Document:

exv10wxiy

 

Exhibit (10i)

EMPLOYMENT AGREEMENT BETWEEN FAR EAST ENERGY CORPORATION AND MICHAEL R.
McELWRATH

Far East Energy Corporation, a Nevada corporation (“Company”), and Michael R.
McElwrath (“Executive”) hereby agree as follows:

1. The term of this Agreement shall commence and this Agreement shall be
effective as of October 13, 2003, and shall terminate on October 13, 2008.
Employment of Executive, pursuant to the terms of this Agreement, will continue
thereafter only so long as both Company and Executive want it to do so. This
Agreement may be terminated by the Executive or Company upon thirty (30) days
written notice, subject to payment to Executive of the severance, separation or
contractual default payments of Clause 6 below. It is understood that upon
execution of this Agreement, Executive will tender two weeks notice to his
current employer, and that he will commence full-time duties for Company no
later than two weeks from such notice, and that during said two weeks Executive
will endeavor to provide such services to Company as may be possible subject to
the requirements of his current employer.

2. Executive shall be employed by Company as its Chief Executive Officer (CEO)
and shall have such duties, responsibilities and authority as shall be
consistent with that position. Executive shall report directly and solely to
the Company’s Board of Directors. Company agrees to nominate Executive for
Board Membership at each annual meeting of the stockholders during his
employment hereunder. If Executive is not nominated and elected as a Board
Member at any annual meeting, or is removed as CEO or as a Board Member by the
action of the Board or the shareholders (unless for “Cause” as defined
hereinbelow), then such non-nomination, non-election, or removal from the Board
or from the position of CEO, shall operate as termination of Executive’s
employment and shall trigger the obligation and payment of the lump-sum
separation or termination payment described in Clause 6 below.

3. As a material inducement to Executive to accept the position of CEO of Far
East Energy Corporation, Company shall pay to Executive a signing bonus in the
amount of $56,250.00 immediately upon the effective date of this Agreement. It
is expressly declared and stipulated by the Company and Executive that this
payment is not related to any indebtedness which the Company owes to Executive
(nor is there any such indebtedness at the date of execution hereof), it is
expressly declared and stipulated by the Company and Executive that this is not
a payment to be earned over time by Executive, is not conditioned upon length
of service or services rendered, and is given solely for the purpose of
inducing Executive to accept employment as CEO of Far East Energy. Without the
payment of this signing bonus, Executive would not accept Employment.

4. Executive shall receive an annual base salary of not less than $225,000,
payable in equal semi-monthly installments. Additionally, Executive shall be
eligible to receive, at six-month intervals during the life of this Agreement
(said intervals measured from the effective date of this Agreement) performance
bonuses in the amount of not less than $20,000, with the appropriate
performance criteria to be established by the Compensation Committee of Company
(or the Board, if no Compensation Committee exists) in discussions with
Executive. The initial performance criteria for the first six months of

 

 

Executive’s employment shall be established within 120 days after the effective
date of this Agreement and shall be delivered to the Executive in writing
signed by the necessary representative(s) of the Company. Thereafter, said
criteria shall be established and delivered in writing to Executive no later
than the first day of the appropriate six-month period. At least annually, and
no later than October 1st of each year, the Compensation Committee (or Board,
if there is no Compensation Committee in place) shall review the salary, bonus
and other compensation of Executive based upon performance, competitiveness and
appropriateness in the industry and make such increases, supplemental bonus
payments, or other incentive awards as it sees fit. In no event, however, will
Executive’s base salary ever be less than an annual rate of $225,000, or shall
performance bonuses which Executive may earn be less than $20,000 per six
months. No increase in salary or compensation will operate as a cancellation of
this Agreement, but merely as an amendment to this Clause 4. In addition to the
base salary and other compensation discussed in this Clause 4. Executive shall
be entitled to receive any benefits and fringes (whether subsidized in part, or
paid for in full by Company) including, but not limited to, medical, dental,
life and disability insurance, and 401K Savings and Retirement Plan which
Company now or in the future pays or subsidizes for any of its
professional/technical or management employees, or employees in the same class
as Executive.

5. On the effective date of this Agreement, Executive, in consideration for
other services rendered, and as a material inducement to Executive to accept
employment, shall receive options (the “Supplemental Options”) to acquire one
million two hundred thousand (1,200,000) shares of Far East Energy Corporation
Common Stock at the exercise price of $0.65 per share (the “Supplemental Option
Exercise Price”), said Supplemental Options to be awarded pursuant to the Stock
Option Agreement attached hereto as Exhibit A. With respect to one-half of the
shares to be exercised pursuant to each notice of exercise, in lieu of paying
the Supplemental Option Exercise Price in cash, the Executive or his assigns,
heirs, executors or administrators or personal or legal representatives may
exercise the Supplemental Options via cashless exercise by converting the
Supplemental Option into shares (the “Cashless Exercise Right”) as set forth
more fully in the Stock Option Agreement.

     The Supplemental Options shall vest according to the following schedule,
and shall be exercisable, in whole or in part until, October 13, 2013:

	 	(i)	 	240,000 of the Supplemental Option shares shall vest on the effective
date of this Employment Agreement;
	 
	 	(ii)	 	240,000 of the Supplemental Option shares shal1 vest one year from
the effective date of this employment agreement;
	 
	 	(iii)	 	240,000 of the Supplemental Option shares shall vest two years from
the effective date of this employment agreement;
	 
	 	(iv)	 	240,000 of the Supplemental Option shares shall vest three
years the effective date of this employment agreement; and
	 
	 	(v)	 	240,000 of the Supplemental Option shares shall vest four years from
the effective date of this employment agreement.

Options that have not previously vested shall vest immediately and fully
upon the death or disability of Executive, or in the event Company is
purchased or a Change of Control of Company occurs. In the event of death
or disability of Executive prior to April 1, 2005, Executive’s estate,
heirs, executors,

 

 

administrators, or personal or legal representatives as the case may be,
may not offer or sell any securities covered hereby until April 1, 2005.
“Change of Control” shall be deemed to have occurred if (l) any “person”
or “‘group” is or becomes the “beneficial owner” directly or indirectly,
of securities of Company representing 50% or more of the combined voting
power of Company’s then outstanding securities, or (2) the stockholders
of Company approve a merger or consolidation of company with any other
corporation or entity other than a merger or consolidation winch would
result in the voting securities of Company continuing to represent more
than 50% of the combined voting power of the voting securities of Company
or such surviving entity outstanding immediately after such merger or
consolidation.

6. As a material inducement to Executive to secure his services as Chief
Executive Officer, Company agrees that in the event that Executive is
terminated by Company for any reason (other than for “‘Cause” as defined herein
below), including by reference any termination effected by the occurrences set
forth in Clause 2 above, or is terminated after a Change in Control; or in the
event that Company becomes insolvent or seeks rebel or protection through
bankruptcy proceedings, makes a liquidation or distribution of its assets, or
simply ceases operations, all of which (insolvency, bankruptcy, distribution of
assets, and cessation of operations) shall be considered to constitute
constructive termination of Executive, Company shall immediately pay to
Executive a single lump-sum severance or separation payment of One Hundred
Thousand Dollars ($100,000). “Cause” shall mean gross misappropriation or theft
of company funds, conviction of a felony, or complete and total abandonment of
duties for thirty consecutive days (other than for reason of disability).
Additionally, if Company shall fail to pay any regular semi-monthly base salary
installment to Executive and should such failure to pay continue for more than
10 days, Executive may, at his option declare this agreement to be in default
and shall thereupon be entitled to an immediate lump-sum payment equal to One
Hundred Thousand Dollars ($100,000). Executive shall retain all of his rights
in, and ownership of, all stock options vested as of the date of termination,
or that would vest within thirty, (30) days following the date of termination
or separation, or contractual default.

Any termination by the Company or by Executive shall be communicated in
writing to the other party at least thirty (30) days before the date on
which the termination is proposed to take effect. With respect to any
termination by the Company for “Cause”, the notice shall set forth in
detail the facts and circumstances alleged to provide a basis for such
termination.

Any controversy or claim arising with regard to tile severance or
separation payment required under this Agreement shall be settled by
Expedited Arbitration in accordance with the provisions of the Texas
Arbitration Act with Texas law being applied. The controversy or claim
shall be submitted to an arbitrator appointed by the Presiding Judge of
the Harris County, Texas Judicial District Court and shall occur within
thirty days of the date of severance, separation, or termination and
within ten days of the court’s appointment of an arbitrator. The decision
of the arbitrator shall be final and binding upon the parties hereto and
shall be delivered in writing signed by the arbitrator to each of the
parties hereto. Should the arbitrator rule in favor of Executive, then
any award or sums due and owing to Executive hereunder shall be increased
by an amount equal to one month of Executive’s last effective base salary
for each month or part thereof that

 

 

has passed beyond the date of Executive’s termination or separation.
Should Company fail to comply with the decision of the arbitrator, or
should Company unsuccessfully appeal (any appeal shall be through the
courts of the State of Texas) the decision of the arbitrator, then any
award or sums due and owing to Executive hereunder shall be increased by
an amount equal to one month of Executive’s last effective base salary
for each month or part thereof that passes beyond the date of the
arbitrator’s initial decision or determination. Should the arbitrator in
the initial arbitration proceeding, or any court in any appeal thereof
determine that Company acted in bad faith, or frivolously, in claiming
“Cause” as its reason for termination, or in failing to immediately
tender to Executive the severance or separation payment set forth in this
Clause 6, Executive shall be entitled to receive and Company shall be
ordered to pay to Executive as a penalty an additional One Hundred
Thousand Dollars ($100,000.00) in addition to the One Hundred Thousand
Dollars ($100,000) initially required, as well as any additional sums due
or awarded hereunder. The prevailing party in the arbitration proceeding
or in any appeal shall be entitled to recover attorney’s fees, court
costs and all associated costs from the non-prevailing party.

7. If the Company shall at any time be merged or consolidated into or with any
other corporation or entity, the provisions of this agreement shall survive any
such transaction and shall be binding on and inure to the benefit and
responsibility of the corporation resulting from such merger or consolidation
of the corporation to which such assets will be transferred (and this provision
shall apply in the event of any subsequent merger, consolidation, or transfer),
and the Company, upon the occasion of any of the above-described transactions,
shall include in the appropriate agreements the obligation that the payments
herein agreed to be paid to or for the benefit of Michael R. McElwrath, his
beneficiaries or estate, shall be paid, and that the provisions of this Clause
7 be performed.

8. Executive, will nominate at least two outside Directors to the Board as soon
as is possible, intending to accomplish this within ninety (90) to
one-hundred-and-eighty (180) days. It is intended that these Directors be
prominent individuals within the energy industry.

9. Any controversy or claim arising under this Agreement shall be settled by
Arbitration in accordance with the provisions of the Texas Arbitration Act with
Texas law being applied. To the full extent controllable by stipulation of the
parties hereto, this Agreement and the accompanying Stock Option Agreement
shall be interpreted under Texas law. The controversy or claim shall be
submitted to an arbitrator appointed by the Presiding Judge of the Harris
County, Texas Judicial District Court. The decision of the arbitrator shall be
final and binding upon the parties hereto and shall be delivered in writing
signed by the arbitrator to each of the parties hereto. The prevailing party in
the arbitration proceeding or in any appeal shall be entitled to recover
attorney’s fees, court costs and all associated costs from the non-prevailing
party, if the dispute is related to the severance or separation payment in
Clause 6 above, the expedited arbitration provisions of Clause 6 shall apply
and the provisions of said Clause 6 shall control.

10 Any notice, request, or other communication required or permitted pursuant
to this Agreement shall be in writing and shall be deemed duly given when
received by the party to whom it shall be given or three days after being
mailed by certified, registered, or express mail, postage prepaid, addressed as
follows:

 

 

	 	 	 	 	 
	

	 	If to Company:
	

	 	 	 	Far East Energy Corporation
	

	 	 	 	400 North Sam Houston Parkway East
	

	 	 	 	Suite 205
	

	 	 	 	Houston, Texas 77060
	 
	 	 	 	 
	

	 	With copies to:
	

	 	 	 	Woltjen Law Firm
	

	 	 	 	4144 North Central Expressway, Suite 410 Dallas, Texas 75204
	

	 	 	 	Attention: Kevin Woltjen
	 
	 	 	 	 
	

	 	If to Executive:
	

	 	 	 	Michael R. McElwrath
	

	 	 	 	7 Stargazer Place
	

	 	 	 	The Woodlands, Texas 77381

11. This Agreement may be executed in counterparts, each of which, when taken
together, shall constitute one original Agreement.

     IN WITNESS WHEREOF, Company has caused its duly authorized officer and
directors to execute and attest to this Agreement, and to apply the corporate
seal hereto, and Participant has placed his or her signature hereon, effective
as of the first date above.

	 	 	 	 
	 	FAR EAST ENERGY CORPORATION
	 	
BY:

Name:

Title:	 	

/s/ Joe Cooper

Joe Cooper

President
	 	By:

Name:

Title:	 	
/s/ Jawaharlal Gondi

Jawaharlal Gondi

Director
	 	By:

Name:

Title:	 	
/s/ Tun Aye Sai

Tun Aye Sai

Director
	 	EXECUTIVE:
	 	By:

Name:	 	
/s/ Michael R. McElwrath

Michael R. McElwrath<PAGE>
                                                                  EXHIBIT (10ii)

                           PRODUCT SHARING CONTRACT
                FOR EXPLOITATION OF COALBED METHANE RESOURCES
                        IN ZHAOTONG, YUNNAN PROVINCE,
                         THE PEOPLE'S REPUBLIC OF CHINA

                   CHINA UNITED COALBED METHANE CORP. LTD.,
                                       AND
                           FAR EAST ENERGY CORPORATION

                                 BEIJING, CHINA

<PAGE>

                                    Contents

<Table>
<S>         <C>                                                 <C>
            Preamble                                             1
Article 1   Definitions                                          2
Article 2   Objective of the Contract                            7
Article 3   Contract Area                                        7
Article 4   Contract Term                                        8
Article 5   Relinquishment of Contract Area                     10
Article 6   Minimum Exploration Work Commitment and Expected
            Minimum Exploration Expenditures                    12
Article 7   Management Organization and Its Functions           13
Article 8   Operator                                            19
Article 9   Assistance Provided by CUCBM                        22
Article 10  Work Program and Budget                             23
Article 11  Determination of Commerciality of CBM               25
Article 12  Financing and Cost Recovery                         27
Article 13  CBM Production and Allocation                       29
Article 14  Quality, Quantity, Price, and Destination of CBM    33
Article 15  Employment of Personnel and the Procurement of
            Goods aServices                                     37
Article 16  Training of Chinese Personnel                       38
Article 17  Ownership of Assets and Data                        39
Article 18  Accounting, Auditing and Personnel Costs            40
</Table>

<PAGE>

<Table>
<S>         <C>                                                 <C>
Article 19  Taxation                                            43
Article 20  Insurance                                           43
Article 21  Confidentiality                                     45
Article 22  Assignment                                          47
Article 23  Environmental Protection and Safety                 48
Article 24  Force Majeure                                       49
Article 25  Consultation and Arbitration                        50
Article 26  Effectiveness and Termination of the Contract       51
Article 27  The Applicable Law                                  52
Article 28  Language of the Contract and Working Language       53
Article 29  Miscellaneous                                       53

Annex I     Geographical Location and Coordinates of Connecting
            Points of the Boundary Lines of the Contract Area   I-1
Annex II    Accounting Procedure                                II-1
Annex III   Personnel Costs                                     III-1
Annex IV    Data Control                                        IV-1
</Table>

<PAGE>

Preamble

This Contract is entered into in Beijing on this ___ day by and between China
United CBM Corporation Ltd. (hereafter abbreviated as "CUCBM"), a company
organized and existing under the laws of the People's Republic of China, having
its headquarters domiciled in Beijing, the People's Republic of China as one
part; Far East Energy Corporation, a company organized and existing under the
laws of the State of Nevada, USA, having its headquarters domiciled in Houston,
Texas(hereinafter referred to as the "Foreign Contractor" or "Contractor") as
the other part.

WITNESSETH

WHEREAS, all coalbed methane resources under the territory and internal waters
of the People's Republic of China and within the limits of national jurisdiction
of the People's Republic of China are owned by the People's Republic of China;
and

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

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

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

                                       1
<PAGE>

Article 1
Definitions

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

1.1 "Coalbed Methane" or "CBM" means any gas mainly consisting of methane stored
in coal seams and/or adjacent strata (including in the overlying and underlying
strata) within the Contract Area.

1.2 "JMC" means the joint management committee established in accordance with
Article 7 hereof.

1.3 "Coalbed Methane Discovery" or "CBM Discovery" means a potential Coalbed
Methane reservoir worth further evaluation proved by exploration within the
Contract Area.

1.4 "Coalbed Methane Field" or "CBM Field" means an accumulation of Coalbed
Methane or otherwise within the Contract Area which has been determined to be of
commercial value and for which it has been decided to proceed with development.
The accumulation may be bounded by but is not limited to geologic structure,
fault blocks, coal discontinuities or topographical features. Fields may also be
designated as areas of similar geologic characteristics including but not
limited to coal thickness, drill depths, and gas content.

1.5 "Petroleum" means Crude Oil and Natural Gas deposited in the subsurface and
being extracted or already extracted, including any valuable non-hydrocarbon
substances produced in association with Crude Oil and/or Natural Gas separated
or extracted therefrom.

1.6 "Coalbed Methane Operations" or "CBM Operations" means the Exploration
Operations, the Development Operations, the Production Operations, and other
activities related to these Operations carried out under the Contract.

1.7 "Liquid Hydrocarbons" means any liquid hydrocarbons extracted from CBM.

1.8 "Exploration Operations" means operations carried out for the purpose of
discovering and evaluating CBM bearing areas by means of geological,
geophysical, geochemical and other methods including exploratory well drilling;
all the work undertaken to determine the commerciality of areas in which CBM has
been discovered including core drilling, modeling, area selection, feasibility
studies, Pilot Development (including production therefrom), formulation of the
Overall Development Program; and activities related to all such operations
including negotiation and execution of longterm transportation and sales
contracts.

                                       2
<PAGE>

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

1.10 "Production Operations" means operations and all activities related thereto
carried out for CBM production of each CBM Field from the Date of Commencement
of Commercial Production, including, but not limited to extraction, injection,
stimulation, treatment, storage, transportation and lifting, etc.

1.11 "Contract Area " means a surface area demarcated with geographic
coordinates for the cooperative exploitation of CBM resources, and in the
Contract, means the surface area stipulated in Article 3.1 hereof.

1.12 "Exploration Area" means the surface area within the Contract Area which
has not been relinquished before the expiration of the exploration period hereof
and in which Development Operations and Production Operations have not begun.

1.13 "Development Area" means a portion of the Contract Area covering a CBM
Field which has been designated for development. The Development Area(s) shall
be proposed by the Operator, demarcated by the JMC and delineated as such in the
Overall Development Program submitted for approval and approved by the
Department or Unit.

1.14 "Production Area" means a surface area within any Development Area for the
purpose of the performance of the Production Operations within the said
Development Area. The Production Area proposed by the Operator, demarcated by
JMC shall be submitted to CUCBM for approval before the Date of Commencement of
Commercial Production.

1.15 "Date of Commencement of Commercial Production" for any CBM Field means the
date of commencement of the production of CBM from such CBM Field proposed and
announced by JMC in accordance with the provisions in Article 7.2.5 hereof.

1.16 "Calendar Year" means a period of twelve (12) consecutive Gregorian months
under the Gregorian Calendar, beginning on the first day of January and ending
on the thirty-first day of December in the same year.

1.17 "Contract Year" means a period of twelve (12) consecutive Gregorian months
under the Gregorian Calendar, within the term of the Contract, beginning on the
Date of Commencement of the Implementation of the Contract or any anniversary
thereof.

1.18 "Production Year" means in respect of each CBM Field, a period of twelve
(12) consecutive Gregorian months under the Gregorian Calendar, beginning on the
Date of Commencement of Commercial Production of such CBM Field or any
anniversary thereof.

                                       3
<PAGE>

1.19 "Calendar Quarter" means a period of three (3) consecutive Gregorian months
under the Gregorian Calendar, beginning on the first day of January, the first
day of April, the first day of July, or the first day of October.

1.20 "Exploration Well" means any well drilled within the Contract Area during
the exploration period for the purpose of searching for CBM accumulations,
including wells drilled for the purpose of obtaining geological and geophysical
parameters, any dry hole(s) and discovery well(s).

1.21 "Pilot Development" means the installation and operation of necessary
equipment within the Contract Area (including wells) aiming at evaluating,
through pilot production of Coalbed Methane, the potential commercial value of
the Coalbed Methane in a specific area.

1.22 "Development Well" means a well drilled after the date of approval of the
Overall Development Program for CBM Field for the purpose of producing CBM,
increasing production or accelerating extraction of CBM, including production
wells, injection wells and dry holes.

1.23 "Work Program" means all types of plans formulated for the performance of
the CBM Operations, including but not limited to plans for exploration,
development, production, transportation and sales.

1.24 "Overall Development Program" means a plan prepared by the Operator for the
development of a CBM Field or part of a CBM Field (phased development) which has
been reviewed and adopted by JMC, confirmed by CUCBM and approved by the
Department or Unit, and such plan shall include, but not be limited to,
recoverable reserves, the Development Well pattern, master design, production
profile, economic analysis and time schedule of the Development Operations.

