, card records and physical fixed
assets are in conformity. In case that any damage or loss arises to the fixed assets, the
Operator shall determine the reasons and submit them to JMC for examination and approval.

15

 

Article 5

Expense Accounting

	5.1	 	Rules for accounting

	 	5.1.1	 	According to the provisions of Articles 12.1.1, 12.1.2 and 12.1.3 of the
Contract, all Pilot Test Costs, Development Costs and Operating Costs incurred shall
be recorded in the Joint Account separately.
	 
	 	 	 	The Operator shall establish and maintain three separate accounts, namely:

	 	5.1.1.1	 	Pilot Test Costs account;
	 
	 	5.1.1.2	 	Development Costs account;
	 
	 	5.1.1.3	 	Operating Costs account

	 	 	 	in which all charges and costs as classified pursuant to
Articles 5.2 and 5.3 of
this Accounting Procedure shall be reflected.
	 
	 	5.1.2	 	If either CNPC or the Contractor makes the decision to develop excess
Associated Natural Gas for its sole account in accordance with Article 18 of the
Contract or to undertake any other operation for its own account, the relevant costs
shall be accounted for separately.
	 
	 	5.1.3	 	All items related to the Petroleum Operations such as discounts, deductions,
allowances, interest income, gains from various services, indemnities from insurance
and other miscellaneous income by the Operator, shall be credited to the relevant
expense accounts.
	 
	 	5.1.4	 	All direct services or research work (including personnel) provided by the
superior organizations or Affiliates of CNPC or of the Contractor and by the Third
Parties for the Petroleum Operations shall be subject to the advance work order
procedures on the basis of the annual budget or of the approval by JMC and shall be
charged to the Joint Account after verification of relevant invoices.
	 
	 	 	 	The work order procedure shall be established through consultations at JMC
meetings by both Parties within three (3) months as of the Date of Commencement of
the Implementation of the Contract. The rates charged for direct services or
research work (including personnel cost) provided by the superior

16

 

	 		 	organization or Affiliates of CNPC or of the Contractor shall be competitive
when compared with the rates of similar services furnished by the Third Parties.
The Operator shall, in accordance with Article 15 of the Contract, give priority to
use direct services or research work (including personnel) provided by CNPC.

	5.2	 	Cost items:
	 
	 	 	The following items shall be chargeable to the Joint Account at Operator’s net cost.

	 	5.2.1	 	Subcontractor charges:
	 
	 	 	 	The charges paid to Subcontractors in accordance with contracts signed between the
Operator and Subcontractors.
	 
	 	5.2.2	 	Personnel expenses:
	 
	 	 	 	All personnel expenses as stipulated in Article 19.3 of the Contract.
	 
	 	5.2.3	 	Travel and living expenses:
	 
	 	 	 	Travel and living expenses paid according to Article 19 of the Contract to the
personnel involved in the Petroleum Operations.
	 
	 	5.2.4	 	Material expenses:
	 
	 	 	 	Expenses paid in accordance with Article 4 of this Accounting Procedure to
purchase Material for use in the Petroleum Operations.
	 
	 	5.2.5	 	Relocation and transportation expenses:
	 
	 	 	 	Relocation and transportation expenses for the personnel involved in the Petroleum
Operations to be relocated into or out of the People’s Republic of China and
transferred from job-sites to job-sites within the People’s
Republic of China.
	 
	 	5.2.6	 	Maintenance, repair and leasing expenses:
	 
	 	 	 	Expenses for maintenance, repair or replacement of all properties plant and the
equipment used in the Petroleum Operations and the leasing expenses paid for
leased properties and equipment.
	 
	 	5.2.7	 	Insurance premiums:
	 
	 	 	 	Necessary net payment made for the insurance of the Petroleum Operations and
related costs and expenses, including deductibles paid in the event of loss
pursuant to Article 21.4 of the Contract.

17

 

	 	5.2.8	 	Legal expenses:
	 
	 	 	 	In order to protect the interests of Parties, all costs or expenses paid for attorney’s
fees, litigation or investigation, including expenses in securing evidences, mediation
and settlements. The expenses for handling legal matters incurred for the interests of
any Party to the Contract shall be borne solely by such Party.
	 
	 	5.2.9	 	Taxes:
	 
	 	 	 	All taxes paid according to the tax laws of the People’s Republic of China, except for the
income taxes, Value Added Tax and royalty to be paid by the companies comprising the
Contractor or CNPC and individual income tax to be paid by employees and other related
costs.
	 
	 	5.2.10	 	Energy expenses:
	 
	 	 	 	All costs in respect of fuel, electricity, heat, water or other energy used and consumed
for the Petroleum Operations.
	 
	 	5.2.11	 	Field office facility charges:
	 
	 	 	 	The costs and expenses of establishing, maintaining and operating any offices, camps or
housing facilities necessary for the performance of job-site operations, including a
share of the costs of any office used by staff directing such operations (calculated by
apportioning office costs and expenses on the basis of space occupied by such staff).
	 
