Document:

EXHIBIT 4(A)

FARM-OUT AGREEMENT

[*] Denotes confidential information which has been filed separately
with the Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.  

 

CANADIAN SUPERIOR

ENERGY INC.

December 30, 2005

Challenger Energy Corp.

Suite 1000, 400 — 3rd Avenue S.W. Calgary, Alberta

T2P 4H2

Dear Sir:

Re:
Amended and Restated Farmout and Option Agreement

WHEREAS,
effective November 17, 2004 Canadian Superior Energy Inc. (“Canadian Superior”)
and Challenger Energy Corp. (“CNE”) entered into an agreement (the “Prior Mariner
Agreement”) for the purpose of establishing the terms and conditions on which Canadian
Superior and CNE jointly participate in the drilling of the Mariner Test Well, may jointly
participate in the Option Well(s) (as such terms are hereinafter defined), and under
which CNE acquired a right to participate in certain projects located in the Republic
of Trinidad and Tobago;

AND WHEREAS,
in consideration of the terms and provisions of the Rights Issuance the Parties
have agreed to amend and restate the terms of the Prior Mariner Agreement;

NOW THEREFORE,
in consideration of the premises and the mutual covenants set forth herein, the
Parties hereto do covenant and agree as follows:

ARTICLE 1

INTERPRETATION

1.1                          Definitions

Capitalized
words and phrases used in this Agreement, including in the recitals hereto and the
Schedules, have the meaning set forth in this Section 1.1, namely:

(a)           “Abandon” means the proper plugging and abandonment of the Mariner
Test Well, including the salvage of salvageable material and equipment therefrom
and the restoration of the well site, all in accordance with the Regulations and
good offshore oilfield practices;

(b)           “Accord Acts” means, collectively, the Canada-Nova Scotia. Offshore
Petroleum Resources Accord Implementation Act, S.N.S 1988, c. 28, and the Canada-Nova
Scotia Offshore Petroleum Resources Accord Implementation Act, S.C. 1988, c. 28,
as amended from time to time, and includes any successor Regulations thereto, in
whole or in part;

(c)           “After Earned Interest” means with respect to CNE an undivided
twenty five percent (25%) interest and with respect to Canadian Superior an undivided
seventy five percent (75%) interest;

(d)           “Agreement” means the main body of this agreement together with
all Schedules and attachments hereto, as amended from time to time;

 

 

(e)           “Ardal Overriding Royalty” means the 0.5% gross overriding royalty
pertaining to the Mariner Lands granted by Canadian Superior to Ardal Petroleum
Inc. under a certain Purchase of Exploration Prospects and Participation Agreement
between Canadian Superior and Ardal Petroleum Inc. dated September 21, 2000
(a copy of such agreement is attached as Schedule ”C” hereto);

(f)            “Business Day” means any day other than a Saturday,
Sunday or statutory holiday in Calgary, Alberta;

(g)           “Cap” means the installation of such production-quality casing,
plugs and equipment as are necessary to enable the well to be used for the production
of Petroleum Substances at a later date;

(h)           “CNSOPB” means the Canada-Nova Scotia Offshore Petroleum Board
constituted pursuant to the Accord Acts, and includes any successor body or agency
thereto;

(i)            “Earning Period” means the period during which CNE has the right
to earn the Mariner Farmout Interest pursuant hereto, which period commences on
the Effective Date and expires on the time at which earning thereof occurs and subject
to any earlier termination of this Agreement by a Party in accordance with its right
to do so as may be provided herein;

(j)            “Effective Date” means November 17, 2004;

(k)           “Farmout” has the meaning ascribed thereto in Section 2.1;

(1)           “Financial Responsibility Guidelines” means the Guidelines Respecting
Financial Responsibility Requirements for Work or Activity in the Newfoundland and
Nova Scotia Offshore Areas, dated December 2000 and issued by the CNSOPB, as
the same may be amended from time to time and includes any replacement guidelines
issued therefor;

(m)          “Initial Drilling Program” means the drilling and Capping or Abandoning
of the Mariner Test Well subject
to and in accordance with the Regulations, the Mariner Licence and the terms and
conditions of this Agreement;

(n)           “Marauder Licence” means Exploration Licence 2415 issued by the
CNSOPB in the name of and beneficially held 100% by Canadian Superior, as more particularly
described in Part 2 of Schedule ”A” hereto;

(o)           “Marauder Farmout Interest” means an undivided twenty five percent
(25%) interest in and to the Marauder Licence and the applicable portion of the
Option Lands;

(p)           “Marconi Licence” means Exploration Licence 2416 issued by the
CNSOPB in the name of and beneficially held 100% by Canadian Superior, as more particularly
described in Part 3 of Schedule ”A” hereto;

(q)           “Marconi Farmout Interest” means an undivided twenty five percent
(25%) interest in and to the Marconi Licence and the applicable portion of the Option
Lands;

(r)            “Mariner Licence” means Exploration Licence 2409 issued by the
CNSOPB in the name of and beneficially held 100% by Canadian Superior, as more particularly described in Part 1
of Schedule ”A” hereto;

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(s)           “Mariner Farmout Interest” means an undivided twenty five percent
(25%) interest in and to the Mariner Licence and the Mariner Lands;

(t)            “Mariner Lands” means all lands within and subject to the Mariner
Licence;

(u)           “Mariner Test Well” means the initial well to be drilled to the
Test Well Depth at the following coordinates on the Mariner Lands (or, if drilling
at such location is not possible or practical in the circumstances, the most proximate
location thereto at which drilling is both possible and practical in the circumstances):

	
  NAD 1983 – Canada

  	
  Latitude:

  	
  44°03’32.1709”N

  
	
   

  	
  Longitude:

  	
  59°38’46.1338”W

  
	
   

  	
  Northing:

  	
  4883889.4

  
	
   

  	
  Easting:

  	
  768631.00

  
	
   

  	
  (UTM Zone 20)

  	
   

  

 

(v)           “Operating Agreement” means the 2002 Model Form International
Operating Agreement distributed by the Association of International Petroleum Negotiators
(“AIPN”) along with the 2004 AIPN Model Form International Accounting Procedure
(“Accounting Procedure”) copies of which are attached and marked as Schedule ”B”
hereto with specific agreed upon elections indicated in the documents;

(w)          “Option Lands” means all lands within and subject to the Marauder
Licence and/or the Marconi Licence, if applicable;

(x)            “Participating Interest” means, subject to the provisions of
this Agreement applicable thereto, Canadian Superior and potential partners as to
an undivided 66.67% interest and CNE as to an undivided 33.33% interest;

(y)           “Party” means a party bound by this Agreement;

(z)            “Permitted Encumbrances” means:

(i)            the
royalties payable or royalty share deliverable pursuant to the Regulations;

(ii)           the
Ardal Overriding Royalty;

(iii)          the
terms and conditions of the Mariner Licence;

(iv)          liens,
privileges or other encumbrances imposed or permitted by the Regulations such as
carriers’ liens, warehousemen’s liens, builders’ liens and other liens, privileges
or other charges of a similar nature; provided such liens, privileges and other
charges relate to obligations not due or delinquent;

(v)           liens
for taxes, assessments, duties, fees, premiums, imposts, levies and other charges
imposed by any Regulatory Authority that are not at such date due or delinquent
or the validity of which is being contested at the time in good faith by appropriate
proceedings diligently conducted and there is no imminent risk of forfeiture;

 3
 

 

(vi)          public
and statutory obligations which are not due or delinquent or the validity of which
is being contested at the time in good faith by appropriate proceedings diligently
conducted and such obligations do not cause a material adverse effect on the Parties;
and

(vii)         liens,
privileges or other encumbrances imposed or created in respect of Royalties;

(aa)         “Person” means a natural person, corporation, company, partnership,
trust, unincorporated association, sole proprietorship, union, government or governmental
department, ministry, board, commission or agency;

(bb)         “Petroleum Substances” means petroleum, natural gas, natural
gas liquids, condensate and every other mineral or substance, or any of them, in
which an interest in or right to explore for is granted or acquired under the Title
Documents;

(cc)         “Regulations” means all laws, statutes, regulations, accords,
instruments, agreements, orders or documents of a regulatory nature issued, made
or granted by a Regulatory Authority from time to time;

(dd)         “Regulatory Authority”
means a government, or a government department, agency or other authority including
courts, tribunals, boards or panels having apparent or actual jurisdiction over
the Parties, the Mariner Licence or otherwise in relation to the subject matter
hereof, including without limitation the CNSOPB;

(ee)         “Rig Release” means the point in time at which the Parties cease
incurring costs to the drilling contractor in respect of the Mariner Test Well provided
that if a delineation well is drilled from the same surface location as the Test
Well then in such event “Rig Release” shall mean the point in time that the repositioning
of the rig derrick occurs in order to drill such delineation well without moving
the hull of the rig;

(ff)           “Rights Issuance” means the proposed issuance by CNE to Canadian
Superior (and, subsequently, to Canadian Superior’s shareholders) (to occur immediately
following the completion by CNE of a registration statement with the Securities
and Exchange Commission, but in any event, no later than December 31, 2006)
of the right to acquire common shares in the share capital of CNE, either by way
of right, warrant or convertible preferred share, or such other matter of convertible
security of CNE as mutually agreed to between Canadian Superior and CNE, acting
reasonably, such rights to be distributed by Canadian Superior to its shareholders
by way of an in specie dividend and/or distribution, subject
to requisite regulatory approvals, as applicable, and subject to compliance with
all requisite securities laws;

(gg)         “Subject Interest” means an undivided 100% interest in and to
the Mariner Land and the Option Lands;

(hh)         “Test” means an operation, conducted to the reasonable satisfaction
of the Parties and any Regulatory Authority, undertaken in respect of the Mariner
Test Well to evaluate the presence of Petroleum Substances in an interpreted geological
structure or stratigraphic trap and to evaluate the capacity thereof to produce
Petroleum Substances from the Mariner Test Well;

(ii)           “Test Well Depth” means a minimum of 5000 metres subsea or such
other depth as the Parties mutually agree upon;

 4
 

 

(jj)           “Title Documents” means any and all documents of title, including
but not limited to the Mariner Licence, the Marauder Licence and the Marconi Licence,
under and by virtue of which the holder thereof is entitled to explore for, win,
take, remove, or sell Petroleum Substances produced from the Mariner Lands and Option
Lands, and any and all renewals, extensions or continuations thereof, or further
documents of title issued pursuant to, subsequent to, or in substitution therefor
in whole or in part, from time to time; and

(kk)         “Well Data” means, with respect to the Mariner Test Well and
any Option Well, all data gathered in connection with the Initial Drilling Program,
drilling, logging, Capping and Abandonment and Test, if applicable.

1.2                          Interpretation

In this
Agreement, unless the contrary intention appears from the context or express provisions
of this Agreement:

(a)           the
inclusion of headings and a table of contents are for convenience of reference only
and are not to be considered or taken into account in construing the provisions
of this Agreement or to in any way qualify, modify or explain the effect of any
such provisions;

(b)           references
to an Article, Section or Schedule are references to an Article, Section or
Schedule, as the case may be, in this Agreement;

(c)           words
importing the singular shall include the plural and vice versa and
words importing a particular gender shall include all genders;

(d)           all
monetary amounts are expressed in Canadian currency;

(e)           where
a period of time is specified, dated or calculated from a date or event, the period
shall be calculated excluding such date or the date on which such event occurs,
as the case may be;

(f)            time
shall be of the essence; and

(g)           where
a term is defined in this Agreement, a derivative of that term shall have a corresponding
meaning unless the context otherwise requires.

1.3                          Business
Day

If, pursuant
to this Agreement, a notice must be given or an action taken within a specified
period or on or before a specified date and such period ends on, or such date falls
on, a day that is not a Business Day, such notice may be given or such action
may be taken on the next succeeding Business Day.

1.4                          Governing
Law and Attornment

Regardless
of where executed or delivered, this Agreement and the rights and obligations of
the Parties hereunder shall be governed by, and construed and interpreted in accordance
with, the Regulations applicable in the Province of Alberta and the federal laws
of Canada applicable therein, provided that those Regulations of the Province of
Nova Scotia governing the Mariner Licence, the Marauder Licence and the Marconi
Licence shall be applied in accordance with their terms. Subject thereto, the Parties
hereby expressly attorn to the jurisdiction of the Courts of Alberta, and all Courts
of

 5
 

 

Appeal therefrom, with
respect to all matters or disputes pertaining to or arising out of this Agreement,
the rights and obligations of the Parties hereunder or the subject matter hereof
in this regard any choice of law principles applicable in the Province of Alberta
shall not be applied to exclude the jurisdiction of the Courts of Alberta with respect
hereto.

1.5                          Conflicts

If there
is a conflict or inconsistency between any provision of the main body of this Agreement
and the Schedules, the provision contained in the main body of this Agreement shall
govern and prevail to the extent of the conflict or inconsistency.

1.6                          Schedule

The following
Schedules is attached to and forms part of this Agreement:

	
  Schedule ”A”

  	
  Mariner Licence,
  Marauder Licence and Marconi Licence

  
	
  Schedule ”B”

  	
  Operating Agreement
  with Accounting Procedure

  
	
  Schedule ”C”

  	
  Ardal Overriding
  Royalty Agreement

  
	
  Schedule ”D”

  	
  Block 5(c) Participation

  
	
  Schedule ”E”

  	
  MGB Participation

  

 

1.7                          Harmonized Taxes

Subject
to the remaining provisions of this Section 1.7, CNE acknowledges that it is
responsible for paying any federal Goods and Services Tax (“GST”) or other taxes
(other than income taxes), fees, charges or assessments which may be imposed
by any governmental authority (such GST and other taxes hereinafter collectively
referred to as “Taxes”) and which may be payable in connection with any operations
or other activities carried out pursuant to this Agreement. Prior to earning the
Mariner Farmout Interest and/or the Marauder Farmout Interest and/or the Marconi
Farmout Interest, CNE and Canadian Superior shall each be responsible for and shall
pay its Participating Interest of all Taxes payable in connection with operations
or activities carried out on or in respect of the Mariner Lands and the Option Lands,
if applicable.

After earning
the Mariner Farmout Interest and/or the Marauder Farmout Interest and/or the Marconi
Farmout Interest, Canadian Superior and CNE shall be responsible for and shall pay
their After Earned Interest share of all such Taxes. The Parties agree to elect
in prescribed form (and to file the same if required) pursuant to subsection 273(1) of
the Excise Tax Act (Canada), and any comparable provisions
applicable under the Regulations of Nova Scotia, such that the Operator shall, for
and on behalf of the Parties, administer all transactions arising out of or pertaining
to operations conducted pursuant hereto and that are subject to the GST and provincial
sales tax harmonized therewith, and the Operator shall collect all amounts or make
all payments relating thereto as applicable. Each Party hereby agrees to be bound
by such election, when made, for the duration of the term of this Agreement and
the Operating Agreement, provided that if a Party elects to take its After Earned
Interest share of Petroleum Substances in kind, such GST and other harmonized sales
tax election shall be revoked or remade to allow such Party to administer such transactions
and payments related to that portion of production taken in kind that were the responsibility
of the Operator. All references to “Operator” in this Section 1.7 shall be
interpreted to mean the Test Well Operator under this Agreement at all times prior
to the Operating Agreement coming into effect.

 6
 

 

ARTICLE 2

FARMOUT

2.1                          Agreement
to Farmout

Canadian
Superior hereby agrees to farmout (the “Farmout”) all of its right, title, estate
and interest in and to the Mariner Farmout Interest, the Marauder Farmout Interest
and the Marconi Farmout Interest to CNE in accordance with and subject to the terms
and conditions set forth herein.

ARTICLE 3

CNE TRINIDAD RIGHTS

3.1                          Agreement
to Enter into Participation Agreements

Canadian
Superior and CNE hereby agree to execute contemporaneously with this Agreement the
following two agreements: i) an Amended and Restated Participation Agreement dated
December 30, 2005 concerning Block 5(c), (as defined in such agreement), a
copy of which is attached as Schedule ”D” hereto (“Block 5(c) Participation”),
and; ii) an Amended and Restated Participation in a Farmout Agreement dated December 30,
2005 concerning the Mayaro Bay Lands and the Guayaguayare Bay Lands (as such terms
are defined in such agreement), a copy of which is attached as Schedule ”E”
hereto (“MGB Participation”).

ARTICLE 4

WARRANTY OF TITLE

4.1                          Title
Documents and Warranty

(a)           CNE
acknowledges that it has examined and is satisfied with the Title Documents, including
but not limited to all indicia of Canadian Superior’s title to the Lands, Option
Lands and Licences.

(b)           Canadian
Superior does not convey, purport, promise, represent or agree to convey to CNE
any better right, title or interest in and to any of the Mariner Lands, Mariner
Licence, Marauder Licence, Marconi Licence or the Option Lands than that which it
now has by virtue of its interest therein and thereto as conferred by the Title
Documents, provided that Canadian Superior does represent and warrant to CNE that
Canadian Superior:

(i)            has
not encumbered the Mariner Farmout Interest, the Marauder Farmout Interest or the
Marconi Farmout Interest in any manner except for the Permitted Encumbrances;

(ii)           has
not, as of the Effective Date, received any notice of default in respect of the
Mariner Licence, the Marauder Licence or the Marconi Licence from any Regulatory
Authority under the Regulations in respect thereof; and

(iii)          has
complied with all of the terms of the Title Documents in all material respects and
has not received any notice from any Person to the contrary.

(c)           During
the Earning Period in respect of the Subject Interest, and thereafter in respect
of the Mariner Farmout Interest and/or the Marauder Farmout Interest and/or the
Marconi Farmout Interest, neither Party shall do or cause to be done any act, or
make or cause to be made any act or omission, whereby the Title Documents, the Mariner
Lands or the Option Lands become

 7
 

 

encumbered (other than by a Permitted Encumbrance) in such
a way as to adversely affect any of them or make them or the Mariner Lands, Mariner
Licence, Option Lands, Marauder Licence or the Marconi Licence subject to termination
or forfeiture in any respect.

(d)           Except
as otherwise provided herein, if the interest of any Party in the Subject Interest
or the Title Documents is now or hereafter becomes encumbered by any royalty, overriding
royalty, production payment or other charge, burden or encumbrance, such charge,
burden or encumbrance shall be charged to and paid entirely by the Party whose interest
is or becomes so encumbered.

ARTICLE 5

TEST WELL AND EARNING

5.1                          Commitment
to Drill Test Well

Subject
to rig availability and approval
of the CNSOPB (both of which Canadian Superior shall pursue with reasonable commercial
diligence), on or before September 30, 2007, the Parties shall commence drilling
the Mariner Test Well. The Mariner Test Well shall be drilled to the Test Well Depth
and shall be continuously drilled and Capped or Abandoned in accordance with the
terms of this Agreement, the Regulations and good offshore oilfield practices. Each
Party shall be responsible for and shall pay its Participating interest share of
the costs and expenses associated with the Initial Drilling Program as follows:

(a)           CNE
shall pay its Participating Interest share of the projected dry hole cost of the
Mariner Test Well not less than 10 days prior to the spud date of such well; and

(b)           CNE
shall pay its Participating Interest share of the balance of the costs and expenses
associated with the Initial Drilling Program on a cash call basis.