1.25 "Deemed Interest" means interest accruing on the development costs
calculated in accordance with the rate of interest stipulated in Article
12.2.3.2 hereof when the development costs incurred in each CBM Field within the
Contract Area are recovered by the Parties.

1.26 "CBM Field Straddling a Boundary" means a CBM Field extending from the
Contract Area to one or more other contract areas and/or areas in respect of
which no CBM contracts have been signed.

1.27 "Annual Gross Production of CBM" means the total amount of CBM produced
from each CBM Field within the Contract Area considered separately in each
Calendar Year, less the amount of CBM used for CBM Operations in such CBM Field
within the Contract Area and the amount of losses, which is saved and measured
by a measuring device at the Delivery Point as specified in Article 14.3.1
hereof.

                                       4
<PAGE>

1.28 "Annual Gross Production of Liquid Hydrocarbons" means the total amount of
Liquid Hydrocarbons produced from each CBM Field within the Contract Area
considered separately in each Calendar Year, less the amount of Liquid
Hydrocarbons used for CBM Operations in such CBM Field within the Contract Area
and the amount of losses, which is saved and measured by a measuring device at
the Delivery Point as specified in Article 14.3.1 hereof.

1.29 "Basement" means igneous rocks, metamorphic rocks or rocks of such nature
which, or formations below which, could not contain CBM deposits in accordance
with the knowledge generally accepted in the international Coalbed Methane
industry circle and shall also include such impenetrable rock substances as salt
domes, mud domes and any other rocks which make further drilling impracticable
or economically unjustifiable by the modern drilling technology normally
utilized in the international Coalbed Methane industry.

1.30 "Contractor" means the Foreign Contractor specified in the Preamble hereto,
including assignee(s) in accordance with Article 22 hereof.

1.31  "Parties" means CUCBM and the Contractor.

1.32  "Party" means either of the Parties.

1.33 "Operator" means the entity responsible for the performance of the CBM
Operations under the Contract.

1.34 "Subcontractor" means an entity which provides the Operator with goods or
services for the purpose of the Contract.

1.35 "Third Party" means any individual or entity except CUCBM, the Contractor
and any of their Affiliates.

1.36 "Chinese Personnel" means any citizen of the People's Republic of China,
including CUCBM's personnel and Chinese citizens employed by the Contractor
and/or the Subcontractor(s), involved in Coalbed Methane Operations under the
Contract.

1.37 "Expatriate Employee" means any person employed by the Contractor,
Subcontractor(s), or CUCBM who is not a citizen of the People's Republic of
China. Overseas Chinese who reside abroad and have the nationality of the
People's Republic of China and other Chinese abroad, when they are employed by
the Contractor, Subcontractor(s) or CUCBM, shall also be deemed to be Expatriate
Employees within the scope of the Contract.

1.38  "Affiliate" means in respect of the Contractor:

                                       5
<PAGE>

      (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 CUCBM, any subsidiary, branch, or
      regional corporation of CUCBM and any entity in which CUCBM directly or
      indirectly holds fifty percent (50%) or more of the voting rights carried
      by its share capital.

1.39 "Delivery Point" means a point or points agreed upon by the Parties for the
delivery of CBM or Liquid Hydrocarbon located within or outside the Contract
Area and specified in the Overall Development Program.

1.40 "Department 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 Coalbed Methane industry of the People's Republic of
China.

1.41 "Date of Commencement of the Implementation of the Contract" means the
first day of the month following the month in which the Contractor has received
notification from CUCBM in writing, together with the original certificate, of
the approval of the Contract by the Ministry of Foreign Trade and Economic
Co-operation of the People's Republic of China.

                                       6
<PAGE>

Article 2
Objective of the Contract

2.1 The objective of the Contract is to explore for, develop, produce and sell
Coalbed Methane, or Liquid Hydrocarbons that may exist in the Contract Area.

2.2 The Contractor shall apply appropriate technology and assign competent
experts to perform the Coalbed Methane Operations.

2.3 During the performance of the CBM Operations, the Contractor shall, as far
as practicable and appropriate, train Chinese personnel in accordance with
Article 16 hereof.

2.4 The Contractor shall bear all the exploration costs required for the
Exploration Operations. In the event that any CBM Field is discovered within the
Contract Area, the development costs of such CBM Field shall be borne by the
Parties in proportion to their participating interests: forty percent (40%) by
CUCBM and sixty percent (60%) by the Contractor. In the event that CUCBM opts to
participate at a level less than forty percent (40%) of the participating
interests, or not to participate in the development of the CBM Field, the
Contractor shall bear the remaining development costs necessary for the
development of the CBM Field in accordance with Article 12.1.2 hereof.

2.5 If any CBM Field is discovered within the Contract Area, the CBM and/or
Liquid Hydrocarbons produced therefrom shall be allocated in accordance with
Articles 12 and 13 hereof.

2.6 Nothing contained in the Contract shall be deemed to confer any right on the
Contractor other than those rights expressly granted hereunder.

Article 3
Contract Area

3.1 The Contract Area as of the date of signature of the Contract covers a total
area of two hundred (200) square kilometers, as marked out by the geographic
location and the coordinates of the connecting points of the boundary lines
shown on Annex I attached hereto.

    The said total area of the Contract Area shall be reduced in accordance
    with Articles 4, 5 and 11 hereof.

                                       7
<PAGE>

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

3.3 CUCBM shall obtain and/or shall use its best efforts to assis the Operator
to obtain all necessary governmental licenses, permits and approvals for the
Contract Area with respect to the CBM Operations.

Article 4
Contract Term

4.1 The term of the Contract shall include an exploration period, a development
period and a production period.

4.2 The exploration period, beginning on the Date of Commencement of the
Implementation of the Contract, shall be divided into two (2) phases and shall
consist of three (3) consecutive Contract Years, unless the Contract is sooner
terminated, or the exploration period is extended in accordance with Article 24
hereof and Article 4.3 herein. The two (2) phases shall be as follows:

      the first phase of one and one half (1.5) Contract Years (the first
      Contract Year through the sixth month of the second Contract Year) for
      core testing;

      the second phase of one and one half (1.5) Contract Years (the seventh
      month of the second Contract Year through the third Contract Year) for
      Pilot Development.

4.3 When time is insufficient to complete the Pilot Development work on a CBM
Discovery made shortly before the expiration of the exploration period or when
the time of the Pilot Development work on a CBM Discovery in accordance with the
Pilot Development Work Program approved by JMC as stated in Article 11 hereof
extends beyond the exploration period and/or where there is no transportation or
market access or consuming facilities and/or the Parties have not completed
long-term transportation and sales agreements in respect of the CBM, CBM
Products or Liquid Hydrocarbons, the exploration period as described in Article
4.2 herein shall be extended. The period of extension shall be approved by CUCBM
and which shall be a reasonable period of time, in accordance with international
CBM practice,required to complete the above-mentioned work and for
transportation and market access and consuming facilities to develop and for the
Parties to negotiate longterm transportation and sales agreements in respect of
the, CBM and Liquid Hydrocarbons in order to enable JMC to make a decision on
the commerciality of the said CBM Discovery in accordance with Article 11 hereof
and submits an acceptable Overall Development Program to the Department or Unit,
and until the Department or Unit makes its final decision on the Overall
Development Program.

                                       8
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4.4 The development period of any CBM Field within the Contract Area shall begin
on the date of approval of the Overall Development Program of the said CBM
Field, and end on the date of the entire completion of the Development
Operations set forth in the Overall Development Program (which may continue
beyond the Date of Commencement of Commercial Production), excluding the time
for carrying out other additional development projects during the production
period in accordance with Article 11.10 hereof.

4.5 The production period of any CBM Field within the Contract Area shall be a
period beginning on the Date of Commencement of commercial production of the
said CBM Field up to the Date of the expiration of the production period as
specified in the Overall Development Program approved. However, the period shall
not go beyond twenty (20) Consecutive Production Years beginning on the Date of
Commencement of Commercial Production of the said CBM Field, unless otherwise
provided in Article 4.6 herein and Article 24 hereof. Under such circumstances
as where the construction of an CBM Field is to be conducted on a large scale,
and the time span required therefore is long, or where separate production of
each of the multiple CBM producing zones of an CBM Field is required, or under
other special circumstances, the production period thereof shall, when it is
necessary, be properly extended with the approval of the Department or Unit.

4.6  Suspension or abandonment of production of a CBM Field.

4.6.1 Suspension of production from a CBM Field within the production period

In the event that the Parties agree to suspend temporarily production from a CBM
Field, which has entered into commercial production, the Production Area covered
by the CBM Field shall be retained within the Contract Area. In no event shall
the period of such retention extend beyond the date of the expiration of the
production period of that CBM Field, unless extended pursuant to Article 24.4
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 the Operator, and shall be decided by JMC
through discussion. With respect to the aforesaid CBM 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 CBM
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 by paying to the
other party its participating interest share of the costs incurred in restoring
such production, but shall have no rights or obligations in respect of such CBM
Field for the production during such solely restored production period.

                                       9
<PAGE>

      In any event, the obligation for abandonment and site restoration shall
rest solely with the Party(s) which participate in the restored production;
which shall indemnify and hold harmless any other non-participating Party from
any costs, expenses or claims arising out of such obligation.

4.6.2 Abandonment of production from a CBM Field within the production period.

4.6.2.1 During the production period, either Party to the Contract may propose
to abandon production from any CBM Field within the Contract Area, provided,
however, that prior written notice shall be given to the other Party to the
Contract. The other Party shall make a response in writing within ninety (90)
days from the date on which the said notice is received. If the other Party also
agrees to abandon production from the said CBM Field, then abandonment costs
shall be paid by the Parties in proportion to their participating interests in
such CBM Field. The Parties shall abandon such CBM Field in accordance with
procedure agreed on by the Parties. From the date on which the abandonment is
completed, the production period of such CBM Field shall be terminated and such
CBM Field shall be excluded from the Contract Area.

4.6.2.2 If the Contractor notifies CUCBM in writing of its decision to abandon
production from a CBM Field, while CUCBM decides not to abandon production from
such CBM Field, then from the date on which the Contractor receives CUCBM's
written response of its aforesaid decision, namely Abandonment Date, all of the
Contractor's rights and obligations under the Contract in respect of the said
CBM Field, including, but not limited to, any obligation with respect to
abandonment and site restoration in respect of such CBM Field shall be
transferred to CUCBM and terminated automatically with respect to Contractor,
provided that the Contractor shall not transfer to CUCBM any of the Contractor's
debts, existing liabilities and obligations in respect of the said CBM Field.
In addition, the Contractor shall undertake and enjoy its respective existing
obligations and rights under the Contract prior to the Abandonment Date. From
the Abandonment Date, the said CBM Field shall be excluded from the Contract
Area.

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

Article 5
Relinquishment of the Contract Area

5.1 The Contractor shall relinquish a portion or portions of the Contract Area
in accordance with the following provisions:

                                       10
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5.1.1 In any of the following cases, the Contractor shall relinquish the
remaining Contract Area, except for any Development Area, a possible or proposed
Development Area and/or Production Area:

(a)   at the expiration of the last phase of the exploration period (including
extensions) as mentioned in Article 4.2 hereof; or

(b)   at the expiration of the said exploration phase if the Contractor
exercises its option under Article 6.3 (b) of the Contract; or

(c) at the expiration of the extended period, in the event that the exploration
period is extended in accordance with the first paragraph of Article 4.3 or
Article 24 hereof. 5.1.2 In the execution of Articles 5.1.1 herein, a Production
Area and/or Development Area or an area proposed by Contractor corresponding to
a CBM Discovery with a possibility of or potential for Pilot Development or
awaiting Pilot Development and/or under a Pilot Development or included in an
Overall Development Program awaiting approval, shall not be regarded as an area
to be relinquished.

5.1.3 At the expiration of its production period of any CBM Field as specified
in Article 4.5 hereof, such CBM Field within the Contract Area shall be excluded
from the Contract Area.

5.2 Within ninety (90) days prior to the date of relinquishment of the Contract
Area, the Contractor shall submit to CUCBM a report on its completed Exploration
Operations on the areas proposed to be relinquished, including a map showing the
proposed areas to be relinquished with the geographic location and the
coordinates of the connecting points of the boundary lines.

5.3 In the exploration period, the Contractor shall bear the fee for CBM
exploration right of the Contract Area paid in accordance with the relevant laws
and regulations of the People's Republic of China. In the development period and
production period, CUCBM and the Contractor shall, in proportion to their
respective participating interests, bear the fee for CBM mining right of the
Development Area and Production Area paid in accordance with relevant laws and
regulations of the People's Republic of China. The fees for CBM exploration and
mining rights shall be paid pursuant to Article 5.2.20 of Annex II hereof.

                                       11
<PAGE>

Article 6
Minimum Exploration Work Commitment
and Expected Minimum Exploration Expenditures

6.1 The Contractor shall begin to perform the Exploration Operations within six
(6) months after the Date of Commencement of the Implementation of the Contract,
unless otherwise agreed upon by the Parties.

6.2 The Contractor shall fulfill the minimum exploration work commitment and
expected minimum exploration expenditures for each phase of the exploration
period in accordance with the following provisions:

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

Drill two (2) Exploration Wells.

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

Drill four (4) Pilot Development wells.

6.2.3 With respect to the minimum exploration work commitment for each phase of
the exploration period committed by the Contractor in accordance with Articles
6.2.1 and 6.2.2 herein, when calculating whether the minimum exploration work
commitment has been fulfilled, the number of Exploration Wells and Pilot
Development wells shall be the basis of such calculation.

6.3 At the expiration of the first phase of the exploration period, the
Contractor has options (a) or (c) and at the expiration of the second phase of
the exploration period options (b) or (c) as follows:

(a)   to enter the next phase and continue exploration; or

(b) to conduct Development Operations and Production Operations only on any CBM
Discoveries in accordance with the procedures under Article 11 hereof provided,
however, that the minimum exploration work commitments up to the date of such
expiration of the said exploration phase have been fulfilled and the areas
specified in Article 5 hereof have been relinquished; or

(c)   to terminate the Contract.

6.4 At the expiration of any phase of the exploration period, if the actual
exploration work fulfilled by the Contractor is less than the minimum
exploration work commitment set forth for the said exploration phase, and if the
Contractor opts to enter the next phase and continue exploration under Article
6.3 (a) herein, the Contractor shall give reasons to CUCBM for the
underfulfillment. The unfulfilled balance of the said phase shall be added to
the minimum exploration work commitment for the next exploration phase.

                                       12
<PAGE>

At any time within the exploration period, if there is any potential CBM
Discovery, JMC shall, at the request of any Party to the Contract, discuss the
possibility of amending the exploration work. Any Exploration Wells or Pilot
Development wells added by any such amendment shall be deducted from and/or
credited against the minimum exploration work commitment.

6.5 Where the Contractor has fulfilled ahead of time the minimum exploration
work commitment for any phase of the exploration period, the duration of such
exploration phase stipulated in Article 4.2 hereof shall not be shortened
thereby, and if the exploration work actually fulfilled by the Contractor
exceeds the minimum exploration work commitment for the said exploration phase,
the excess part shall be deducted from and credited against the minimum
exploration work commitment for the next exploration phase.

6.6 If any addition or deduction is made under Article 6.4 or Article 6.5 herein
in regard to the minimum exploration work commitment for any phase of the
exploration period, the increased or reduced exploration work shall become the
new minimum exploration work commitment for the Contractor to fulfill in the
said phase.

6.7 At the expiration of any phase during the exploration period, if the
exploration work actually fulfilled by the Contractor is less than the minimum
exploration work commitment for such phase or less than the new minimum
exploration work commitment as mentioned in Article 6.6 herein, and if,
regardless of whether the expected minimum exploration expenditures are
fulfilled or not fulfilled, the Contractor opts to terminate the Contract under
Article 6.3 (c) herein, or if the said phase is the last exploration phase, the
Contractor shall, within thirty (30) days from the date of the decision of its
election to terminate the Contract or within thirty (30) days from the date of
the expiration of the exploration period, pay CUCBM only any unfulfilled balance
of the minimum exploration work commitment ( or of the new one ) 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 exploration work
commitment for the exploration period is fulfilled while its expected
corresponding minimum exploration expenditures are not fulfilled, the
unfulfilled part shall be deemed as a saving and shall not be paid to CUCBM.

Article 7
Management Organization and Its Functions

                                       13
<PAGE>

7.1 For the purpose of the proper performance of the CBM Field, the Parties
shall establish a JMC within forty-five (45) days from the Date of Commencement
of the Implementation of the Contract.

7.1.1 CUCBM and the Contractor shall each have the right to appoint an equal
number of representatives (two to five) to form JMC, and each Party to the
Contract shall designate one of its representatives as its chief representative.
The representative of the Operator of the companies comprising the Contractor
shall be the chief representative of the Contractor. Either Party may replace
any of its representatives, or designate another representative as its chief
representative, by a written notice to the other Party, pursuant to Article 8.2
hereof. All the aforesaid representatives shall have the right to present their
views on the proposals at the meetings held by JMC. When a decision is to be
made on any proposal, the chief representative from each Party to the Contract
shall be the spokesman on behalf of the Party to the Contract.

The chairman of JMC shall be the chief representative designated by CUCBM, and
the vice chairman shall be the chief representative designated by the
Contractor. The chairman of JMC shall preside over meetings of JMC. In his
absence, one representative present at the meeting from CUCBM shall be
designated to act as the chairman of the meeting. In the absence of the vice
chairman of JMC, one representative present at the meeting from the Contractor
shall be designated to act as the vice chairman of the meeting. The Parties may,
according to need, designate a reasonable number of advisers who may attend, but
shall not be entitled to vote at JMC meetings.

7.1.2 A regular meeting of JMC shall be held at least once a Calendar Quarter,
and other meetings, if necessary, may be held at any time at the request of any
Party to the Contract, upon giving reasonable notice to the other Party of the
date, time and location of the meeting and the items to be discussed.

7.2   The Parties shall empower JMC to:

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

7.2.2 Determine the potential commerciality of each Coalbed Methane Discovery
that has been made in accordance with the Operator's Pilot Development report
and report its decision to CUCBM for confirmation;

7.2.3 Review and adopt the Overall Development Program and budget for each CBM
Field and the amendments to the budget;

7.2.4 Approve or confirm the following items of procurement and expenditures:

(a)   approve procurement of any item within the budget with a unit price
exceeding 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);

                                       14
<PAGE>

(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;

7.2.5 Propose and announce the Date of Commencement of Commercial Production of
each CBM Field within the Contract Area;

7.2.6 Determine the type and scope of information and data provided to any Third
Party in accordance with Article 21.5 hereof;

7.2.7 Demarcate boundaries of the Development Area and the Production Area of
each CBM Field;

7.2.8 Review and approve the Joint Operating Agreement in accordance with
Article 8.8 hereof;

7.2.9 Review and approve the insurance program proposed by the Operator and
emergency procedures on safety and environmental protection;

7.2.10Review and approve personnel training programs;

7.2.11Review and approve minutes and/or resolutions of JMC meetings, and
discuss, review, decide and approve other matters that have been proposed by
either Party to the Contract or submitted by the expert groups pursuant to
Article 7.4.2 hereof or by the Operator; and

7.2.12 Review and examine matters required to be submitted to relevant
authorities of the Chinese Government and/or CUCBM for approval or confirmation.

7.3 Decisions of JMC shall be made unanimously through consultation. All
decisions made unanimously shall be deemed as formal decisions and shall be
equally binding upon the Parties. When matters upon which agreement cannot be
reached arise, the Parties may convene another meeting in an attempt to find a
new solution thereto based on the principle of mutual benefit.

7.3.1 During the exploration period, and any extension thereof, the parties
shall endeavor to reach agreement through consultation on exploration programs
and annual exploration Work Pro- grams. If the Parties fail to reach agreement
through consultation within thirty (30) days of commencement of the
consultation, the Contractor's proposal shall prevail, provided that such
proposal is not in conflict with the relevant provisions in Articles 4, 5 and 6
hereof.

                                       15
<PAGE>

7.3.2 If it is considered by the chairman and/or the vice chairman or their
nominees that a matter requires urgent handling or may be decided without
convening a meeting, JMC may make decisions through 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 (1) secretary shall be appointed by each of the Parties. The
secretaries shall not be members of JMC, but may attend meetings of JMC as
observers. The duties of the secretariat are as follows:

(a)   to keep minutes of meetings;

(b)   to prepare summaries of the resolutions for JMC meetings;

(c)   to draft and transmit notices of meetings; and

(d) to receive and transmit proposals, reports or plans submitted by the
Operator and/or proposed by any Party to the Contract, that require discussion,
review or approval by JMC.

7.4.2 Expert Groups

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

(a) to discuss and study matters assigned to them by JMC and submitted by the
Operator to JMC for its review and approval and any other matter assigned to
them by JMC and to make constructive suggestions to JMC;

(b) to have access to and observe and investigate the Coalbed Methane Operations
conducted by the Operator without affecting such Operations at its office and
operating sites as work requires and to submit relevant reports to JMC; and

(c)   to attend meetings of JMC as observers at the request of JMC.