	 	5.2.12	 	Communication charges:
	 
	 	 	 	The costs of acquiring, leasing, installing, operating, repairing and maintaining
communication systems, including radio and microwave facilities between the Contract Area
and the base facilities.
	 
	 	5.2.13	 	Ecological and environmental protection charges:
	 
	 	 	 	The charges for any measures undertaken for the Petroleum Operations within the Contract
Area as required by relevant statutory regulations formulated by the authorities
concerned or pursuant to the programs agreed by the Parties.

18

 

	 	5.2.14	 	Service charges:

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

	 	(A)	 	The charges for the assistance provided by CNPC for
the Contractor to carry out the Petroleum Operations in accordance with
Article 9 of the Contract.
	 
	 	(B)	 	For all assistance to be provided by the head office
organization of CNPC to the Contractor in the course of the Development
Operations and the Production Operations before CNPC takes over the said
Production Operations, CNPC shall charge an administrative fee of Two
Hundred Thousand (200,000) U.S. dollars for each Calendar Year. The
aforesaid administrative fee shall be paid respectively on June 1st and
December 1st each Calendar Year, with One Hundred Thousand (100,000)
U.S. dollars for each time.

	 	5.2.15	 	Damages and losses to the assets:
	 
	 	 	 	All costs and expenses necessary for the repair, replacement or supplement of the assets
resulting from damages or losses incurred by fire, flood, storm, theft or any other force
majeure causes, excluding the losses specified in Article 8.4 of the Contract which shall
be borne by the Operator alone.

19

 

	 	5.2.16	 	Personnel training costs:
	 
	 	 	 	Costs incurred for personnel training pursuant to Article 16 of the Contract and Annex IV—
Training of Chinese Personnel and Transfer of Technology.
	 
	 	5.2.17	 	Miscellaneous expenses:
	 
	 	 	 	Any reasonable miscellaneous expenses needed for the Petroleum Operations excluded in the
above items of expenses, such as bank charges, books, stationery and conference expenses
as well as other reasonable expenses.
	 
	 	5.2.18	 	Overhead:
	 
	 	 	 	Overhead refers to the indirect costs for the managerial and operational services provided
by the Operator’s superior management organizations for the Petroleum Operations,
including management, administration, accounting, treasury, inter company audit, tax,
legal matters, procurement, employee relations, financing, the collection of economic data
and costs for general consultation on such planning, design, research and operational
activities, etc. to the extent that these are not chargeable under article 5.1.4 of this
Accounting Procedure. The overhead for the Pilot Test Operations shall be calculated in
accordance with the following tiers and based on the sum of the total actual costs from
Article 5.2.1 through Article 5.2.17 and Article 5.2.19 of this Accounting Procedure, but
not including CNPC’s assistance charges under Article 5.2.14.3 of this Accounting
Procedure.

	 	 	 	 	 
	Direct Costs for Pilot Test	 	Percentage Rate
	(U.S.S./Year)
	 	 	(	%)
	First Tier: 0 to 5,000,000
	 	 	5	%
	 
	 	 	 	 
	Second Tier: 5,000,001 to 15,000,000
	 	 	3	%
	 
	 	 	 	 
	Third Tier: 15,000,001 to 25,000,000
	 	 	2	%
	 
	 	 	 	 
	Fourth Tier: over 25,000,000
	 	 	1	%

	 	 	 	The overhead rates for the Development Operations shall be agreed upon by the Parties
through discussions at the time when the development budget is being prepared. However,
direct costs for development shall not include investments on special items of
construction which shall include, but not be limited to, gas processing facilities,
terminal loading and other facilities of which the overhead rates shall be agreed upon
through discussions

20

 

	 	 	 	between the Parties at the time when the development budget is being made.
	 
	 	 	 	When the first budget is prepared for the Calendar Year of commencement of
commercial production from the Oil Field, the overhead rates for production period
and its related calculation method as well as the utilization method shall be
agreed upon through discussions between the Parties.
	 
	 	 	 	On the last working day of each month, the Operator shall make provision into the
Joint Account for the overhead fees for the current month, calculated on the
basis of cumulative actual expenditure for the Calendar Year to that date and
payment shall be made from the Joint Account on the last working day of the
following month. The final adjustment of the overhead shall be made at the end of
the Calendar Year in respect to any difference between the actual payment by the
Joint Account and the total overhead for that Calendar Year calculated on the
annual cumulative actual investment expenditure at the end of such year. Any
excess shall be refunded and deficiencies made good.
	 
	 	5.2.19	 	General and administrative expenses:
	 
	 	 	 	General and administrative expenses refer to the administrative expenses incurred
for the offices established by the Operator within the Chinese territory and for
JMC and its subordinate bodies for the performance of the Petroleum Operations not
otherwise directly chargeable pursuant to Article 5.2 of the Accounting Procedure
in accordance with the provisions of the Contract. Such expenses shall be
classified according to minor accounts.