If Canadian Superior
and CNE mutually elect to drill the Mariner Test Well to a depth greater than the
Test Well Depth, each Party shall continue to he responsible for and shall pay its
Participating Interest share of the costs and expenses associated with drilling
the Mariner Test Well to such greater depth and thereafter Capping or Abandoning
the Mariner Test Well. If the Parties mutually agree to Test the Mariner Test Well
the cost of such operation shall be borne by the Parties in accordance to their
Participating Interest.

5.2                          Financial Contributions

Each of
the Parties shall be responsible for posting or depositing with the appropriate
Regulatory Authority their respective Participating Interest of all financial assurances
as may be required under or pursuant to the Financial Responsibility Guidelines
and the Regulations in connection with the drilling of the Mariner Test Well. The
Parties shall, acting jointly and in a commercially reasonable manner in the circumstances,
determine the manner in which their respective Participating Interest of such financial
assurances are provided which may include:

(i)            each
of CNE and Canadian Superior posting its respective Participating Interest share
of such financial assurances directly with such Regulatory Authority;

(ii)           Canadian
Superior posting 100% of such financial assurances and CNE reimbursing its Participating
Interest share thereof to Canadian Superior; or

 8
 

 

(iii)          a
combination of subparagraphs (i) and (ii) above.

5.3                          Earning
of Mariner Farmout Interest

Once CNE
has fully complied with its obligations set forth in this Article 5 and provided
that it is not in default of any of its other obligations contained in this Agreement,
once Rig Release occurs at the Mariner Test Well, CNE shall have earned the Mariner
Farmout Interest, subject at all times to the Permitted Encumbrances. Thereafter,
except as otherwise provided herein, all operations conducted by the Parties on
or in respect of the Mariner Lands shall be shared by the Parties on the basis of
their respective After Earned Interests therein and shall be governed by and conducted
in accordance with the Operating Agreement. PROVIDED THAT in the event that CNE
fails to pay when due the amount required pursuant to clause 5.1(a) above,
this Agreement shall terminate without further notice, and CNE shall have forfeited
its right to earn any interest hereunder.

ARTICLE 6

SEISMIC DATA

6.1                          Canadian  Superior Seismic Data

Provided
that CNE has fulfilled its obligations with respect to the Mariner Test Well and
that it is not in default of any of its other obligations contained in this Agreement,
CNE shall have the right to a copy of, but not an ownership interest in, all proprietary
seismic data owned by Canadian Superior as of the Effective Date and located on
the Mariner Land.

6.2                          Third
Party Trade Seismic Data

CNE acknowledges
that Canadian Superior may be obligated to acquire one or more licensed copies
of other non-proprietary seismic data owned by Geophysical Service Incorporated
for CNE in respect of the Mariner Land and Option Land. CNE agrees that it shall
(i) be responsible for and shall pay all fees required to obtain such copies
and (ii) execute and deliver all agreements or other documents that may be
required in connection therewith.

ARTICLE 7

OPTION TO PARTICIPATE IN MARCONI AND MARAUDER

7.1                          Option

Provided
CNE has earned the Mariner Farmout Interest, CNE shall have the option, but not
the obligation, to elect to participate in the drilling of a well on the Option
Lands to earn an interest in the Option Lands. Prior to drilling or causing a well
to be drilled on the Option Land (“Option Well”), Canadian Superior shall provide
CNE written notice of such intention to drill or cause a well to be drilled (“Well
Notice”). The Well Notice shall contain all relevant information necessary for CNE
to make an informed decision to participate or not in the particular Option Well
including but not limited to: a geological and geophysical discussion along with
supporting data, economic data, expected well performance data, expected reservoir
data, exact location, detailed cost estimate, estimate of commencement date, estimated
duration of the drilling operation and expected total depth. Within 120 days from
receipt of delivery of each Well Notice, CNE shall have the option to elect, by
written notice to Canadian Superior, to either:

(a)           participate
for its Participating Interest in the Option Well(s) on a well by well basis; or

 9
 

 

(b)           terminate
such option to participate in such Option Well.

7.2                          Interests
of Parties in the Event CNE Participates in Option Well(s)

In the
event CNE elected pursuant to Section 7.1 (a) of this Agreement and once
CNE participates in the drilling, Capping or Abandoning of the applicable Option
Well for its Participating Interest then once Rig Release occurs at the Option Well,
CNE shall have earned the Marauder Farmout Interest if the Option Well is located
on the Marauder Licence or the Marconi Farmout Interest if the Option Well is located
on the Marconi Licence, subject at all times to the Permitted Encumbrances. Thereafter,
except as otherwise provided herein, all operations conducted by the Parties on
or in respect of the Option Lands, shall be shared by the Parties on the basis of
their respective After Earned Interest therein and shall be governed by and conducted
in accordance with the Operating Agreement.

7.3                          Option to Participate in Seismic Program(s)

After the
Effective Date, in the event Canadian Superior acquires proprietary or trade seismic
data over the Option Lands, CNE shall have the option, but not the obligation, to
elect to participate in the acquisition of such seismic data. Prior to acquiring
proprietary or trade seismic data on the Option Land (“Option Seismic”), Canadian
Superior shall provide CNE written notice of its intention to acquire such Option
Seismic (“Seismic Notice”). The Seismic Notice shall contain all relevant information
necessary for CNE to make an informed decision to participate or not in the acquisition
of the particular Option Seismic including but not limited to: a geological and
geophysical discussion along with supporting data, economic data, vendor information,
acquisition parameters, exact location of the data, detailed cost estimate, estimate
of commencement date, and estimated duration of the acquisition operation (if applicable).
Within 120 days from receipt of delivery of each Seismic Notice, CNE shall have
the option to elect, by written notice to Canadian Superior, to either:

(a)           participate
for its Participating Interest in the Option Seismic on a case by case basis; or

(b)           terminate
such option to participate in such Option Seismic.

ARTICLE 8

TITLE AND OPERATIONAL MATTERS

8.1                          Transfer
and Registration of Farmout Interests

(a)           Once
CNE has earned the Mariner Farmout Interest in accordance with the terms of this
Agreement, and provided that CNE is not in default of any of its obligations hereunder,
Canadian Superior shall, by documentation in form and content acceptable to
CNE acting reasonably, convey the Mariner Farmout Interest to CNE.

(b)           Once
CNE has earned the Marauder Farmout Interest and/or the Marconi Farmout Interest
in accordance with the terms of this Agreement, and provided that CNE is not in
default of any of its obligations hereunder, Canadian Superior shall, by documentation
in form and content acceptable to CNE acting reasonably, convey either or both
the Marauder Farmout Interest and/or the Marconi Farmout Interest, as applicable,
to CNE.

(c)           In
addition to the conveyance contemplated in Section 8.1 (a) and (b), once
CNE has earned the Mariner Farmout Interest and/or the Marauder Farmout Interest
and/or the Marconi Farmout Interest, Canadian Superior shall, subject to the Regulations,
use all commercially reasonable efforts in the circumstances to have CNE recognised
with the appropriate Regulatory Authority in

 10
 

 

the Mariner Licence and if applicable and/or the Marauder
Licence and/or the Marconi Licence, together with any other Title Documents that
may be applicable thereto. Canadian Superior makes no representations or warranties
as to when or if such recognition will occur. Until CNE becomes a recognised party
in and to the Mariner Licence, the Marauder Licence, and the Marconi Licence and
any other Title Document applicable thereto, Canadian Superior shall hold, as bare
trustee and on and subject to the terms and conditions set forth in this Agreement
and any terms of the Regulations applicable thereto, the applicable beneficial interest
therein earned by CNE pursuant to this Agreement.

8.2                          Operation
of Mariner Test Well and Option Well(s)

(a)           The
Parties hereby appoint Canadian Superior as the operator of the Mariner Test Well
and any and all Option Well(s) (the “Test Well Operator”). Canadian Superior shall
properly perform and discharge its duties and obligations as Test Well Operator
in accordance with the terms of this Agreement, the Regulations, and good offshore
oilfield practices

8.3                          Test Well Operator’s Authority

Subject
to the terms and conditions of this Agreement, and prior to CNE earning the Mariner
Farmout Interest and/or the Marauder Farmout Interest and/or the Marconi Farmout
Interest, as applicable the following provisions of the Operating Agreement shall
apply to the drilling of the Mariner Test Well and the Option Well(s) together with
any associated operations conducted under this Agreement on the Mariner Lands and
Option Lands:

	
  Article 1

  	
  Definitions (to the
  extent required for interpretation of the relevant provisions of the
  Operating Agreement adopted by this Section 8.3)

  
	
   

  	
   

  
	
  Article 4

  	
  Operator

  
	
   

  	
   

  
	
  Article 8

  	
  Default

  
	
   

  	
   

  
	
  Article 14

  	
  Relationship of Parties

  
	
   

  	
   

  
	
  Article 15

  	
  Venture Information

  
	
   

  	
   

  
	
  Article 16

  	
  Force Majeure

  
	
   

  	
   

  
	
  Accounting Procedure

  	
  Entire Document

  

 

8.4                          Subsequent Operations

Once CNE
has earned the Mariner Farmout Interest and/or the Marauder Farmout Interest and/or
the Marconi Farmout Interest, as applicable, and provided that CNE is not in default
of any of its obligations hereunder at the relevant time, the Parties shall appoint
Canadian Superior as the operator in respect of the Mariner Lands and/or the Option
Lands together with all other subsequent operations conducted thereon, in all cases
subject to the provisions of the Operating Agreement. Canadian Superior shall accept
such appointment and covenants that it shall properly perform and discharge
its duties and obligations as Operator in accordance with the terms of the Operating
Agreement, the Regulations and good offshore oilfield practices.

 11
 

 

8.5                          Exchange
of Information

(a)           Canadian
Superior shall provide all Well Data to CNE upon such Well Data immediately upon
being available to Canadian Superior.

(b)           In
addition, upon reasonable notice from CNE, Canadian Superior shall allow authorized
representatives of CNE access to the site of the Mariner Test Well and any Option
Well, including platform floor access privileges, at CNE’s sole cost, risk
and expense.

ARTICLE 9

TERMINATION

9.1                          Termination
by Canadian Superior

Canadian
Superior may, by Notice to CNE, terminate this Agreement if:

(a)           CNE
fails to participate in the drilling of the Mariner Test Well; or

(b)           CNE
is in default of any of the other material terms and conditions of this Agreement
and CNE has not remedied such default within thirty (30) Business Days after receipt
of Notice thereof from Canadian Superior. PROVIDED THAT in the case of an alleged
monetary default Canadian Superior shall be entitled to deliver such Notice of Default
only if CNE has failed to pay within 30 days any amount due to be paid by it pursuant
to the provisions of this Agreement.

(c)           Notwithstanding
the foregoing, upon earning by the CNE of any interest available to it pursuant
to this Agreement, the default provisions of the Operating Agreement shall apply
to all further operations in respect of such earned interest(s) and the respective
obligations of the parties in relation thereto.

9.2                          Termination
by CNE

CNE may,
by Notice to CNE, terminate this Agreement if Canadian Superior fails to commence
drilling operations on the Mariner Test Well on or before September 30, 2007.

9.3                          Consequences
of Termination

Termination
of this Agreement shall not affect any of the obligations and liabilities of the
Parties arising, accrued or accruing at or prior to the time of termination.

ARTICLE 10

NOTICES

10.1                        Notice

All demands,
notices or other communications to be given in connection with this Agreement (“Notice”)
shall be in writing and shall be sufficiently given or made if:

(a)           delivered
to the intended recipient personally or by courier during normal business hours
on a Business Day at the intended recipient’s address as set forth below; or

 12
 

 

(b)           sent
by facsimile transmission or sent to the intended recipient by other means of recorded
electronic communication:

	
  Canadian Superior Energy
  Inc.:

  	
  Suite 3300, 400 -
  3rd Avenue SW

  
	
   

  	
  Calgary, Alberta T2P
  4H2

  
	
   

  	
   

  
	
   

  	
  Attention:

  	
  President

  
	
   

  	
  Fax No.:

  	
  (403) 216-2374

  
	
   

  	
   

  
	
  Challenger Energy Corp.

  	
  Suite 3300, 400 —
  3rd Avenue SW

  
	
   

  	
  Calgary, Alberta T2P
  4H2

  
	
   

  	
   

  
	
   

  	
  Attention:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  Fax No.:

  	
  (403) 216-2374

  

 

10.2                        Deemed
Delivery

Any Notice
given or made in the manner set forth in Section 10.1 shall be deemed to have
been given or made and to have been received on the day of its delivery or transmission,
as the case may be, if such day is a Business Day and such Notice is received
prior to 2:00 p.m., Calgary time, and, if not, on the first Business Day thereafter.

10.3                        Change
of Address

A Party
may change its address or telecopier number by Notice to the other Party given
in accordance with Section 10.1.

ARTICLE 11

LIABILITY AND INDEMNITY

11.1                        Liability
of and Indemnification

(a)           CNE
shall be liable to Canadian Superior for all losses, costs, damages and expenses
whatsoever, excepting consequential damages, which Canadian Superior may suffer,
sustain, pay or incur and, as a separate and independent covenant, shall indemnify
and save harmless Canadian Superior from and against all actions, proceedings, claims
demands, losses, costs, damages and expenses whatsoever which may be brought
against or suffered by Canadian Superior or which it may sustain, pay or incur
by reason of any matter or thing arising out of or in any way attributable to the
gross negligence or wilful or wanton misconduct of CNE in respect of operations
carried on by CNE, its servants, agents, employees, independent contractors, licencees
or other workers or representatives of any kind in respect of the Mariner Test Well
and/or any Option Well.

(b)           Canadian
Superior shall be liable to CNE for all losses, costs, damages and expenses whatsoever,
excepting consequential damages, which CNE may suffer, sustain, pay or incur
and, as a separate and independent covenant, shall indemnify and save harmless CNE
from and against all actions, proceedings, claims demands, losses, costs, damages
and expenses whatsoever which may be brought against or suffered by CNE or
which it may sustain, pay or incur by reason of any matter or thing arising
out of or in any way attributable to the gross negligence or wilful or wanton misconduct
of Canadian Superior in respect of operations carried on by Canadian

 13
 

 

Superior, its servants, agents, employees, independent
contractors, licencees or other workers or representatives of any kind in respect
of the Mariner Test Well and/or any Option Well.

(c)           Notwithstanding
Sections 11.1 (a) and (b), at such time, if any, that CNE earns the Mariner
Farmout Interest or the Marauder Farmout Interest or the Marconi Farmout Interest,
as applicable, the wells and all other operations conducted on the Mariner Lands
or the Option Lands, as applicable shall be operated under and governed by the Operating
Agreement including the liability and indemnification provisions thereof. If CNE
earns the Marauder Farmout Interest and/or the Marconi Farmout Interest in addition
to the Mariner Farmout Interest, the Operating Agreement shall apply separately
and independently to each of the Mariner Lands and the Option Lands and shall be
deemed to constitute a separate and independent agreement between the Parties in
respect of each such parcel of lands.

ARTICLE 12

COVENANTS

12.1                        Covenants

The Parties
will use their reasonable commercial efforts to proceed with the Rights Issuance
contemplated pursuant to this Agreement.

ARTICLE 13

MISCELLANEOUS

13.1                        Amendments

All amendments
to this Agreement shall be made in a written instrument signed by both Parties.

13.2                        Waiver
in Writing

No waiver
of any provision, or the breach of any provision, of this Agreement shall be effective
unless contained in a written instrument signed by the Party granting the waiver.
Such waiver shall affect only the matter specifically identified in the instrument
granting the waiver and shall not extend to any other matter, provision or breach.

13.3                        Delay
Not Waiver

The failure
of a Party to give Notice to any other Party or to take any other steps in exercising
any right, or in respect of the breach or nonfulfillment of any provision of this
Agreement, shall not operate as a waiver of that right, breach or provision nor
shall any single or partial exercise of any right preclude any other or future exercise
of that right or the exercise of any other right, whether in law or in equity or
otherwise.

13.4                        Acceptance
of Payment Not Waiver

Acceptance
of payment by a Party after the breach or nonfulfillment of any provision of this
Agreement by another Party shall not constitute a waiver of the provisions of this
Agreement, other than any breach cured by such payment.

 14
 

 

13.5                        Primacy of Farmout Agreement

In the
event of a conflict between the provisions of this Agreement and the Operating Agreement,
the provisions of this Agreement shall prevail.

13.6                        Entire Agreement

This Agreement
constitutes the entire agreement of the Parties in respect of the subject matter
hereof and supersedes all prior oral or written agreements and understandings of
the Parties.

13.7                        Further Assurances

Each Party
shall do all such things and execute and deliver all such further instruments as
the other Parties may reasonably request to give effect to and implement this
Agreement.

13.8                        Assignment

This Agreement
may not be assigned by either Party without the prior written consent of the
other Party, which consent shall not be unreasonably delayed or withhold.

13.9                        Enurement

This Agreement
is binding upon and shall enure to the benefit of the Parties hereto and their respective
successors and permitted assigns.

13.10                      Counterpart Execution

This Agreement
may be executed in counterpart and all counterparts shall together constitute
one and the same Agreement.

13.11                      Delivery

A Party
which has executed this Agreement may deliver it to the other Party by facsimile
transmission at its address for such transmissions set out in Article 10, and
any copy so delivered shall be deemed an original for all purposes. A Party so delivering
this Agreement shall thereafter forthwith deliver to the other Party an original
execution page hereof with its original signature located thereon provided,
however, that any failure by a Party to so deliver such original execution page shall
not affect the validity or enforceability of this Agreement against that Party.

13.12                      Severability

The invalidity
or unenforceability of any Section or provision of this Agreement shall not
affect the validity or enforceability of any other Section, provision or whole of
this Agreement.

13.13                      Limitation
of Actions

The Parties
hereby acknowledge and agree that the limitation period of two (2) years provided
in Section 3(l) of the Limitations Act, S.A. 1996, c. L-15.l, as amended (the
“Limitations Act”), for any claim (as such term is defined in the Limitations Act)
arising in connection with this Agreement shall be extended by an additional four
(4) years in accordance with this Agreement and with Section 7 of the
Limitations Act.

 15
 

 

13.14                      Press
Releases

Each Party
agrees not to make any public announcement concerning this Agreement or any of the
matters contemplated herein, except as may be required by law, without the
consent of the other Party regarding the proposed announcement, which consent shall
not be unreasonably withheld.

Please
indicate your agreement to the foregoing by signing and dating both copies of this
letter in the space provided below and returning one copy to the undersigned.

12.15                      Authority

Each of
the Parties agrees and acknowledges that it has the requisite capacity, power and
authority to enter into this Agreement and to take such further steps as are required
to give effect to the provisions hereof.