                                       16
<PAGE>

7.5 When one of the companies comprising the Contractor acts as the Operator,
CUCBM shall have the right to assign professional representatives to the
Operator's administrative and technical departments which are related to the CBM
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 CUCBM.

The professional representatives shall have access to the centers of research,
design, and data processing related only to the execution of the Contract and to
the operating sites to observe all the activities and study all the information
with respect to the CBM Operations. Whether to provide such access to the
aforesaid centers outside the People's Republic of China shall be decided by
JMC through discussion. If the decision is made, the Operator shall arrange such
access and the Operator shall use all reasonable endeavors to assist the
professional representatives to have access to Third Parties' sites. The work of
professional representatives of CUCBM shall be arranged by the manager(s) of the
departments of the Operator in which professional representatives work.

Professional representatives of CUCBM, except for the professional
representatives in charge of procurement who shall undertake their functions in
accordance with Article 7.6 herein, shall not interfere in the decision making
on relevant matters by departmental manager(s) of the Operator. However, such
professional representatives shall have the right to make proposals and comments
to departmental manager(s) of the Operator or to report directly to CUCBM's
representatives in JMC.

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

7.5.2 The number of professional representatives, which shall be a reasonable
number and consistent with accepted international CBM industry practice and
sound economic practice, shall be decided by JMC through consultations.

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

7.6.1 The procurement department of the Operator shall inform the professional
representatives appointed by CUCBM in charge of procurement of all the items of
procurement and specifications relating thereto.

7.6.2 The Operator shall be subject to Articles 15.1 and 15.3 hereof and reach
agreement through consultation with the professional representatives of CUCBM in
charge of procurement when preparing the procurement plan in accordance with the
Work Program and budget. The professional representatives of CUCBM in charge of
procurement shall work out an inventory listing the equipment and materials
which can be made and provided in China and a list of manufacturers, engineering
and construction companies and enterprises in China which can provide services
and undertake subcontracting work.

                                       17
<PAGE>

7.6.3 Unless otherwise agreed upon by the Parties, the Operator shall, in
general, make procurement by means of calling for bids and shall notify at the
same time manufacturers and enterprises concerned both inside and outside China,
and the work of calling for bids shall be done within the territory of China.

7.6.4 When any procurement is to be made by means of calling for bids, the
manufacturers and enterprises in China applying for bidding which are included
in a list delivered in advance to the Operator by the professional
representatives of CUCBM in charge of procurement shall be invited. The
professional representatives of CUCBM in charge of procurement shall have the
right to take part in the work of calling for bids, including examination of the
list of bidders to be invited, preparing and issuing bidding documents, opening
bids, evaluation of bids, and shall have the right to consult with the Operator
on the determination of award of contracts and to participate in negotiations
for various contracts. The foregoing shall be handled in an expeditious,
efficient and timely manner.

7.6.5 With respect to the items of procurement by means other than calling for
bids, the Operator and the professional representatives of CUCBM in charge of
procurement shall, in accordance with the provisions specified in Article 7.6.2
herein, define those items which are to be procured in the People's Republic of
China and those items which are to be procured abroad.

7.7 All salaries, costs and expenses with respect to the staff members of the
Parties in the subordinate bodies of the JMC established in accordance with
Article 7.4 herein, those with respect to the professional representatives
referred to in Article 7.5 herein, and those with respect to the representatives
of JMC referred to in Article 7.1.1 herein while attending JMC meetings, shall
be paid by the Operator and charged respectively to the exploration costs,
development costs and operating costs in accordance with Annex II- Accounting
Procedure hereto. During the exploration period, all salaries, costs and
expenses with respect to the staff members of CUCBM in the subordinate bodies of
JMC, the CUCBM professional representatives and the CUCBM representatives of JMC
shall be paid by the Operator in accordance with Annex III - Personnel Costs
hereto. All salaries, costs and expenses with respect to the above-mentioned
personnel to be paid and charged during the development period and production
period shall be determined by the Parties through consultation. It is understood
no salary duplication for any individual shall be allowed. In the event any
individual occupies more than one chargeable position, then the higher
applicable salary shall be charged to the Joint Account for the period during
which the higher position is occupied.

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

                                       18
<PAGE>

Article 8
Operator

8.1 The Parties agree that Far East Energy Corporation shall act as the Operator
for the CBM Operations within the Contract Area, unless otherwise stipulated in
Article 8.8 herein and Article 29.4 hereof.

8.2 For the implementation of the Contract, each company comprising the
Contractor shall register with the State Administration for Industry and
Commerce of the People's Republic of China, or if any of such companies is
already registered, such company shall amend its registration to include in the
Contract in accordance with the relevant provisions of the State Administration
for Industry and Commerce. CUCBM shall, at the request of the Contractor,
provide assistance for this purpose.

The person designated by Operator to be in charge of CBM Operations shall have
the full right to represent the Contractor in respect of the performance of the
CBM Operations. The names, positions and resumes of the staff and organization
chart of the Operator shall be submitted in advance to CUCBM and the appointment
of the Operator's senior staff must be subject to the consent of CUCBM and
vice-versa.

8.3   The Operator shall have the following obligations:

8.3.1 To apply appropriate technology and business managerial experience of the
Contractor or its Affiliates to perform the CBM Operations reasonably,
economically and efficiently in accordance with sound international practice.

8.3.2 To prepare Work Programs and budgets related to the CBM Operations and to
carry out the approved Work Programs and budgets.

8.3.3 To be responsible for procurement of installations, equipment, and
supplies and entering into subcontracts and service contracts related to the CBM
Operations, in accordance with the approved Work Programs and budgets and the
applicable provisions of Articles 7.2.4, 7.6 and 10.2 hereof.

8.3.4 To prepare in advance, in accordance with Article 16 hereof, a personnel
training program and budget before the commencement of the Exploration
Operations, Development Operations and Production Operations respectively, and,
in accordance with the said program and budget, to be responsible for preparing
an annual personnel training program and budget and carrying out the annual
program and budget after approval by JMC.

8.3.5 To establish an insurance program, and to enter into and implement the
insurance contracts in accordance with Article 20 hereof.

8.3.6 To issue cash-call notices to all the Parties to the Contract to raise the
required funds based on the approved budgets and in accordance with Article 12
hereof and Annex II - Accounting Procedure hereto.

8.3.7 To maintain complete and accurate accounting records of all the costs and
expenditures of the CBM Operations in accordance with the provisions of An- nex
II - Accounting Procedure hereto and to keep the accounting books secure and in
good order.

8.3.8 To make necessary preparation for regular meetings of JMC, and to submit
in advance to JMC necessary information related to the matters to be reviewed
and approved by JMC.

8.3.9 To inform directly or indirectly all the Subcontractors which render
services for the CBM Operations in China and all the Expatriate Employees of the
Op- erator and of Subcontractors who are engaged in the CBM Operations in Chi-
na that they shall be subject to the laws, decrees, and other rules and
regulations of the People's Republic of China.

8.3.10 To report its work to JMC as provided in Article 7.2 hereof.

8.4 In the course of the performance of the CBM Operations, any direct losses,
arising strictly out of the gross negligence or willful misconduct of the
Operator, (excluding , for so long as the Contractor solely forms the Operator,
personnel specified in Article 1.2 of Annex III-Personnel Costs, hereto) shall
be solely borne by the Operator. Losses arising from any cause other than
strictly out of the gross negligence or willful misconduct of the Operator shall
be borne by the Parties in accordance with their respective participating
interests. The Operator shall make its best efforts in accordance with
international CBM industry practice to include provisions similar to this
Article 8.4 herein in related subcontracts and service contracts.

8.5 In the course of the performance of the CBM Operations, the Operator shall
handle the information, samples or reports in accordance with the following
provisions:

8.5.1 The Operator shall provide CUCBM with various information, samples and
data in accordance with relevant regulations and Annex IV - Data Control hereto.
The ownership of all the information, samples and data shall vest in CUCBM; and
the Operator shall have the right to use and handle such infor- mation, samples
and data in accordance with Annex IV - Data Control hereto. The information and
data shall be reported to CUCBM at the same time that the Operator reports them
to its parent corporation. Upon receipt by the Operator of any report from its
parent corporation concerning such information and data, a copy of such report
shall be furnished to CUCBM as soon as practicable.

8.5.2 The Operator shall furnish CUCBM in a timely manner with reports on
safety, environmental protection and accidents related to the CBM Operations and
with financial reports prepared in accordance with the provisions of Annex II -
Accounting Procedure hereto.

                                       19
<PAGE>

8.5.3 The Operator shall provide the non-operator(s) of the Contractor with
copies of the relevant data and reports reasonably required by non-operator(s)
and referred to in Articles 8.5.1 and 8.5.2 herein.

8.5.4 The Operator shall, at the request of any Party to the Contract, furnish
that Party to the Contract with the following:

8.5.4.1     Procurement plans for purchasing equipment and materials, inquiries,
offers, orders and service contracts;

8.5.4.2 Technical manuals, technical specifications, design criteria, design
documents (including design drawings), construction records and information,
consumption statistics, equipment inventory, and spare parts inventory;

8.5.4.3     Technical investigation and cost analysis reports; and

8.5.4.4 Other information relating to the CBM Operations in the Contract Area
already acquired by the Operator in the performance of the Contract.

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

8.6.1 Minimize the damage and destruction caused by the CBM Operations to
community and ecological environment;

8.6.2 Control blowouts promptly and prevent or avoid waste or loss of CBM
discovered in or produced from the Contract Area;

8.6.3 Prevent land, forests, vegetation, crops, buildings and other
installations from being damaged and destroyed; and

8.6.4 Minimize the danger to personnel safety and health.

8.7   Project Management Team

In any CBM Field within the Contract Area where CUCBM has a participating
interest in the development of the said Field, a project management team
(hereafter referred to as "PMT") shall be established for the development of
such CBM Field in the organization of the Operator within thirty (30) days from
the date of approval of the Overall Development Program for the said Field.

                                       20
<PAGE>

PMT shall comprise those personnel designated by the Parties and the number of
CUCBM's personnel shall be no less than one third (1/3) of the total number of
personnel within PMT. The Contractor shall designate a person acting as the
manager of PMT, and CUCBM shall designate a person acting as the deputy manager
of PMT.

PMT shall be located at the Operator's office within the Chinese territory. The
working location(s) of the members of PMT shall be decided according to the need
of the work.

The specific organization, staffing and working system of PMT and
responsibilities and competence of various positions including those of CUCBM's
personnel assigned to PMT shall be determined by the Parties through
consultation prior to the approval of the Overall Development Program for the
said CBM Field. The PMT shall exist for the period of the development of said
CBM Field.

8.8     Conduct of CBM Operations.

8.8.1 Not later than one year prior to the forecasted date of the full recovery
of development costs and Deemed Interest thereon, ("Cost Recovery Date"), in
accordance with the Overall Development Program for the first CBM Field within
the Contract Area forecasted to recover said costs, the Parties shall commence
good faith negotiations of a Joint Operating Agreement and Organization on the
basis of the terms and conditions of this Contract.
..
8.8.2 It is the intent of the Contractor and CUCBM that effective no later than
said Cost Recovery Date, all CBM Operations within the Contract Area will be
conducted by the Contractor and CUCBM as Operator pursuant to such Joint
Operating Agreement.

8.9 The expenses incurred in the transfer and takeover of the CBM Operations to
CUCBM and Contractor as Operator shall be approved as a budget item and charged
to the operating costs in accordance with Annex II- Accounting Procedure.

8.10 With a view to efficiently conducting Work Programs approved by the JMC,
the Operator shall have the right to use or occupy/and, including to obtain
rights of way, inside or outside the Contract Area, subject to promulgated
Chinese laws and regulations.

                                       21
<PAGE>

Article 9
Assistance Provided by CUCBM

9.1 To enable the Contractor to carry out expeditiously and efficiently the CBM
Operations, CUCBM shall have the obligation to assist the Contractor at its
request to:

9.1.1 Obtain the approvals or permits needed to open accounts with reputable
banks in the PRC;

9.1.2 Go through the formalities of exchanging foreign currencies;

9.1.3 Obtain office space, office supplies, transportation and communication
facili- ties and make arrangements for accommodations as required, at reasonable
rates;

9.1.4 Go through the formalities of Customs;

9.1.5 Obtain entry and exit visas and residence permits for Expatriate Employees
who will come to China for the performance of the Contract and for their
dependents, who will visit them or reside in China and provide assistance for
their transportation and moving as well as medical services and travel in China;

9.1.6 Obtain necessary permission to send abroad, if necessary, documents, data
and samples for analysis or processing during the performance of the CBM
Operations; and

9.1.7 Maintain liaison with central and local governments, and contact and
coordi- nate with departments engaged in fishing, aquatic plants, stock raising,
agriculture, meteorology, ocean shipping, civil aviation, railway,
transportation, electric power communication and services for supply bases, for
relevant matters and otherwise assist the Contractor in obtaining on a timely
basis approvals necessary for the conduct of the CBM Operations under the
Contract;

9.1.8 Lease or use warehouses, yards, terminal facilities, barges, aircrafts,
pipelines and land, etc. in the implementation of the CBM Operations; and

9.1.9 Facilitate the Contractor and Subcontractors' registration in China such
as registration with the State Administration for Industry and Commerce, tax
registration, registration with the Customs, etc.

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

9.3 CUCBM shall, at the request of the Contractor, provide the Contractor with
data and samples, if any, from the Contract Area within CUCBM's and/or its
Affiliates Control, at reasonable rates in accordance with any relevant rules
and regulations and CUCBM shall also assist the Contractor to arrange the
purchase of any other data including but not limited to environmental,
hydrological, topographical and meteorological data at reasonable rates.

                                       22
<PAGE>

9.4 CUCBM shall, at the request of the Contractor, also assist the Contractor
with matters other than those under Articles 9.1, 9.2 and 9.3 herein, including,
but not limited to, the acquisition, at reasonable costs where applicable, of
any rights of way necessary for transportation infrastructure, and the
facilitation or bringing about of the granting of all approvals, permits and
licenses related to the CBM Operations, including the relevant land use rights.

9.5 All expenses incurred in the assistance provided by CUCBM in accordance with
this Article 9 shall be paid by the Contractor and shall be handled in
accordance with the provisions of Annex II-Accounting Procedure hereto.

Article 10
Work Program and Budget

10.1 After the Date of Commencement of the Implementation of the Contract, the
Operator shall propose and submit to JMC the annual Work Program and budget for
the remainder of the same Calendar Year at the first regular meeting of JMC.
Before the fifteenth (15th) of September of each Calendar Year, the Operator
shall complete and submit to JMC for its review an annual Work Program and
budget for the next Calendar Year except as otherwise agreed by CUCBM. JMC shall
either adopt the annual Work Program and budget as submitted or make such
modifications agreed by the Parties. The adopted annual Work Program and budget
shall be submitted to CUCBM for review and approval within one (l) month as of
the date on which they are submitted to JMC. Within fifteen (15) days following
the receipt of the annual Work Program and budget, CUCBM shall notify JMC in
writing of its approval or disapproval or any modifications thereto with its
detailed reasons. If CUCBM requests any modifications to the aforesaid annual
Work Program and budget, the Parties shall promptly hold meetings to make
modifications and any modifications agreed upon by the Parties shall be effected
immediately. In case CUCBM fails to notify JMC in writing of its 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
CUCBM. The Operator shall make its best efforts to perform the CBM Operations in
accordance with the approved annual Work Program and budget. For reviewing Work
Program and budget by JMC, the Operator shall provide to JMC the supporting data
when requested. During the exploration period, the budgets so approved by CUCBM
shall be sufficient to allow the Operator to fulfill the Work Programs including
those Work Programs under Article 7.3.1 hereof and the obligations under the
Contract.

                                       23
<PAGE>

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
the aggregate amount of all such excess expenditures to JMC for confirmation on
a Calendar Quarter basis.

10.2.2 For the efficient performance of the CBM Operations, the Operator may,
without 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 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 Article 10.2.2 herein:

(a) if expenditures or excess expenditures are determined to be reasonable, the
Operator may incur such expenditures or excess expenditures again during the
same Calendar Year, subject to Article 10.2 herein; or

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

                                       24
<PAGE>

Article 11
Determination of Commerciality of CBM

11.1 If any CBM Discovery is made within the Contract Area, the Operator shall
promptly report such discovery to JMC. If JMC or the Contractor makes a decision
that a CBM Discovery is worthy of a Pilot Development, the Operator shall submit
to JMC a Pilot Development Work Program which shall include disposal of any CBM
and/or Liquid Hydrocarbons whether by sale, flaring or otherwise and timetable
for such CBM Discovery as soon as possible. Such Pilot Development Work Program
shall be worked out no later than ninety (90) days from the date of the
aforesaid decision made by JMC or the Contractor. The Pilot Development Work
Program shall, in so far as is practicable, be based on conducting the Pilot
Development work con- tinuously, with a view to commencing operations within one
hundred and eighty (180) days from the date of the aforesaid decision made by
JMC or the Contractor.

11.2 After the approval by JMC of the Pilot Development Work Program referred to
in Article 11.1 herein, the Operator shall carry out the operations as soon as
possible without unreasonable delay in accordance with the timetable set forth
in the approved Pilot Development Work Program.

11.3 Unless otherwise specified in the Pilot Development Work Program, within
one hundred and eighty (180) days after the completion of the Pilot Development,
the Operator shall submit to JMC a detailed Pilot Development report on the
evaluation of the potential commerciality of the CBM Discovery for review and
discussion. Under special circumstances, the above-mentioned period may be
reasonably extended upon agreement of the Parties.

The Pilot Development report shall include the evaluation on geology,
development, engineering and economics, the Maximum Efficient Rate (MER) and the
estimated duration of the production period determined in accordance with the
international CBM industry practice.

11.4 If JMC decides unanimously that a CBM Discovery is non-commercial, at the
request of the Contractor, the corresponding area covered by the CBM Discovery
may be retained in the Contract Area during the exploration period. But if, at
the expiration of the exploration period, JMC unanimously still considers the
said CBM Discovery to be non-commercial, the area covered by the CBM Discovery
shall be excluded from the Contract Area. The preceding shall not apply to a CBM
Field which in the opinion of either Party has potential commercial value but
which has not been developed due to a lack of market, a shortage of consuming
facilities or lack of transportation facilities and/or inability to negotiate
longterm transportation and/or sales agreements.

Prior to the expiration of the exploration period, if any Party considers that a
CBM Discovery which has been determined to be non-commercial needs to be
reappraised because of some favorable factors, the Operator shall work out a new
evaluation report on that CBM Discovery and submit it to JMC for review and
approval.

                                       25
<PAGE>

11.5 If the Contractor, prior to the expiration of the exploration period,
advises JMC in writing that any CBM Discovery is non-commercial, the Contractor
shall be deemed to have waived its rights of participating in the development of
that CBM Field, then, CUCBM shall have the right to solely develop such
potential CBM Field.

11.6 Where the Parties consider a CBM Discovery to be potentially commercial, as
the Operator, the Contractor shall work out the Overall Development Program for
that CBM Field. the Parties shall negotiate to reach an agreement on the
development of the said CBM Field in a manner that shall not interfere
unreasonably with the expansion of coal mining operations in the relevant coal
field. The Overall Development Program and the agreement concerning the
development shall be a supplementary document and an integral part hereof after
they are approved by the Ministry of Foreign Trade and Economic Cooperation
(MOFTEC) of the People's Republic of China and the Department and Unit.

11.7 Longterm CBM and Liquid Hydrocarbons transportation and sales agreements
shall be concluded prior to the determination of commerciality.

11.8 In the event of a CBM Field Straddling a Boundary or of a potentially
commercial CBM Discovery straddling a boundary of the Contract Area, CUCBM shall
organize the Contractor and the neighboring party(ies) involved, which may
include CUCBM and/or it's Affiliates, to work out a unitized or new Overall
Development Program for such Field or Pilot Development work program for such
CBM Discovery. If such area is controlled solely by CUCBM and/or its Affiliates,
then the Contract Area shall be extended to cover the CBM Field with the
approval of Department or Unit.

11.9 If a CBM Discovery without commercial value within the Contract Area and a
CBM Discovery outside the Contract Area can be most economically developed as a
commercial CBM Field by common facilities jointly constructed; or if CBM
Discovery without commercial value within the Contract Area, can be economically
developed as a commercial CBM Field by linking it up with existing facilities
located outside the Contract Area, CUCBM shall organize the Contractor and the
neighboring party(ies) involved, which may include CUCBM and/or its Affiliates,
to work out an equitable agreement for construction or utilization and sharing
the costs relative to said facilities.

11.10 In Article 11 those procedures which reference the Overall Development
Program, shall be applied, by analogy in the following circumstances: additional
development projects referring to the Overall Development Program designed
either to improve the producing capability of the reservoir or to substantially
increase the recoverable reserves therefrom through additional investments. Any
extension of the production period of the CBM Field due to such additional
development projects shall be subject to the related provision of Article 4.5
hereof.

                                       26
<PAGE>

11.11 Notwithstanding the Date of Commencement of Commercial Production or
anything else to the contrary herein, the allocation of the production from a
Pilot Development shall be governed by the principles set forth in Articles 12
and 13 hereof.

Article 12
Financing and Cost Recovery

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

12.1.1 Solely the Contractor shall provide all the exploration costs required
for Exploration Operations. For purpose of the Contract, all costs incurred
during the extended period described in Article 4.3 hereof shall be deemed
exploration costs and shall be provided solely by the Contractor.