	5.3	 	Except as otherwise provided in this Accounting Procedure, the allocation of common costs
and expenses for each item of operations shall be provided by the Contractor if they are the
Pilot Test Costs and Development Costs and shall be charged in proportion to the Operating
Costs actually incurred in each month if they are the Operating Costs.
	 
	5.4	 	With respect to the expenditures or excess expenditures as mentioned in Article 10.2.4 (b)
of the Contract which are determined by JMC to be unreasonable, JMC will form a joint team
for further investigation to determine whether they shall be charged to the Joint Account or
shall be borne by the Operator alone before the year-end final closing of accounts.

21

 

Article 6

Recovery of Costs

	6.1	 	In accordance with the provisions of Article 12.2 of the Contract, the Operating Costs of
the Oil Field shall be recovered from the production of the Oil Field. In accordance with the
provisions of Article 12.3 of the Contract, the Pilot Test Costs and the Development Costs
incurred by the Contractor and the Pre-development Costs incurred by CNPC shall be recovered
from the production of the Oil Field.
	 
	6.2	 	At the date of completing each lifting of Crude Oil, the Operator shall make separate
records into Joint Account for the appropriate reimbursement of the Operating Costs in
accordance with Article 12.2 of the Contract. Written notices shall be sent by the Operator
to CNPC and the Investing Parties at the same time.
	 
	6.3	 	In accordance with the provisions of Article 19.1 of the Contract, the Operator shall
establish complete books for recording the volume and value of Crude Oil and/or Natural Gas,
precisely reflecting the production and disposal of the Crude Oil and/or Natural Gas within
the Contract Term.
	 
	6.4	 	Crude Oil production in each Calendar Year for the Oil Field within the production period
shall be accounted according to the allocation proportions specified in Article 13 of the
Contract and at the Crude Oil price determined pursuant to
Article 14.3 of the Contract.

22

 

Article 7

Accounting Reports

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

23

 

Article 8

Audit

	8.1	 	Audits shall be carried out in accordance with
Article 19.2 of the Contract.
	 
	8.2	 	The expenses of audits by any Party of the Contract shall be borne by such Party Which
conducts the audit.

24

 

Article 9

Transfer Procedure for the Joint Account

	9.1	 	If, at the expiration of the pilot test period, the Contractor opts to enter into
development period, or when the Oil Field within the Contract Area goes from development into
production, or when the Contractor terminates the Contract, an inventory and check of all
properties and accounts shall be conducted.
	 
	 	 	If the Contract Area has entered into the development period or the production period, the
Operator (after taking an inventory of all properties taken by all Investing Parties)
shall make a proposal to JMC for its approval listing the remaining equipment and
Materials needed for the Petroleum Operations for the following period and which shall be
carried forward to the next period in book values in the Joint Account. The Operator shall
be responsible for the disposal of the equipment and materials not needed for the
Petroleum Operations, the gains or losses derived from such disposal shall be allocated in
accordance with the share of each Investing Party in proportion to the overall investment
amount of all Investing Parties and be adjusted against the original accounts.
	 
	 	 	If the Contract terminates, the method of an inventory to all of the remaining equipment
and Materials shall be the same as mentioned above, and the gains and losses derived from
such disposal shall be adjusted against the accounts of the original Investing Party in
accordance with the above mentioned methods.
	 
	9.2	 	In accordance with the provisions of Article 8.9 of the Contract, when CNPC becomes the
Operator of the Oil Field within the Contract Area, the former Operator shall transfer to
CNPC all the Accounting Records relating to the Joint Account.
	 
	9.3	 	Upon the termination of the Contract, the Operator shall transfer all the relevant vouchers,
books and statements over to CNPC for custody.
	 
	9.4	 	In conducting the transfer of the accounting books and inventory and check of all the
properties in accordance with the provisions of this Accounting Procedure, the implementation
procedure for the transfer and verification, the accounting files to be transferred and
accounting matters to be settled as well as other details shall be agreed upon through
consultation in advance between the Operator and CNPC. The transfer procedure shall be
completed within the time period agreed upon by the Parties.

25

 

Annex III

Personnel Costs

Contents

			
	Article 1	 	General Provisions

			
	Article 2	 	Employment of Chinese Personnel

			
	Article 3	 	Salaries and Wages of Personnel

			
	Article 4	 	Other Expenses

			
	Article 5	 	Settlement of Personnel Costs

26

 

Annex III

Personnel Costs

Article I

General Provisions

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

	 	(1)	 	representatives of JMC appointed by CNPC referred to in Article 7.1.1 of the
Contract;
	 
	 	(2)	 	personnel of CNPC in the subordinate bodies of JMC referred to in Article
7.4 of the Contract;
	 
	 	(3)	 	professional representatives assigned by CNPC to the Operator’s
(Contractor’s) organizations referred to in Article 7.5 of the Contract; and
	 
	 	(4)	 	personnel furnished by CNPC to the Contractor for employment (not including
personnel recruited by CNPC for the Contractor) referred to in Article 2 hereof.