Sincerely,

CANADIAN SUPERIOR
ENERGY INC.

 

	
  By:

  	
  /s/ Michael E. Coolen

  	
   

  	
  /s/ T.J. Harp Dir.

  	
   

  
	
   

  	
  Michael E. Coolen,
  Director

  	
   

  	
  T.J. Harp

  

 

AGREED AND ACCEPTED
this 30 day of December, 2005

CHALLENGER
ENERGY CORP.,

	
  By:

  	
  /s/ Neil MacKenzie

  	
   

  
	
   

  	
  President

  	
   

  

 

 16

Schedule
“A”

Lands

This is
Schedule “A” forming part of the Amended and Restated Farmout and Option

Agreement dated December 30, 2005 between Canadian Superior Energy Inc. and

Challenger Energy Corp.

PART 1

MARINER
LICENCE

	
  Title Document:

  	
  Exploration Licence No. 2409

  
	
   

  	
   

  
	
  Land Description:

  	
  Grid Area 44-20-59-45

  
	
   

  	
  Sections 1-5, 11-15, 21-25, 31-35, 41-45

  
	
   

  	
   

  
	
   

  	
  Grid Area 44-20-59-30

  
	
   

  	
  Sections 91-95

  
	
   

  	
   

  
	
   

  	
  Grid Area 44-10-59-45

  
	
   

  	
  Sections 3-10, 13-20, 23-30, 33-40, 43-50, 53-55,
  63-65

  
	
   

  	
   

  
	
   

  	
  Grid Area 44-10-59-30

  
	
   

  	
  Sections 45-47, 54-57, 64-67, 74-80, 83-90, 93-100

  
	
   

  	
   

  
	
   

  	
  All petroleum substances in all geological
  formations.

  
	
   

  	
   

  
	
   

  	
  Total Area: 40, 734 Hectares

  
	
   

  	
   

  
	
  Work Expenditure Bid:

  	
  $15,510,000.00

  
	
   

  	
   

  
	
  Total Area:

  	
  40,734 Hectares

  
	
   

  	
   

  
	
  Permitted Encumbrances:

  	
  Ardal Overriding Royalty

  

PART 2

MARAUDER
LICENCE

	
  Title Document:

  	
  Exploration Licence No. 2415

  
	
   

  	
   

  
	
  Land Description:

  	
  Grid Area 44-10-59-15

  
	
   

  	
  Sections 46-50, 56-60, 66-70, 76-80, 88-90, 98-100.

  
	
   

  	
   

  
	
   

  	
  Grid Area 44-10-59-30

  
	
   

  	
  Sections 8-10, 18-20, 28-30

  
	
   

  	
   

  
	
   

  	
  Grid Area 44-20-59-00

  
	
   

  	
  Sections 44-50, 54-60, 64-70, 72-80, 82-90, 

  

 

 1
 

 

	
  

  	
  92-100

  
	
   

  	
   

  
	
   

  	
  Grid Area 44-20-59-15

  
	
   

  	
  Sections 2-10, 12-20, 22-30, 32-100

  
	
   

  	
   

  
	
   

  	
  Grid Area 44-20-59-30

  
	
   

  	
  Sections 1-5, 11-15, 21-25, 31-35, 42-45, 53-55,
  64-65, 74-75, 84-85.

  
	
   

  	
   

  
	
   

  	
  Grid Area 44-30-59-00

  
	
   

  	
  Sections 41-100.

  
	
   

  	
   

  
	
   

  	
  Grid Area 44-30-59-15

  
	
   

  	
  Sections 1-45, 51-55, 61-65, 71-75, 81-85, 91-95.

  
	
   

  	
   

  
	
   

  	
  All petroleum substances in all geological
  formations.

  
	
   

  	
   

  
	
   

  	
  Total Area: 40,734 Hectares

  
	
   

  	
   

  
	
  Work Expenditure Bid:

  	
  $12,857,000.00

  
	
   

  	
   

  
	
  Total Area:

  	
  126,280 Hectares

  
	
   

  	
   

  
	
  Permitted Encumbrances:

  	
  Ardal Overriding Royalty

  

PART 3

MARCONILICENCE

	
  Title Document:

  	
  Exploration Licence No. 2416

  
	
   

  	
   

  
	
  Land Description:

  	
  Grid Area 44-50-59-15

  
	
   

  	
  Sections 46-50, 56-60, 66-70, 76-80, 86-90, 96-100.

  
	
   

  	
   

  
	
   

  	
  Grid Area 44-10-59-15

  
	
   

  	
  Sections 41-45, 51-55, 61-65, 71-75, 81-85, 91-95.

  
	
   

  	
   

  
	
   

  	
  Grid Area 44-00-59-30

  
	
   

  	
  Sections 4-5, 14-15.

  
	
   

  	
   

  
	
   

  	
  All petroleum substances in all geological
  formations.

  

 

 2
 

 

	
  

  	
  Total Area: 40, 734 Hectares

  
	
   

  	
   

  
	
  Work Expenditure Bid:

  	
  $1, 250, 000.00

  
	
   

  	
   

  
	
  Total Area:

  	
  23, 814 Hectares

  
	
   

  	
   

  
	
  Permitted Encumbrances:

  	
  Ardal Overriding Royalty

  

 

 3

 

 

 

Schedule “B”

This is Schedule “B” attached to and made part of an Amended and
Restated Participation Agreement dated December 30, 2005 between Challenger
Energy Corp. and Canadian Superior Energy, Inc.

2002

MODEL INTERNATIONAL OPERATING AGREEMENT

 

OPERATING
AGREEMENT COVERING:

OFFSHORE
NOVA SCOTIA, CANADA

 3

 

TABLE OF CONTENTS

	
  ARTICLE 1 DEFINITIONS

  	
  1

  
	
  ARTICLE 2 EFFECTIVE
  DATE AND TERM

  	
  5

  
	
  ARTICLE 3 SCOPE

  	
  6

  
	
  3.1

  	
  Scope

  	
  6

  
	
  3.2

  	
  Participating Interest

  	
  6

  
	
  3.3

  	
  Ownership, Obligations and Liabilities

  	
  6

  
	
  3.4

  	
  Government Participation

  	
  7

  
	
  ARTICLE 4 OPERATOR

  	
  7

  
	
  4.1

  	
  Designation of Operator

  	
  7

  
	
  4.2

  	
  Rights and Duties of Operator

  	
  7

  
	
  4.3

  	
  Operator Personnel

  	
  9

  
	
  4.4

  	
  Information Supplied by Operator

  	
  12

  
	
  4.5

  	
  Settlement of Claims and Lawsuits

  	
  13

  
	
  4.6

  	
  Limitation on Liability of Operator

  	
  13

  
	
  4.7

  	
  Insurance Obtained by Operator

  	
  14

  
	
  4.8

  	
  Commingling of Funds

  	
  16

  
	
  4.9

  	
  Resignation of Operator

  	
  17

  
	
  4.10

  	
  Removal of Operator

  	
  17

  
	
  4.11

  	
  Appointment of Successor

  	
  18

  
	
  4.12

  	
  Health, Safety and Environment (HSE)

  	
  19

  
	
  ARTICLE 5 OPERATING COMMITTEE

  	
  20

  
	
  5.1

  	
  Establishment of Operating Committee

  	
  20

  
	
  5.2

  	
  Powers and Duties of Operating Committee

  	
  20

  
	
  5.3

  	
  Authority to Vote

  	
  20

  
	
  5.4

  	
  Subcommittees

  	
  21

  
	
  5.5

  	
  Notice of Meeting

  	
  21

  
	
  5.6

  	
  Contents of Meeting Notice

  	
  21

  
	
  5.7

  	
  Location of Meetings

  	
  21

  
	
  5.8

  	
  Operator’s Duties for Meetings

  	
  21

  
	
  5.9

  	
  Voting Procedure

  	
  22

  
	
  5.10

  	
  Record of Votes

  	
  23

  
	
  5.11

  	
  Minutes

  	
  23

  
	
  5.12

  	
  Voting by Notice

  	
  23

  
	
  5.13

  	
  Effect of Vote

  	
  24

  
	
  ARTICLE 6 WORK PROGRAMS AND BUDGETS

  	
  26

  
	
  6.1

  	
  Exploration and Appraisal

  	
  26

  
	
  6.2

  	
  Development

  	
  27

  
	
  6.3

  	
  Production

  	
  28

  
	
  6.4

  	
  Itemization of Expenditures

  	
  28

  
	
  6.5

  	
  Multi-Year Work Program and Budget

  	
  29

  
	
  6.6

  	
  Contract Awards

  	
  29

  
	
  6.7

  	
  Authorization for Expenditure (AFE) Procedure

  	
  31

  
	
  6.8

  	
  Overexpenditures of Work Programs and Budgets

  	
  32

  

 

 

 

	
  ARTICLE 7 OPERATIONS BY LESS
  THAN ALL PARTIES

  	
  33

  
	
  7.1

  	
  Limitation on Applicability

  	
  33

  
	
  7.2

  	
  Procedure to Propose Exclusive Operations

  	
  34

  
	
  7.3

  	
  Responsibility for Exclusive Operations

  	
  36

  
	
  7.4

  	
  Consequences of Exclusive Operations

  	
  36

  
	
  7.5

  	
  Premium to Participate in Exclusive Operations

  	
  39

  
	
  7.6

  	
  Order of Preference of Operations

  	
  40

  
	
  7.7

  	
  Stand-By Costs

  	
  41

  
	
  7.8

  	
  Special Considerations Regarding Deepening and
  Sidetracking

  	
  42

  
	
  7.9

  	
  Use of Property

  	
  42

  
	
  7.10

  	
  Lost Production

  	
  44

  
	
  7.11

  	
  Production Bonuses

  	
  44

  
	
  7.12

  	
  Conduct of Exclusive Operations

  	
  45

  
	
  ARTICLE 8 DEFAULT

  	
  46

  
	
  8.1

  	
  Default and Notice

  	
  46

  
	
  8.2

  	
  Operating Committee Meetings and Data

  	
  46

  
	
  8.3

  	
  Allocation of Defaulted Accounts

  	
  47

  
	
  8.4

  	
  Remedies

  	
  48

  
	
  8.5

  	
  Survival

  	
  52

  
	
  8.6

  	
  No Right of Set Off

  	
  53

  
	
  ARTICLE 9 DISPOSITION OF PRODUCTION

  	
  53

  
	
  9.1

  	
  Right and Obligation to Take in Kind

  	
  53

  
	
  9.2

  	
  Disposition of Crude Oil

  	
  53

  
	
  9.3

  	
  Disposition of Natural Gas

  	
  55

  
	
  9.4

  	
  Principles of Natural Gas Agreement(s) with
  Government

  	
  57

  
	
  ARTICLE 10 ABANDONMENT

  	
  57

  
	
  10.1

  	
  Abandonment of Wells Drilled as Joint Operations

  	
  57

  
	
  10.2

  	
  Abandonment of Exclusive Operations

  	
  59

  
	
  10.3

  	
  Abandonment Security

  	
  59

  
	
  ARTICLE 11 SURRENDER, EXTENSIONS AND RENEWALS

  	
  59

  
	
  11.1

  	
  Surrender

  	
  59

  
	
  11.2

  	
  Extension of the Term

  	
  60

  
	
  ARTICLE 12 TRANSFER OF INTEREST OR RIGHTS AND
  CHANGES IN CONTROL

  	
  60

  
	
  12.1

  	
  Obligations

  	
  60

  
	
  12.2.

  	
  Transfer

  	
  61

  
	
  12.3

  	
  Change in Control

  	
  66

  
	
  ARTICLE 13 WITHDRAWAL FROM AGREEMENT

  	
  69

  
	
  13.1

  	
  Right of Withdrawal

  	
  69

  
	
  13.2

  	
  Partial or Complete Withdrawal

  	
  69

  
	
  13.3

  	
  Rights of a Withdrawing Party

  	
  70

  
	
  13.4

  	
  Obligations and Liabilities of a Withdrawing Party

  	
  70

  
	
  13.5

  	
  Emergency

  	
  71

  
	
  13.6

  	
  Assignment

  	
  71

  
	
  13.7

  	
  Approvals

  	
  71

  
	
  13.8

  	
  Security

  	
  71

  
	
  13.9

  	
  Withdrawal or Abandonment by all Parties

  	
  72

  

 

 ii
 

 

 

	
  ARTICLE 14 RELATIONSHIP OF
  PARTIES AND TAX

  	
  72

  
	
  14.1

  	
  Relationship of Parties

  	
  72

  
	
  14.2

  	
  Tax

  	
  72

  
	
  14.3

  	
  United States Tax Election

  	
  72

  
	
  ARTICLE 15 VENTURE INFORMATION - CONFIDENTIALITY -
  INTELLECTUAL PROPERTY

  	
  73

  
	
  15.1

  	
  Venture Information

  	
  73

  
	
  15.2

  	
  Confidentiality

  	
  74

  
	
  15.3

  	
  Intellectual Property

  	
  75

  
	
  15.4

  	
  Continuing Obligations

  	
  76

  
	
  15.5

  	
  Trades

  	
  76

  
	
  ARTICLE 16 FORCE MAJEURE

  	
  76

  
	
  16.1

  	
  Obligations

  	
  76

  
	
  16.2

  	
  Definition of Force Majeure

  	
  77

  
	
  ARTICLE 17 NOTICES

  	
  77

  
	
  ARTICLE 18 APPLICABLE LAW - DISPUTE RESOLUTION -
  WAIVER OF SOVEREIGN IMMUNITY

  	
  78

  
	
  18.1

  	
  Applicable Law

  	
  78

  
	
  18.2

  	
  Dispute Resolution

  	
  78

  
	
  18.3

  	
  Expert Determination

  	
  83

  
	
  18.4

  	
  Waiver of Sovereign Immunity

  	
  83

  
	
  ARTICLE 19 ALLOCATION OF COST & PROFIT
  HYDROCARBONS

  	
  84

  
	
  19.1

  	
  Allocation of Total Production

  	
  84

  
	
  19.2

  	
  Allocation of Hydrocarbons to Parties

  	
  84

  
	
  19.3

  	
  Use of Estimates

  	
  85

  
	
  19.4

  	
  Principles

  	
  85

  
	
  ARTICLE 20 GENERAL PROVISIONS

  	
  85

  
	
  20.1

  	
  Conduct of the Parties

  	
  85

  
	
  20.2

  	
  Conflicts of Interest

  	
  86

  
	
  20.3

  	
  Public Announcements

  	
  86

  
	
  20.4

  	
  Successors and Assigns

  	
  86

  
	
  20.5

  	
  Waiver

  	
  87

  
	
  20.6

  	
  No Third Party Beneficiaries

  	
  87

  
	
  20.7

  	
  Joint Preparation

  	
  87

  
	
  20.8

  	
  Severance of Invalid Provisions

  	
  87

  
	
  20.9

  	
  Modifications

  	
  87

  
	
  20.10

  	
  Interpretation

  	
  87

  
	
  20.11

  	
  Counterpart Execution

  	
  87

  
	
  20.12

  	
  Entirety

  	
  88

  

 

	
  Exhibit A

  	
  -

  	
  Accounting Procedure

  	
   

  
	
  Exhibit B

  	
  -

  	
  Contract Area

  	
   

  
	
  [Exhibit C

  	
  -

  	
  Insurance]

  	
   

  
	
  [Exhibit D

  	
  -

  	
  Lifting Procedure [NOTE: A model Lifting
  Procedure may be acquired from the AIPN]]

  	
   

  

 iii

 

 

OPERATING AGREEMENT

THIS AGREEMENT is made as of the 17th day of November, 2004 (the “Effective Date”) among Challenger
Energy Corp., a company existing under the laws of Alberta, Canada (hereinafter
referred to as CNE); and Canadian Superior Energy Inc., a company existing
under the laws of Canada (hereinafter referred to as Canadian Superior).  The companies named above, and their
respective successors and assignees (if any), may sometimes individually be
referred to as “Party” and collectively as the “Parties”.

WITNESSETH:

WHEREAS, the Parties have entered into a Participation
Agreement dated November 17, 2004  (hereinafter referred to as the “Option”),
with, inter alia, the intention to jointly own interests in a Production
Sharing Contract (hereinafter referred to as the “Contract”);
and

WHEREAS, the Parties desire to define their respective
rights and obligations with respect to their operations under the Contract;

NOW, THEREFORE, in consideration of the premises and
the mutual covenants and agreements and obligations set out below and to be
performed, the Parties agree as follows:

ARTICLE 1

DEFINITIONS

As used in this Agreement, the following words and
terms shall have the meaning ascribed to them below:

1.1                               Accounting Procedure means the
rules, provisions and conditions contained in Exhibit A.

1.2                               AFE means an authorization for
expenditure pursuant to Article 6.7.

1.3                               Affiliate means a legal entity which
Controls, or is Controlled by, or which is Controlled by an entity which
Controls, a Party.

1.4                               Agreed Interest Rate means interest
compounded on a monthly basis, at the rate per annum equal to the one (1) month
term, London Interbank Offered Rate (LIBOR rate) for U.S. dollar deposits, as
published in London by the Financial Times or if not published, then by The
Wall Street Journal, plus two percent (2%) percentage points, applicable on
the first Business Day prior to the due date of payment and thereafter on the
first Business Day of each succeeding calendar month.  If the aforesaid rate is contrary to any
applicable usury law, the rate of interest to be charged shall be the maximum
rate permitted by such applicable law.

1.5                               Agreement means this agreement,
together with the Exhibits attached to this agreement, and any extension,
renewal or amendment hereof agreed to in writing by the Parties.

1.6                               Appraisal Well means any well (other
than an Exploration Well or a Development Well) whose purpose at the time of
commencement of drilling such well is to appraise the extent or the volume of
Hydrocarbon reserves contained in an existing Discovery.

1.7                               Business Day means a Day on which
the banks in Calgary, Alberta, Canada are customarily open for business.

1.8                               Calendar Quarter means a period of
three (3) months commencing with January 1 and ending on the following
March 31, a period of three (3) months commencing with April 1 and ending on
the following June 30, a period of three (3) months commencing with July 1
and ending on the following September 30, 

 

or a period of three (3)
months commencing with October 1 and ending on the following December 31, all
in accordance with the Gregorian Calendar.

1.9                               Calendar Year means a period of
twelve (12) months commencing with January 1 and ending on the following
December 31 according to the Gregorian Calendar.

1.10                        Commercial Discovery means any
Discovery that is sufficient to entitle the Parties to apply for authorization
from the Government to commence exploitation.

1.11                        Completion means an operation
intended to complete a well through the Christmas tree as a producer of
Hydrocarbons in one or more Zones, including the setting of production casing,
perforating, stimulating the well and production Testing conducted in such
operation.  “Complete”
and other derivatives shall be construed accordingly.

1.12                        Consenting Party means a Party who
agrees to participate in and pay its share of the cost of an Exclusive
Operation.