12.1.2 The development costs required for Development Operations in each CBM
Field within the Contract Area shall be provided by CUCBM and the Contractor in
proportion to their respective participating interests: forty percent (40%) by
CUCBM and sixty percent (60%) by the Contractor, unless CUCBM applies the
provisions of the second paragraph of this Article 12.1.2 herein.

In the event that CUCBM, at its option, decides not to participate in the
development of a CBM Field or decides to participate in the development of such
CBM Field to an extent of less than forty percent (40%) of the participating
interest, CUCBM shall notify the Contractor in writing of its decision of
non-participation or a specific lesser percentage of the participating interests
before the Operator submits the Pilot Development report to JMC for its review
pursuant to Article 11.43 hereof. In such case, if CUCBM does not participate in
the development of such CBM Field, the development costs therein shall be borne
solely by the Contractor, or in case CUCBM participates in the development of
such CBM Field to an extent of less than forty percent (40%) of the
participating interests, such development costs shall be borne by the Parties in
proportion to their actual respective participating interests.

12.1.3 The operating costs incurred for the performance of the Production
Operations of each CBM Field before the Date of Commencement of Commercial
Production shall be considered as development costs. The operating costs so
incurred after the Date of Com- mencement of Commercial Production shall be paid
respectively by CUCBM and the Contractor in proportion to their participating
interests of the said CBM Field.

12.1.4 The Parties, on each others request, shall cooperate and assist each
other to facilitate the financing of CBM Operations on the best terms and
conditions available. For the purpose of implementation of the Contract, CUCBM
agrees that the Contractor may, when financing, use the entitlement of its share
of production under the Contract as a security for loans, pro- vided that the
Contractor shall advise CUCBM in advance and the loan application therefore
shall be examined by CUCBM, and provided further that the rights and interests
of CUCBM under the Contract shall not be impaired thereby.

                                       27
<PAGE>

12.2 All the costs incurred in the performance of CBM Operations shall be
recovered in accordance with Annex II - Accounting Procedure hereto and the
provisions described as follows:

12.2.1The operating costs for any given Calendar Year actually incurred by CUCBM
and the Contractor in respect of each CBM Field pursuant to Article 12.1.3
herein, shall be recovered in kind by the Parties out of the CBM and Liquid
Hydrocarbons produced from the said CBM Field during that Calendar Year in
accordance with Annex II - Accounting Procedure hereto, after the operating
costs have been converted into a quantity of CBM and Liquid Hydrocarbons on the
basis of the CBM price and Liquid Hydrocarbons price determined in accordance
with Article 14 hereof. Unrecovered operating costs shall be carried forward to
the succeeding (subsequent) Calendar Year(s).

12.2.2 The exploration costs incurred by the Contractor shall be recovered as
follows:

After the Date of Commencement of Commercial Production of a CBM Field within
the Contract Area, the exploration costs incurred by the Contractor in respect
of the Contract Area shall be recovered in kind out of the CBM and Liquid
Hydrocarbons produced from any CBM Field within the Contract Area in accordance
with Article 13.2.2.2 hereof, after the exploration costs have been converted
into a quantity of CBM and Liquid Hydrocarbons based on the CBM price and Liquid
Hydrocarbons price determined in accordance with Article 14 hereof. The
exploration costs shall be recovered without any interest.

If no CBM Field is discovered within the Contract Area, the exploration costs
incurred by the Contractor shall be deemed as its loss. Under no circumstances
shall CUCBM reimburse the Contractor for such loss.

12.2.3 The development costs in respect of each CBM Field incurred by CUCBM and
the Contractor and Deemed Interest thereon shall be recovered as follows:

12.2.3.1 After the Date of Commencement of Commercial Production of any CBM
Field within the Contract Area, the development costs in respect of such CBM
Field incurred by CUCBM and the Contractor and Deemed Interest thereon
calculated in accordance with Article 12.2.3.2 herein shall be recovered in kind
out of the CBM and Liquid Hydrocarbons produced from such CBM Field in
accordance with Article 13.2.2.2 hereof, after the development costs and Deemed
Interest thereon have been converted into a quantity of CBM and Liquid
Hydrocarbons based on the CBM price and Liquid Hydrocarbons price determined in
accordance with Article 14 hereof.

12.2.3.2 Deemed Interest on the development costs incurred by CUCBM and the
Contractor for each CBM Field within the Contract Area shall be calculated at a
fixed annual compound rate of nine percent (9%) from the first day of the month
following the month in which such development costs expended by each Party to
the Contract are actually received in the bank account of the Joint Account

                                       28
<PAGE>

opened by the Operator. The detailed method of such calculation shall be as
provided in Annex II - Accounting Procedure hereto.

12.2.4 Any CBM and Liquid Hydrocarbons extracted and delivered from a CBM Field
before the Date of Commencement of Commercial Production shall be allocated in
accordance with Article 12 and Article 13 hereof.

Article 13
CBM Production and Allocation

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

13.2 The Annual Gross Production of CBM and Liquid Hydrocarbons of each CBM
Field within the Contract Area in each Calendar Year during the production
period shall be allocated in accordance with the following sequence and
proportions:

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

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

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

13.2.2 Seventy percent (70%) of the Annual Gross Production of CBM and Liquid
Hydrocarbons shall be deemed as the "cost recovery CBM and Liquid Hydrocarbons"
and shall be used for payments or for cost recovery in the following sequence:

13.2.2.1 Payment in kind for the operating costs actually incurred but not yet
recovered by the Parties pursuant to Article 12.2.1 hereof based on the price of
the said "cost recovery CBM and Liquid Hydrocarbons" determined in accordance
with Article 14 hereof.

13.2.2.2    The remainder of the "cost recovery CBM and Liquid Hydrocarbons"
shall, after payment for operating costs in accordance with Article 13.2.2.1

                                       29
<PAGE>

herein, be deemed as "investment re- covery CBM and Liquid Hydrocarbons". Such
"investment recovery CBM and Liquid Hydrocarbons" shall be used for the recovery
of the exploration costs in respect of the Contract Area which were incurred and
not yet recovered by the Contractor, and shall be used for the recovery of the
development costs in respect of the CBM Field itself which were incurred and not
yet recovered by CUCBM and the Contractor in accordance with Articles 12.2.2 and
12.2.3 hereof, and Deemed Interest thereon. The method of recovery and the
recovery sequence are as follows:

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

The unrecovered exploration costs shall be carried forward to and recovered from
the "investment recovery CBM and Liquid Hydrocarbons" in succeeding Calendar
Years until fully recovered by the Contractor.

(b) Beginning in the Calendar Year during which the exploration costs incurred
by the Contractor in respect of the Contract Area have been fully recovered, the
remainder of the "investment recovery CBM and Liquid Hydrocarbons" of a CBM
Field shall be used for the simultaneous recovery of the development costs
incurred and not yet recovered respectively by CUCBM and the Contractor and
Deemed Interest thereon in respect of such CBM Field in proportion to their
respective participating interests therein based on the price of such remainder
of the "investment recovery CBM and Liquid Hydrocarbons" determined in
accordance with Article 14 hereof. The unrecovered development costs and Deemed
Interest thereon shall be carried forward to and recovered from the "investment
recovery CBM and Liquid Hydrocarbons" in succeeding Calendar Years until fully
recovered.

(c) During the production period of a CBM Field, costs for an additional
development project incurred pursuant to Article 11.9 hereof and Deemed Interest
thereon shall be recovered together with the unrecovered development costs and
Deemed Interest thereon. If the development costs and Deemed Interest thereon
have been fully recovered, then costs for the said additional development
project and Deemed Interest thereon shall be recovered from the "investment
recovery CBM and Liquid Hydrocarbons" of such CBM Field referred to in Article
13.2.2.2 herein in accordance with the provisions specified in Article 13.2
herein. The unrecovered costs for the additional development project and Deemed
Interest thereon shall be carried forward to and recovered in succeeding
Calendar Years until fully recovered.

(d) After the recovery of a CBM Field's development costs and Deemed Interest
thereon and/or costs for the additional development project and Deemed Interest
thereon from the said CBM Field by the Parties, the remainder of the "investment

                                       30
<PAGE>

recovery CBM and Liquid Hydrocarbons" shall automatically be regarded as part of
the "remainder CBM and Liquid Hydrocarbons" referred to in Article 13.2.3
herein. By the date of expiration of the production period of a CBM Field
pursuant to Article 4.5 hereof, if any development costs and Deemed Interest
thereon and/or costs for the additional development project incurred in respect
of such CBM Field and Deemed Interest thereon have not yet been fully recovered,
then such unrecovered costs and Deemed Interest thereon shall be regarded as a
loss, and the Parties shall bear the loss in proportion to their respective
participating interests.

13.2.3 The remainder of the Annual Gross Production of CBM and Liquid
Hydrocarbons after the allocation referred to in Articles 13.2.1 and 13.2.2
herein shall be deemed as "remainder CBM and Liquid Hydrocarbons". Such
"remainder CBM and Liquid Hydrocarbons" shall be divided into "share CBM and
Liquid Hydrocarbons" of the Chinese side and "allocable remainder CBM and Liquid
Hydrocarbons". The "allocable remainder CBM and Liquid Hydrocarbons" of each CBM
Field in each Calendar Year shall be equal to the "remainder CBM and Liquid
Hydrocarbons" of that Calendar Year multiplied by the factor (X) for each CBM
Field within the Contract Area in that Calendar Year. The factor (X) of each CBM
Field in each Calendar Year shall be determined in accordance with the following
successive incremental tiers on the basis of the Annual Gross Production of CBM
and Liquid Hydrocarbons from such CBM Field during that Calendar Year.

      ----------------------------------------------------------------
            Annual Gross Production       Factors (X) in Percentage
                     of        Applicable to Each
            CBM and Liquid Hydrocarbons   Production Tier of
              From Each CBM Field         Each CBM Field Within
              (Million Cubic Meters)      the Contract Area
      ----------------------------------------------------------------
            equal to or less than 500      Xl = 100 percent (100%)
            over 500 to 800                X2 = 99 percent (99%)
            over 800 to 1,200              X3 = 98 percent (98%)
            over 1,200 to 1,800            X4 = 96 percent (96%)
            over 1,800 to 2,500            X5 = 93 percent (93%)
            over 2,500 to 5,000            X6 = 89 percent (89%)
            over 5,000                     X7 = 85 percent (85%)
      ----------------------------------------------------------------

In the above table, it is assumed that each cubic meter of CBM has a
heating value of thirty-six thousand and nine hundred sixty (36,960) BTU
approximately. On this basis, a metric ton of Liquid Hydrocarbons in general
will have a heating value of forty- three (43) million BTU, or equivalent to

                                       31
<PAGE>

1,164 cubic meters of CBM.  1.0 kilocalorie is equal to 3.97 BTU.
Adjustments will be made if actual heating value exceeds or is less than the
above by ten percent (10%) or more.

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

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

500X1 + 300X2 +400X3 + 600X4 + 700x5 + 564X6
X = ----------------------------------------------------------------------X 100%
                                      3,064

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

500X1 + 300X2 + 400X3 + 600X4 + 700X5 + 2090X6
X = ----------------------------------------------------------------------X 100%
                                      4,590

13.2.4 The "allocable remainder CBM and Liquid Hydrocarbons" of each CBM Field
in each Calendar Year referred to in Article 13.2.3 herein shall be shared by
the Parties in proportion to their respective participating interests in the
development costs, forty percent (40%) for CUCBM and sixty percent (60%) for the
Contractor. In the event that CUCBM does not participate in the development of
an CBM Field within the Contract Area, the Contractor shall obtain one hundred
percent (100%) of the "allocable remainder CBM and Liquid Hydrocarbons" of that
CBM Field. In the event that CUCBM participates to an extent less than forty
percent (40%) in the development of an CBM Field within the Contract Area, the
"allocable remainder CBM and Liquid Hydrocarbons" of such CBM Field in that
Calendar Year shall be shared by the Parties in proportion to their actual
respective participating interests in such CBM Field.

13.3 Pursuant to the method of allocation specified in this Article, the
Contractor may obtain an aggregate amount of CBM and Liquid Hydrocarbons
consisting of the following three categories and shall be subject to Article 1.7
of Annex II.

13.3.1The total amount of CBM and Liquid Hydrocarbons as converted from the

                                       32
<PAGE>

actual operating costs paid by the Contractor in all CBM Fields in proportion to
its participating interests in the development costs stipulated in Article
13.2.2.1 hereof when recovering such costs;

13.3.2 The total amount of the "investment recovery CBM and Liquid Hydrocarbons"
from all CBM Fields due to the Contractor provided for in Article 13.2.2.2
herein; and

13.3.3The total amount of the "allocable remainder CBM and Liquid Hydrocarbons"
of all CBM Fields due to the Contractor in accordance with Article 13.2.4
herein.

Article 14
Quality, Quantity, Price,
and Destination of CBM

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

14.2  Quality of the CBM and Liquid Hydrocarbons.

14.2.1 The quality analysis of CBM and Liquid Hydrocarbons produced from each
CBM Field within the Contract Area shall be undertaken at the Delivery Point.
Such analysis shall be carried out on a sample taken by the General
Administration of Quality Supervision and Quarantine (hereafter 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. Such procedure shall be implemented in
such a manner so as to avoid any unreasonable delay in the production of such
CBM and/or Liquid Hydrocarbons.

14.3  Quantity of the Coalbed Methane and Liquid Hydrocarbons.

14.3.1 The quantity measurement of the CBM and/or Liquid Hydrocarbons produced
from each CBM Field within the Contract Area, when being lifted, shall be made
at a Delivery Point and with measuring devices both to be agreed upon by the
Parties. A relevant measuring organization of the Chinese Government or a
representative agency authorized thereby shall, at appropriate regular
intervals, calibrate all the measuring devices, conduct special testing and
issue certificates of qualification with respect thereto or confirm their
qualification before the measuring devices are put into use. The quality and
quantity of the CBM and/or Liquid Hydrocarbons delivered shall be authenticated
in accordance with the commodity quality certificate and weight certificate
issued by the Bureau and such quality and quantity shall be the basis for the
accounting settlement.

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14.3.2 If any Party to the Contract believes that the CBM or Liquid Hydrocarbons
measuring devices, sampling or analysis are inaccurate, or has any objection to
the results specified in the above mentioned certificates, on-site
investigations, technical exchanges and discussions may be conducted by the
Parties to resolve the issue in a manner satisfactory to the Parties.

14.4  Determination of the Coalbed Methane and/or Liquid Hydrocarbons Price.

14.4.1 The price of various grades of the CBM and Liquid Hydrocarbons shall be
expressed as a FOB price at the Delivery Point. Determination of the CBM and
Liquid Hydrocarbons price shall be based on the actual free market price
received by the Parties; and

a)    shall be determined each Calendar Quarter by CUCBM and each Party
comprising Foreign Contractor individually; and

b)    shall be the volumetrically weighted average of the following components:

      1. In arm's length transactions, the actual price received.

      2. For other than arm's length transactions, the fair market price taking
into account the prevailing market conditions.

The aforesaid price in arm's length transactions in this Article refers to a
free market price at which a seller sells its CBM and/or Liquid Hydrocarbons to
a buyer who is independent of the seller, but not including prices used for
government to government transactions or other fixed or controlled prices which
do not reflect the free market price, exchange or barter transactions.

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

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

14.4.2 Where the CBM and/or Liquid Hydrocarbons produced from each CBM Field
within the Contract Area differs in quality, the prices of such CBM with
different quality shall if practicable be individually determined.

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<PAGE>

14.4.3 The price of the Contractor's share of the CBM and Liquid Hydrocarbons
produced from all the CBM Fields within the Contract Area shall be denominated
in U.S. dollars per cubic meter (based on BTU basis in accordance with Article
13.2.3), and payment made in U.S. dollars.

14.5 Terms of Payment for the Purchased CBM and Liquid Hydrocarbons, Pursuant to
Article 14.6 hereof.

14.5.1 Before the CBM and Liquid Hydrocarbons price is determined, the Parties
through consultation in accordance with the general international practice then
prevailing shall agree upon the time limit for payment.

14.5.2 In case any Party is in default of such payment, such Party shall pay
interest on arrears of the payment, starting from the first day of such default.
The interest rate shall be the thirty-day term London Inter-Bank Offered Rate
(LIBOR) for U.S. dollars quoted by Midland Bank in London at eleven (11:00) a.m.
on the first working day following the due date of payment plus five percent
(5%).

14.6  Destination of the CBM and Liquid Hydrocarbons.

14.6.1 The destination of Contractor's CBM, and Liquid Hydrocarbons obtained
under the Contract shall be at the discretion of the Contractor. The Contractor
shall have the following non-exclusive options:

       (1) to join with CUCBM to market a part or all of their respective shares
of CBM and Liquid Hydrocarbons and to sell such CBM and Liquid Hydrocarbons
jointly to prospective purchasers able to pay in U.S.
Dollars;

       (2) to sell directly its share of the CBM and Liquid Hydrocarbons to the
Chinese users subject to the approval of the relevant government departments if
required;

       (3) to sell its share of  the CBM and Liquid Hydrocarbons to CUCBM
and/or its Affiliates, CUCBM and/or its Affiliates shall pay to the
Contractor in U.S. Dollars in accordance with Article 14.6.5; or

       (4)   any other lawful destinations or buyers.

14.6.2 Transportation costs shall be determined in accordance with Article
14.4.1 herein.

14.6.3 The CBM price or value shall be determined in accordance with this
Article 14 with the objective of the Parties being to produce the CBM at the

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MER and to obtain the best price possible.

14.6.4 Unless otherwise mutually agreed, the CBM Delivery Point shall be the
most economically viable nearby pipeline having available capacity.

14.6.5 For the purpose of encouraging the exploration and development of CBM,
CUCBM and/or its Affiliates will, upon request of Contractor, act as a buyer to
purchase all or part of Contractor's share of CBM and Liquid Hydrocarbons
produced from the Contract Area in accordance with the following provisions.

14.6.5.1 The Parties shall agree upon the volume and rates of delivery of CBM
and Liquid Hydrocarbons by Contractor and to be purchased by CUCBM and/or its
Affiliates.

14.6.5.2 The price of CBM and other essential terms and conditions including but
not limited to Delivery Point and pipeline costs shall be determined pursuant to
the provisions of Article 14 and shall unless otherwise mutually agreed be
agreed upon prior to the determination of commerciality and preparation of the
Overall Development Program.

14.6.5.3 The Purchase of the CBM and Liquid Hydrocarbons produced from the
Contract Area shall be made at the Delivery Point, which unless otherwise
mutually agreed, shall be the most economically viable nearby Natural Gas
pipeline having available capacity.

14.6.5.4 Unless otherwise agreed by the Contractor, payments for CBM and Liquid
Hydrocarbons shall be made in U.S. Dollars in the bank account designated by
Contractor.

14.6.6 In the case that CUCBM and/or its Affiliates have available capacity in
the gas trunklines and/or pipeline infrastructure, once a CBM transportation
contract with reasonable transportation costs determined in accordance with
Article 14.4.1 and with due reference to Chinese CBM industry practice has been
signed by and between CUCBM and/or its Affiliates and Contractor, Contractor
shall be guaranteed access and priority use of such trunkline and/or pipeline
infrastructure and any subsequent CBM or Natural Gas producer shall be subject
to Contractors' guaranteed access and priority use of such trunkline and/or
pipeline infrastructure.

14.6.7 Both Parties understand that the construction of pipelines and related
facilities (the "Pipeline") is required for the purpose of transport CBM from
the Contract Area. The construction can either be included in the Overall
Development Program or be developed as a separate project. Unless otherwise
agreed between the Parties in writing and subject to the applicable laws and
regulations, the Contractor shall have the right to participate in the Pipeline
and to all revenues generated thereof equal to its participating interest

                                       36
<PAGE>

under this Contract. In either event, the decision to construct the Pipeline,
its connection to the economically most viable pipeline and / or buyers, and all
its operations shall be based on the Parties' intention to maximize their
profits under this Contract and the exploitation of the Pipeline.

Article 15
Employment of Personnel and Procurement of Goods and Services

15.1 For the performance of the CBM Operations, the Contractor's procurement of
necessary goods, leasing equipment and signature of subcontracts or other
service contracts shall be subject to relevant regulations. The Contractor shall
give preference to goods, equipment and service, determined to be the most
competitive in terms of price, quality and term of delivery.

15.2 The Contractor may give preference to employ Chinese Personnel in the
performance of the CBM Operations in accordance with relevant regulations. For
this purpose, the Contractor may submit in advance to CUCBM a plan for the
employment of Chinese Personnel listing all the posts and number of the persons
involved. CUCBM shall, at the request of the Contractor and in accordance with
the plan, provide or assist in recruiting Chinese employee candidates for such
employment. For the performance of CBM Operations, the Contractor shall have the
obligation to employ competent personnel. The Contractor shall give preference
in employing the Chinese Personnel who have participated in the training program
provided by the Contractor.

It is agreed between CUCBM and the Contractor that total Chinese Personnel
employment levels, including the costs thereof, for the purpose of conducting
CBM Operations, including training therefore, shall always be consistent with
conducting such operations in an efficient and economic manner in accordance
with good and generally accepted international CBM practices.