	1.3	 	Personnel costs referred to in this Annex shall include salaries and wages of personnel
specified in Article 3 hereof and other expenses specified in Article 4 hereof.
	 
	1.4	 	There is a table attached to this Annex, i.e. Table of Salary and Wage Standards of Chinese
Personnel.

27

 

Article 2

Employment of Chinese Personnel

	2.1	 	The Contractor shall employ the Chinese Personnel in accordance with Article 15.2 of
the Contract.

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

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

	 	2.1.3	 	The employee candidates furnished and recruited by CNPC for the Contractor
shall be employed by the Contractor only when they have passed tests conducted by the
Contractor or become qualified after being trained by the Contractor. The Contractor
shall notify CNPC in writing of the name list of the employee candidates whom it has
decided to employ and whom it has decided not to employ promptly after the tests or
training have been conducted. The Contractor shall explain the reason to CNPC with
respect to the employee candidates whom it has decided not to employ. If the
explanation given by the Contractors is reasonable, CNPC shall promptly furnish or
recruit additional employee candidates.

	2.2	 	The employment contract(s) shall be signed by the Parties for employment of personnel
furnished by CNPC who have passed the tests conducted by the Contractor or become qualified
after being trained by the Contractor. The said employment contract(s) shall include
provisions with respect to employees, such as employment, dismissal, resignation, production
and working assignments, salaries or wages and other expenses, awards and penalties, working
time and vacations, labor insurance and welfare, labor protection and labor discipline, etc..
In addition, the Parties shall work

28

 

		 	out specific stipulations with regard to the term of the
employment contract(s), conditions
of termination and modification of employment contract(s), responsibilities in the case of
violation of the contract, and rights and obligations of the Parties.
	 
	2.3	 	The Contractor shall notify CNPC in writing thirty (30) days before dismissing or replacing
any personnel furnished by CNPC and employed by the Contractor.

29

 

Article 3

Salaries and Wages of Personnel

	3.1	 	Salaries and wages of the personnel referred to in Article 1.2 hereof (hereinafter
referred to as “CNPC Personnel”) shall be dealt with in accordance with the following
provisions:

	 	3.1.1	 	CNPC Personnel shall be divided into two parts, i.e. personnel of JMC and
employees. Personnel of JMC shall fall into two categories and employees shall fall
into four categories. The salaries and wages of the personnel in each category shall
be classified as three levels. The levels of the personnel in each category shall be
determined in accordance with the number of years of working experience they have.
Those who have less than three (3) years of working experience shall be determined as
Level One; those who have three (3) to ten (10) years of working experience shall be
determined as Level Two; and those who have more than ten (10) years of working
experience shall be determined as Level Three. The salary and wage standards with
respect to Levels One, Two and Three of each category of personnel are specified in
the Table of Salary and Wage Standards of Chinese Personnel.
	 
	 	3.1.2	 	The salary and wage standards specified in the Table of Salary and Wage
Standards of Chinese Personnel, which are expressed in 1998 U.S. dollars, shall be
increased annually in the same percentage as the average annual increase percentage
in base salaries granted to Expatriate Employee.
	 
	 	3.1.3	 	The salary and wage standards of personnel at each level in each category
specified in the Table of Salary and Wage Standards of Chinese Personnel divided by
twenty-one point five (21.5) shall be the daily salary and wage standards of
personnel at such level in such category.

	3.2	 	Those CNPC Personnel who have worked for full eighteen (18) days shall be paid in
accordance with the monthly salary and wage standards; those CNPC personnel who have worked
for less than full eighteen (18) days shall be paid in accordance with the daily salary and
wage standards.
	 
	3.3	 	CNPC’s chief representative of JMC shall always be paid in accordance with the salary and
wage standards with respect to representatives of JMC. Other CNPC’s representatives of JMC
shall be paid, for the period in which he or she attends JMC meetings, in accordance with the
salary and wage standards with respect to representatives of JMC. If any professional
representative (including the secretary) of CNPC or any

30

 

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

31

 

Article 4

Other Expenses

	4.1	 	CNPC Personnel shall be paid, in addition to the salaries and wages as stipulated in
Article 3 hereof, the following expenses.

	 	4.1.1	 	Expenses for working meals and transportation are as follows:
	 
	 	 	 	Four Hundred and Thirty (430) U.S. dollars each month for each CNPC Personnel, of
which:

	 	(1)	 	Ten (10) U.S. dollars per day for each CNPC Personnel for
working meals, Two Hundred and Fifteen (215) U.S. dollars for each month;
	 
	 	(2)	 	Ten (10) U.S. dollars per day for each CNPC Personnel for
transportation, Two Hundred and Fifteen (215) U.S. dollars for each month.