1.13                        Consequential Loss means any loss,
damages, costs, expenses or liabilities caused (directly or indirectly) by any
of the following arising out of, relating to, or connected with this Agreement
or the operations carried out under this Agreement: (i) reservoir or formation
damage; (ii) inability to produce, use or dispose of Hydrocarbons; (iii) loss
or deferment of income; (iv) punitive damages; or (v) other indirect damages or
losses whether or not similar to the foregoing.

1.14                        Contract means the instrument
identified in the recitals to this Agreement and any extension, renewal or
amendment thereto.

1.15                        Contract Area means as of the
Effective Date the area that is described in Exhibit B.  The perimeter or perimeters of the Contract
Area shall correspond to that area covered by the Contract, as such area may
vary from time to time during the term of validity of the Contract.

1.16                        Control means the ownership directly
or indirectly of

Check one Alternative.

x                                  ALTERNATIVE NO. 1

more than fifty (50) percent

o                                    ALTERNATIVE NO.
2

fifty (50) percent or more

of the voting rights in a legal entity.  “Controls”,
“Controlled by” and other
derivatives shall be construed accordingly.

1.17                        Cost Hydrocarbons means that portion
of the total production of Hydrocarbons which is allocated to the Parties under
the Contract and this Agreement for the recovery of the costs
and expenses incurred by the Parties and allowed to be recovered pursuant to
the Contract.

1.18                        Crude Oil means all crude oils,
condensates, and natural gas liquids at atmospheric pressure which are subject
to and covered by the Contract.

1.19                        Day means a calendar day unless
otherwise specifically provided.

1.20                        Deepening means an operation whereby
a well is drilled to an objective Zone below the deepest Zone in which the well
was previously drilled, or below the deepest Zone proposed in the associated AFE
(if required), whichever is the deeper.  “Deepen” and other derivatives shall
be construed accordingly.

 2
 

 

 

1.21                        Development Plan means a plan for
the development of Hydrocarbons from an Exploitation Area.

1.22                        Development Well means any well
drilled for the production of Hydrocarbons pursuant to a Development Plan.

1.23                        Discovery means the discovery of an
accumulation of Hydrocarbons whose existence until that moment was unproven by
drilling.

1.24                        Dispute means any dispute,
controversy or claim (of any and every kind or type, whether based on contract,
tort, statute, regulation, or otherwise) arising out of, relating to, or
connected with this Agreement or the operations carried out under this
Agreement, including any dispute as to the construction, validity,
interpretation, enforceability or breach of this Agreement.

1.25                        Entitlement means that quantity of
Hydrocarbons (excluding all quantities used or lost in Joint Operations) of
which a Party has the right and obligation to take delivery pursuant to the terms
of this Agreement and the Contract, as such rights and obligations may be
adjusted by the terms of any lifting, balancing and other disposition
agreements entered into pursuant to Article 9.

1.26                        Environmental Loss means any loss,
damages, costs, expenses or liabilities (other than Consequential Loss) caused
by a discharge of Hydrocarbons, pollutants or other contaminants into or onto
any medium (such as land, surface water, ground water and/or air) arising out
of, relating to, or connected with this Agreement or the operations carried out
under this Agreement, including any of the following: (i) injury or damage to,
or destruction of, natural resources or real or personal property; (ii) cost of
pollution control, cleanup and removal; (iii) cost of restoration of natural
resources; and (iv) fines, penalties or other assessments.

1.27                        Exclusive Operation means those
operations and activities carried out pursuant to this Agreement, the costs of
which are chargeable to the account of less than all the Parties.

1.28                        Exclusive Well means a well drilled
pursuant to an Exclusive Operation.

1.29                        Exploitation Area means that part of
the Contract Area which is established for development of a Commercial
Discovery pursuant to the Contract or, if the Contract does not establish an
exploitation area, then that part of the Contract Area which is delineated as
the exploitation area in a Development Plan approved as a Joint Operation or as
an Exclusive Operation.

1.30                        Exploitation Period means any and
all periods of exploitation during which the production and removal of
Hydrocarbons is permitted under the Contract.

1.31                        Exploration Period means any and all
periods of exploration set out in the Contract.

1.32                        Exploration Well means any well the
purpose of which at the time of the commencement of drilling is to explore for
an accumulation of Hydrocarbons, which accumulation was at that time unproven
by drilling.

1.33                        G & G Data means only
geological, geophysical and geochemical data and other similar information that
is not obtained through a well bore.

1.34                        Government means the government of
the Canada and any political subdivision, agency or instrumentality thereof,
including the Government Oil & Gas Company.

1.35                        Government Oil & Gas Company
means                                                                          .

1.36                        Gross Negligence / Willful Misconduct
means any act or failure to act (whether sole, joint or concurrent) by any
person or entity which was intended to cause, or which was in reckless
disregard of or wanton indifference to, harmful consequences such person or
entity knew, or should have known, such act or 

 3
 

 

failure would have on the
safety or property of another person or entity.

1.37                        Hydrocarbons means all substances
which are subject to and covered by the Contract, including Crude Oil and
Natural Gas.

1.38                        Joint Account means the accounts
maintained by Operator in accordance with the provisions of this Agreement,
including the Accounting Procedure.

1.39                        Joint Operations means those
operations and activities carried out by Operator pursuant to this Agreement,
the costs of which are chargeable to all Parties.

1.40                        Joint Property means, at any point
in time, all wells, facilities, equipment, materials, information, funds and
property (other than Hydrocarbons) held for use in Joint Operations.

1.41                        Laws / Regulations means those laws,
statutes, rules and regulations governing activities under the Contract.

1.42                        Minimum Work Obligations means those
work and/or expenditure obligations specified in the Contract that must be
performed in order to satisfy the obligations of the Contract.

1.43                        Natural Gas means all gaseous
hydrocarbons (including wet gas, dry gas and residue gas) which are subject to
and covered by the Contract, but excluding Crude Oil.

1.44                        Non-Consenting Party means each
Party who elects not to participate in an Exclusive Operation.

1.45                        Non-Operator means each Party to
this Agreement other than Operator.

1.46                        Operating Committee means the
committee constituted in accordance with Article 5.

1.47                        Operator means a Party to this
Agreement designated as such in accordance with Articles 4 or 7.12(F).

1.48                        Participating Interest means as to
any Party, the undivided interest of such Party (expressed as a percentage of
the total interests of all Parties) in the rights and obligations derived from
the Parties’ interest in the Contract and this Agreement.

1.49                        Plugging Back means a single
operation whereby a deeper Zone is abandoned in order to attempt a Completion
in a shallower Zone.  “Plug Back” and other derivatives
shall be construed accordingly.

1.50                        Profit Hydrocarbons means that
portion of the total production of Hydrocarbons, in excess of Cost
Hydrocarbons, which is allocated to the Parties under the terms of the
Contract.

1.51                        Recompletion means an operation
whereby a Completion in one Zone is abandoned in order to attempt a Completion
in a different Zone within the existing wellbore.  “Recomplete”
and other derivatives shall be construed accordingly.

1.52                        Reworking
means an operation conducted in the wellbore of a well after it is Completed to
secure, restore, or improve production in a Zone which is currently open to
production in the wellbore.  Such
operations include well stimulation operations, but exclude any routine repair
or maintenance work, or drilling, Sidetracking, Deepening, Completing,
Recompleting, or Plugging Back of a well. 
“Rework” and other
derivatives shall be construed accordingly.

1.53                        Security means (i) a guarantee or
standby letter of credit issued by a bank; (ii) an on-demand bond issued by a
surety corporation; (iii) a corporate guarantee; (iv) any financial security
required by the Contract or this Agreement; and (v) any financial security
agreed from time to time by the Parties; provided, however, that the bank,
surety or corporation issuing the guarantee, standby letter of credit, bond or
other security (as 

 4
 

 

applicable) has a credit
rating indicating it has a sufficient worth to pay its obligations in all
reasonably foreseeable circumstances.

1.54                        Senior Supervisory Personnel means,
with respect to a Party, any individual who functions as:

Check one Alternative.

o                                    ALTERNATIVE
NO. 1 -  Field Supervisor Tier               

its designated manager or supervisor who is responsible for or in charge of
onsite drilling, construction or production and related operations, or any
other field operations;

x                                  ALTERNATIVE
NO. 2 -  Facility Manager Tier              

its designated manager or supervisor of an onshore or offshore installation or
facility used for operations and activities of such Party, but excluding all
managers or supervisors who are responsible for or in charge of onsite
drilling, construction or production and related operations or any other field
operations;

o                                    ALTERNATIVE
NO. 3 -  Resident Manager and Direct
Managerial Report Tier

its senior resident manager who directs all operations and activities of such
Party in the country or region in which he is resident, and any manager who
directly reports to such senior resident manager in such country or region, but
excluding all managers or supervisors who are responsible for or in charge of
installations or facilities, onsite drilling, construction or production and
related operations, or any other field operations;

o                                    ALTERNATIVE
NO. 4 -  Resident Manager Tier           

its senior resident manager who directs all operations and activities of such
Party in the country or region in which he is resident, but excluding all
managers or supervisors who are responsible for or in charge of installations
or facilities, onsite drilling, construction or production and related
operations, or any other field operations;

and, in any of the above alternatives, any individual
who functions for such Party or one of its Affiliates at a management level
equivalent to or superior to the tier selected, or any officer or director of
such Party or one of its Affiliates.

1.55                        Sidetracking means the directional
control and intentional deviation of a well from vertical so as to change the
bottom hole location unless done to straighten the hole or to drill around junk
in the hole or to overcome other mechanical difficulties.  “Sidetrack”
and other derivatives shall be construed accordingly.

1.56                        Testing means an operation intended
to evaluate the capacity of a Zone to produce Hydrocarbons.  “Test” and
other derivatives shall be construed accordingly.

1.57                        Urgent Operational Matters has the
meaning ascribed to it in Article 5.12(A)(1).

1.58                        Work Program and Budget means a work
program for Joint Operations and budget therefor as described and approved in
accordance with Article 6.

1.59                        Zone means a stratum of earth
containing or thought to contain an accumulation of Hydrocarbons separately
producible from any other accumulation of Hydrocarbons.

ARTICLE 2

EFFECTIVE DATE AND TERM

This Agreement shall have
effect from the Effective Date (as defined in the preamble to this Agreement)
and shall continue in effect until the following occur in accordance with the
terms of this Agreement: the Contract terminates; all materials, equipment and
personal property used in connection with Joint Operations or Exclusive 

 5
 

 

Operations have
been disposed of or removed; and final settlement (including settlement in
relation to any financial audit carried out pursuant to the Accounting
Procedure) has been made. 
Notwithstanding the preceding sentence: (i) Article 10 shall remain
in effect until all abandonment obligations under the Contract have been
satisfied; and (ii) Article 4.5, Article 8, Article
15.2, Article 18 and the indemnity obligation under Article 20.1 (A) shall
remain in effect until all obligations have been extinguished and all Disputes
have been resolved.  Termination of this
Agreement shall be without prejudice to any rights and obligations arising out
of or in connection with this Agreement which have vested, matured or accrued
prior to such termination.

ARTICLE 3

SCOPE

3.1          Scope

(A)                              The
purpose of this Agreement is to establish the respective rights and obligations
of the Parties with regard to operations under the Contract, including the
joint exploration, appraisal, development, production and disposition of
Hydrocarbons from the Contract Area.

(B)                                For
greater certainty, the Parties confirm that, except to the extent expressly
included in the Contract, the following activities are outside of the scope of
this Agreement and are not addressed herein:

(1)                                  construction,
operation, ownership, maintenance, repair and removal of facilities downstream
from the delivery point (as determined under Article 9) of the Parties’
Entitlements;

(2)                                  transportation
of the Parties’ Entitlements downstream from the delivery point (as determined
under Article 9);

(3)                                  marketing
and sales of Hydrocarbons, except as expressly provided in
Article 7.12(E), Article 8.4 and Article 9;

(4)                                  acquisition
of rights to explore for, appraise, develop or produce Hydrocarbons outside of
the Contract Area (other than as a consequence of unitization with an adjoining
contract area under the terms of the Contract); and

(5)                                  exploration,
appraisal, development or production of minerals other than Hydrocarbons,
whether inside or outside of the Contract Area.

3.2                               Participating
Interest

(A)                              The
Participating Interests of the Parties as of the Effective Date are:

	
  CNE

  	
   

  	
  12.5

  	
  %

  
	
  Canadian Superior

  	
   

  	
  87.5

  	
  %

  

 

(B)                                If
a Party transfers all or part of its Participating Interest pursuant to the
provisions of this Agreement and the Contract, the Participating Interests of
the Parties shall be revised accordingly.

3.3                               Ownership,
Obligations and Liabilities

(A)                              Unless
otherwise provided in this Agreement, all the rights and interests in and under
the Contract, all Joint Property, and any Hydrocarbons produced from the
Contract Area shall, subject to the terms of the Contract, be owned by the
Parties in accordance with their respective Participating Interests.

 6
 

 

 

(B)                                Unless
otherwise provided in this Agreement, the obligations of the Parties under the
Contract and all liabilities and expenses incurred by Operator in connection
with Joint Operations shall be charged to the Joint Account and all credits to
the Joint Account shall be shared by the Parties, in accordance with their
respective Participating Interests.

(C)                                Each
Party shall pay when due, in accordance with the Accounting Procedure, its
Participating Interest share of Joint Account expenses, including cash advances
and interest, accrued pursuant to this Agreement.  A Party’s payment of any charge under this
Agreement shall be without prejudice to its right to later contest the charge.

Check Article 3.4, if desired.

o            OPTIONAL PROVISION

3.4                               Government
Participation

If Government Oil
& Gas Company elects to participate in the rights and obligations of
Parties pursuant to Section        of the
Contract, the Parties shall contribute, in proportion to their respective
Participating Interests, to the interest to be acquired by Government Oil &
Gas Company.

Check one alternative.

o                                    ALTERNATIVE
NO. 1        

The Parties shall execute such documents as may be necessary to effect such
transfer of interests and the joinder of Government Oil & Gas Company as a
Party to this Agreement.  All payments
received for the transfer of such interests shall be credited to the Parties in
proportion to their Participating Interests.

o                                    ALTERNATIVE
NO. 2        

The Parties shall execute such documents as may be necessary to effect such
transfer of interests.  The rights and
obligations of the Parties with respect to each other shall remain unchanged;
however, they shall enter into a separate operating agreement with Government
Oil & Gas Company with respect to the rights and obligations of Government
Oil & Gas Company, on the one hand, and the Parties on the other.  All payments received for the transfer of
such interests shall be credited to the Parties in proportion to their
Participating Interests.

ARTICLE 4

OPERATOR

4.1                               Designation
of Operator

Canadian Superior is
designated as Operator and agrees to act as such in accordance with this
Agreement.

4.2                               Rights
and Duties of Operator

(A)                              Subject
to the terms and conditions of this Agreement, Operator shall have all of the
rights, functions and duties of Operator under the Contract and shall have
exclusive charge of and shall conduct all Joint Operations.  Operator may employ independent contractors
and agents (which independent contractors and agents may include an Affiliate
of Operator, a Non-Operator, or an Affiliate of a Non-Operator) in such Joint
Operations.

(B)                                In
the conduct of Joint Operations Operator shall:

 7
 

 

 

(1)                                  perform
Joint Operations in accordance with the provisions of the Contract, the Laws /
Regulations, this Agreement, and the decisions of the Operating Committee not
in conflict with this Agreement;

(2)                                  conduct
all Joint Operations in a diligent, safe and efficient manner in accordance
with such good and prudent petroleum industry practices and field conservation
principles as are generally followed by the international petroleum industry
under similar circumstances;

(3)                                  exercise
due care with respect to the receipt, payment and accounting of funds in
accordance with good and prudent practices as are generally followed by the
international petroleum industry under similar circumstances;

(4)                                  subject
to Article 4.6 and the Accounting Procedure, neither gain a profit nor suffer a
loss as a result of being the Operator in its conduct of Joint Operations,
provided that Operator may rely upon Operating Committee approval of specific
accounting practices not in conflict with the Accounting Procedure;

(5)                                  perform
the duties for the Operating Committee set out in Article 5, and prepare and
submit to the Operating Committee proposed Work Programs and Budgets and (if
required) AFEs, as provided in Article 6;

(6)                                  acquire
all permits, consents, approvals, and surface or other rights that may be
required for or in connection with the conduct of Joint Operations;

(7)                                  upon
receipt of reasonable advance notice, permit the representatives of any of the
Parties to have at all reasonable times during normal business hours and at
their own risk and expense reasonable access to the Joint Operations with the
right to observe all Joint Operations and to inspect all Joint Property and to
conduct financial audits as provided in the Accounting Procedure;

(8)                                  undertake
to maintain the Contract in full force and effect in accordance with such good
and prudent petroleum industry practices as are generally followed by the
international petroleum industry under similar circumstances.  Operator shall timely pay and discharge all
liabilities and expenses incurred in connection with Joint Operations and use
its reasonable endeavors to keep and maintain the Joint Property free from all
liens, charges and encumbrances arising out of Joint Operations;

(9)                                  pay
to the Government for the Joint Account, within the periods and in the manner
prescribed by the Contract and the Laws / Regulations, all periodic payments,
royalties, taxes, fees and other payments pertaining to Joint Operations but
excluding any taxes measured by the incomes of the Parties;

(10)                            carry
out the obligations of Operator pursuant to the Contract, including preparing
and furnishing such reports, records and information as may be required
pursuant to the Contract;

(11)                            have,
in accordance with any decisions of the Operating Committee, the exclusive
right and obligation to represent the Parties in all dealings with the
Government with respect to matters arising under the Contract and Joint
Operations.  Operator shall notify the
other Parties as soon as possible of such meetings.  Subject to the Contract and any necessary
Government approvals, Non-Operators shall have the right to attend any meetings
with the Government with respect to such matters, but only in the capacity of
observers.  Nothing contained in this
Agreement shall restrict any Party from holding discussions with the Government
with respect to any issue peculiar to its particular business interests 

 8
 

 

arising under the
Contract or this Agreement, but in such event such Party shall promptly advise
the Parties, if possible, before and in any event promptly after such
discussions, provided that such Party shall not be required to divulge to the
Parties any matters discussed to the extent the same involve proprietary
information or matters not affecting the Parties;

(12)                            in
accordance with Article 9.3 and any decisions of the Operating Committee,
assess (to the extent lawful) alternatives for the disposition of Natural Gas
from a Discovery;

(13)                            in
case of an emergency (including a significant fire, explosion, Natural Gas
release, Crude Oil release, or sabotage; incident involving loss of life,
serious injury to an employee, contractor, or third party, or serious property
damage; strikes and riots; or evacuations of Operator personnel): (i) take all
necessary and proper measures for the protection of life, health, the
environment and property; and (ii) as soon as reasonably practicable, report to
Non-Operators the details of such event and any measures Operator has taken or
plans to take in response thereto;

(14)                            establish
and implement pursuant to Article 4.12 an HSE plan to govern Joint Operations
which is designed to ensure compliance with applicable HSE laws, rules and regulations
and this Agreement;

(15)                            include,
to the extent practical, in its contracts with independent contractors and to
the extent lawful, provisions which:

(a)                                  establish
that such contractors can only enforce their contracts against Operator;

(b)                                 permit
Operator, on behalf of itself and Non-Operators, to enforce contractual
indemnities against, and recover losses and damages suffered by them (insofar
as recovered under their contracts) from, such contractors; and

(c)                                  require
such contractors to take insurance required by Article 4.7(H).