All Chinese employees shall sign employment contracts whose terms shall cover
hiring, resignation and dismissal, production and work responsibilities, wages
and bonuses, working hours and holidays, labor insurance and welfare benefits,
labor protection and labor discipline. Such contracts shall include the right to
dismiss such employees in accordance with the Chinese laws and regulations
concerning such employees who do not observe such contract or other rules
applicable to their work.

15.3 The engineering design corporations under or entrusted by CUCBM shall have
the right to participate in the tendering for the master designs and engineering
designs made by the Contractor for the purpose of the implementation of the
Contract.

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<PAGE>

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

Article 16
Training of Chinese Personnel

16.1 The Contractor agrees to provide training for the Chinese Personnel
including workers, technical, economic, managerial, legal and other professional
personnel, in order to improve their technical and/or managerial capabilities
relating to CBM Operations, all in accordance with this Article 16.

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

16.3 The expenses and costs incurred for performing the training program
stipulated in this Article shall be charged to the exploration costs if such
costs are incurred before the date of approval of the Overall Development
Program of the first CBM Field, and shall be charged to the development costs if
such costs are incurred after the date of approval of the Overall Development
Program of the first CBM Field, and before the Date of Commencement of
Commercial Production of the first CBM Field, or shall be charged to the
operating costs if such costs are incurred after the Date of Commencement of
Commercial Production of the first CBM Field.

16.4  In the course of the implementation of the Contract, the Parties may have
scientific and technical cooperation and academic exchange in connection with
the CBM Operations. The relevant provisions concerning the program,
participating personnel and type related to the scientific and technical
cooperation and academic exchange shall be determined by the Parties. The

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<PAGE>

expenses required by the scientific and technical cooperation and academic
exchange (if any) shall be included in the budget specified in Article 16.2
herein and charged to the Joint Account. All inventions, experiments or research
results arising from the said cooperation and academic exchange shall be shared
by and belong to the Parties who, subject to the provisions of Article 21
hereof, shall not disclose them to any Third Party.

16.4.1 In the course of the implementation of the Contract, those scientific
research projects, which are required for the CBM Operations but not carried out
by the Parties, may, with the approval of JMC, be commissioned to, and carried
out by, any Third Party. The Operator shall enter into subcontracts or service
contracts with competent and competitive relevant scientific research
departments. The aforesaid required expenses shall be included in the budget
specified in Article 16.2 herein and charged to the Joint Account. All
inventions and experimental or research results developed from the aforesaid
research projects carried out by a Third Party delegated by the Operator shall
also be shared by and belong to the Parties who, subject to the provisions of
Article 21 hereof, shall not disclose them to any other Third Parties. The
Operator shall endeavor to incorporate the provisions herein in the subcontracts
or service contracts signed with a Third Party.

16.5 Any technology or managerial experience, including proprietary technology,
e.g. patented technology, know-how or other confidential technology that the
Contractor transfers to CUCBM hereunder, shall remain the exclusive property of
the Contractor and also be subject to the confidentiality restrictions of
Article 21 hereof.

16.6 For the purpose of the implementation of this Article 16 - Training of
Chinese Personnel the costs and expenditures incurred by the Contractor annually
for training of Chinese Personnel shall be two thousand ($20,000) U.S. Dollars
during the exploration period and four thousand ($40,000) U.S. Dollars during
the development and production periods unless otherwise agreed by the Parties.
These costs and expenditure shall be charged to the Joint Account.

Article 17
Ownership of Assets and Data

17.1 All assets purchased, installed and constructed under the Work Program and
budget for each CBM Field within the Contract Area shall be owned by CUCBM from
the date on which all the development costs actually incurred by the Contractor
in the development period of such CBM Field have been fully recovered or from
the date on which the production period expires, even though the aforesaid costs
have not been fully recovered. The Operator shall be responsible for the

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<PAGE>

acceptance inspection or testing of the said assets and CUCBM may, as it deems
necessary, send its experts to participate in such acceptance inspection or
testing. In the production period, the Operator may use these aforesaid CUCBM
owned assets free of charge for performing the CBM Operations. Such assets shall
not be used in any operations other than the CBM Operations or any operations by
Third Parties without the consent of the Parties.

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

17.3 The ownership of all data, records, samples, vouchers and other original
data obtained in the course of performing the CBM Operations shall vest in
CUCBM, and the disclosure thereof by CUCBM shall be made in accordance with
Article 21 hereof. However the Contractor shall, subject to any necessary
approval as may be required and Article 21 hereof, have the right to use inside
and outside the People's Republic of China, and keep samples, copies of all
data, records and vouchers for the purposes of the CBM Operations.

17.4 The facilities constructed for the conduct of CBM Operations hereunder,
whether located within or outside the Contract Area, may be used for the common
benefit of any and all CBM Fields within the Contract Area ("Common Facilities")
for so long as any CBM Field in the Contract Area is utilizing any of the Common
Facilities. CUCBM and Contractor shall be entitled to use, free of charge,
excepting Operating Costs, such Common Facilities to the extent required for CBM
Operations, hereunder. Such right of use shall be permitted regardless of
whether or not the costs related to such Common Facilities have been recovered
and regardless of whether or not the production period of the relevant CBM Field
on which the Common Facilities are located has been terminated.

The operating costs of the Common Facilities will be allocated to each CBM Field
in proportion to the total Annual Gross Production of CBM and Liquid
Hydrocarbon, contribution of each CBM Field to the total Annual Gross Production
of CBM and Liquid Hydrocarbons of all the CBM Fields within Contract Area
utilizing such facilities.

Article 18
Accounting, Auditing and Personnel Costs

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<PAGE>

18.1  Accounting

Annex II - Accounting Procedure hereto contains the guidelines for the
Operator to keep accounting books and records and make financial settlements.
The Operator shall keep and settle the accounts for all the financial activities
in respect of the Contract Area and maintain all the accounting books and
records in accordance with Annex II - Accounting Procedure hereto in order to
accurately reflect the exploration costs, development costs with Deemed Interest
thereon and operating costs incurred in the performance of the CBM Operations in
respect of the Contract Area, as well as quantity and monetary value of the
production and allocation of CBM. The Operator shall submit detailed statements
and relevant written reports to JMC and the departments concerned.

18.2  Auditing.

18.2.1 Any non-Operator Party to the Contract shall have the right to audit all
the Operator's Joint Account accounting books and records after the end of each
Calendar Year and shall give the Operator a written notice of the auditing
results. The auditing shall be completed within twenty-four (24) months after
the end of each Calendar Year. In the absence of any written notice of the
exception in the auditing results given by the non-Operator Party within such
period or if the annual Joint Account accounting books and records of the
Operator are not audited by any non-Operator Party within such period, the
Operator's Joint Account accounting books and records shall be deemed correct. A
special auditing of the Operator's Joint Account accounting books and records
may be made due to some special requirements during a Calendar Year.

18.2.2 If the auditing referred to in Article 18.2.1 herein is conducted, the
Operator shall be given thirty (30) day notice prior to the date of commencement
of such auditing. There shall be no impediment to normal CBM Operations during
the period of any audit.

18.2.3 The auditors shall be entitled to access to all relevant Joint Account
records, files and other information and may inspect such sites and facilities
as necessary.

18.2.4 Upon receipt of a notice of the non-Operator Party's exceptions in the
auditing results, the Operator shall use its best efforts to reply in writing
and resolve these matters in due time (no later than sixty (60) days
thereafter).

18.3  Personnel Costs.

18.3.1 The personnel costs mean the remuneration and other related charges paid

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in connection with personnel who are engaged whether temporarily or permanently
in administration, management, accounting, finance, tax, employee relations,
procurement, legal affairs, computer services, engineering, geology, geophysics,
drilling and Production Operations as well as all other work for the
implementation of the Contract.

18.3.1.1 The salary or wages of personnel of the JMC, of the personnel in the
various subordinate bodies of the JMC, of the professional representatives
referred to in Article 7.5 and of all employees engaged in the performance of
the CBM Operations shall be included in the personnel costs as provided in
Article 18.3.1 herein.

18.3.1.2 Personnel costs, which are classified as the overhead of the superior
management organization pursuant to Article 5.2.18 of Annex II - Accounting
Procedure hereto shall not be included in the personnel costs mentioned herein.

18.3.2 After the Date of Commencement of the Implementation of the Contract, the
Operator shall work out a staffing plan for its organization and a personnel
costs plan with respect thereto (including a plan of personnel costs, such as
basic salary or wage, overseas allowance and area allowance, etc.) before the
beginning of each Calendar Year and submit such plan with the annual Work
Program and budget to JMC for review and examination.

During the exploration period, the Operator shall submit a staffing plan for its
organization and a personnel costs plan with the annual Work Program and budget
to JMC for review and examination.

In the development period and production period, the Operator shall submit a
staffing plan for its organization and a personnel costs plan with the annual
Work Program and budget to JMC for review and approval and the Contractor shall
provide to CUCBM with an itemized plan of personnel costs of the Expatriate
Employees. CUCBM shall bear the obligation of confidentiality to such
information provided by the Contractor.

The Operator shall charge the personnel costs of the Contractor's personnel
actually incurred to the Joint Account.

CUCBM shall have the right to audit the personnel costs charged to the Joint
Account, and when CUCBM acts as the Operator, the Contractor shall also have the
right to audit such personnel costs.

18.3.3 The level of the salaries and wages paid to the representatives appointed
by CUCBM to JMC established in accordance with Article 7.1 hereof, the Chinese
Personnel working in various subordinate bodies of JMC established in accordance
with Article 7.4 hereof, the professional representatives assigned by CUCBM to
all administrative and technical departments of the Operator (Contractor) in

                                       42
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accordance with Article 7.5 hereof and CUCBM's personnel employed by the
Contractor shall be determined pursuant to the provisions of Annex III -
Personnel Costs hereto.

The salaries and wages of the Chinese Personnel other than CUCBM personnel
employed by the Operator shall be determined through consultations and specified
in the individual employment contracts.

The settlement of all charges for the salaries and wages of CUCBM personnel
mentioned in Article 18.3.3 herein, shall be made between CUCBM and the Operator
in accordance with Annex III (Personnel Costs) hereto. CUCBM personnel shall be
responsible for any and all individual income tax due including but not limited
to that due in accordance with the provisions of the individual income tax law
of the People's Republic of China.

18.3.4 The Operator shall withhold the individual income tax of the Expatriate
Employees it is required to withhold and due in accordance with the provisions
of the individual income tax law of the People's Republic of China.

Article 19
Taxation

19.1 Except for the taxes and duties for which the Contractor has the statutory
obligation to file and pay for the CBM Operations, each of the companies
comprising the Contractor shall pay taxes measured by income to the Government
of the People's Republic of China subject to the tax laws and regulations of the
People's Republic of China applicable to the Contract.

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

Article 20
Insurance

20.1 The Operator shall work out an insurance program for the Exploration Opera-
tions 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

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<PAGE>

accordance with such program as approved by JMC before commencement of CBM
Operations within the Contract Area.

Similar provisions shall apply in respect of Development Operations and
Production Operations.

20.2 All of the insurance items as approved in the insurance program shall be
insured with the insurance companies established in accordance with the laws of
the People's Republic of China (hereinafter referred to as insurance companies
in the People's Republic of China) and shall be insured in accordance with the
laws and regulations of the People's Republic of China and on terms and
conditions competitive with the world markets.

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

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

20.4 In any insurance contracts, the deductibles shall be determined by the
Parties through consultation, and losses within the deductible limits shall be
borne by Parties in proportion to their respective participating interests in
the relevant operations.

20.5 When signing subcontracts or lease contracts, the Operator shall endeavor
to require Subcontractors and lessors to insure their risks under the relevant
subcontracts or lease contracts shall be insured with insurance companies in the
People's Republic of China in accordance with the laws and regulations of

                                       44
<PAGE>

the People's Republic of China. The rates, terms and conditions of such
insurance shall be competitive with world markets for similar risks.

20.6 In the course of the CBM Operations, the Parties shall cover separately
personnel accidental death and injury insurance with respect to personnel
assigned by them respectively. The premiums in respect thereof shall be dealt
with in the following way: the premiums for personnel accidental death and
injury insurance with respect to personnel whose costs are charged to the Joint
Account pursuant to the provisions of the Contract shall be charged to the Joint
Account, and those with respect to other personnel shall be borne respectively
by the Parties by which they are assigned.

20.7 Insurance companies owned by or affiliated with any Party to the Contract,
or the Parties themselves, may reinsure relevant insurance companies in the
People's Republic of China who have obtain the insurance contract by reaching an
agreement with such companies if they are interested in covering any part of the
insurance program hereof.

20.8 All motor vehicles used in the CBM Operations shall be insured with
insurance companies in the People's Republic of China in accordance with the
laws and regulations of the People's Republic of China.

20.9 The premiums of insurance in the exploration period and the development
period shall be charged respectively to the exploration costs and development
costs while those in the production period shall be charged to the operating
costs.

20.10 Any claim under the insurances of the agreed insurance program charged to
the Joint Account shall be handled by the Operator and any recovery made from
insurers shall be credited to the Joint Account.

Article 21
Confidentiality

21.1 CUCBM shall, in conformity with applicable laws and regulations of the
Government of the People's Republic of China on confidentiality and by taking
into account international practice, determine in consultation with the
Contractor the confidentiality periods for which the Contract and all documents,
information, data and reports related to the CBM Operations within the Contract
Area shall be kept confidential.

21.2 Without the written consent of the other Party, no Party to the Contract
shall disclose, during such confidentiality periods, the Contract, documents,
information, data and reports referred to in Article 21.1 herein or any other

                                       45
<PAGE>

information regarded by JMC as confidential, to any Third Party except the Third
Parties specified in Article 21.5 herein and to any Affiliate not directly
connected with the implementation of the Contract, and no Party to the Contract
shall otherwise transfer, donate, sell or publish them in any way within the
confidentiality periods. However, CUCBM may furnish the following original data
and information or interpretation thereof with respect to the Contract Area to
the relevant Third Parties:

(a)   original data and information held by CUCBM for over two (2) years;
and

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

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

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

21.3 During the term of the Contract and after the termination of the Contract,
CUCBM shall not disclose to any Third Party any patent, know-how or proprietary
technology transferred to CUCBM by the Contractor without the written consent of
the Contractor except for any technology, the patent of which has expired and
any proprietary and confidential technology which has entered the public domain.

21.4 After the termination of the Contract or after any assignment of rights
and/or obligations of the Contract under Article 22 hereof, the Contractor and
any assignee shall, within the confidentiality periods, continue to be obliged
to keep confidential documents, information, data and reports mentioned in
Article 21.2 herein except for official documents and information published with
the consent of the Parties.

21.5 For the implementation of the Contract, CUCBM and each company comprising
the Contractor may furnish the necessary documents, information, data and
reports to Affiliates related to the CBM Operations. CUCBM and each company
comprising the Contractor may, after review by JMC and CUCBM, furnish the
necessary documents, information, data and reports to the Third Party related to
the CBM Operations. The Third Parties include:

21.5.1Banks, credit institutions, investors or other financial guarantors from
which financing is sought by any Party to the Contract for the implementation of
the Contract;

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21.5.2 Third Parties which provide services for the CBM Operations, including
Subcontractors and other service contractors; and

21.5.3 An assignee or assignees to whom the rights and/or obligations under the
Contract may be assigned.

21.6 Necessary information, documents, data and reports may be furnished by the
Parties or an Affiliate of the Parties related to CBM Operations in accordance
with the laws of their home countries to the governments and stock exchanges,
provided that the Parties report to JMC in advance.

21.7 CUCBM and each company comprising the Contractor when furnishing the
documents, information, data and reports to Third Parties and Affiliates as
mentioned in Article 21.5 herein shall require them to assume the
confidentiality obligations as set forth herein, or shall bear full
responsibility for any violation thereof.

Article 22
Assignment

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

(a) Any company comprising the Contractor who assigns, shall submit to CUCBM
copies of a written agreement on the corresponding part of its rights and/or
obligations to be assigned;

(b) Any company comprising the Contractor who assigns, shall guarantee in
writing to CUCBM the performance of the assigned obligations; and

(c) No such assignment shall interfere with the performance of the CBM
Operations or affect the organizational structure.

22.2 The Contractor may assign part or all of its rights and/or obligations
under the Contract to any Third Party provided that such assignment shall be
agreed by CUCBM in advance and approved by the Ministry of Foreign Trade and
Economic Co-operation of the People's Republic of China. However, if the

                                       47
<PAGE>

conditions offered by CUCBM are the same, CUCBM shall have the right of first
refusal in respect of such assignment to be exercised by CUCBM in writing within
sixty (60) days upon receipt of notice from the Contractor to assign to a Third
Party, unless otherwise agreed upon by the Parties.

22.3 Upon notice to the Contractor, CUCBM may authorize its Affiliates to
implement the Contract, but CUCBM shall remain responsible for the performance
of the Contract.

22.4 With prior consent of the Contractor and subject to the approval of the
Ministry of Foreign Trade and Economic Co-operation of the People's Republic of
China, CUCBM may assign part of its rights and/or obligations hereunder to any
Third Party, provided that such assignment shall not interfere with the
performance of CBM Operations.

Article 23
Environmental Protection and Safety

23.1 In the performance of the CBM Operations, the Operator shall be subject to
the laws, decrees, regulations and standards on environmental protection and
safety promulgated by the Chinese Government and carry out the operations
according to international practice. The Operator shall make its best efforts to
protect farmland, aquatic resources, forest reserves and other natural
resources, and prevent pollution and damage to the atmosphere, rivers, lakes,
groundwater, harbors, other land environments and ecological environment and
secure the safety and health of the operating personnel. The Operator shall use
all reasonable endeavors to eliminate promptly any pollution occurring as a
direct result of and in the performance of the CBM Operations and minimize its
consequences. Economic losses caused by any pollution shall be charged to the
Joint Account, unless otherwise provided in Article 8.4 hereof.

23.2 When competent authorities under the Chinese Government assign a person to
inspect environmental protection, health and safety within the scope of the CBM
Operations according to the laws, decrees, rules and regulations of the People's
Republic of China, the Operator shall provide all necessary facilities and
assistance to enable the inspectors to carry out such inspection smoothly.

23.3 In the performance of the CBM Operations in any fixed fishing net casting
area and /or aquatic breeding area, the Operator shall make prior contact with
the relevant authorities of the Chinese Government provided that upon the
Operator's request, CUCBM shall promptly assist Operator in making such
contacts.

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<PAGE>

23.4 The Operator shall, subject to Article 4.6.2, after the completion of
various CBM Operations, to the extent reasonable and practicable, level or
restore or reclaim the land of the operating sites to the condition existing at
the commencement of implementation of the Contract in accordance with the
relevant rules and regulations.

Article 24
Force Majeure

24.1 No Party to the Contract shall be considered in default of the performance
of any of its obligations hereunder, if any failure to perform or any delay in
performing its obligations is in conformity with all the events described as
follows:

The performance of any obligations hereunder is prevented, hindered or delayed
because of any event or combination of events which could not be foreseen and/or
which is beyond the control of such Party; and

Any such event or combination of events is the direct cause of preventing,
hindering or delaying of such Party's performance of its obligations hereunder;
and

When any such event or combination of events has occurred, such Party has taken
all reasonable actions to overcome any cause that prevents, hinders or delays
performance of its obligations and shall in so far as is practicable continue to
perform its obligations hereunder.

24.2 Notice of any event of force majeure and the conclusion thereof shall
forthwith be given to the other Party by the Party claiming force majeure.

24.3 In the event of force majeure, the Parties shall immediately consult in
order to find an equitable solution thereto and shall use all reasonable
endeavors to minimize the consequences of such force majeure.

24.4 If the CBM Operations in the Contract Area are partially or entirely
suspended as a result of the force majeure referred to in Article 24 herein, the
period of the CBM Operations may be extended by a period corresponding to such
suspension. Within fifteen (15) days following the end of each Calendar Year,
the Operator shall report to JMC in writing on the suspension of the CBM
Operations caused by force majeure, if any, during the preceding Calendar Year.

24.5  Should, however, the force majeure condition continue for a period of

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twenty-four (24) consecutive months, then, in such event, Contractor shall have
the option to terminate this Contract without any further liability.

24.6 The provision of this Article 24 shall not apply in the case of default in
the making of any payment of money under the Contract.

Article 25
Consultation and Arbitration

25.1 The Parties shall make their best efforts to settle amicably through
consultation any dispute arising in connection with the performance or
interpretation, or validity of any provision hereof.

25.2 Any dispute mentioned in Article 25.1 herein that has not been settled
through such consultation within ninety (90) days after the dispute arises may
be referred to arbitration at the request of and by either Party to the
Contract. The arbitration shall be conducted in accordance with the following
provisions:

25.2.1 If agreed upon by the Parties, such dispute shall be referred to
arbitration conducted by the China International Economic and Trade Arbitration
Commission in accordance with the arbitration proceeding rules thereof.

25.2.2 If the Parties fail to reach an agreement on the arbitration arrangement
men- tioned in Article 25.2.1 herein within sixty (60) days after a Party has
requested in writing that a dispute be referred to arbitration, the Parties
shall establish an ad hoc arbitration tribunal to conduct arbitration in
accordance with the following provisions:

25.2.2.1 The ad hoc arbitration tribunal shall consist of three (3) arbitrators.
The Parties shall each appoint an arbitrator and the two (2) arbitrators so
appointed shall designate a third arbitrator. If one of the Parties does not
appoint its arbitrator within sixty (60) days after the first appointment, or if
the two (2) arbitrators once appointed fail to appoint the third within sixty
(60) days after the appointment of the second arbitrator, the relevant
appointment shall be made by the Arbitration Institute of the Stockholm Chamber
of Commerce, Sweden.