	 	 	 	Those CNPC Personnel who have worked for eighteen (18) days in a month shall be
paid in accordance with the monthly expenses for working meals and transportation;
those CNPC Personnel who have worked for less than eighteen (18) days in a month
shall be paid in accordance with the daily expenses for working meals and
transportation.
	 
	 	4.1.2	 	Allowance
	 
	 	 	 	Any CNPC Personnel, who work on operating sites or on supporting base in desert,
Gobi and offshore areas for performance of the Contract, shall obtain an allowance
from thirty percent (30%) to fifty percent (50%) of the daily salary or wage
standards as stipulated in Article 3.1.3 hereof.
	 
	 	4.1.3	 	Expenses for visiting family:

	 	4.1.3.1	 	Any CNPC Personnel whose cumulative working time in a Calendar Year
reaches six (6) calendar months or more may enjoy a thirty (30) calendar day
home leave with pay.
	 
	 	4.1.3.2	 	Standards of home leave expenses for CNPC Personnel:
	 
	 	 	 	Three Hundred and Fifty (350) U.S. dollars for each CNPC Personnel each
time.

32

 

	 	 	 	The home leave frequency and the standards of expenses for any CNPC
Personnel who work in remote area, desert, Gobi or offshore areas for
the purpose of performance of the Contract shall be decided through
consultation between the Parties in view of the actual conditions.

	 	4.1.4	 	Premiums for accidental personal injury and death insurance and the
expenses incurred in dealing with injuries or death of CNPC Personnel, which shall
include:

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

	 	4.1.5	 	Expenses for CNPC Personnel on business trips.
	 
	 	4.1.6	 	Lodging expenses for CNPC Personnel working in the Petroleum Operation area
or the area where the JMC will locate for the purpose of performance of the Petroleum
Operations if they are not local residents there.

	4.2	 	In the event that commodity prices or transportation fees increase, the standards of
expenses referred to in Articles 4.1.1, 4.1.2 and 4.1.3.2 herein shall be adjusted
accordingly through consultation by the Parties.

33

 

Article 5

Settlement of Personnel Costs

	5.1	 	Salaries and wages of personnel stipulated in Article 3 hereof and the expenses
stipulated in Articles 4.1.1, 4.1.2 and 4.1.3 hereof shall all be settled by the
Operator with CNPC. If the Operator has provided CNPC Personnel with working meals and
transportation, no expenses specified in Article 4.1.1 hereof shall be paid to CNPC.
	 
	5.2	 	The expenses referred to in Articles 4.1.4, 4.1.5 and 4.16 hereof shall be provided by
the Operator or reimbursed based on receipts, bills or vouchers.

Table of Salary and Wage of Chinese Personnel

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Monthly Salary & Wage Standards
	 	 	 	 	 	 	 	 	 	 	(U.S.$)	 	 
	 	 	Ordinal	 	 	 	Level	 	Level	 	Level
	Category	 	No.	 	Personnel	 	One	 	Two	 	Three
	JMC	 	1	 	Representative of JMC
appointed by CNPC
	 	 	1,800	 	 	 	2,640	 	 	 	3,600	 
	JMC	 	2	 	Professional
Representative
(including
Secretary)
	 	 	1,440	 	 	 	2,040	 	 	 	2,640	 
	Employee	 	1	 	Senior Technical
Personnel
	 	 	1,440	 	 	 	2,040	 	 	 	2,640	 
	Employee	 	2	 	Middle Level Technical
Personnel
	 	 	1,200	 	 	 	1,500	 	 	 	1,800	 
	Employee	 	3	 	Ordinary
Technical and
Administration
Personnel
	 	 	900	 	 	 	1,000	 	 	 	1,200	 
	Employee	 	4	 	Worker
	 	 	650	 	 	 	750	 	 	 	950	 

34

 

Annex IV

Training of Chinese Personnel

and Transfer of Technology

Contents

			
	Article 1	 	Use of Appropriate and Advanced Technology

			
	Article 2	 	Objectives and Requirements of Training And Transfer of Technology

			
	Article 3	 	Program of Training and Transfer of Technology

			
	Article 4	 	Scope of Training and Transfer of Technology

			
	Article 5	 	Type of Training and Transfer of Technology

			
	Article 6	 	Scientific and Technical Cooperation and Exchange

			
	Article 7	 	Miscellaneous

35

 

Annex IV

Training of Chinese Personnel

and Transfer of Technology

Article 1

Use of Appropriate and Advanced Technology

Subject to the Contract, the Contractor agrees, in the implementation of Petroleum Operations,
to apply its appropriate and advanced technology and managerial experience including proprietary
technology e.g. patented technology, know-how or other confidential technology, etc. and according
to the requirement of the progress of Petroleum Operations, the Parties shall have scientific and
technical cooperation and academic exchange of views. The Contractor shall, at the request of JMC,
according to the requirements of the Pilot Test Operations, Development Operations and Production
Operations, propose in advance the aforesaid specific items and submit them to JMC for discussion
and review.