4.3                               Operator
Personnel

Check one
Alternative

o                                    ALTERNATIVE NO. 1

Operator shall engage or retain only such employees, contractors, consultants
and agents as are reasonably necessary to conduct Joint Operations.  Subject to the Contract and this Agreement,
Operator shall determine the number of employees, contractors, consultants and
agents, the selection of such persons, their hours of work, and the
compensation to be paid to all such persons in connection with Joint Operations.

o                                    ALTERNATIVE NO. 2

Operator shall engage or retain only such employees,
secondees, contractors, consultants and agents as are reasonably necessary to
conduct Joint Operations.  Subject to the
Contract and this Agreement, Operator shall determine the number of employees,
secondees, contractors, consultants and other persons, the selection of such
persons, their hours of work, and (except for secondees) the compensation to be
paid to all such persons in connection with Joint Operations.

x                                  ALTERNATIVE NO. 3
- (from Paragraph (A) to (F))

(A)                              Operator
shall engage or retain only such employees, Secondees, contractors, consultants
and agents as are reasonably necessary to conduct Joint Operations.  For the purposes of this Article 4.3, “Secondee” means an employee of a
Non-Operator (or its Affiliate) who 

 9
 

 

is seconded to Operator
to provide services under a secondment agreement to be negotiated and entered
into between Operator and such Non-Operator; and “Secondment”
means placement within Operator’s organization in accordance with this Article
4.3 of one or more persons who are employed by a Non-Operator or an Affiliate.

(B)                                Subject
to the Contract and this Agreement, Operator shall determine the number of
employees, Secondees, contractors, consultants and agents, the selection of
such persons, their hours of work, and (except for Secondees) the compensation
to be paid to all such persons in connection with Joint Operations.

(C)                                No
Secondment may be implemented except (i) in situations requiring particular expertise
or involving projects of a technical, operational or economically challenging
nature; and (ii) in the manner set out in paragraphs (1) to (7) below.

(1)                                  Any
Party may propose Secondment for a designated purpose related to Joint
Operations.  Any proposal for Secondment
must include the:

(a)                                  designated
purpose and scope of Secondment, including duties, responsibilities, and
deliverables;

(b)                                 duration
of the Secondment;

(c)                                  number
of Secondees and minimum expertise, qualifications and experience required;

(d)                                 work
location and position within Operator’s organization of each Secondee; and

(e)                                  estimated
costs of the Secondment.

(2)                                  In
relation to a proposed Secondment meeting the requirements of
Article 4.3(C)(1), Operator shall as soon as reasonably practicable:

Check one Alternative.

o                                    ALTERNATIVE NO. 1

approve or reject any Secondment proposed by a Non-Operator, in Operator’s sole
discretion.

x                                  ALTERNATIVE NO. 2

approve (such approval to not be unreasonably withheld) or reject any
Secondment proposed by a Non-Operator. Without prejudice to Operator’s right to
conduct Joint Operations in accordance with this Agreement and the Contract,
Operator shall consider such Secondment proposal in light of the: (i) expertise
and experience required for the relevant Joint Operations; (ii) expertise
and experience of Operator’s personnel; and (iii) potential benefits of such
Secondment to the conduct of Joint Operations.

(3)                                  Any
proposal for one or more Secondment positions approved by Operator is subject
to: (i) the Operating Committee’s authorization of an appropriate budget for
such Secondment positions; and (ii) Non-Operators continuing to make available
to Operator Secondees qualified to fulfill the designated purpose and scope of
such Secondment.

 10

 

 

(4)                                  As
to each approved and authorized Secondment position, Operator shall request
Non-Operators to nominate, by a specified date, qualified personnel to be the
Secondee for such position.  Each
Non-Operator has the right (but not the obligation) to nominate for each
Secondment position one or more proposed Secondees who such Non-Operator
considers reasonably qualified to fulfill the designated purpose and scope of
such Secondment.

(5)                                  Following
the deadline for submitting nominations, Operator shall consider the expertise
and experience of each such nominee in light of the expertise and experience
required for the approved and authorized Secondment position, and shall:

Check one Alternative.

o                                    ALTERNATIVE NO. 1

select or reject any nominee in Operator’s sole discretion.

x                                  ALTERNATIVE NO. 2

select from the nominees the best qualified person, unless Operator reasonably
demonstrates that no nominee is qualified to fulfill the designated purpose and
scope of such Secondment.

(6)                                  Operator
shall have the right to terminate the Secondment for cause in accordance with
the secondment agreement provided for under Article 4.3(D).

(7)                                  Although
each Secondee shall report to and be directed by Operator, each Secondee shall
remain at all times the employee of the Party (or its Affiliate) nominating
such Secondee.

(D)                               Any
Secondment under this Agreement shall be in accordance with a separate
secondment agreement to be negotiated and entered into between Operator and the
employer of the Secondee, which agreement shall be consistent with this Article
4.3.

(E)                                 All
costs related to Secondment and Secondees that are within the Work Program and
Budget related to such Secondment position shall be charged to the Joint
Account.

(F)                                 If
any Secondee acting as the Senior Supervisory Personnel of Operator or its
Affiliates engages in Gross Negligence / Willful Misconduct which proximately
causes the Parties to incur damage, loss, cost, expense or liability for
claims, demands or causes of action referred to in Articles 4.6(A) or 4.6(B), then
all such damages, losses, costs, expenses and liabilities shall be allocated
to:

Check one Alternative.

o                                    ALTERNATIVE NO. 1

the Joint Account notwithstanding the provisions of Article 4.6.

x                                  ALTERNATIVE NO. 2

Operator, in accordance with Article 4.6.

o                                    ALTERNATIVE NO. 3

the Non-Operator who nominated such Secondee, in an equivalent manner and to
the same extent liability for Gross Negligence / Willful Misconduct is 

 11
 

 

allocated to Operator
pursuant to Article 4.6.

4.4                               Information
Supplied by Operator

(A)                              Operator
shall provide Non-Operators with the following data and reports (to the extent
to be charged to the Joint Account) as they are currently produced or compiled
from Joint Operations:

(1)                                  copies
of all logs or surveys, including in digitally recorded format if such exists;

(2)                                  daily
drilling reports;

(3)                                  copies
of all Tests and core data and analysis reports;

(4)                                  final
well recap report;

(5)                                  copies
of plugging reports;

(6)                                  copies
of final geological and geophysical maps, seismic sections and shot point
location maps;

(7)                                  engineering
studies, development schedules and [quarterly/annual] progress reports on
development projects;

(8)                                  field
and well performance reports, including reservoir studies and reserve
estimates;

(9)                                  as
requested by a Non-Operator, (i) copies of all material reports relating to
Joint Operations or the Contract Area furnished by Operator to the Government;
and (ii) other material studies and reports relating to Joint Operations;

(10)                            gas
balancing reports under agreements provided for in Article 9.3;

(11)                            such
additional information as a Non-Operator may reasonably request, provided that
the requesting Party or Parties pay the costs of preparation of such
information and that the preparation of such information will not unduly burden
Operator’s administrative and technical personnel.  Only Non-Operators who pay such costs will
receive such additional information; and

(12)                            other
reports as directed by the Operating Committee.

(B)                                Operator
shall give Non-Operators access at all reasonable times during normal business
hours to all data and reports (other than data and reports provided to
Non-Operators in accordance with Article 4.4(A)) acquired in the conduct
of Joint Operations, which a Non-Operator may reasonably request.  Any Non-Operator may make copies of such
other data at its sole expense.

 12
 

 

 

4.5                               Settlement
of Claims and Lawsuits

(A)                              Operator
shall promptly notify the Parties of any and all material claims or suits that
relate in any way to Joint Operations. 
Operator shall represent the Parties and defend or oppose the claim or
suit.  Operator may in its sole
discretion compromise or settle any such claim or suit or any related series of
claims or suits for an amount not to exceed the equivalent of one hundred
thousand U.S. dollars exclusive of legal fees. 
Operator shall obtain the approval and direction of the Operating
Committee on amounts in excess of the above-stated amount.  Without prejudice to the foregoing, each
Non-Operator shall have the right to be represented by its own counsel at its
own expense in the settlement, compromise or defense of such claims or suits.

(B)                                Any
Non-Operator shall promptly notify the other Parties of any claim made against
such Non-Operator by a third party that arises out of or may affect the Joint Operations,
and such Non-Operator shall defend or settle the same in accordance with any
directions given by the Operating Committee. 
Those costs, expenses and damages incurred pursuant to such defense or
settlement which are attributable to Joint Operations shall be for the Joint
Account.

(C)                                Notwithstanding
Article 4.5(A) and Article 4.5(B), each Party shall have the right to
participate in any such suit, prosecution, defense or settlement conducted in
accordance with Article 4.5(A) and Article 4.5(B), at its sole cost and
expense; provided always that no Party may settle its Participating Interest
share of any claim without first satisfying the Operating Committee that it can
do so without prejudicing the interests of the Joint Operations.

4.6                               Limitation
on Liability of Operator

(A)                              [Except
as set out in Article 4.6(C)], neither Operator nor any other Indemnitee (as
defined below) shall bear (except as a Party to the extent of its Participating
Interest share) any damage, loss, cost, expense or liability resulting from
performing (or failing to perform) the duties and functions of Operator, and
the Indemnitees are hereby released from liability to Non-Operators for any and
all damages, losses, costs, expenses and liabilities arising out of, incident
to or resulting from such performance or failure to perform, even though caused
in whole or in part by a pre-existing defect, or the negligence (whether sole,
joint or concurrent), gross negligence, willful misconduct, strict liability or
other legal fault of Operator (or any such Indemnitee).

(B)                                [Except
as set out in Article 4.6(C)], the Parties shall (in proportion to their
Participating Interests) defend and indemnify Operator and its Affiliates, and
their respective directors, officers, and employees (collectively, the “Indemnitees”), from any and all
damages, losses, costs, expenses (including reasonable legal costs, expenses
and attorneys’ fees) and liabilities incident to claims, demands or causes of
action brought by or on behalf of any person or entity, which claims, demands
or causes of action arise out of, are incident to or result from Joint
Operations, even though caused in whole or in part by a pre-existing defect, or
the negligence (whether sole, joint or concurrent), gross negligence, willful
misconduct, strict liability or other legal fault of Operator (or any such
Indemnitee).

x                                  OPTIONAL
PROVISION

(C)                                Notwithstanding
Articles 4.6(A) or 4.6(B), if any Senior Supervisory Personnel of Operator or
its Affiliates engage in Gross Negligence / Willful Misconduct which
proximately causes the Parties to incur damage, loss, cost, expense or
liability for claims, demands or causes of action referred to in Articles
4.6(A) or 4.6(B), then, in addition to its Participating Interest share:

Check one
Alternative.

x                                  ALTERNATIVE NO. 1
- No Limitation             

 13
 

 

 

 

Operator
shall bear all such damages, losses, costs, expenses and liabilities.

 

o                                    ALTERNATIVE NO.
2 - Joint Property Limitation

Operator
shall bear only the actual damage, loss, cost, expense and liability to repair,
replace and/or remove Joint Property so damaged or lost, if any.

o                                    ALTERNATIVE
NO. 3 — Financial Limitation               

Operator shall bear only the first [                
U.S. dollars] of such damages, losses, costs, expenses and liabilities.

Notwithstanding the foregoing,
under no circumstances shall Operator (except as a Party to the extent of its
Participating Interest) or any other Indemnitee bear any Consequential Loss or
Environmental Loss.

(D)                               Nothing
in this Article 4.6 shall be deemed to relieve Operator from its Participating
Interest share of any damage, loss, cost, expense or liability arising out of,
incident to, or resulting from Joint Operations.

4.7                               Insurance
Obtained by Operator

(A)                              Operator
shall procure and maintain for the Joint Account all insurance in the types and
amounts required by the Contract or the Laws / Regulations [or as provided in
Exhibit C].

(B)                                Operator
shall procure and maintain any further insurance, at reasonable rates, as the
Operating Committee may from time to time require.  In the event that such further insurance is,
in Operator’s reasonable opinion, unavailable or available only at an
unreasonable cost, Operator shall promptly notify the Non-Operators in order to
allow the Operating Committee to reconsider such further insurance.

(C)                                Each
Party will be provided the opportunity to underwrite any or all of the
insurance to be obtained by Operator under Articles 4.7(A) and 4.7(B), through
such Party’s Affiliate insurance company or, if such direct insurance is not so
permitted, through reinsurance policies to such Party’s Affiliate insurance
company; provided that the security and creditworthiness of such insurance
arrangements are satisfactory to Operator, and that such arrangements will not
result in any part of the premiums for such insurance not being recoverable
under the Contract, or being significantly higher than the market rate.

(D)                               Subject
to the Contract and the Laws / Regulations, any Party may elect not to
participate in the insurance to be procured under:

Check one
Alternative.

o                                    ALTERNATIVE
NO. 1        

Articles 4.7(A) and 4.7(B) provided such Party:

x                                  ALTERNATIVE
NO. 2        

Article 4.7(B) provided such Party:

(1)                                  gives
prompt written notice to that effect to Operator;

(2)                                  does
nothing which may interfere with Operator’s negotiations for such insurance for
the other Parties;

 14
 

 

(3)                                  obtains
insurance prior to or concurrent with the commencement of relevant operations
and maintains such insurance (in respect of which a current certificate of
adequate coverage, provided at least once a year, shall be sufficient evidence)
or other evidence of financial responsibility which fully covers its
Participating Interest share of the risks that would be covered by the
insurance to be procured under Article 4.7(A) and/or Article 4.7(B), as applicable,
and which the Operating Committee determines to be acceptable.  No such determination of acceptability shall
in any way absolve a non-participating Party from its obligation to meet each
cash call (except, in accordance with Article 4.7(F), as regards the costs of
the insurance policy in which such Party has elected not to participate)
including any cash call with respect to damages and losses and/or the costs of
remedying the same in accordance with the terms of this Agreement, the Contract
and the Laws / Regulations.  If such
Party obtains other insurance, such insurance shall (a) contain a waiver of
subrogation in favor of all the other Parties, the Operator and their insurers
but only with respect to their interests under this Agreement; (b) provide that
thirty (30) days written notice be given to Operator prior to any material
change in, or cancellation of, such insurance policy; (c) be primary to, and
receive no contribution from, any other insurance maintained by or on behalf
of, or benefiting Operator or the other Parties; and (d) contain adequate
territorial extensions and coverage in the location of the Joint Operations;
and

(4)                                  is
responsible for all deductibles, coinsurance payments, self-insured exposures,
uninsured or underinsured exposures relating to its interests under this
Agreement.

Check Paragraph (E), if desired.
Renumber following paragraphs if Paragraph (E) is not selected.

x           OPTIONAL PROVISION

(E)                                 In
the event Operator elects, to the extent permitted by the Contract and Laws / Regulations,
to self-insure all or part of the coverage to be procured under Articles 4.7(A)
and/or 4.7(B), Operator shall so notify the Operating Committee and provide a
qualified self-insurance letter stating what coverages Operator is
self-insuring.  Any risk to be covered by
insurance to be procured in accordance with Articles 4.7(A) and 4.7(B), that is
not identified in the self-insurance letter shall be covered by insurance and
supported by a current certificate of adequate coverage.  If requested by the Operating Committee from
time to time, Operator shall provide evidence of financial responsibility,
acceptable to the Operating Committee, which fully covers the risks that would
be covered by the insurance to be procured under Articles 4.7(A) and 4.7(B).

(F)                                 The
cost of insurance in which all the Parties are participating shall be for the
Joint Account and the cost of insurance in which less than all the Parties are
participating shall be charged to the Parties participating in proportion to
their respective Participating Interests. 
Subject to the preceding sentence, the cost of insurance with respect to
an Exclusive Operation shall be charged to the Consenting Parties.

(G)                                Operator
shall, with respect to all insurance obtained under this Article 4.7:

(1)                                  use
reasonable endeavors to procure or cause to be procured such insurance prior to
or concurrent with, the commencement of relevant operations and maintain or
cause to be maintained such insurance during the term of the relevant
operations or any longer term required under the Contract or the Laws /
Regulations;

(2)                                  promptly
inform the participating Parties when such insurance is obtained and supply
them with certificates of insurance or copies of the relevant policies when the
same are issued;

 15
 

 

(3)                                  arrange
for the participating Parties, according to their respective Participating
Interests, to be named as co-insureds on the relevant policies with waivers of
subrogation in favor of all the Parties but only with respect to their
interests under this Agreement;

(4)                                  use
reasonable endeavors to ensure that each policy shall survive the default or
bankruptcy of the insured for claims arising out of an event before such
default or bankruptcy and that all rights of the insured shall revert to the
Parties not in default or bankruptcy; and

(5)                                  duly
file all claims and take all necessary and proper steps to collect any proceeds
and credit any proceeds to the participating Parties in proportion to their
respective Participating Interests.

(H)                               Operator
shall use its reasonable endeavors to require all contractors performing work
with respect to Joint Operations to:

(1)                                  obtain
and maintain any and all insurance in the types and amounts required by the
Contract, the Laws / Regulations or any decision of the Operating Committee;

(2)                                  name
the Parties as additional insureds on the contractor’s insurance policies and
obtain from their insurers waivers of all rights of recourse against Operator,
Non-Operators and their insurers; and

(3)                                  provide
Operator with certificates reflecting such insurance prior to the commencement
of their services.

4.8                               Commingling
of Funds

Check one Alternative.

x                                  ALTERNATIVE
NO. 1

Operator may not commingle with Operator’s own funds the monies which Operator
receives from or for the Joint Account pursuant to this Agreement.  However, Operator reserves the right to make
future proposals to the Operating Committee with respect to the commingling of
funds to achieve financial efficiency.

o                                    ALTERNATIVE
NO. 2        

Operator may commingle with its own funds the monies which it receives from or
for the Joint Account pursuant to this Agreement.  Notwithstanding that monies of a Non-Operator
have been commingled with Operator’s funds, Operator shall account to the
Non-Operators for the monies of a Non-Operator advanced or paid to Operator,
whether for the conduct of Joint Operations or as proceeds from the sale of
Hydrocarbons or Joint Property under this Agreement.  Such monies shall be applied only to their
intended use and shall in no way be deemed to be funds belonging to Operator.