25.2.2.2 The third arbitrator shall be a citizen of a country which has formal
diplomatic relations with both the People's Republic of China and the home
country of any of the companies comprising the Contractor, and shall not have
any economic interests or relationship with the Parties.

25.2.2.3  The place of arbitration shall be determined by the Parties through

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<PAGE>

consultations or, failing the agreement of the Parties within sixty (60) days
after the appointment of the third arbitrator, by the majority of arbitrators of
the ad hoc arbitration tribunal.

25.2.2.4 The ad hoc arbitration tribunal shall conduct the arbitration in
accordance with the arbitration rules of the United Nations Commission on
International Trade Law ("UNCITRAL") of 1976, as amended. However, if the
above-mentioned arbitration rules are in conflict with the provisions of this
Article 25, including the provisions concerning appointment of arbitrators, the
provisions of this Article 25 shall prevail.

25.3 Both the Chinese and English languages shall be official languages used in
the arbitrage proceedings. All hearing materials, statements of claim or
defense, awards and the reasons supporting them shall be written in both Chinese
and English.

25.4 Any award of the arbitration tribunal shall be final and binding upon the
Parties.

25.5 The right to arbitrate disputes under the Contract shall survive the
termination of the Contract.

Article 26
Effectiveness and Termination of the Contract

26.1 The Contract shall, after it is signed, be approved by the Ministry of
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 1, hereinabove. CUCBM
shall notify the Contractor of the said approval in writing as soon as possible.

26.2 All annexes to the Contract shall be integral parts of the Contract. If
there is any inconsistency between the provisions of the annexes and the main
body of the Contract, the main body of the Contract shall prevail. All
references to the Contract thereof refer to the main body of the Contract.

26.3 If in the course of implementation of the Contract, the Parties decide
through consultation to make amendment or supplement to any part of the
Contract, a written agreement signed by the authorized representatives of the
Parties shall be required. Such written agreement shall be subject to the
approval of the Ministry of Foreign Trade and Economic Co-operation of the
People's Republic of China should there be any significant modifications hereof.

                                       51
<PAGE>

Such agreement shall be regarded as an integral part of the Contract.

26.4  The Contract shall terminate under any of the following circumstances:

26.4.1 Exercise of the Contractor's election to terminate the Contract under
Article 6.3 (c) hereof; or

26.4.2 Failure to discover any commercial CBM reservoir within the Contract Area
by the expiration of the exploration period or the extended exploration period
granted under Article 4.3 hereof; or

26.4.3 If there is only one (l) commercial CBM Field in production in the
Contract Area, on termination of the production period of such CBM Field; or

26.4.4 If there are two (2) or more commercial CBM Fields and/or CBM Fields in
production in the Contract Area, on termination of the production period of the
CBM Field with the latest termination date; or

26.4.5 At the end of the last day of the thirtieth (30th) Contract Year from the
Date of Commencement of the Implementation of the Contract unless otherwise
extended pursuant to Articles 4.5, 4.6.1, or 24.4 hereof.

26.5 Before the expiration of the first phase of the exploration period as
specified in Article 4.2 hereof, the Contractor shall not propose termination of
the Contract unless the Contractor has fulfilled the minimum exploration work
commitment for the first phase of the exploration period ahead of time.

26.6 If any Party to the Contract commits a material breach of the Contract, the
other Party to the Contract shall have the right to demand that such breach be
remedied within a reasonable period of time. If such breach is not remedied
satisfactorily within such period of time, the complaining Party, arising from
such breach shall have the right to terminate the Contract by giving ninety (90)
days written notice to the other Party. However, no Party shall be deemed to
have committed a material breach in the performance of any provision of the
Contract concerning which there is any dispute between CUCBM and the Contractor,
until such time as all disputes concerning such provision including any
contention that a Party is in material breach, have been settled as provided in
Article 25 hereof. During the time of such dispute, CUCBM and the Contractor
shall continue to carry out their responsibilities pursuant to the Contract,
which shall remain in full force and effect.

Article 27
The Applicable Law

                                       52
<PAGE>

27.1 The validity, interpretation and implementation of the Contract shall be
governed by the laws of the People's Republic of China. Failing the relevant
provisions of the laws of the People's Republic of China for the interpretation
or implementation of the Contract, the principles of the applicable laws widely
used in CBM resources countries acceptable to the Parties shall be applicable.

27.2 If a material change occurs to the Contractor's economic benefits after the
effective date of the Contract due to the promulgation of new laws, decrees,
rules and regulations or any amendment to the applicable laws, decrees, rules
and regulations of the People's Republic of China, the Parties shall consult
promptly and make necessary revisions and adjustments to the relevant provisions
of the Contract in order to maintain the Contractor's normal economic benefits
hereunder.

Article 28
Language of Contract and Working Language

28.1 The text of the Contract, annexes and supplementary documents attached
hereto shall be written in both Chinese and English, and both versions shall
have equal force and effect.

28.2 The Parties agree that both Chinese and English shall be used as working
languages. After the effective date of the Contract, technical documents and
information concerning the CBM Operations hereunder including Work Programs and
Budgets shall, in general, be written in English except for technical documents
and information available previously and received from Third Parties.

Unless otherwise agreed by CUCBM, in consultation with the Contractor, documents
and information in respect of administration shall be written in both Chinese
and English. Forms for production and other reports and records shall be printed
with headings in both Chinese and English and may be filled out in either
Chinese or English.

Article 29
Miscellaneous

29.1 Any notice or written communication provided for in this Contract by any
Party to any of the other Party, including but not limited to any and all
offers, writings, or notices to be given hereunder, shall be made by facsimile

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<PAGE>

or telegram, and confirmed by courier service delivered letter, promptly
transmitted or addressed to the other Party. The date of receipt of a notice of
communication hereunder shall be deemed be five(5) working days after dispatch
of a facsimile or telegram. All notices and communications shall be sent to the
appropriate address set forth below, until the same is changed by notice given
in writing by one Party to the other Party:

            Address of China United CBM Corporation, Ltd.:

            China United Coalbed Methane Corporation, Ltd.
            A88, Anwai Ave., Beijing 100011
            P.R. China
            Tel:  86-10-6429-7887
            Fax:  86-10-6429-1881
            For the attention of:

            Address of the representative of the Contractor:

            Far East Energy Corporation
            400 N. Sam Houston Pkwy.E., Suite 320
            Houston, TX 77060 USA

            Tel.:             1-281-591-5834
            Fax:              1 -281-591-5825
            For the attention B Jackson
                              J. Gondi

29.3 Either Party to the Contract may change its address or representative by a
written notice to the other Party to the Contract.

29.4 Companies comprising the Contractor have the following percentages of
participating interests as of the effective date of the Contract:

(I) Far East Energy Corporation. one hundred percent (100%);

Subject to Article 29.6 herein, the rights and obligations of each company
comprising the Contractor hereunder may, as between themselves, be varied by the
operating agreement between such companies and the Contractor shall advise CUCBM
in writing of any expected variation and, thereafter, of the actual variation.
If such variation leads to the transfer of the operatorship, or the companies
comprising the Contractor have made a decision to change the Operator, the
Operator referred to in Article 8.1 hereof may be replaced after obtaining a
written consent from CUCBM.

29.5  The Contractor shall pay CUCBM a signature fee of fifty thousand U.S.
Dollars (US $50,000) within thirty (30) days after the Date of Commencement of

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<PAGE>

the Implementation of Contract, and fifty thousand U.S. Dollars (US $50,000)
shall be paid on each anniversary date for the next two years. The total number
is one hundred and fifty thousand U.S. Dollars (US $150,000). And such signature
fee shall, in no case, be charged to the Joint Account, nor be deemed
recoverable costs.

29.6 Companies comprising the Contractor signing the Contract with CUCBM agree
to undertake the obligations of the Contractor under the Contract jointly and
severally.

29.7 Whenever alternative interpretations of the Contract are possible subject
to Article 27.1 hereof, CUCBM and the Contractor agree that preference shall be
given to interpretations that will facilitate and promote the intent of the
Contract.

29.8 It is the express and agreed intention of CUCBM and the Contractor that the
terms and conditions of the Contract shall be applied, and that the grant of any
consents or approvals required hereunder shall be given by each Party in a
manner and under conditions which are at all times reasonable and in line with
international CBM industry practice.

29.9 No waiver by any Party of any one or more defaults by another Party in the
performance of the Contract shall operate or be construed as a waiver of any
preceding or future default or defaults by the same Party, whether of a like or
of a different character. Except as expressly provided in this Contract, no
Party shall be deemed to have waived, released or modified any of its rights
under the Contract unless such Party has expressly stated, in writing that it
does waive, release or modify such right.

29.10 Each Party represents and warrants that it has the power, capacity and
authority to enter into this Contract and that this Contract is a legal, valid
and binding obligation enforceable against it or its successor in accordance
with its terms.

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

CHINA UNITED CBM CORPORATION, LTD               FAR EAST ENERGY CORPORATION

By:________________________                     By:______________________

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<PAGE>

Annex I

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

                                      I-1
<PAGE>

Annex II

Accounting Procedure

Contents

      Article

      1     General Provisions

      2     Definitions

      3     Cash Calls

      4     Accounting and Management of Material

      5     Expense Accounting

      6     Recovery of Costs and Deemed Interest

      7     Accounting Reports

      8     Audit

      9     Transfer Procedure of the Joint Account

                                      II-1
<PAGE>

Annex II
Accounting Procedure

Article 1
General Provisions

1.1  This Accounting Procedure is an integral part of the Contract.

The definitions set forth in Article 1 of the Contract are equally applicable to
this Accounting Procedure. The definitions and provisions in this Accounting
Procedure have the same force and effect as those in the Contract. If the
provisions in this Accounting Procedure are in conflict with those in the
Contract, the provisions in the Contract shall prevail.

1.2 Purpose: The purpose of this Accounting Procedure is to establish equitable
control methods for determining charges and credits applicable to the CBM
Operations according to the relevant provisions of the Contract, including the
guidelines for accounting settlements in respect of managing funds and
materials, financing and Accounting Records, and for compiling accounting
statements.

The Operator shall neither gain nor lose in relation to the other Parties to the
Contract by means of the fact that it acts as the Operator.

1.3 Accounting methods:  The double-entry accrual method of accounting shall be
used in this Accounting Procedure.

1.4 Working language: Chinese or both Chinese and English shall be used as the
working languages for the Accounting Records and analyses of financial
conditions in respect of the Joint Account, at the Operator's option.

1.5 Currency for accounting: U.S. dollars shall be the unit of currency for
accounting in the Joint Account and shall be the currency for the investments
and reimbursements under the Contract. In case currencies other than U.S.
Dollars are used to carry out business activities, the relevant bank accounts
and other current asset and current liability accounts shall be kept both in
U.S. dollars and in the currencies used.

1.6 Currency translation: For the purpose of accounting, currency translation
entered into the Joint Account shall be made in accordance with following
guidelines:

The rate of exchange to be used for the conversion into U.S. dollars of
cash calls received in Renminbi shall be the mid-rate of exchange applicable to
any individual or commercial entity quoted by the People's Bank of China at
11:00 a.m. on the date of receipt of such cash in the Operator's bank
account(s). If the relevant date is a non-business day of the People's Bank of
China, the rate quoted on the previous business day by the People's Bank of
China shall apply.

                                      II-2
<PAGE>

All other transactions recorded in the Joint Account which are made in Renminbi
shall be translated into and recorded in U.S. dollars at the rate of exchange as
quoted above on the last business day of the previous month, while those
transactions which are made in currencies other than Renminbi and U.S. Dollars
shall be recorded in U.S. dollars at the actual cost in U.S. dollars of
effecting the transaction.

Neither CUCBM nor the companies comprising the Contractor shall experience an
exchange gain or loss, at the expense or benefit of the other Party.

The Operator shall make its best efforts to minimize any exchange loss.

All gains or losses from currency conversion or translation shall be
recorded in the Joint Account.

1.7 Foreign exchange business: foreign exchange business related to the CBM
Operations shall be made in accordance with relevant regulations for foreign
exchange control and rules for the implementation of such regulations of the
People's Republic of China. These regulations provide that the Contractor can:

1.7.1 Open and maintain bank accounts, both inside and outside of the People's
Republic of China as may be required for CBM Operations agreed upon by CUCBM, as
provided in Article 3 of this Accounting Procedure.

1.7.2 Buy and sell foreign exchange at the official foreign exchange rate
applicable to all and any individual or commercial entity quoted by the State
Administration of Foreign Exchange of the People's Republic of China.

1.7.3 Retain and freely dispose of Renminbi or foreign exchange generated
hereunder, but Contractor must remit back to the People's Republic of China the
amounts needed to pay taxes when they are due and payable according to the tax
laws and regulations of the People's Republic of China, and other obligations
when due and payable in the People's Republic of China.

1.7.4 Remit abroad the foreign exchange proceeds from Contractor's sales of CBM
and Liquid Hydrocarbons sold in the People's Republic of China, but Contractor
must pay taxes when due and payable according to the tax laws and regulations of
the People's Republic of China.

1.7.5 Make disbursements directly from internationally recognized bank accounts
inside or outside of the People's Republic of China for payments of salaries and
wages of Expatriate Employees, purchased materials and various items of labor

                                      II-3
<PAGE>

and service charges from Affiliates of Contractor and foreign Subcontractors to
carry out the CBM Operations as specified in the Contract, after taxes are
withheld according to the provisions of the tax laws and regulations of the
People's Republic of China.

1.7.6 Transfer Renminbi according to the needs of the CBM Operations between
Renminbi currency accounts opened within the People's Republic of China.

1.7.7 Deposit foreign exchange receipts in the Bank of China in the original
currency and such deposits need not be converted to Renminbi until needed.

1.7.8 Remit abroad excess foreign exchange or Renminbi, after reconversion to
foreign exchange, advanced or generated by the investing Parties and not
expended or not to be expended and held by the Contractor for the investing
parties in proportion to the extent of their respective percentage interests in
such excess, provided that CUCBM's share of such excess shall be returned to
CUCBM.

1.8   Accounting Records and Statements

1.8.1 All Accounting Records related to the CBM Operations shall be established
and maintained by the Operator within the territory of the People's Republic of
China.

1.8.2 All vouchers, accounts, books and statements shall be prepared in
accordance with the CBM Operations Accounting System established by CUCBM and
the Contractor through consultation pursuant to the Accounting Regulations of
the People's Republic of China for Enterprises with Foreign Investment.

1.8.3 Annual accounting statements and important accounting books, including
asset records, cash or bank journals, general and subsidiary ledgers, balance
sheets, and annual gross CBM production allocation statements shall be
maintained for the term of the Contract as specified in Article 4.7 of the
Contract, or for any further period if required by the laws and regulations of
the People's Republic of China. Other accounting vouchers and books shall be
kept for fifteen (15) years. Quarterly and monthly statements shall be
maintained for five (5) years.

Upon the expiration of the custody period, a list shall be made of the
accounting files which are to be disposed of. Disposal of the accounting files
shall only be made after the approval of CUCBM. The list of the accounting files
disposed of shall be maintained with the annual accounting statements.

                                      II-4
<PAGE>

Article 2
Definitions

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

2.1 "Accounting Records" means all accounting books, source documents, original
vouchers, approved documents, analytical data, work papers and accounting
statements maintained for the CBM Operations.

2.2 "Accounting System" means the CBM Operations Accounting System prepared by
CUCBM and the Contractor through consultation pursuant to the Accounting
Regulations of the People's Republic of China for Enterprises with Foreign
Investment, specifying the accounting titles to be used by the Operator and
instructions for implementation, forms and contents of various accounting
statements and their preparation methods, including a material classification
section, a definition of Controllable Material, standards for itemizing assets
and the provisions for fixed asset accounting.

2.3 "Material" means materials, tools, facilities, equipment and consumables
procured, leased or otherwise acquired and held for the CBM Operations.

2.4 "Joint Account" means accounts established by the Operator for the
implementation of the Contract to record all debts and credits related to the
CBM Operations.

2.5 "Controllable Material" means the Material referred to in the Accounting
System described in Article 2.2 of this Accounting Procedure.

2.6 "LIBOR" means the seven-day term London Inter-Bank Offered Rate for U.S.
dollars for similar amounts to the sums in question, quoted by Midland Bank in
London at 11:00 a.m. on the first business day of the relevant period. If the
Midland Bank is unable or fails to supply such daily quotation, that of Barclays
Bank International Ltd. will be used, and failing this, National Westminster
Bank PLC's quotation will be used.

2.7 "Investing Party" means any party that is contributing the funds for the CBM
Operations in accordance with its participating interest determined pursuant to
the relevant provisions of the Contract.

                                      II-5
<PAGE>

Article 3
Cash Calls

3.1 Except as otherwise provided in the Contract, the Contractor shall provide
all the exploration costs for the Exploration Operations according to the
provision of Article 12.1.1 of the Contract and all the Investing Parties shall
provide the development costs for the Development Operations in proportion to
their respective participating interests as provided in Article 12.1.2 of the
Contract. In accordance with each approved annual budget, the Operator shall
issue monthly cash call notices to each Investing Party to provide the Operator
with funds to cover the planned expenditures of the next month. Whether or not
the cash call notices for the exploration costs are to be issued shall be at the
option of the Operator.

3.2   Development Operations cash call and default

3.2.1 According to the needs of the CBM Operations, the Operator shall regularly
issue monthly cash call notices within the amount of approved annual budget to
request each Investing Party to respectively make advances as specified by the
Operator. The Operator shall, before twenty (20) days prior to the commencement
of each month, issue cash call notices for the development costs and each
Investing Party shall provide its percentage share of funds according to the
requirement and within the time limit specified in the cash call notice. However
the payment due date specified in the cash call notices shall not be earlier
than the first working day of the month for which cash is called. Each Investing
Party shall transfer its percentage share of funds to the Operator's bank
account(s) established by the Operator particularly for the CBM Operations. Such
bank account(s) will be interest bearing account(s) if possible. Such interest
shall be credited directly to the respective CUCBM and Contractor accounts as
applicable, in accordance with their respective percentage of participating
interest.

Any excessive advances made by each Investing Party for any month shall be
adjusted in the next cash call.

In case that the Operator, owing to the needs of the Development Operations, has
to incur expenditures which are unforeseen in the cash call for any month,
written notices shall be issued to all the Investing Parties who shall finance
their own shares for additional amount within ten (10) days following the
receipt of the written notice.

3.2.2 Interest shall be paid by CUCBM or the companies comprising Contractor
failing to pay its share of funds on the due date specified in the cash call at
LIBOR on the delinquent date plus five percent (5%) on the delinquency of less
than one (1) month and thereafter at the average LIBOR rate ruling throughout
each subsequent month plus five percent (5%), such interest being compounded

                                      II-6
<PAGE>

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. The Operator, or any non-
defaulting party, if the Operator is a defaulting party, on behalf of the non-
defaulting party or parties is entitled to take and sell the defaulting party's
or parties' share of the Annual Gross Production of CBM and Liquid Hydrocarbons
and apply the proceeds of the sale of such CBM and Liquid Hydrocarbons against
all sums due and payable by the defaulting party or parties including accrued
interest. Any excess funds remaining from such proceeds after deduction of all
amounts due, including interest and the costs, charges and expenses incurred by
the Operator, or any non-defaulting party, if the Operator is a defaulting
party, in connection with such sale, shall be paid over to the defaulting party.
Any deficiency remaining due after deducting the proceeds of any such sale shall
remain an obligation of the defaulting party or parties and may be collected as
any other debt.

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

3.3.1 Annual development costs to be shared by each Investing Party as shown in
the approved annual budget.

3.3.2 Amount of funds advanced by each Investing Party at the end of the month
prior to the month in which the cash call notice is prepared and the actual
expenditures and the actual balance (i.e. funds unused) recorded in the Joint
Account, accompanied by the bank statements related to the Joint Account for the
previous month.

3.3.3 Amount of funds to be called from each Investing Party in the month for
which the funds will be used and the estimated amounts of funds to be called in
the following two (2) months.

3.3.4 The date when funds are to be provided, the amount of funds, currency,
account number, name of the account, the recipient bank and its address.

3.3.5 Where applicable, the participating Parties shall pay their participating
interest share of such invoice, via wire transfer, within thirty (30) days of
receipt of such invoice ("due date"). In the event a Party falls to pay such
participating interest share by such due date, the Parties shall be subject to
the provisions of Article 3.2.2 of the Annex II and the other provision of the
Contract.

                                      II-7
<PAGE>

3.4 On the Date of Commencement of Commercial Production of any CBM Field, any
development investment for the CBM Field advanced by the Investing Parties which
has not been expended or will not be expended shall be returned to each of the
Investing Parties in proportion to its share.