36

 

Article 2

Objectives and Requirements of

Training and Transfer of Technology

In accordance with Article 16 of the Contract, the Contractor shall train the Chinese
Personnel, transfer its technology and managerial experience to CNPC and its Affiliates so as to
enable the Chinese Personnel to learn the use of the appropriate and advanced technology and
managerial experience including proprietary technology, e.g. patented technology, etc. and to
master the knowledge and skill in the course of Petroleum Operations according to an agreed
program, and to obtain all the information and/or data needed for the performance of the Petroleum
Operations, to develop a competent, matured and well-trained Chinese Petroleum team. In the course
of such training and transfer of technology, any proprietary technology and/or information
including systematized technical data, information, software, specifications, manuals, operating
procedure, etc., of the Contractor or its Affiliates, which are required in the Petroleum
Operations hereunder, and which involve royalty, may be used by CNPC and its Affiliates without
royalty. However, CNPC shall not disclose any proprietary technology and/or information to any
Third Party without the written consent of the Contractor.

37

 

Article 3

Program of Training and

Transfer of Technology

	3.1	 	Respectively before the commencement of the Pilot Test Operations, Development Operations
and Productions Operations, the Contractor shall, in advance, consult with the representatives
of CNPC in JMC and prepare a draft program of personnel training and transfer of technology
and managerial experience respectively for the aforesaid three periods and submit them to JMC
for discussion and approval. After approval by JMC, the Contractor shall put them into
practice.
	 
	3.2	 	In accordance with the aforesaid program approved by JMC and actual requirement of the
Petroleum Operations, the Contractor shall work out a plan for each year respectively during
pilot test, development and production periods. After such plan is approved by JMC, in
accordance with the provisions of Article 7.3 and Article 10 of the Contract, it shall become
an integral part of the Contractor’s annual Work Program and the Contractor shall be
responsible for its implementation, including trainee study inspection, test and
certification.
	 
	3.3	 	The Program and plan submitted by the Contractor for the training of the Chinese Personnel
and transfer of technology shall include at least the fields of specialization, specialized
technology, scope of personnel, specific job categories, type, method, the number of
personnel, timing, location, budget and objective to be reached, as well as the method of
inspection of the trainee’s progress, examination, and certification of course completion.

38

 

Article 4

Scope of Training and

Transfer of Technology

	4.1	 	Subject to the Contract, the Parties agree that the Contractor shall, according to the
requirements of the Petroleum Operations under the Contract, train the Chinese Personnel and
transfer its technology and managerial experience to CNPC including, but not limited to, the
following fields of specialization:

	 	(A)	 	Petroleum geology, geochemistry, geophysical data collection, conventional
and special processing and interpretation, well logging data, conventional and
special processing and interpretation, well testing and the evaluation of oil and
gas resources;
	 
	 	(B)	 	Development geology, digital simulation and physical modeling of Oil Field
development, development seismic data collection, conventional and special
processing and interpretation, reservoir and development engineering, feasibility
study and evaluation of Oil Field development, formulation of the Overall
Development Program, the evaluation of early production or appraisal trial
production;
	 
	 	(C)	 	Environmental conditions for construction, engineering project management,
engineering planning, design, construction and installation, pipeline laying
technique, oil and gas gathering and processing, transportation of Crude Oil.
	 
	 	(D)	 	Oil and/or gas recovery technology including production automation, remote
sensing and control, and technology of secondary and tertiary recovery;
	 
	 	(E)	 	Directional drilling procedures, optimum drilling, formation pore pressure
estimation and blowout control;
	 
	 	(F)	 	Economic evaluation, finance and control, procurement, sales, development of
personnel ability and contract administration;
	 
	 	(G)	 	Laws, safety, fire fighting and lifesaving, environmental protection,
communications and other fields of specialization related to the
Contract.

	4.2	 	The Parties agree that during the pilot test period the Contractor shall, in accordance with
the fields of specialization specified in Article 4.1 herein, transfer systematically and in
complete sets to CNPC the Contractor’s technology and managerial experience.

39

 

	 	 	During the development period and production period, the specialized technology and
managerial experience transferred to CNPC from the Contractor shall be proposed by the
Contractor prior to the approval of the Overall Development Program of the Oil Field and
the commencement of commercial production therefrom respectively, and be included in the
phasic plan after a decision is made thereupon by the Parties through consultation.
	 
	4.3	 	Subject to the Contract, the Parties agree that the Contractor shall train Chinese
Personnel, transfer technology and teach managerial knowledge to CNPC including, but not
limited to, the following personnel areas:

	 	4.3.1	 	The Contractor shall transfer its technology to the Chinese Personnel who
have been assigned to work in subordinate bodies of JMC and teach them managerial
experience.
	 