Check if desired, in relation to
Alternative No. 2

o                                    OPTIONAL
PROVISION    

Notwithstanding the foregoing, the Operating Committee shall have the right to
require Operator to segregate from Operator’s own funds the monies which
Operator receives:

Check one alternative.

o                                    ALTERNATIVE
NO. 2-1     

from or for the Joint Account pursuant to this Agreement.

 16
 

 

o                                    ALTERNATIVE
NO. 2-2     

from the Parties in connection with operations on each Exploitation Area.

Check if
desired.

o                                    OPTIONAL
PROVISION - Interest Bearing Account    

The Operating Committee may decide that monies Operator receives for the Joint
Account shall be deposited in an interest-bearing account

Check one alternative.

o                                    ALTERNATIVE
NO. 1        

at any time.

o                                    ALTERNATIVE
NO. 2        

after the approval of the Development Plan.

Interest earned shall be allocated among the Parties
on an equitable basis taking into account the date of the funding by each Party
and its share of the Joint Account monies. 
Operator shall apply such earned interest to the next succeeding cash
call or, if directed by the Operating Committee, pay it to the Parties.

4.9                               Resignation
of Operator

Subject to Article 4.11, Operator may resign as
Operator at any time by so notifying the other Parties at least one hundred and
twenty (120) Days prior to the effective date of such resignation.

4.10                        Removal of
Operator

(A)                              Subject
to Article 4.11, Operator shall be removed upon receipt of notice from any
Non-Operator if:

(1)                                  Operator
becomes insolvent or bankrupt, or makes an assignment for the benefit of
creditors;

(2)                                  an
order is made by a court or an effective resolution is passed for the
reorganization under any bankruptcy law, dissolution, liquidation, or winding
up of Operator;

(3)                                  a
receiver is appointed for a substantial part of Operator’s assets; or

(4)                                  Operator
dissolves, liquidates, is wound up, or otherwise terminates its existence.

(B)                                Subject
to Article 4.11, Operator may be removed by the decision of the Non-Operators
if Operator has committed a material breach of this Agreement and has either
failed to commence to cure that breach within thirty (30) Days of receipt of a
notice from Non-Operators detailing the alleged breach or failed to diligently
pursue the cure to completion.  Any
decision of Non-Operators to give notice of breach to Operator or to remove
Operator under this Article 4.10(B) shall be made by an affirmative vote of a
majority of at least twenty five percent (25%). 
However, if Operator disputes such alleged commission of or failure to
cure a material breach and dispute resolution proceedings are initiated
pursuant to Article 18.2 in relation to such breach, then Operator shall remain
appointed and no successor Operator may be appointed pending the conclusion or
abandonment of such proceedings, subject to the terms of Article 8.3 with
respect to Operator’s breach of its payment obligations.

 17
 

 

Check
Paragraph (C), if desired. Renumber following paragraphs if Paragraph (C) is
not selected.

x                                  OPTIONAL
PROVISION

(C)                                If
Operator together with any Affiliates of Operator is or becomes the holder of a
Participating Interest of less than thirty percent (30%), then Operator shall
be required to promptly notify the other Parties.  The Operating Committee shall then vote
within thirty (30) Days of such notification on whether or not a successor
Operator should be named pursuant to Article 4.11.

Check
Paragraph (D), if desired. Renumber following paragraph if Paragraph (D) is not
selected.

o                                    OPTIONAL
PROVISION

(D)                               If
there is a direct or indirect change in Control of Operator (other than a
transfer of Control to an Affiliate of Operator), Operator shall be required to
promptly notify the other Parties.  The
Operating Committee shall vote within                  
(                )
Days of such notification on whether or not a successor Operator should be
named pursuant to Article 4.11.

Check
Paragraph (E), if desired.

o                                    OPTIONAL
PROVISION

(E)                                 Subject
to Article 4.11, Operator may be removed at any time without cause by the
affirmative vote of a majority of Non-Operators holding a combined
Participating Interest of at least seventy percent (70%).

4.11                        Appointment
of Successor

When a change of Operator occurs pursuant to Article
4.9 or Article 4.10:

(A)                              The
Operating Committee shall meet as soon as possible to appoint a successor
Operator pursuant to the voting procedure of Article 5.9.  No Party may be appointed successor Operator
against its will.

(B)                                If
Operator is removed, [other than in the case of Article 4.10(C) or Article
4.10(D)], neither Operator nor any Affiliate of Operator shall have the right
to be considered as a candidate for the successor Operator.

(C)                                The
resigning or removed Operator shall be compensated out of the Joint Account for
its reasonable expenses directly related to its resignation or removal, except
in the case of Article 4.10(B).

(D)                               The
resigning or removed Operator and the successor Operator shall arrange for the
taking of an inventory of all Joint Property and Hydrocarbons, and an audit of
the books and records of the removed Operator. 
Such inventory and audit shall be completed, if possible, no later than
the effective date of the change of Operator and shall be subject to the
approval of the Operating Committee.  The
liabilities and expenses of such inventory and audit shall be charged to the
Joint Account.

(E)                                 The
resignation or removal of Operator and its replacement by the successor
Operator shall not become effective prior to receipt of any necessary
Government approvals.

(F)                                 Upon
the effective date of the resignation or removal, the successor Operator shall
succeed to all 

 18
 

 

duties, rights and authority prescribed for
Operator.  The former Operator shall
transfer to the successor Operator custody of all Joint Property, books of
account, records and other documents maintained by Operator pertaining to the
Contract Area and to Joint Operations. 
Upon delivery of the above-described property and data, the former
Operator shall be released and discharged from all obligations and liabilities
as Operator accruing after such date.

4.12                        Health,
Safety and Environment (“HSE”)

(A)                              With
the goal of achieving safe and reliable operations in compliance with
applicable HSE laws, rules and regulations (including avoiding significant and
unintended impact on the safety or health of people, on property, or on the
environment), Operator shall in the conduct of Joint Operations:

(1)                                  establish
and implement an HSE plan in a manner consistent with standards and procedures
generally followed in the international petroleum industry under similar
circumstances;

(2)                                  design
and operate Joint Property consistent with the HSE plan; and

(3)                                  conform
with locally applicable HSE laws, rules and regulations and other HSE-related
statutory requirements that may apply.

(B)                                The
Operating Committee shall:

Check one Alternative.

o                                    ALTERNATIVE
NO. 1

from time to time review
details of Operator’s HSE plan and Operator’s implementation thereof.

x                                  ALTERNATIVE
NO. 2

be provided by Operator,
on an annual basis, with an HSE letter of assurance providing adequate evidence
that an HSE plan is in place and that any major HSE issues have been brought to
the attention of the Operating Committee and are being properly managed.

(C)                                In
the conduct of Joint Operations, Operator shall:

Check one
Alternative.

x                                  ALTERNATIVE
NO. 1

establish
and implement a program for regular HSE assessments.  The purpose of such assessments is to
periodically review HSE systems and procedures, including actual practice and
performance, to verify that the HSE plan is being implemented in accordance
with the policies and standards of the HSE plan.  Operator shall, at a minimum, conduct such an
assessment before entering into significant new Joint Operations and before
undertaking any major changes to existing Joint Operations.  Upon reasonable notice given to Operator,
Non-Operators shall have the right to participate in such HSE assessments.

o                                    ALTERNATIVE
NO. 2

establish an annual audit
program whereby independent auditors review and verify the effectiveness of the
HSE plan.

(D)                               Operator
shall require its contractors, consultants and agents undertaking activities
for the Joint Account to manage HSE risks in a manner consistent with the
requirements of this Article 4.12.

 19
 

 

(E)                                 Operator
shall establish and enforce rules consistent with those generally followed in
the international petroleum industry under similar circumstances that, at a
minimum, prohibit within the Contract Area the following:

(1)                                  possession,
use, distribution or sale of firearms, explosives, or other weapons without the
prior written approval of senior management of Operator;

(2)                                  possession,
use, distribution or sale of alcoholic beverages without the prior written
approval of senior management of Operator; and

(3)                                  possession,
use, distribution or sale of illicit or non-prescribed controlled substances
and the misuse of prescribed drugs.

Check if desired.

x                                  OPTIONAL
PROVISION

(F)                                 Without
prejudice to a Party’s rights under Article 4.2(B)(7), with reasonable advance
notice, Operator shall permit each Non-Operator to have at all reasonable times
during normal business hours (and at its own risk and expense) the right to
conduct its own HSE audit.

ARTICLE 5

OPERATING COMMITTEE

5.1                               Establishment
of Operating Committee

To provide for the overall supervision and direction
of Joint Operations, there is established an Operating Committee composed of
representatives of each Party holding a Participating Interest.  Each Party shall appoint one (1)
representative and one (1) alternate representative to serve on the Operating
Committee.  Each Party shall as soon as
possible after the date of this Agreement give notice in writing to the other
Parties of the name and address of its representative and alternate
representative to serve on the Operating Committee.  Each Party shall have the right to change its
representative and alternate at any time by giving notice of such change to the
other Parties.

5.2                               Powers
and Duties of Operating Committee

The Operating Committee shall have power and duty to
authorize and supervise Joint Operations that are necessary or desirable to
fulfill the Contract and properly explore and exploit the Contract Area in
accordance with this Agreement and in a manner appropriate in the
circumstances.

5.3                               Authority
to Vote

The representative of a Party, or in his absence his
alternate representative, shall be authorized to represent and bind such Party
with respect to any matter which is within the powers of the Operating
Committee and is properly brought before the Operating Committee.  Each such representative shall have a vote equal
to the Participating Interest of the Party such person represents.  Each alternate representative shall be
entitled to attend all Operating Committee meetings but shall have no vote at
such meetings except in the absence of the representative for whom he is the
alternate.  In addition to the
representative and alternate representative, each Party may also bring to any
Operating Committee meetings such technical and other advisors as it may deem
appropriate.

 20
 

 

5.4                               Subcommittees

The Operating Committee
may establish such subcommittees, including technical subcommittees, as the
Operating Committee may deem appropriate. 
The functions of such subcommittees shall be in an advisory capacity or
as otherwise determined unanimously by the Parties.  Each Party shall have the right to appoint a
representative to each subcommittee.

5.5                               Notice
of Meeting

(A)                              Operator
may call a meeting of the Operating Committee by giving notice to the Parties
at least fifteen (15) Days in advance of such meeting.

(B)                                Any
Non-Operator may request a meeting of the Operating Committee by giving notice
to all the other Parties.  Upon receiving
such request, Operator shall call such meeting for a date not less than fifteen
(15) Days nor more than twenty (20) Days after receipt of the request.

(C)                                The
notice periods above may only be waived with the unanimous consent of all the
Parties.

5.6                               Contents
of Meeting Notice

(A)                              Each
notice of a meeting of the Operating Committee as provided by Operator shall
contain:

(1)                                  the
date, time and location of the meeting;

(2)                                  an
agenda of the matters and proposals to be considered and/or voted upon; and

(3)                                  copies
of all proposals to be considered at the meeting (including all appropriate
supporting information not previously distributed to the Parties).

(B)                                A
Party, by notice to the other Parties given not less than seven (7) Days prior
to a meeting, may add additional matters to the agenda for a meeting.

(C)                                On
the request of a Party, and with the unanimous consent of all Parties, the
Operating Committee may consider at a meeting a proposal not contained in such
meeting agenda.

5.7                               Location
of Meetings

All meetings of the Operating Committee shall be held
in Calgary, Alberta, Canada, or elsewhere as the Operating Committee may
decide.

5.8                               Operator’s
Duties for Meetings

(A)                              With
respect to meetings of the Operating Committee and any subcommittee, Operator’s
duties shall include:

(1)                                  timely
preparation and distribution of the agenda;

(2)                                  organization
and conduct of the meeting; and

(3)                                  preparation
of a written record or minutes of each meeting.

 21
 

 

(B)                                Operator
shall have the right to appoint the chairman of the Operating Committee and all
subcommittees.

5.9                               Voting
Procedure

Check one Alternative.

x                                  ALTERNATIVE
NO. 1

Except as otherwise expressly provided in this
Agreement, all decisions, approvals and other actions of the Operating
Committee on all proposals coming before it shall be decided by the affirmative
vote of two (2) or more Parties which are not Affiliates then having
collectively at least eighty five percent (85%) of the Participating Interests.

o                                    ALTERNATIVE
NO. 2 (From Paragraph (A) to (C))

Except as otherwise
expressly provided in this Agreement, decisions, approvals and other actions of
the Operating Committee on all proposals coming before it shall be decided as
follows.

(A)                              All
decisions, approvals and other actions for which column (A) below is checked
shall require the affirmative vote of                              
(                 )
or more Parties which are not Affiliates then having collectively at least                                 
percent (         %) of the
Participating Interests.

(B)                                All
decisions, approvals and other actions for which column (B) below is checked
shall require the affirmative vote of                           
(            ) or
more Parties which are not Affiliates then having collectively at least                                 
percent (         %) of the
Participating Interests.

(C)                              All
decisions, approvals and other actions for which column (C) below is checked
shall require the affirmative vote of                              
(                 )
 or more Parties which are not Affiliates
then having collectively at least                                 
percent (         %)  of the Participating Interests.

	
  

  	
   

  	
  Matter

  	
   

  	
  (A)

  	
   

  	
  (B)

  	
   

  	
  (C)

  
	
  (1)

  	
   

  	
  Minimum Work Programs.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (2)

  	
   

  	
  Drilling, Deepening,
  Testing, Sidetracking, Plugging Back, Recompleting or Reworking Exploration
  Wells. [NOTE: This list may be split in order to allow
  different levels of approval]

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (3)

  	
   

  	
  Drilling, Deepening,
  Testing, Sidetracking, Plugging Back, Recompleting or Reworking Appraisal
  Wells. [NOTE: This list may be split in order to allow
  different levels of approval]

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (4)

  	
   

  	
  Development Plans.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (5)

  	
   

  	
  Production programs.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (6)

  	
   

  	
  Completion of a well.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (7)

  	
   

  	
  Plugging and abandoning
  a well.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (8)

  	
   

  	
  Acquisition of G &
  G Data.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 22
 

 

 

	
  (9)

  	
   

  	
  Construction of
  processing, treatment, compression, gathering, transportation and other
  downstream facilities.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (10)

  	
   

  	
  Contract awards (if
  approval is required).

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (11)

  	
   

  	
  Determination that a
  Discovery is a Commercial Discovery.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (12)

  	
   

  	
  Unitization under the
  terms of the Contract with an adjoining contract area.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (13)

  	
   

  	
  Establishment of an
  interest bearing account for Joint Account monies.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (14)

  	
   

  	
  Acquisition and
  development of Venture Information under terms other than as specified in
  Article 15.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (15)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (16)

  	
   

  	
  All other matters
  within the Operating Committee’s authority.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

5.10                        Record of
Votes

The chairman of the Operating Committee shall appoint
a secretary who shall make a record of each proposal voted on and the results
of such voting at each Operating Committee meeting.  Each representative shall sign and be
provided a copy of such record at the end of such meeting, and it shall be
considered the final record of the decisions of the Operating Committee.

5.11                        Minutes

The secretary shall provide each Party with a copy of
the minutes of the Operating Committee meeting within fifteen (15) Business
Days after the end of the meeting.  Each
Party shall have fifteen (15) Days after receipt of such minutes to give notice
to the secretary of its objections to the minutes.  A failure to give notice specifying objection
to such minutes within said fifteen (15) Day period shall be deemed to be
approval of such minutes.  In any event,
the votes recorded under Article 5.10 shall take precedence over the minutes
described above.

5.12                        Voting by
Notice

(A)                              In
lieu of a meeting, any Party may submit any proposal to the Operating Committee
for a vote by notice.  The proposing
Party or Parties shall notify Operator who shall give each Party’s
representative notice describing the proposal so submitted and whether Operator
considers such operational matter to require urgent determination.  Operator shall include with such notice
adequate documentation in connection with such proposal to enable the Parties
to make a decision.  Each Party shall
communicate its vote by notice to Operator and the other Parties within one of
the following appropriate time periods after receipt of Operator’s notice:

(1)                                  forty
eight (48) hours in the case of operations which involve the use of a drilling
rig that is standing by in the Contract Area and such other operational matters
reasonably considered by Operator to require by their nature urgent
determination (such operations and matters being referred to as “Urgent Operational Matters”); and

(2)                                  thirty
(30) Days in the case of all other proposals.

(B)                                Except
in the case of Article 5.12(A)(1), any Party may, by notice delivered to all
Parties within ten (10) Days of receipt of Operator’s notice, request that the
proposal be decided at a meeting 

 23
 

 

rather than by notice. 
In such an event, that proposal shall be decided at a meeting duly called
for that purpose.

(C)                                Except
as provided in Article 10, any Party failing to communicate its vote in a
timely manner shall be deemed to have voted against such proposal.

(D)                               If
a meeting is not requested, then at the expiration of the appropriate time period,
Operator shall give each Party a confirmation notice stating the tabulation and
results of the vote.

5.13                        Effect of
Vote

All decisions taken by the Operating Committee
pursuant to this Article 5 shall be conclusive and binding on all the Parties,
except in the following cases.

(A)                              If
pursuant to this Article 5, a Joint Operation has been properly proposed to the
Operating Committee and the Operating Committee has not approved such proposal
in a timely manner, then any Party that voted in favor of such proposal shall
have the right for the appropriate period specified below to propose, in
accordance with Article 7, an Exclusive Operation involving operations
essentially the same as those proposed for such Joint Operation.

(1)                                  For
proposals related to Urgent Operational Matters, such right shall be
exercisable for twenty-four (24) hours after the time specified in Article
5.12(A)(1) has expired or after receipt of Operator’s notice given to the
Parties pursuant to Article [5.13(D)], as applicable.

(2)                                  For
proposals to develop a Discovery, such right shall be exercisable for ten (10)
Days after the date the Operating Committee was required to consider such
proposal pursuant to Article 5.6 or Article 5.12.

(3)                                  For
all other proposals, such right shall be exercisable for five (5) Days after
the date the Operating Committee was required to consider such proposal
pursuant to Article 5.6 or Article 5.12.

Check Paragraph (B) if desired.
Renumber following paragraphs if Paragraph (B) is not selected.

x                                  OPTIONAL
PROVISION (Paragraph (B))

(B)                                If
a Party voted against any proposal which was approved by the Operating
Committee and which could be conducted as an Exclusive Operation pursuant to
Article 7, then such Party shall have the right not to participate in the operation
contemplated by such approval.  Any such
Party wishing to exercise its right of non-consent must give notice of
non-consent to all other Parties within five (5) Days (or twenty-four (24)
hours for Urgent Operational Matters) following Operating Committee approval of
such proposal.  If a Party exercises its
right of non-consent, the Parties who were not entitled to give or did not give
notice of non-consent shall be Consenting Parties as to the operation contemplated
by the Operating Committee approval, and shall conduct such operation as an
Exclusive Operation under Article 7; provided, however, that any such Party who
was not entitled to give or did not give notice of non-consent may, by notice
provided to the other Parties within five (5) Days (or twenty-four (24) hours
for Urgent Operational Matters) following the notice of non-consent given by
any non-consenting Party, require that the Operating Committee vote again on
the proposal in question. Only the Parties which were not entitled to or have not
exercised their right of non-consent with respect to the contemplated operation
shall participate in such second vote of the Operating Committee, with voting
rights proportional to their respective Participating Interest.  If the Operating Committee approves again the
contemplated operation, any Party which 

 24
 

 

voted
against the contemplated operation in such second vote may elect to be a
Non-Consenting Party with respect to such operation, by notice of non-consent
provided to all other Parties within five (5) Days (or twenty-four (24) hours
for Urgent Operational Matters) following the Operating Committee’s second
approval of such contemplated operation.