3.5 In accordance with Article 12.1.3 of the Contract, the cash for the
Production Operations undertaken by the Parties jointly and approved by JMC
shall be provided by all the Investing Parties to the Contract in proportion to
their respective participating interests in the development costs and shall bear
no Deemed Interest. Based on the needs of the Production Operations, the
Operator may make timely adjustment of the amount of cash to be provided by all
the Investing Parties to the Contract. The Operator shall issue quarterly cash
call notices to call for cash for the Production Operations. In proportion to
its share, each Investing Party shall respectively provide advances on a monthly
basis in accordance with the requirement and within the time limit specified in
the cash call notice of the current month. The default provision specified in
Article 3.2 of this Accounting Procedure shall also apply to any cash calls for
Production Operations.

In case that the Operator, owing to the needs of the Production Operations, has
to incur expenditures which are unforeseen in the cash call for any month,
written notices with explanations shall be issued to all the Investing Parties
who shall finance their own shares for additional amount within ten (10) days
following the receipt of such written notice.

3.6   According to the requirement of the CBM Operations, the Operator shall
indicate in any cash call notice the U.S. dollar equivalent of the total cash
called. The Operator shall also specify the amounts of Renminbi and U.S.
dollars required as estimated to make payment. CUCBM shall provide the
advance of its own share either in Renminbi or in Renminbi and U.S. dollars
with respect to the amounts called for by the Operator, but CUCBM's funding
in Renminbi shall not exceed the total amount of Renminbi as indicated and
called for by the Operator in any cash call notice. The Contractor shall provide
the advance of its own share in U. S. dollars.

3.7   Provisions for recording the sources of funds:

3.7.1 Funds for exploration costs, development costs and operating costs, when
received, pursuant to each cash call shall be credited against the relevant
accounts of the Investing Parties in the Joint Account.

3.7.2 In case CUCBM decides to develop a CBM Field for its sole account pursuant
to Article 11.5 of the Contract, or undertakes any other operation for its sole
account, the funds required shall be financed and accounted for separately.

                                      II-8
<PAGE>

3.7.3 In accordance with Article 6.3 of the Contract, if the Contractor opts to
terminate the Contract as provided in Article 6.3 (c) of the Contract or if the
phase is the last phase of the exploration period, the Contractor shall, within
thirty (30) days from the date of its decision to terminate the Contract or
thirty (30) days from the date of the expiration of the exploration period, pay
CUCBM in U.S. dollars the unfulfilled balance of the minimum exploration work
commitment (or of the new commitment) for the exploration phase, converted into
cash. The detailed method by which the unfulfilled balance of the minimum
exploration work commitment is converted into U.S. dollars is that the actual
average unit cost of the last portion of a seismic line shot under the Contract
or of the last well drilled, excluding the abnormal drilling costs such as those
of the sidetrack, fishing, severe loss of mud circulation, etc. (i.e. U.S.
Dollars/kilometer of seismic line; U.S. Dollars/meter of drilling footage), is
multiplied by the unfulfilled amount of the minimum exploration work commitment.
The formula for such calculation is as follows:

      I = Ac X Pu in which:

      I = converted cash amount of the unfulfilled balance of the minimum
exploration work commitment;

      Ac = actual average unit cost of the last portion of a seismic line shot
or of the last well drilled; and

      Pu = the unfulfilled amount of the minimum exploration work commitment
(The unfulfilled amount of the seismic line shot is the difference between the
kilometers specified in Article 6.2 of the Contract and actual kilometers shot.
The unfulfilled footage of a unfulfilled Wildcat is the designed total depth of
the Wildcat specified in accordance with Article 6.2 of the Contract).

Article 4
Accounting and Management of Material

4.1   Procurement of Material:

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

                                      II-9
<PAGE>

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
CBM Operations:

      (1)   New Material:

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

      (2)   Used Material:

        (a) Material, which is in sound and serviceable condition and is
suitable for reuse without reconditioning shall be priced by the Parties, and
the ceiling price shall not exceed seventy-five percent (75%) of the current
market value of new Material.

        (b) Material which, after being reconditioned, will be further
serviceable for its original function shall be priced by the Parties, and the
ceiling price shall not exceed fifty percent (50%) of the current value of new
Material.

        (c) Used Material which cannot be classified as (a) or (b) above shall
be priced by the Parties through discussions at a value commensurate with its
use.

        (d) If the Operator wishes to use a method other than the above for
pricing used Material, such other method shall be agreed upon in advance by the
Parties through consultations.

4.4 Price determination and leasing expense calculation method for properties
purchased or leased from other contract areas:

The Operator may lease equipment and facilities and purchase Material and
fuel from other contract areas within the People's Republic of China. The
Operator shall charge the leasing expenses or purchase price as agreed upon

                                     II-10
<PAGE>

by the Operator and its suppliers. Such leasing expenses or purchase prices
shall not exceed those currently prevailing in similar contract areas.

4.5 For certain Material which is in short supply in the world markets and
difficult to procure at published market prices and the lack of which will
hinder normal operations, the Operator may, after the approval of JMC, purchase
such Material urgently needed by the CBM Operations and charge actual purchase
costs to the Joint Account.

4.6   Disposal of Equipment and Material:

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 exploration costs,
development costs or operating costs at actual purchase prices (as defined in
Article 4.2 herein) and on the basis of the use of Material. Should such
Material subsequently be used for other purposes, the relevant charges shall be
transferred from the original cost accounts to the appropriate cost accounts.

Material for general use which is first stored in warehouses shall be subject to
inventory control procedures. The quantities, unit prices and total value shall
be recorded for Material in inventory using perpetual inventory methods.
Material in stock shall be priced at purchase costs and the Operator, upon the
commencement of or during the Contract period, has the freedom to choose one of
the following pricing methods such as FIFO, weighted average method and moving
average method, etc. for Material to be transferred out of the stock. Accounts
for inventory Material shall be regarded as exploration costs development costs
or operating costs and shall be recovered in accordance with Article 12.2 of the
Contract.

At the request of any non-Operator, the Operator shall furnish to the
non-Operator a detailed statement of Controllable Material.

The Operator shall conduct physical inventory of Material in warehouses
prior to the annual final accounts or whenever depending upon the actual
situation.

                                     II-11
<PAGE>

The Operator shall give a written notice to JMC sixty (60) days before the date
of proposed physical inventory in order to allow time for participation by the
non-Operators and failure to participate by any non-Operator in the physical
inventory shall be regarded as approval of the physical inventory conducted by
the Operator.

If any gain or loss is found as a result of the physical inventory, the Operator
shall compile a detailed statement of the gain or loss and attach to it an
explanation for the gain or loss, which shall be submitted to JMC for
examination and approval.

4.8 In accordance with Article 17.1 of the Contract, the Operator shall exercise
strict control over the fixed assets of the CBM Operations and set up accounts
and record cards, and shall conduct physical inventory of the fixed assets at
the year-end or whenever depending upon the actual situation to make sure that
the book records, card records and physical fixed assets are in conformity. In
case that any damage or loss arises to the fixed assets, the Operator shall
determine the reasons and submit them to JMC for examination and approval.

Article 5
Expense Accounting

5.1   Rules for accounting

5.1.1 According to the provisions of Articles 12.1.1, 12.1.2 and 12.1.3 of the
Contract, all development costs and operating costs of the Parties as well as
the Contractor's exploration costs shall be recorded in the Joint Account
separately.

      The Operator shall establish and maintain three separate accounts, namely:

5.1.1.1     exploration costs account,

5.1.1.2     development costs account

5.1.1.3     Operating costs account

in which all charges and costs as classified pursuant to Articles 5.2 and
5.3 of this Accounting Procedure shall be reflected.

5.1.2 If either CUCBM or the Contractor, in accordance with Article 11.5, or
Article 12.1.2 of the Contract, makes the decision to develop a CBM Field for
its sole account or to undertake any other operation for its own account, the

                                     II-12
<PAGE>

relevant costs shall be accounted for  separately.

5.1.3 All items related to the CBM Operations such as discounts, deductions,
allowances, interest income, gains from various services, indemnities from
insurance and other miscellaneous income by the Operator, shall be credited to
the relevant costs accounts.

5.1.4 All direct services or research work (including personnel) provided by the
superior organizations or Affiliates of CUCBM or of the Contractor and by the
Third Parties for the CBM Operations shall be subject to the advance work order
procedures on the basis of the annual budget or of the approval by JMC and shall
be charged to the Joint Account after verification of relevant invoices.

The work order procedure shall be established through consultations at JMC
meetings by both Parties within three (3) months as of the Date of Commencement
of the Implementation of the Contract. The rates charged for direct services or
research work (including personnel cost) provided by the superior organization
or Affiliates of CUCBM or of the Contractor shall be competitive when compared
with the rates of similar services furnished by the Third Parties. The Operator
shall, in accordance with Article 15 of the Contract, give priority to use
direct services of research work (including personnel) provided by CUCBM.

5.2   Cost items:

The following items shall be chargeable to the Joint Account at Operator's net
cost.

5.2.1 Subcontractor charges:

The charges paid to Subcontractors in accordance with contracts signed between
the Operator and Subcontractors.

5.2.2 Personnel expenses:

The contents and control of personnel expenses shall be as stipulated in Article
18.3 of the Contract.

5.2.3 Travel and living expenses:

Travel and living expenses paid according to Article 18 of the Contract to the
personnel involved in the CBM Operations.

5.2.4 Material expenses:

                                     II-13
<PAGE>

Expenses paid in accordance with Article 4 of this Accounting Procedure to
purchase Material for use in the CBM Operations.

5.2.5 Relocation and transportation expenses:

Relocation and transportation expenses for the personnel involved in the CBM
Operations to be relocated into or out of the People's Republic of China and
transferred from job-sites to job-sites within the People's Republic of China.

5.2.6 Maintenance, repair and leasing expenses:

Expenses for maintenance, repair or replacement of the properties used in the
CBM Operations and the leasing expenses paid for leased properties and
equipment.

5.2.7 Insurance premiums:

Necessary net payment made for the insurance of the CBM Operations and related
costs and expenses, including deductibles paid in the event of loss pursuant to
Article 20.4 of the Contract.

5.2.8 Legal expenses:

In order to protect the interests of Parties, all costs or expenses paid for
attorney's fees, litigation or investigation, including expenses in securing
evidences, mediation and settlements. The expenses for handling legal matters
incurred for the interests of any Party to the Contract shall be borne solely by
such Party.

5.2.9 Taxes:

All taxes paid according to the tax laws of the People's Republic of China,
except for the income taxes, value added tax based on production and royalty to
be paid by the companies comprising the Contractor or CUCBM and individual
income tax to be paid by employees and withheld by Operator and other related
costs.

5.2.10Energy expenses:

All costs in respect of fuel, electricity, heat, water or other energy used and
consumed for the CBM Operations.

The costs of CBM and Liquid Hydrocarbons produced and used in the same CBM
Field (provided that the Parties have the same interest in such Fields) within
the Contract Area by the Operator for the performance of the Development
Operations and the Production Operations or for well stimulation or for

                                     II-14
<PAGE>

maintaining the reservoir pressure shall not be charged. However, the costs of
transporting such CBM or Liquid Hydrocarbons to their points of use shall be
charged under this item.

5.2.11 Field office facility charges:

The costs and expenses of establishing, maintaining and operating any offices,
camps or housing facilities necessary for the performance of job-site
operations, including a share of the costs of any office used by staff directing
such operations (calculated by apportioning office costs and expenses on the
basis of space occupied by such staff).

5.2.12      Communication charges:

The costs of acquiring, leasing, installing, operating, repairing and
maintaining communication systems, including radio and microwave facilities
between the Contract Area and the base facilities.

5.2.13      Ecological and environmental protection charges:

The charges for any measures undertaken for the CBM Operations within the
Contract Area as required by relevant statutory regulations formulated by the
authorities concerned or pursuant to the programs agreed by the Parties.

5.2.14      Service charges:

5.2.14.1    Technical service charges:

The charges paid for services, such as rock specimen analysis, CBM or Liquid
Hydrocarbons quality tests, geological evaluation, data processing, design and
engineering, well site geology, drilling supervision, special research programs
and other technical services.

5.2.14.2   General service charges:

Professional consultant charges incurred for the common interests of both
Parties and charges for other services to obtain original data needed for CBM
Operations from outside sources, except legal service.

5.2.14.3   CUCBM's assistance charges:

(a) The charges for the assistance provided by CUCBM for the Contractor to carry
out the CBM Operations in accordance with Article 9 of the Contract.

                                     II-15
<PAGE>

(b) For all assistance to be provided by the head office organization of CUCBM
to the Contractor in the course of the Exploration, CUCBM shall charge an
administrative fee of twenty thousand U.S. dollars (US $20,000) for each
Calendar Year. If the whole process of the Exploration Operations conducted for
any CBM Field in any Calendar Year is less than twelve (12) calendar months, the
administrative fee for such Calendar Year shall be calculated in proportion to
the actual calendar month(s) spent thereon (if the actual time spent thereon in
any calendar month is less than thirty (30) days, the calculation shall be made
based on a full calendar month). The aforesaid administrative fee shall be paid
respectively on June 1st and December 1st each Calendar Year, with ten thousand
and five hundred U.S. Dollars (US $10,000) for each time.

(c) For all assistance to be provided by the head office organization of CUCBM
to the Contractor in the course of the Development Operations and the Production
Operations before the implementation of a Joint Operating Agreement by the
Parties, CUCBM shall charge an administrative fee of forty thousand U.S. dollars
(U.S. $40,000) for each Calendar Year. If the whole process of the Development
Operations conducted for any CBM Field in any Calendar Year is less than twelve
(12) calendar months, the administrative fee for such Calendar Year shall be
calculated in proportion to the actual calendar month(s) spent thereon (if the
actual time spent thereon in any calendar month is less than thirty (30) days,
the calculation shall be made based on a full calendar month). The aforesaid
administrative fee shall be paid respectively on June 1st and December 1st each
Calendar Year, with twenty thousand U.S. Dollars (U.S. $20,000) for each time.

(d) No additional assistance charges shall be due for the assistance to be
provided by CUCBM per Article 9 unless agreed in writing by the Parties. For the
avoidance of doubt, this limitation does not relate to the reasonable, out of
the pocket expenses (such as meals, transportation, accommodation and other
travel expenses), approved in advance by the Parties and evidenced by
appropriate receipts, CUCBM incurs in the process of providing the assistance.

5.2.15      Damages and losses to the assets:

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

5.2.16      Personnel training costs:

                                     II-16
<PAGE>

Costs incurred for personnel training pursuant to Article 16 of the Contract-
Training of Chinese Personnel.

5.2.17      Miscellaneous expenses:

Any reasonable miscellaneous expenses needed for the CBM Operations excluded in
the above items of expenses, such as bank charges, books, stationery and
conference expenses as well as other reasonable expenses.

5.2.18      Overhead:

Overhead refers to the indirect costs for the managerial and operational
services provided by the Operator's superior management organizations for the
CBM Operations, including management, administration, accounting, treasury,
inter company audit, tax, legal matters, procurement, employee relations,
financing, the collection of economic data and costs for general consultation on
such planning, design, research and operational activities, etc. to the extent
that these are not chargeable under Article 5.1.4 of this Accounting Procedure.
The overhead for the Exploration Operations shall be calculated in accordance
with the following tiers and based on the sum of the total actual costs from
Article 5.2.1 through Article 5.2.17 and Article 5.2.18 of this Accounting
Procedure, but not including CUCBM's assistance charges under Article 5.2.14.3
of this Accounting Procedure.

Direct Costs for Exploration                    Percentage Rate
      (U.S. $/Year)                                    %

      First Tier: 0 to 5,000,000                      5%

      Second Tier: 5,000,001 to 15,000,000            3%

      Third Tier: 15,000,001 to 24,000,000            2%

      Fourth Tier: over 24,000,000                    1%

      For example, the overheads for direct costs of US $ 25,000,000 will be:

      5% of US$ 5,000,000                             US$ 250,000
      3% of US$ 15,000,000 minus US$ 5,000,000        US$ 300,000
      2% of US$ 24,000,000 minus US$ 15,000,000       US$ 180,000
      1% of US$ 25,000,000 minus US$ 24,000,000       US$ 10,000

      Totals                                          US$740,000

                                     II-17
<PAGE>

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

When the first budget is prepared for the Calendar Year of Commencement of
Commercial Production from each CBM Field, the overhead rates for production
period and its related calculation method shall be agreed upon through
discussions between the Parties.

The costs and expenses for offices established by the Operator within the
Chinese territory which are not specifically dedicated to the CBM Operations
shall be allocated by the Operator to the CBM Operations within the Contract
Area or to other beneficiary Parties, including the Contractor, on the basis of
actual service time recorded, or may be allocated by other methods agreed upon
by the Parties. The amount of allocation charged to the CBM Operations within
the Contract Area shall be included in the cost item of Article 5.2.18 of this
Accounting Procedure. The costs and expenses incurred by the offices established
by the Operator and its superior organizations outside the Chinese territory
(excluding costs and expenses chargeable under Article 5.1.4 of this Accounting
Procedure) has been included in the overhead and shall not be again charged to
the Joint Account.

On the last working day of each month, the Operator shall make provision into
the Joint Account for the overhead fees for the current month, calculated on the
basis of cumulative actual expenditure for the Calendar Year to that date and
payment shall be made from the Joint Account on the last working day of the
following month. The final adjustment of the overhead shall be made at the end
of the Calendar Year in respect to any difference between the actual payment by
the Joint Account and the total overhead for that Calendar Year calculated on
the annual cumulative actual investment expenditure at the end of such year. Any
excess shall be refunded and deficiencies made good.

5.2.19 General and administrative expenses:

General and administrative expenses refer to the administrative expenses
incurred for any offices established by the Operator within the Chinese
territory and for JMC and its subordinate bodies for the performance of the CBM
Operations not otherwise directly chargeable pursuant to Article 5.2 of the
Accounting Procedure in accordance with the provisions of the Contract. Such
expenses shall be classified according to minor accounts.

5.2.20 The fees for exploration and mining rights:

                                     II-18
<PAGE>

The fees for exploration and mining rights refer to the two sorts of fees which
CUCBM pays the relevant department of State for owning CBM exploration
right of the Contract Area and CBM mining right of the Development Area within
the Contract Area, and which shall be respectively considered as the exploration
costs and development costs (or operating costs). The Contractor shall transfer
the specified fee to the bank account of CUCBM within thirty days from the date
on receipt of the written notice for the payments of the exploration right fee
or mining right fee from CUCBM.

5.2.21 The fees for land use rights and relocation compensation:

The fees for the usage of the land and any compensation payable to occupants of
the land within the Contract Area to be used and occupied for the CBM Operations
shall be charged by the Operator to the Joint Account during the exploration
phase, the development phase and the production phase.

5.3 Except as otherwise provided in this Accounting Procedure, the allocation of
common costs and expenses for each item of operations shall be charged in
proportion to the exploration costs, development costs and operating costs
actually incurred in each month.

5.4 With respect to the expenditures or excess expenditures as mentioned in
Article 10.2.4 (b) of the Contract which are determined by JMC to be
unreasonable, JMC will form a joint team for further investigation to determine
whether they shall be charged to the Joint Account or shall be borne by the
Operator alone before the year-end final closing of accounts.

Article 6
Recovery of Costs and Deemed Interest

6.1 According to the provisions of Article 12.2.2 of the Contract, the
exploration costs shall bear no interest.

6.2 The calculation of Deemed Interest on the development costs:

Deemed Interest on the development costs shall be calculated at the specified
rate from the first day after the month in which the development funds of any of
the Investing Parties have been received in the Operator's bank account for the
Joint Account in accordance with the provisions of Article 12.2.3.2 of the
Contract.

                                     II-19
<PAGE>

There are three hundred and sixty-five (365) days in each Calendar Year for the
interest calculation and the interest shall be compounded once each Calendar
Year on December 31st based on actual number of days eligible for the interest.

      Worked Example
      Development costs-- US $100 received on tenth of March
      US $100 received on twentieth of March
      The aggregate amount received in March is US $200.

Deemed interest shall be calculated from the first of April through the end of
such Calendar Year with a total number of two hundred and seventy-five (275)
days.

                                              275
      Formula: Interest = US $200 X 9% X -------------
                                              365

At the end of the year interest is added to the capital and interest thereon
accrues until cost recovery is fully achieved, "i. e.," interest is compounded
at year end.

6.3 Recovery of exploration costs, development costs with Deemed Interest
thereon and operating costs.

6.3.1 In accordance with the provisions of Article 12.2.2 of the Contract, the
exploration costs shall be recovered from the CBM Fields within the Contract
Area which have been developed and are producing and in which development the
Contractor has participated.

6.3.2 In accordance with the provisions of Articles 12.2.1, 12.2.3.1 and
12.2.3.2 of the Contract, the principal of development costs and Deemed Interest
thereon and operating costs, respectively, of each CBM Field shall be recovered
only from the production of each respective CBM Field.

6.3.3 As at the date of completing sale of CBM, or Liquid Hydrocarbons the
Operator shall make separate records into Joint Account for the appropriate
reimbursement of the principal of the exploration costs, development costs with
Deemed Interest thereon and operating costs respectively in accordance with
Article 12.2 of the Contract. Written notices shall be sent by the Operator to
CUCBM and the Investing Parties at the same time.

6.4 In accordance with the provisions of Article 18.1 of the Contract, the
Operator shall establish complete books for recording the volume and value of
CBM and/or Liquid Hydrocarbons, precisely reflecting the production and the

                                     II-20
<PAGE>

disposal of the CBM and/or Liquid Hydrocarbons within the Contract term.