	 	4.3.2	 	The Contractor shall train the Chinese Personnel who have been assigned to
the Contractor including the Chinese personnel who have been employed by the
Contractor for the performance of the Contract and transfer technology to them in
order to improve their technical and/or managerial capabilities.
	 
	 	4.3.3	 	The Contractor shall in advance train the Chinese Personnel who will be
employed by the Contractor for development and production of the Oil Field.
	 
	 	4.3.4	 	The Contractor shall train the Chinese Personnel who work in the
departments of CNPC which are directly related to, or provide directly various
services for the performance of the Contract, and transfer technology to them.

	4.4	 	Within the fields of specialization specified in Articles 4.1 and 4.2 herein, as required
for the performance of the Petroleum Operations under the Contract, the Chinese Personnel
referred to in Article 4. 3 may include, but shall not be limited to, the following specific
job categories;

	 	(A)	 	Geologists, geophysicists, geochemists, petroleum engineers,
paleontologists, seismic data collection and conventional and special processing and
interpretation engineers, well logging data conventional and special processing and
interpretation engineers;
	 
	 	(B)	 	Development geologists, reservoir and development engineers, experts for
digital simulation and physical modeling of the Oil Field development, engineers for
development seismic data collection, conventional and special processing and
interpretation engineers, formulation of Overall Development Program engineers;

40

 

	 	(C)	 	Experts for engineering geology, engineering construction managers and
supervisors, engineering design, construction and installation engineers, pipeline laying
engineers, oil and/or gas gathering and processing engineers
	 
	 	(D)	 	Production engineers, automation engineers, remote sensing and control engineers, secondary
and tertiary recovery, production and maintenance personnel and supervisors;
	 
	 	(E)	 	Drilling engineers, mud engineers, drilling managers and supervisors;
	 
	 	(F)	 	Petroleum economists, accountants, auditors, finance managers, planning managers,
procurement managers, oil and gas sales managers;
	 
	 	(G)	 	Computer hardware engineers, computer software engineers, laboratory engineers and
operators, communication engineers, safety engineers, pollution prevention engineers, experts
working in business transactions, material and warehouse engineers;

All the training or employment candidates for the aforesaid job categories shall be selected in
accordance with the requirements of various periods of the Petroleum Operations under the
Contract. The Contractor shall propose the criteria for the selection, and CNPC shall, pursuant to
such criteria, provide a list of candidates. If such candidates are not able to meet the
requirements of the Contractor, CNPC shall provide additional candidates. The Parties shall
discuss and decide who will finally be selected.

41

 

Article 5

Type of Training and

Transfer of Technology

	5.1	 	The Contractor agrees to train Chinese Personnel in various and efficient ways and to
transfer its technology and managerial experience to CNPC to the extent reasonably possible
pursuant to a program agreed by JMC, including but not limited to the following:

	 	5.1.1	 	With the consent of JMC, the Contractor shall provide necessary training
equipment and training materials so as to give the Chinese Personnel the technology,
management and language training, and all the expenditures thereunder shall be within
the spending limitation for training of Chinese Personnel. When necessary, the
Contractor shall send its experts to the People’s Republic of China to give special
training courses.
	 
	 	5.1.2	 	The Contractor shall send the Chinese Personnel to study in training centers,
training schools and institutes inside or outside the People’s Republic of China, as
well as in some special scientific research institutes, computer centers, and
engineering design companies. Some of them shall have the opportunity to be able to
obtain certain technical qualifications or academic degrees.
	 
	 	5.1.3	 	The training and the transfer of technology and managerial experience shall
be realized through working together with Contractor’s experts in offices and on
operating sites of the Contractor inside or outside the People’s
Republic of China.
	 
	 	5.1.4	 	The Contractor shall endeavor to persuade the Subcontractors to train the
Chinese Personnel and transfer technology to them.
	 
	 	5.1.5	 	With respect to any specialized technology and managerial experience to be
transferred by the Contractor to CNPC, the Parties shall organize special personnel to
be responsible for its execution and realization in accordance with the schedule.

42

 

Article 6

Scientific and Technical Cooperation and Exchange

	6.1	 	The Parties agree, in accordance with the requirements of Petroleum Operations under the
Contract, to have scientific and technical cooperation and academic exchange of views, within
the Fields of specialization specified in Article 4.1 of this Annex. The Parties shall discuss
and propose a plan, items, personnel and type of scientific and technical cooperation and
academic exchange of views for each year in a phased manner, and submit them to JMC for
discussion and approval. After approval by JMC, the Contractor shall incorporate them in the
phased plans and put them into practice.
	 
	6.2	 	The personnel participating in the scientific and technical cooperation and academic
exchange of views shall be experts, engineers and technicians from scientific research and
designing departments related to the Contract. The Parties shall provide them with necessary
facilities and assistance for scientific researches, as required to carry out any plan
approved by the JMC for scientific and technical cooperation.
	 