(C)                                If
the Consenting Parties to an Exclusive Operation under Article 5.13(A) [or
Article 5.13(B)] concur, then the Operating Committee may, at any time,
pursuant to this Article 5, reconsider and approve, decide or take action on
any proposal that the Operating Committee declined to approve earlier, or
modify or revoke an earlier approval, decision or action.

(D)                               Once
a Joint Operation for the drilling, Deepening, Testing, Sidetracking, Plugging
Back, Completing, Recompleting, Reworking, or plugging of a well has been
approved and commenced, such operation shall not be discontinued without the
consent of the Operating Committee; provided, however, that such operation may
be discontinued if:

(1)                                  an
impenetrable substance or other condition in the hole is encountered which in
the reasonable judgment of Operator causes the continuation of such operation
to be impractical; or

(2)                                  other
circumstances occur which in the reasonable judgment of Operator cause the
continuation of such operation to be unwarranted and the Operating Committee,
within the period required under Article 5.12(A)(1) after receipt of Operator’s
notice, approves discontinuing such operation.

On the occurrence of either of the above, Operator
shall promptly notify the Parties that such operation is being discontinued
pursuant to the foregoing, and any Party shall have the right to propose in
accordance with Article 7 an Exclusive Operation to continue such operation.

 

 25

 

ARTICLE 6

WORK PROGRAMS AND BUDGETS

6.1                               Exploration
and Appraisal

(A)                              Within
           (         )
Days after the Effective Date, Operator shall deliver to the Parties a proposed
Work Program and Budget detailing the Joint Operations to be performed for the
remainder of the current Calendar Year and, if appropriate, for the following
Calendar Year.  Within         
(        ) Days of such delivery, the
Operating Committee shall meet to consider and to endeavor to agree on a Work
Program and Budget.

(B)                                On
or before the 30th Day of September of each Calendar Year,
Operator shall deliver to the Parties a proposed Work Program and Budget
detailing the Joint Operations to be performed for the following Calendar
Year.  Within forty five (45) Days of
such delivery, the Operating Committee shall meet to consider and to endeavor
to agree on a Work Program and Budget.

(C)                                If
a Discovery is made, Operator shall deliver any notice of Discovery required
under the Contract and shall as soon as possible submit to the Parties a report
containing available details concerning the Discovery and Operator’s
recommendation as to whether the Discovery merits appraisal.  If the Operating Committee determines that
the Discovery merits appraisal, Operator within forty five (45) Days shall
deliver to the Parties a proposed Work Program and Budget for the appraisal of
the Discovery.  Within forty five (45)
Days of such delivery, or earlier if necessary to meet any applicable deadline
under the Contract, the Operating Committee shall meet to consider, modify and
then either approve or reject the appraisal Work Program and Budget.  If the appraisal Work Program and Budget is
approved by the Operating Committee, Operator shall take such steps as may be
required under the Contract to secure approval of the appraisal Work Program
and Budget by the Government.  In the
event the Government requires changes in the appraisal Work Program and Budget,
the matter shall be resubmitted to the Operating Committee for further
consideration.

(D)                               The
Work Program and Budget agreed pursuant to this Article shall include at least
that part of the Minimum Work Obligations required to be carried out during the
Calendar Year in question under the terms of the Contract.  If within the time periods prescribed in this
Article 6.1 the Operating Committee is unable to agree on such a Work Program
and Budget, then the proposal capable of satisfying the Minimum Work
Obligations for the Calendar Year in question that receives the largest
Participating Interest vote (even if less than the applicable percentage under
Article 5.9) shall be deemed adopted as part of the annual Work Program and
Budget.  If competing proposals receive
equal votes, then Operator shall choose between those competing proposals.  Any portion of a Work Program and Budget
adopted pursuant to this Article 6.1(D) instead of Article 5.9 shall contain
only such operations for the Joint Account as are necessary to maintain the
Contract in full force and effect, including such operations as are necessary to
fulfill the Minimum Work Obligations required for the given Calendar Year.

(E)                                 Any
approved Work Program and Budget may be revised by the Operating Committee from
time to time.  To the extent such
revisions are approved by the Operating Committee, the Work Program and Budget
shall be amended accordingly.  Operator
shall prepare and submit a corresponding work program and budget amendment to
the Government if required by the Contract.

(F)                                 Subject
to Article 6.8, approval of any such Work Program and Budget which includes:

(1)                                  an
Exploration Well, whether by drilling, Deepening or Sidetracking, shall include
approval for:

 26
 

 

Check one Alternative.

x                                  ALTERNATIVE
NO. 1 - No Casing Point Election         

all expenditures necessary for drilling, Deepening or Sidetracking, as
applicable, and Testing and Completing an Exploration Well.

o                                    ALTERNATIVE
NO. 2 - Casing Point Election - (This alternative shall not
apply where Minimum Work Obligations require Testing or Completing of a well.)

only expenditures
necessary for the drilling, Deepening or Sidetracking of such Exploration Well,
as applicable.  When an Exploration Well
has reached its authorized depth, all logs, cores and other approved Tests have
been conducted and the results furnished to the Parties, Operator shall submit
to the Parties in accordance with Article 5.12(A)(1) an election to participate
in an attempt to Complete such Exploration Well.  Operator shall include in such submission
Operator’s recommendation on such Completion attempt and an AFE for such
Completion costs.

(2)                                  an
Appraisal Well, whether by drilling, Deepening or Sidetracking, shall include
approval for:

Check one
Alternative.

x                                  ALTERNATIVE
NO. 1 - No Casing Point Election         

all expenditures necessary for drilling, Deepening or Sidetracking, as applicable,
and Testing and Completing such Appraisal Well.

o                                    ALTERNATIVE
NO. 2 - Casing Point Election - (This alternative shall not
apply where Minimum Work Obligations require Testing or Completing of an
Appraisal Well.)

only
expenditures necessary for the drilling, Deepening or Sidetracking of such
Appraisal Well, as applicable.  When an
Appraisal Well has reached its authorized depth, all logs, cores and other
approved Tests have been conducted and the results furnished to the Parties,
Operator shall submit to the Parties in accordance with Article 5.12(A)(1) an
election to participate in an attempt to Complete such Appraisal Well.  Operator shall include in such submission
Operator’s recommendation on such Completion attempt and an AFE for such
Completion costs.

(G)                                Any
Party desiring to propose a Completion attempt, or an alternative Completion
attempt, must do so within the time period provided in Article 5.12(A)(1) by
notifying all other Parties.  Any such
proposal shall include an AFE for such Completion costs.

6.2                               Development

(A)                              If
the Operating Committee determines that a Discovery may be a Commercial
Discovery, Operator shall, as soon as practicable, deliver to the Parties a
Development Plan together with the first annual Work Program and Budget (or a
multi-year Work Program and Budget pursuant to Article 6.5) and provisional
Work Programs and Budgets for the remainder of the development of the
Discovery, which shall contain, inter alia:

(1)                                  details
of the proposed work to be undertaken, personnel required and expenditures to
be incurred, including the timing of same, on a Calendar Year basis;

(2)                                  an
estimated date for the commencement of production;

(3)                                  a
delineation of the proposed Exploitation Area; and

 27
 

 

(4)                                  any
other information requested by the Operating Committee.

(B)                                After
receipt of the Development Plan and prior to any applicable deadline under the
Contract, the Operating Committee shall meet to consider, modify and then
either approve or reject the Development Plan and the first annual Work Program
and Budget for the development of a Discovery, as submitted by Operator.  If the Operating Committee determines that
the Discovery is a Commercial Discovery and approves the corresponding
Development Plan, Operator shall, as soon as possible, deliver any notice of
Commercial Discovery required under the Contract and take such other steps as
may be required under the Contract to secure approval of the Development Plan
by the Government.  In the event the
Government requires changes in the Development Plan, the matter shall be
resubmitted to the Operating Committee for further consideration.

(C)                                If
the Development Plan is approved, such work shall be incorporated into and form
part of annual Work Programs and Budgets, and Operator shall, on or before the 30th Day of September of each Calendar Year submit
a Work Program and Budget for the Exploitation Area, for the following Calendar
Year.  Subject to Article 6.5, within forty
five (45) Days after such submittal, the Operating Committee shall endeavor to
agree to such Work Program and Budget, including any necessary or appropriate
revisions to the Work Program and Budget for the approved Development Plan.

6.3                               Production

On or before the 30th Day of September of each Calendar Year,
Operator shall deliver to the Parties a proposed production Work Program and
Budget detailing the Joint Operations to be performed in the Exploitation Area
and the projected production schedule for the following Calendar Year.  Within forty five (45) Days of such delivery,
the Operating Committee shall agree upon a production Work Program and Budget,
failing which the provisions of Article 6.1(D) shall be applied mutatis mutandis.

6.4                               Itemization
of Expenditures

(A)                              During
the preparation of the proposed Work Programs and Budgets and Development Plans
contemplated in this Article 6, Operator shall consult with the Operating
Committee or the appropriate subcommittees regarding the contents of such Work
Programs and Budgets and Development Plans.

(B)                                Each
Work Program and Budget and Development Plan submitted by Operator shall
contain an itemized estimate of the costs of Joint Operations and all other
expenditures to be made for the Joint Account during the Calendar Year in
question and shall, inter alia:

(1)                                  identify
each work category in sufficient detail to afford the ready identification of
the nature, scope and duration of the activity in question;

(2)                                  include
such reasonable information regarding Operator’s allocation procedures and
estimated manpower costs as the Operating Committee may determine;

(3)                                  comply
with the requirements of the Contract;

Check
(4), if desired. Renumber following paragraph if (4) is not selected.

x           OPTIONAL PROVISION

(4)           contain an estimate of funds to be
expended by Calendar Quarter; and

 28
 

 

Check (5), if desired.

x                                  OPTIONAL
PROVISION

(5)                                  during
the Exploration Period, provide a forecast of annual expenditures and
activities through the end of the Exploration Period.

(C)                                The
Work Program and Budget shall designate the portion or portions of the Contract
Area in which Joint Operations itemized in such Work Program and Budget are to
be conducted and shall specify the kind and extent of such operations in such
detail as the Operating Committee may deem suitable.

6.5                               Multi-Year
Work Program and Budget

Any work that cannot be efficiently completed within a
single Calendar Year may be proposed in a multi-year Work Program and
Budget.  Upon approval by the Operating
Committee, such multi-year Work Program and Budget shall, subject only to
revisions approved by the Operating Committee thereafter: (i) remain in effect
as between the Parties (and the associated cost estimate shall be a binding
pro-rata obligation of each Party) through the completion of the work; and
(ii) be reflected in each annual Work Program and Budget.  If the Contract requires that Work Programs
and Budgets be submitted to the Government for approval, such multi-year Work
Program and Budget shall be submitted to the Government either in a single
request for a multi-year approval or as part of the annual approval process,
according to the terms of the Contract.

6.6                               Contract
Awards

Check one
Alternative.

o                                    ALTERNATIVE NO.
1

Subject to the
Contract, Operator shall award the contract to the best qualified contractor as
determined by cost and ability to perform the contract without the obligation
to tender and without informing or seeking the approval of the Operating
Committee, except that before entering into contracts with Affiliates of
Operator exceeding [          
U.S. dollars], Operator shall obtain the approval of the Operating Committee.

o                                    ALTERNATIVE NO.
2 (From Paragraph (A) to (C))       

Subject to the Contract, Operator shall award each contract for Joint
Operations on the following basis (the amounts stated are in thousands of U.S.
dollars):

	
  

  	
   

  	
  Procedure A

  	
   

  	
  Procedure B

  	
   

  	
  Procedure C

  
	
  Exploration and
  Appraisal Operations

  	
   

  	
  0 to 250

  	
   

  	
  250 to 500

  	
   

  	
  >500

  
	
  Development
  Operations

  	
   

  	
  0 to 500

  	
   

  	
  500 to 1,500

  	
   

  	
  >1,500

  
	
  Production
  Operations

  	
   

  	
  0 to 500

  	
   

  	
  500 to 1,500

  	
   

  	
  >1,500

  

 

Procedure A

(A)                              Operator
shall award the contract to the best qualified contractor as determined by cost
and ability to perform the contract without the obligation to tender and
without informing or seeking the approval of the Operating Committee, except
that before entering into contracts with Affiliates of Operator exceeding one
hundred thousand U.S. dollars, Operator shall obtain the approval of the
Operating Committee.

 29
 

 

Procedure B

(B)                                Operator
shall:

(1)                                  provide
the Parties with a list of the entities whom Operator proposes to invite to
tender for the said contract;

(2)                                  add
to such list any entity whom a Party reasonably requests to be added within
fourteen (14) Days of receipt of such list;

(3)                                  complete
the tendering process within a reasonable period of time;

(4)                                  inform
the Parties of the entities to whom the contract has been awarded, provided
that before awarding contracts to Affiliates of Operator which exceed one
hundred thousand U.S. dollars, Operator shall obtain the approval of the
Operating Committee;

(5)                                  circulate
to the Parties a competitive bid analysis stating the reasons for the choice
made; and

(6)                                  upon
the request of a Party, provide such Party with a copy of the final version of
the contract.

Procedure C

(C)                                Operator
shall:

(1)                                  provide
the Parties with a list of the entities whom Operator proposes to invite to
tender for the said contract;

(2)                                  add
to such list any entity whom a Party reasonably requests to be added within
fourteen (14) Days of receipt of such list;

(3)                                  prepare
and dispatch the tender documents to the entities on the list as aforesaid and
to Non-Operators;

(4)                                  after
the expiration of the period allowed for tendering, consider and analyze the
details of all bids received;

(5)                                  prepare
and circulate to the Parties a competitive bid analysis, stating Operator’s
recommendation as to the entity to whom the contract should be awarded, the
reasons therefor, and the technical, commercial and contractual terms to be
agreed upon;

(6)                                  obtain
the approval of the Operating Committee to the recommended bid; and

(7)                                  upon
the request of a Party, provide such Party with a copy of the final version of
the contract.

 30
 

 

Check Article 6.7, if desired.
Renumber following article if Article 6.7 is not selected.

x           OPTIONAL
PROVISION

[NOTE: If
Article 6.7 is not checked, the definition of an AFE in Article 1.2 and all
references to AFEs in Articles 1.20, 4.2(B)(5), 6.1(F), 6.1(G), 6.8(B), 7.4(C),
and 13.4(A) are to be removed.]

6.7                               Authorization
for Expenditure (“AFE”) Procedure

(A)                              Prior
to incurring any commitment or expenditure for the Joint Account, which is
estimated to be:

(1)                                  in
excess of fifty thousand U.S. dollars in an exploration or appraisal Work
Program and Budget;

(2)                                  in
excess of two hundred thousand U.S. dollars in a development Work Program and
Budget; and

(3)                                  in
excess of two hundred thousand U.S. dollars in a production Work Program and
Budget,

Operator shall send to
each Non-Operator an AFE as described in Article 6.7(C).  Notwithstanding the above, Operator shall not
be obliged to furnish an AFE to the Parties with respect to any Minimum Work
Obligations, workovers of wells and general and administrative costs that are
listed as separate line items in an approved Work Program and Budget.

Check one
Alternative for Paragraph (B).

o                                    ALTERNATIVE NO.
1

(B)                                Notwithstanding
any other provision of this Agreement, all AFEs shall be for informational
purposes only.  Approval of an operation
in the current Work Program and Budget shall authorize Operator to conduct the
operation (subject to Article 6.8) without further authorization from the
Operating Committee.

o                                    ALTERNATIVE
NO. 2

(B)                                Prior
to making any expenditures or incurring any commitments for work subject to the
AFE procedure in Article 6.7(A), Operator shall obtain the approval of the
Operating Committee.  If the Operating
Committee approves an AFE for the operation within the applicable time period
under Article 5.12(A), Operator shall be authorized to conduct the operation
under the terms of this Agreement.  If
the Operating Committee fails to approve an AFE for the operation within the
applicable time period, the operation shall be deemed rejected.  Operator shall promptly notify the Parties if
the operation has been rejected, and, subject to Article 7, any Party may thereafter
propose to conduct the operation as an Exclusive Operation under Article
7.  When an operation is rejected under
this Article 6.7(B) or an operation is approved for differing amounts than
those provided for in the applicable line items of the approved Work Program
and Budget, the Work Program and Budget shall be deemed to be revised
accordingly.

 31
 

 

x                                  ALTERNATIVE
NO. 3

(B)                                Prior
to making any expenditures or incurring any commitments for work subject to the
AFE procedure in Article 6.7(A), Operator shall obtain the approval of the
Operating Committee to an AFE for cost and technical control purposes.  A Party may vote to disapprove an AFE issued
in furtherance of an approved Work Program and Budget only if (i) some or all
of the costs described in the AFE exceed the line items in the approved Work
Program and Budget by more than is permitted under Article 6.8; (ii) the
proposed terms of any third party contract described in the AFE do not
approximate fair market terms; or (iii) in such Party’s good faith opinion, any
material technical specifications contained in the AFE that are not in the
approved Work Program and Budget are imprudent or are not supported by the
known data about the formations being drilled. 
A Party’s vote shall be considered a vote to approve the AFE unless the
Party specifically describes one or more of the three reasons listed above as
the basis for its vote of disapproval. 
If the Operating Committee approves an AFE for the operation within the
applicable time period under Article 5.12(A), Operator shall be authorized to conduct
the operation under the terms of this Agreement.  If the Operating Committee fails to approve
an AFE for the operation within the applicable time period, the operation shall
be deemed rejected.  Operator shall
promptly notify the Parties if the operation has been rejected, and, subject to
Article 7, any Party may thereafter propose to conduct the operation as an
Exclusive Operation under Article 7. 
When an operation is rejected under this Article 6.7(B) or an operation
is approved for differing amounts than those provided for in the applicable
line items of the approved Work Program and Budget, the Work Program and Budget
shall be deemed to be revised accordingly.

(C)                                Each
AFE proposed by Operator shall:

(1)                                  identify
the operation by specific reference to the applicable line items in the Work
Program and Budget;

(2)                                  describe
the work in detail;

(3)                                  contain
Operator’s best estimate of the total funds required to carry out such work;

(4)                                  outline
the proposed work schedule;

(5)                                  provide
a timetable of expenditures, if known; and

(6)                                  be
accompanied by such other supporting information as is necessary for an
informed decision.