6.5 CBM and Liquid production in each Calendar Year for each CBM Field within
the production period shall be accounted according to the allocation proportions
specified in Article 13 of the Contract and at the CBM and Liquid Hydrocarbons
price determined pursuant to Article 14.4 of the Contract.

Article 7
Accounting Reports

7.1 The Operator shall provide relevant accounting reports and statements based
on the Accounting System to CUCBM and each company comprising the Contractor.
Monthly reports shall be submitted within thirty (30) days after the end of each
month, quarterly reports within forty-five (45) days after the end of each
Calendar Quarter and annual reports within forty-five (45) days after the end of
each Calendar Year. Monthly, quarterly and annual reports shall be submitted in
accordance with requirements and formats specified in the Accounting System.

7.2 Any Investing Party to the Contract may require the Operator to allow its
staff to have access to the Joint Account Accounting Records relating to the
application of expenses in the stipulated custody period, upon giving thirty
(30) days notice but such access shall not unduly hinder the Operator's normal
operations.

Article 8
Audit

8.1 Audits shall be carried out in accordance with Article 18.2 of the Contract.

8.2 The expenses of audits by any non-Operator shall be borne by the non-
Operator which conducts the audit. The expenses for any joint audits conducted
by more than one non-Operator shall be allocated in proportion to their
respective participating interests in the development costs.

Article 9
Transfer Procedure for the Joint Account

9.1 When the Exploration Operations are successful and the Contract Area enters
the development period, the Operator shall conduct an inventory and check of

                                     II-21
<PAGE>

all the properties and accounts for CUCBM. When each CBM Field within the
Contract Area goes from development into production, or when the Contractor
terminates the Contract, an inventory and check of all properties and accounts
shall be conducted.

If the Contract Area has entered into the development period or the production
period, the Operator (after taking an inventory of all properties taken by all
Investing Parties) shall make a proposal to JMC for its approval listing the
remaining equipment and Materials needed for the CBM Operations for the
following period and which shall be carried forward to the next period in book
values in the Joint Account. The Operator shall be responsible for the disposal
of the equipment and materials not needed for the CBM Operations, the gains or
losses derived from such disposal shall be allocated in accordance with the
share of each Investing Party in proportion to the overall investment amount of
all Investing Parties and be adjusted against the original accounts.

If the Contract terminates, the method of an inventory to all of the remaining
equipment and Materials shall be the same as mentioned above, and the gains and
losses derived from such disposal shall be adjusted against the accounts of the
original Investing Party in accordance with the above mentioned methods.

9.2 In accordance with the provisions of Article 8.7 of the Contract, when the
Joint Operators Group (JOG) pursuant to Article 8.8.1 herein becomes the
Operator of all the said CBM Fields within the Contract Area, the former
Operator shall transfer to JOG all of the Accounting Records relating to the
Joint Account.

9.3 Upon the termination of the Contract, the Operator shall transfer all the
relevant vouchers, books and statements over to CUCBM for custody.

9.4 In conducting the transfer of the accounting books and inventory and check
of all the properties in accordance with the provisions of this Accounting
Procedure, the implementation procedure for the transfer and verification, the
accounting files to be transferred and accounting matters to be settled as well
as other details shall be agreed upon through consultation in advance between
the Operator and CUCBM. The transfer procedure shall be completed within the
time period agreed upon by the Parties. Thereafter, owing to the needs of any
Investing Party to the Contract, CUCBM shall allow that Party's staff access to
the Accounting Records within the relevant Accounting Records custody period and
provide them with duplicates, if necessary.

                                     II-22
<PAGE>

Annex III

Personnel Costs

Table of Contents

      Article           Description

            1           General Provisions

            2           Employment of CUCBM Personnel

            3           Salaries and Wages of Personnel

            4           Other Expenses

            5           Settlement of Personnel Costs

                                     III-1
<PAGE>

Annex III
Personnel Costs

Article 1
General Provisions

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

1.2 The provisions in this Annex with respect to personnel costs shall only be
applicable to the following personnel:

(1)   representatives of JMC appointed by CUCBM  referred to in  Article
7.1 of the Contract;

(2)   personnel  of CUCBM in the subordinate bodies of JMC referred to in
Article 7.4 of the Contract;

(3)   professional representatives assigned by CUCBM to the Operator's
(Contractor's) organizations referred to in Article 7.5 of the Contract;
and

(4)   personnel furnished by CUCBM to the Contractor (not including
personnel recruited by CUCBM for the Contractor) referred to in

                                     III-2
<PAGE>

Article 2  hereof.

1.3 Personnel costs referred to in this Annex shall include salaries and wages
of personnel specified in Article 3 hereof and other expenses specified in
Article 4 hereof.

1.4   There is a table attached to this Annex, i.e. Table of Salary and Wage
Standards of CUCBM Personnel.

1.5 All salaries, costs and expenses with respect to the staff members of CUCBM
in the subordinate bodies of JMC, the CUCBM professional representatives and the
CUCBM representatives of JMC to be paid and charged during the development
period and production period shall be determined by the Parties through
consultation.

Article 2
Employment of CUCBM Personnel

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

2.1.1 When employing the Chinese Personnel, the Contractor may request CUCBM's
assistance by submitting to CUCBM a personnel employment plan, which shall
specify specialties, number of personnel necessary to be employed, and such
requirements as to technique, experience and education, with respect to the
personnel to be employed.

2.1.2 CUCBM shall, within sixty (60) days from the date on which it receives the
personnel employment plan submitted by the Contractor, notify the Contractor in
a written form of the following:

(1) names and specialties of employee candidates which will be furnished by
CUCBM, as well as their health conditions, working experience and education; and

(2) specialties and number of employee candidates to be recruited by CUCBM for
the Contractor and provided by the Chinese organizations other than CUCBM, as
well as recruitment arrangements with respect thereto.

2.1.3 The employee candidates furnished and recruited by CUCBM for the
Contractor shall be engaged by the Contractor only when they have passed

                                     III-3
<PAGE>

tests conducted by the Contractor or become qualified after being trained by the
Contractor. The Contractor shall notify CUCBM in writing of the name list of the
employee candidates whom it has decided to engage and whom it has decided not to
employ promptly after the tests or training have been conducted. The Contractor
shall explain the reason to CUCBM with respect to the employee candidates whom
it has decided not to employ. Upon Contractor's request, CUCBM shall promptly
furnish or recruit additional employee candidates.

2.2 The employment contract(s) shall be signed for employment of personnel
furnished by CUCBM per Article 2.1.2 (2) who have passed the tests conducted by
the Contractor or become qualified after being trained by the Contractor. The
said employment contract(s) shall include provisions with respect to employees,
such as employment, dismissal, resignation, production and working assignments,
salaries or wages and other expenses, awards and penalties, working time and
vacations, labor insurance and welfare, labor protection and labor discipline.
In addition, the Parties shall work out specific stipulations with regard to the
term of the employment contract(s), conditions of termination and modification
of employment contract(s), responsibilities in the case of violation of the
contract, and rights and obligations of the Parties.

2.3 The Contractor shall notify CUCBM in writing thirty (30) days before
dismissing or replacing any personnel furnished by CUCBM and engaged by the
Contractor.

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

Article 3
Salaries and Wages of Personnel

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

3.1.1 CUCBM Personnel shall be divided into two parts, i.e. personnel of JMC and
employees. Personnel of JMC shall fall into two categories and employees shall
fall into five categories. The salaries and wages of the personnel in each
category shall be classified as three levels. The levels of the personnel in
each category shall be determined in accordance with the number of years of
useful working experience they have. Those who have less than three (3) years of

                                     III-4
<PAGE>

useful working experience shall be determined as Level One; those who have three
(3) to ten (10) years of useful working experience shall be determined as Level
Two; and those who have more than ten (10) years of working experience shall be
determined as Level Three. The salary and wage standards with respect to Levels
One, Two and Three of each category of personnel are specified in the Table of
Salary and Wage Standards of CUCBM Personnel.

3.1.2 The salary and wage standards specified in the Table of Salary and Wage
Standards of CUCBM Personnel, which are expressed in 2002 U.S. Dollars, shall be
increased annually in the same percentage as the average annual increase
percentage in base salaries granted to Expatriate Employees.

3.1.3 The salary and wage standards of personnel at each level in each category
specified in the Table of Salary and Wage Standards of CUCBM Personnel divided
by twenty-one point five (21.5) shall be the daily salary and wage standards of
personnel at such level in such category.

3.2 Those CUCBM Personnel who have worked for a full Calendar Month or twenty
(20) working days in a Calendar Month shall be paid in accordance with the
monthly salary and wage standards; those CUCBM personnel who have worked for
less than twenty (20) working days in a Calendar Month shall be paid in
accordance with the daily salary and wage standards in Article 3.1.3.

3.3 CUCBM's chief representative of JMC shall always be paid in accordance with
the salary and wage standards with respect to representatives of JMC. Other
CUCBM's representatives of JMC shall be paid, for the period in which he or she
attends JMC meetings, in accordance with the salary and wage standards with
respect to representatives of JMC. If any professional representative (including
the secretary) of CUCBM or any CUCBM expert working in expert group(s) is
concurrently a representative of JMC (other than CUCBM's chief representative of
JMC), then he or she shall be paid, for the period in which he or she attends
JMC meetings, in accordance with the salary and wage standards with respect to
representatives of JMC, and for the rest of the period in accordance with the
salary and wage standards with respect to his or her actual post, i.e. the
professional representatives (including the secretary) shall be paid in
accordance with the salary and wage standards with respect to the professional
representatives, and CUCBM experts working in expert group(s) shall be paid in
accordance with salary and wage standards with respect to the employees
specified in the Table of Salary and Wage Standards of CUCBM Personnel.

3.4 The initial determination and any subsequent modification with respect to
any post and level of representatives of JMC appointed by CUCBM, secretaries,
experts and professional representatives of CUCBM shall be made by CUCBM in
accordance with the number of years of working experience and capabilities they
have.

                                     III-5
<PAGE>

The levels of the personnel furnished by CUCBM and employed by the Contractor
shall be determined in accordance with Article 3.1.1 herein, the posts of such
personnel shall be determined by the Contractor on the basis of assessment, and
the subsequent promotion and demotion with respect to the posts or levels of
such personnel shall be determined by the Contractor. The aforesaid personnel
shall be paid in accordance with the salary and wage standards corresponding to
their new posts from the month following the month in which their posts or
levels are promoted or demoted.

3.5 The working time of the secretary, professional representatives and experts
assigned by CUCBM to the subordinate bodies of JMC shall be determined in
accordance with the working system of JMC. However, the professional
representatives of CUCBM shall work for no more than five (5) days per week and
eight (8) hours per day.

Article 4
Other Expenses

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

4.1.1 Expenses for working meals and other miscellaneous personal expenses based
on 21.5 average working days per Calendar Month are as follows:

Three hundred and one (301.00) U.S. Dollars each month for working meals and
other miscellaneous personal expenses for each CUCBM Personnel.

Those CUCBM Personnel who have worked for the full Calendar Month shall be paid
in accordance with the monthly expenses for working meals and other
miscellaneous expenses; those CUCBM Personnel who have worked for less than the
full Calendar Month shall be paid as follows:

                 301  X  Number of Days Worked
                 21.5

4.1.2 Home leave and expenses for visiting family:

                                     III-6
<PAGE>

4.1.2.1 Any CUCBM Personnel who work in the Contract Area for the performance of
the Contract and whose cumulative working time in one(1) Calendar Year reaches
eleven (11) Calendar Months may enjoy a thirty (30) day home leave with pay.

4.1.2.2 Standards of home leave expenses for CUCBM Personnel:

Two Hundred (200) U.S. Dollars for each CUCBM personnel each time whose home is
in the province(s) in which the Contract Area locates.

Three Hundred and Fifty (350) U. S. Dollars for each CUCBM Personnel each time
whose home is outside the province(s) in which the Contract Area locates.

If the work is performed, at the request of JMC, in the province outside the
Contract Area, two hundred (200) US dollars for each CUCBM Personnel each time
whose home is in the same province in which the work place is located and three
hundred fifty (350) US dollars for each CUCBM Personnel each time whose home is
outside the province in which the work place is located.

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

(a) premiums for accidental personal injury and death insurance calculated in
accordance with insured amount and insurance premium rate with respect to CUCBM
Personnel in each category; and

(b) expenses actually incurred in dealing with injuries or death in the event
that accidental injuries to or death of CUCBM Personnel occur.

4.1.4 Administrative expenses for CUCBM Personnel and expenses for CUCBM
personnel on business trips.

4.1.5 Lodging expenses for CUCBM Personnel working for the purpose of
performance of the CBM Operations during the period when they are not local
residents there.

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

                                     III-7
<PAGE>

Article 5
Settlement of Personnel Costs

5.1 Salaries and wages of personnel stipulated in Article 3 hereof and the
expenses stipulated in Articles 4.1.1, 4.1.2 and 4.1.3 hereof shall all be
settled by the Operator with CUCBM. If the Operator has provided CUCBM Personnel
with working meals and transportation, no expenses specified in Article 4.1.1
hereof shall be paid to CUCBM.

5.2 The expenses referred to in Article 4.1.4 and Article 4.1.5 hereof shall be
provided by the Operator or reimbursed based on receipts, bills or vouchers.

Table of Salary and Wage Standards of CUCBM Personnel

                                                Gross Monthly Salary and Wage
                                                Standard (USD)
Category  Ordinal No.  Personnel             Level One    Level Two  Level Three
--------------------------------------------------------------------------------
JMC            1       Representative of JMC
                       appointed by CUCBM    1,500         2,200      3,000
               2       Professional
                       Representative
                       (Including Secretary) 1,200         1,700      2,200
Employee       1       Senior Technical
                       Personnel             1,200         1,700      2,200
               2       Middle Level
                       Technical Personnel   1,000         1,300      1,500
               3       Ordinary Technical
                       Personnel               600           750        900
               4       Ordinary
                       Administrative
                       Personnel               550           650        750
               5       Technical Worker and
                       Automobile Driver       450           550        650
               6       Common Labor            300           350        400

                                     III-8
<PAGE>

Annex IV
Data Control

Table of Contents

      Article     Description

      1           General Provisions
      2           Ownership of the Data
      3           Control and  Use of the Data
      4           Scope of the Data Provided for CUCBM

                                      IV-1
<PAGE>

Annex  IV
Data Control

Article  1
General Provision

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

Article  2
Ownership of the Data

2.1 The ownership of all of the data, records, vouchers and other original data
obtained and/or acquired by the Contractor in the implementation of the Contract
shall vest in CUCBM.

2.2 The ownership and right of use of cores, rock samples and other samples
obtained and/or acquired by the Contractor from the Contract Area shall vest in
CUCBM.

2.3 Within the validity period of the Contract, after the termination of the
Contract and after the contractor assigns its rights and obligations, no data,
information and samples mentioned in Articles 2.1 and 2. 2 hereof shall be
disclosed in any way to a Third Party except as stipulated in Articles 3.4 and
3.5 hereof or be transferred, donated, exchanged, sold, or published in any form
without the permission in writing of CUCBM.

Article  3
Control and Use of the Data

3.1 During the implementation of the CBM Operations, the Contractor shall be
responsible to keep in good order, all the data, information and samples
stipulated in Articles 2.1 and 2.2 hereof within the territory of the People's
Republic of China and shall furnish CUCBM in a timely manner with such data,
information and samples for use and turn them over to CUCBM in a step-by-step or
phase-by-phase manner.

3.2 The Contractor shall have the right to use or duplicate the data and
information mentioned in Article 2.1 hereof and use samples referred to in
Article 2.2 hereof within and outside China and the results of research,
interpretation, analysis and chemical examination shall be submitted or reported
to CUCBM in a timely manner. The Contractor shall not use the above-mentioned
data, information and samples for purposes other than those related to the
implementation of the Contract.

3.3 Any shipment abroad for use of the original data and information (such as
original magnetic tapes, original recordings, etc.) referred to in Article 2.1
hereof and of the samples referred to in Article 2.2 hereof shall be subject to
the consent in writing of CUCBM. Unless otherwise agreed by CUCBM, the size of
any piece of core or amount of any batch of rock cuttings and samples to be
shipped abroad shall not be greater than one half (1/2) of the total size or
amount of the original piece or batch. The original data and information shipped
abroad shall, upon completion of the use or duplication thereof, be shipped in a
timely manner back to and be kept in China.

                                      IV-2
<PAGE>

3.4 If, for the purpose of implementation of the Contract, the Contractor need
to provide the data and information for such Third Parties as banks or other
credit institutions, Subcontractors and potential assignees to which the rights
and interests under the Contract are assigned, the type and scope of the data
and information to be provided shall be subject to review by CUCBM and the
Contractor shall obtain from such Third Parties a written undertaking that they
shall have the obligation to keep the provided data and information
confidential.

3.5 The Contractor may provide such data and information as may be requested by
their parent corporations or Affiliates relating to the implementation of the
Contract or by securities and exchange organizations or the governments of the
Contractor's home countries, subject to the prior reporting thereof to CUCBM.
The Contractor shall inform the aforesaid parent corporations or Affiliates
which receive the data and information that they shall be obligated to keep such
data and information confidential and shall request the security and exchange
organizations or the governments of their home countries to keep such data and
information confidential subject to international practice.

3.6 Release of the data and information to the press shall be subject to the
consultation and agreement between the Parties.

Article 4
Scope of the Data Provided for CUCBM

In carrying out the CBM Operations, the Contractor shall provide CUCBM with data
and information, 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     Overall and phased exploration program of the Contract  Area;

4.1.2     Annual operational plans for exploration;

4.1.3     Early development programs, Overall Development Programs and adjusted
development programs of CBM Fields;

4.1.4     Annual and separate operational designs of geophysical survey;

4.1.5     Designs for single well drilling and for single well production
testing of exploratory wells;

                                      IV-3
<PAGE>

4.1.6     Plans for production and production testing of wells and CBM Fields;

4.1.7     The content and general schedules of engineering project;

4.1.8     Basic designs of engineering projects (e.g. CBM and water treatment
facilities, modules and pipelines);

4.1.9     Annual and monthly operational progress charts for engineering
projects;

4.1.10    Procurement plans and schedules for engineering projects;

4.1.11    Test-run and commissioning schedules for engineering projects.

4.2       Information  and  documents  on the  progress  of  all operations:

4.2.1     Daily(weekly), monthly and annual reports on geophysical survey;

4.2.2     Daily, monthly and annual reports on well drilling and  production
testing;

4.2.3     Daily, monthly and annual reports on production testing and
production of wells and CBM Fields;

4.2.4     Monthly and annual reports on operational progress of engineering
projects;

4.2.5     Other operational progress reports;

4.2.6     Operational rules and unpatented technical manuals of CBM operations.

4.3       Original data and information of CBM Operations:

4.3.      Original magnetic tapes, original records, data, seismic sections,
drawings and other relevant data and information of geophysical surveys;

4.3.      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 CBM
Fields;

4.3.5     Original records, data and automatic recording cards of CBM metering;

4.3.6     Original data and recording cards of CBM transportation, storage and
marketing;

                                      IV-4
<PAGE>

4.3.7     All the samples (including cores, cuttings, CBM, Liquid
Hydrocarbons, and water samples and mud samples) and results of  analysis and
chemical examination thereon;

4.3.8     Data on physical properties of pay zones;

4.3.9     Data on environment, hydrology and meteorology.

4.3.10    All original data provided for in this Article 4.3 shall be kept and
stored under conditions guaranteed to preserve the data and data quality, all of
which data shall be made available to Contractor when requested.

4.4       Basic information of engineering projects:

4.4.1     Instructions on design calculations and detailed design drawings of
engineering projects;

4.4.2     Technical specifications and standards of design, manufacture and
installation, safety rules, environmental protection rules and operational
rules;

4.4.      Construction records of individual projects and order slips on design
and construction alterations;

4.4.4     Project commissioning drawings and manuals and original records or
reports on project acceptance.

4.5       Summary reports on operational results and reports on specialized
research and comprehensive study of each CBM Operation:

4.5.1     Reports on locations of geophysical survey, geochemical survey, well
drilling and other operations;

4.5.2     Operational reports on data processing and interpretation of
geophysical and geochemical survey;

4.5.3     Summary reports on drilling geology;

4.5.4     Summary reports on production testing;

4.5.5     Reports on physical properties study of CBM reservoirs and reports
on reservoir simulations and analyses;

4.5.6     Summary reports on geological structure drilling, reserves
calculations of CBM and reports on feasibility study on CBM Field geology,
development, engineering and economic evaluations;

                                      IV-5
<PAGE>

4.5.7     Reports on specialized and comprehensive studies on problems arising
in the course of CBM Field exploration and development;

4.5.8     Reports on experiment and research for engineering designs.

4.6       Data and information on economic and planning:

4.6.1     General budgets for basic development plans of CBM Field and
calculation basis thereon;

4.6.2     Data on production of CBM, output  value and productivity of CBM
Field;

4.6.3     Geophysics survey, well drilling work and budgets of CBM Field, as
well as economic, technical and energy consumption data and information;

4.6.4     Data on production, marketing, distribution and transportation of
production from CBM Field;

4.6.5     Information on investment and financing and accounting for
engineering projects;

4.6.6     Other financial data specified in the Accounting Procedure of the
Contract.

                                      IV-6

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