	6.3	 	The Contractor shall furnish CNPC world-wide information concerning Petroleum science and
technology, economics, legal and managerial topics According to the requirement of Petroleum
Operations, scientific and technical seminars shall be jointly held by the Parties through
consultation. The Contractor shall invite the Chinese Personnel to attend relevant scientific
and technical seminars organized solely by the Contractor or jointly with others and shall
assist the Chinese Personnel to get permits to attend international conferences relating to
Petroleum technology, economics and legal topics and to participate in other relevant
activities.

43

 

Article 7

Miscellaneous

	7.1	 	All obligations imposed upon Contractor under the provisions of this Annex IV shall be
limited to those required for the conduct of Petroleum Operations under the Contract, unless
otherwise agreed by the Parties.
	 
	7.2	 	This Annex is an integral part of the Contract. The definitions set forth in Article 1 of
the Contract are applicable to this Annex.

44

 

Annex V

Data Control

Contents

			
	Article 1	 	General Provisions

			
	Article 2	 	Ownership of the Data

			
	Article 3	 	Control and Use of the Data

			
	Article 4	 	Scope of the Data Provided for CNPC

45

 

Annex V

Data Control 

Article 1

General Provision

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

46

 

Article 2

Ownership of the Data

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

47

 

Article 3

Control and Use of the Data

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

48

 

		 	organizations or the governments of their home countries to keep such data and information
confidential subject to international practice.
	 
	3.6	 	Release of the data and information to the press shall be subject to the consultation
and agreement between the Parties.

49

 

Article 4

Scope of the Data Provided for CNPC

In carrying out the Petroleum Operations, the Contractor shall provide CNPC with data and
information, including, but not limited to the following:

	4.1	 	Overall programs and plans of operations and information and documents
of designs of an individual project:

	 	4.1.1	 	Pilot test program of the Contract Area;
	 
	 	4.1.2	 	Annual operational plans for pilot test;
	 
	 	4.1.3	 	Pilot test program;
	 
	 	4.1.4	 	Designs for sidetrack, well repair, well recompletion and single well
injectivity test and designs for single well new technique test and well groups
displacement tests for the purpose of pilot test;
	 
	 	4.1.5	 	Early development programs, overall development programs and adjusted
development programs of Oil Fields;
	 
	 	4.1.6	 	Plans for production and production testing of wells and Oil Fields;
	 
	 	4.1.7	 	The content and general schedules of engineering project;
	 
	 	4.1.8	 	Basic designs of engineering projects (e.g. oil, gas and water treatment
facilities, modules and pipelines);
	 
	 	4.1.9	 	Annual and monthly operational progress charts for engineering projects;
	 
	 	4.1.10	 	Procurement plans and schedules for engineering projects;
	 
	 	4.1.11	 	Test-run and commissioning schedules for engineering projects.

	4.2	 	Information and documents on the progress of all operations:

	 	4.2.1	 	Daily, monthly and annual reports on well drilling and production testing;
	 
	 	4.2.2	 	Daily, monthly and annual reports on production testing and production of
wells and Oil Fields;
	 
	 	4.2.3	 	Monthly and annual reports on operational progress of engineering
projects;

50

 

	 	4.2.4	 	Other operational progress reports;
	 
	 	4.2.5	 	Operational rules and unpatented technical manuals of Petroleum
Operations.

	4.3	 	Original data and information of Petroleum Operations:

	 	4.3.1	 	Original magnetic tapes, original records, data, seismic sections, drawings
and other relevant data and information of geophysical surveys;
	 
	 	4.3.2	 	Original records, data, drawings and other relevant data and information of
geochemical survey;
	 
	 	4.3.3	 	Original records, data, drawings, samples and other relevant information of
well drilling, mud, well logging, cementing, well completion, production testing and
workover operations;
	 
	 	4.3.4	 	Original records, data, drawings and other relevant information of
production testing, production, injection and stimulation of wells and Oil Fields;
	 
	 	4.3.5	 	Original records, data and automatic recording cards of Crude Oil and
Natural Gas metering;
	 
	 	4.3.6	 	Original data and recording cards of Crude Oil and Natural Gas
transportation, storage and marketing;
	 
	 	4.3.7	 	All the samples (including cores, cuttings, oil, gas and water samples and
mud samples) and results of analysis and chemical examination thereon;
	 
	 	4.3.8	 	Data on physical properties of pay zones;
	 
	 	4.3.9	 	Data on environment, hydrology and meteorology.

	4.4	 	Basic information of engineering projects:

	 	4.4.1	 	Instructions on design calculations and detailed design drawings of
engineering projects;
	 
	 	4.4.2	 	Technical specifications and standards of design, manufacture and
installation, safety rules, environmental protection rules and operational rules;
	 
	 	4.4.3	 	Construction records of individual projects and order slips on design and
construction alterations;

51

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