6.8          Overexpenditures of Work Programs and Budgets

(A)                              For
expenditures on any line item of an approved Work Program and Budget, Operator
shall be entitled to incur without further approval of the Operating Committee
an overexpenditure for such line item up to ten percent (10%) of the authorized
amount for such line item; provided that the cumulative total of all
overexpenditures for a Calendar Year shall not exceed five percent (5%) of the
total annual Work Program and Budget in question.

(B)                                At
such time Operator reasonably anticipates the limits of Article 6.8(A) will be
exceeded, Operator shall furnish to the Operating Committee:

 32
 

 

Check one Alternative.

o                                    ALTERNATIVE
NO. 1 – Informational AFE System     

a reasonably detailed estimate for the Operating Committee’s approval.  The Work Program and Budget shall be revised
accordingly and the overexpenditures permitted in Article 6.8(A) shall be based
on the revised Work Program and Budget. 
Operator shall promptly give notice of the amounts of overexpenditures
when actually incurred.

x                                  ALTERNATIVE
NO. 2 – Operational AFE System        

a supplemental AFE for the estimated expenditures for the Operating Committee’s
approval, and Operator shall provide reasonable details of such
overexpenditures.  The Work Program and
Budget shall be revised accordingly and the overexpenditures permitted in
Article 6.8(A) shall be based on the revised Work Program and Budget.  Operator shall promptly give notice of the
amounts of overexpenditures when actually incurred.

(C)                                The
restrictions contained in this Article 6 shall be without prejudice to Operator’s
rights to make expenditures for Urgent Operational Matters and measures set out
in Article 13.5 without the Operating Committee’s approval.

ARTICLE 7

OPERATIONS BY LESS THAN ALL PARTIES

7.1                               Limitation
on Applicability

(A)                              No
operations may be conducted in furtherance of the Contract except as Joint
Operations under Article 5 or as Exclusive Operations under this Article
7.  No Exclusive Operation shall be
conducted (other than the tie-in of Exclusive Operation facilities with
existing production facilities pursuant to Article 7.10) which conflicts with a
previously approved Joint Operation or with a previously approved Exclusive
Operation.

(B)                                Operations
which are required to fulfill the Minimum Work Obligations must be proposed and
conducted as Joint Operations under Article 5, and may not be proposed or
conducted as Exclusive Operations under this Article 7.

Check if desired.

o                                    OPTIONAL
PROVISION

Except for Exclusive
Operations relating to Deepening, Testing, Completing, Sidetracking, Plugging
Back, Recompletions or Reworking of a well originally drilled to fulfill the
Minimum Work Obligations, no Exclusive Operations may be proposed or conducted
until the Minimum Work Obligations are fulfilled.

(C)                                No
Party may propose or conduct an Exclusive Operation under this Article 7 unless
and until such Party has properly exercised its right to propose an Exclusive
Operation pursuant to Article 5.13, or is entitled to conduct an Exclusive
Operation pursuant to Article 10.

Check one Alternative for
Paragraph (D).

o                                    ALTERNATIVE
NO. 1

(D)                               Any
operation that may be proposed and conducted as a Joint Operation, other than
operations pursuant to an approved Development Plan, may be proposed and
conducted as an Exclusive Operation, subject to the terms of this Article 7.

 33
 

 

x                                  ALTERNATIVE
NO. 2

(D)                               The
following operations may be proposed and conducted as Exclusive Operations,
subject to the terms of this Article 7:

(1)                                  drilling
and/or Testing of Exploration Wells and Appraisal Wells;

(2)                                  Completion
of Exploration Wells and Appraisal Wells not then Completed as productive of
Hydrocarbons;

(3)                                  Deepening,
Sidetracking, Plugging Back and/or Recompletion of Exploration Wells and
Appraisal Wells;

(4)                                  development
of a Commercial Discovery;

(5)                                  acquisition
of G & G Data;

(6)                                  any
operations specifically authorized to be undertaken as an Exclusive Operation
under Article 10; and

(7)                                  any
operation that has unanimous approval from the Parties.

No other type of
operation may be proposed or conducted as an Exclusive Operation.

7.2                               Procedure
to Propose Exclusive Operations

(A)                              Subject
to Article 7.1, if any Party proposes to conduct an Exclusive Operation, such
Party shall give notice of the proposed operation to all Parties, other than
Non-Consenting Parties who have relinquished their rights to participate in
such operation pursuant to Article 7.4(B) or Article 7.4(F) and have no option
to reinstate such rights under Article 7.4(C). 
Such notice shall specify that such operation is proposed as an
Exclusive Operation and include the work to be performed, the location, the
objectives, and estimated cost of such operation.

(B)                                Any
Party entitled to receive such notice shall have the right to participate in
the proposed operation.

(1)                                  For
proposals to Deepen, Test, Complete, Sidetrack, Plug Back, Recomplete or Rework
related to Urgent Operational Matters, any such Party wishing to exercise such
right must so notify the proposing Party and Operator within twenty-four (24)
hours after receipt of the notice proposing the Exclusive Operation.

(2)                                  For
proposals to develop a Discovery, any Party wishing to exercise such right must
so notify Operator and the Party proposing to develop within sixty (60) Days
after receipt of the notice proposing the Exclusive Operation.

(3)                                  For
all other proposals, any such Party wishing to exercise such right must so
notify the proposing Party and Operator within ten (10) Days after receipt of
the notice proposing the Exclusive Operation.

(C)                                Failure
of a Party to whom a proposal notice is delivered to properly reply within the
period specified above shall constitute an election by that Party not to
participate in the proposed operation.

(D)                               If
all Parties properly exercise their rights to participate, then the proposed
operation shall be conducted as a Joint Operation.  Operator shall commence such Joint Operation
as promptly as 

 34
 

 

practicable and conduct it with due diligence.

(E)                                 If
less than all Parties entitled to receive such proposal notice properly
exercise their rights to participate, then:

Check one
Alternative.

o                                    ALTERNATIVE NO.
1 (From Paragraph (1) to (3))

(1)                                  The
Party proposing the Exclusive Operation, together with any other Consenting
Parties, shall have the right exercisable for the applicable notice period set
out in Article 7.2(B), to instruct Operator (subject to Article 7.12(F)) to
conduct the Exclusive Operation.

(2)                                  If
the Exclusive Operation is conducted, the Consenting Parties shall bear a
Participating Interest in such Exclusive Operation, the numerator of which is
such Consenting Party’s Participating Interest as stated in Article 3.2(A) and
the denominator of which is the aggregate of the Participating Interests of the
Consenting Parties as stated in Article 3.2(A), or as the Consenting
Parties may otherwise agree.

(3)                                  If
such Exclusive Operation has not been commenced within             
(        ) Days (excluding any
extension specifically agreed by all Parties or allowed by the force majeure
provisions of Article 16) after the date of the instruction given to Operator
under Article 7.2(E)(1), the right to conduct such Exclusive Operation shall
terminate.  If any Party still desires to
conduct such Exclusive Operation, notice proposing such operation must be
resubmitted to the Parties in accordance with Article 5, as if no proposal to
conduct an Exclusive Operation had been previously made.

x                                  ALTERNATIVE
NO. 2 (From Paragraph (1) to (8))

(1)                                  Immediately
after the expiration of the applicable notice period set out in
Article 7.2(B), Operator shall notify all Parties of the names of the
Consenting Parties and the recommendation of the proposing Party as to whether
the Consenting Parties should proceed with the Exclusive Operation.

(2)                                  Concurrently,
Operator shall request the Consenting Parties to specify the Participating
Interest each Consenting Party is willing to bear in the Exclusive Operation.

(3)                                  Within
twenty-four (24) hours after receipt of such notice, each Consenting Party
shall respond to Operator stating that it is willing to bear a Participating
Interest in such Exclusive Operation equal to:

(a)                                  only
its Participating Interest as stated in Article 3.2(A);

(b)                                 a
fraction, the numerator of which is such Consenting Party’s Participating
Interest as stated in Article 3.2(A) and the denominator of which is the
aggregate of the Participating Interests of the Consenting Parties as stated in
Article 3.2(A); or

(c)                                  the
Participating Interest as contemplated by Article 7.2(E)(3)(b) plus all or any
part of the difference between one hundred percent (100%) and the total of the
Participating Interests subscribed by the other 

 35
 

 

Consenting Parties. Any
portion of such difference claimed by more than one Party shall be distributed
to each claimant on a pro-rata basis.

(4)                                  Any
Consenting Party failing to advise Operator within the response period set out
above shall be deemed to have elected to bear the Participating Interest set
out in Article 7.2(E)(3)(b) as to the Exclusive Operation.

(5)                                  If,
within the response period set out above, the Consenting Parties subscribe less
than one hundred percent (100%) of the Participating Interest in the Exclusive
Operation, the Party proposing such Exclusive Operation shall be deemed to have
withdrawn its proposal for the Exclusive Operation, unless within twenty-four
(24) hours of the expiry of the response period set out in Article 7.2(E)(3),
the proposing Party notifies the other Consenting Parties that the proposing
Party shall bear the unsubscribed Participating Interest.

(6)                                  If
one hundred percent (100%) subscription to the proposed Exclusive Operation is
obtained, Operator shall promptly notify the Consenting Parties of their
Participating Interests in the Exclusive Operation.

(7)                                  As
soon as any Exclusive Operation is fully subscribed pursuant to
Article 7.2(E)(6), Operator, subject to Article 7.12(F), shall commence
such Exclusive Operation as promptly as practicable and conduct it with due
diligence in accordance with this Agreement.

(8)                                  If
such Exclusive Operation has not been commenced within ninety (90) Days
(excluding any extension specifically agreed by all Parties or allowed by the
force majeure provisions of Article 16) after the date of the notice given by
Operator under Article 7.2(E)(6), the right to conduct such Exclusive Operation
shall terminate.  If any Party still
desires to conduct such Exclusive Operation, notice proposing such operation
must be resubmitted to the Parties in accordance with Article 5, as if no
proposal to conduct an Exclusive Operation had been previously made.

7.3                               Responsibility
for Exclusive Operations

(A)                              The
Consenting Parties shall bear in accordance with the Participating Interests
agreed under Article 7.2(E) the entire cost and liability of conducting an
Exclusive Operation and shall indemnify the Non-Consenting Parties from any and
all costs and liabilities incurred incident to such Exclusive Operation
(including Consequential Loss and Environmental Loss) and shall keep the
Contract Area free and clear of all liens and encumbrances of every kind
created by or arising from such Exclusive Operation.

(B)                                Notwithstanding
Article 7.3(A), each Party shall continue to bear its Participating Interest
share of the cost and liability incident to the operations in which it
participated, including plugging and abandoning and restoring the surface
location, but only to the extent those costs were not increased by the
Exclusive Operation.

7.4                               Consequences
of Exclusive Operations

(A)                              With
regard to any Exclusive Operation, for so long as a Non-Consenting Party has
the option under Article 7.4(C) to reinstate the rights it relinquished under
Article 7.4(B), such Non-Consenting Party shall be entitled to have access concurrently
with the Consenting Parties to all data and other information relating to such
Exclusive Operation, other than data obtained in an Exclusive Operation for the
purpose of acquiring G & G Data.  If
a Non-Consenting Party desires to receive and acquire the right to use such G
& G Data, then such Non-Consenting Party shall 

 36
 

 

have the right to
do so by paying to the Consenting Parties its Participating Interest share as
set out in Article 3.2(A) of the cost incurred in obtaining such G & G
Data.

(B)                                Subject
to Article 7.4(C) [and Articles 7.6(E) and 7.8, if selected], each
Non-Consenting Party shall be deemed to have relinquished to the Consenting
Parties, and the Consenting Parties shall be deemed to own, in proportion to
their respective Participating Interests in any Exclusive Operation:

(1)                                  all
of each such Non-Consenting Party’s right to participate in further operations
in the well or Deepened or Sidetracked portion of a well in which the Exclusive
Operation was conducted and on any Discovery made or appraised in the course of
such Exclusive Operation; and

(2)                                  all
of each such Non-Consenting Party’s right pursuant to the Contract to take and
dispose of Hydrocarbons produced and saved:

(a)                                  from
the well or Deepened or Sidetracked portion of a well in which such Exclusive
Operation was conducted; and

(b)                                 from
any wells drilled to appraise or develop a Discovery made or appraised in the
course of such Exclusive Operation.

(C)                                A
Non-Consenting Party shall have only the following options to reinstate the
rights it relinquished pursuant to Article 7.4(B):

(1)                                  If
the Consenting Parties decide to appraise a Discovery made in the course of an
Exclusive Operation, the Consenting Parties shall submit to each Non-Consenting
Party the approved appraisal program. 
For thirty (30) Days (or forty-eight (48) hours for Urgent Operational
Matters) from receipt of such appraisal program, each Non-Consenting Party
shall have the option to reinstate the rights it relinquished pursuant to
Article 7.4(B) and to participate in such appraisal program.  The Non-Consenting Party may exercise such
option by notifying Operator within the period specified above that such
Non-Consenting Party agrees to bear its Participating Interest share of the
expense and liability of such appraisal program, and to pay such amounts as set
out in Articles 7.5(A) and 7.5(B).

(2)                                  If
the Consenting Parties decide to develop a Discovery made or appraised in the
course of an Exclusive Operation, the Consenting Parties shall submit to the
Non-Consenting Parties a Development Plan substantially in the form intended to
be submitted to the Government under the Contract.  For sixty (60) Days from receipt of such
Development Plan or such lesser period of time prescribed by the Contract, each
Non-Consenting Party shall have the option to reinstate the rights it
relinquished pursuant to Article 7.4(B) and to participate in such Development
Plan.  The Non-Consenting Party may
exercise such option by notifying Operator within the period specified above
that such Non-Consenting Party agrees to bear its Participating Interest share
of the liability and expense of such Development Plan and such future operating
and producing costs, and to pay the amounts as set out in Articles 7.5(A)
and 7.5(B).

(3)                                  If
the Consenting Parties decide to Deepen, Complete, Sidetrack, Plug Back or
Recomplete an Exclusive Well and such further operation was not included in the
original proposal for such Exclusive Well, the Consenting Parties shall submit
to the Non-Consenting Parties the approved AFE for such further operation.  For thirty (30) Days (or forty-eight (48)
hours for Urgent Operational Matters) from receipt of such AFE, each
Non-Consenting Party shall have the option to reinstate the rights it
relinquished pursuant to Article 7.4(B) and to participate in such
operation.  The 

 37
 

 

Non-Consenting Party may
exercise such option by notifying Operator within the period specified above
that such Non-Consenting Party agrees to bear its Participating Interest share
of the liability and expense of such further operation, and to pay the amounts
as set out in Articles 7.5(A) and 7.5(B).

A Non-Consenting Party shall not be entitled to
reinstate its rights in any other type of operation.

(D)                               If
a Non-Consenting Party does not properly and in a timely manner exercise its
option under Article 7.4(C), including paying all amounts due in accordance
with Articles 7.5(A) and 7.5(B), such Non-Consenting Party shall have
forfeited the options as set out in Article 7.4(C) and the right to participate
in the proposed program, unless such program, plan or operation is materially
modified or expanded (in which case a new notice and option shall be given to
such Non-Consenting Party under Article 7.4(C)).

(E)                                 A
Non-Consenting Party exercising its option under Article 7.4(C) shall notify
the other Parties that it agrees to bear its share of the liability and expense
of such further operation and to reimburse the amounts set out in Articles
7.5(A) and 7.5(B) that such Non-Consenting Party had not previously paid.  Such Non-Consenting Party shall in no way be
deemed to be entitled to any amounts paid pursuant to Articles 7.5(A) and
7.5(B) incident to such Exclusive Operations. 
The Participating Interest of such Non-Consenting Party in such
Exclusive Operation shall be its Participating Interest set out in Article
3.2(A).  The Consenting Parties shall
contribute to the Participating Interest of the Non-Consenting Party in
proportion to the excess Participating Interest that each received under
Article 7.2(E). If all Parties participate in the proposed operation, then
such operation shall be conducted as a Joint Operation pursuant to Article 5.

(F)                                 If
after the expiry of the period in which a Non-Consenting Party may exercise its
option to participate in a Development Plan the Consenting Parties desire to
proceed, Operator shall give notice to the Government under the appropriate
provision of the Contract requesting a meeting to advise the Government that
the Consenting Parties consider the Discovery to be a Commercial Discovery.  Following such meeting such Operator for such
development shall apply for an Exploitation Area (if applicable in the
Contract).  Unless the Development Plan
is materially modified or expanded prior to the commencement of operations
under such plan (in which case a new notice and option shall be given to the
Non-Consenting Parties under Article 7.4(C)), each Non-Consenting Party to such
Development Plan shall:

(1)                                  if
the Contract so allows, elect not to apply for an Exploitation Area covering
such development and forfeit all interest in such Exploitation Area, or

(2)                                  if
the Contract does not so allow, be deemed to have:

(a)                                  elected
not to apply for an Exploitation Area covering such development;

(b)                                 forfeited
all economic interest in such Exploitation Area; and

(c)                                  assumed
a fiduciary duty to exercise its legal interest in such Exploitation Area for
the benefit of the Consenting Parties.

In either case such Non-Consenting Party shall be
deemed to have withdrawn from this Agreement to the extent it relates to such
Exploitation Area, even if the Development Plan is modified or expanded
subsequent to the commencement of operations under such Development Plan and
shall be further deemed to have forfeited any right to participate in the
construction and ownership of facilities outside such Exploitation Area
designed solely for the use of such Exploitation Area.

 38
 

 

7.5                               Premium
to Participate in Exclusive Operations

(A)          Each such Non-Consenting Party shall:

Check one Alternative.

x           ALTERNATIVE NO. 1

within thirty (30) Days
of the exercise of its option under Article 7.4(C), pay in immediately
available funds to the Consenting Parties in proportion to their respective
Participating Interests in such Exclusive Operations a lump sum amount payable
in the currency designated by such Consenting Parties.  Such lump sum amount shall be equal to such
Non-Consenting Party’s Participating Interest share of all liabilities and
expenses that were incurred in every Exclusive Operation relating to the
Discovery (or Exclusive Well, as the case may be) in which the Non-Consenting
Party desires to reinstate the rights it relinquished pursuant to Article
7.4(B), and that were not previously paid by such Non-Consenting Party.

o            ALTERNATIVE NO. 2

immediately
upon the exercise of its option under Article 7.4(C), begin to bear one hundred
percent (100%) of the cash calls made on each Consenting Party in respect of
both Joint Operations and Exclusive Operations until such Non-Consenting Party
has reimbursed the original Consenting Parties (in proportion to their
respective Participating Interest in the Exclusive Operations in which such
Non-Consenting Party is reinstating its rights) an amount equal to such
Non-Consenting Party’s Participating Interest share of all liabilities and
expenses that were incurred in every Exclusive Operation relating to the
Discovery (or Exclusive Well, as the case may be) in which the Non-Consenting
Party desires to reinstate the rights it relinquished pursuant to Article
7.4(B) and that were not previously paid by such Non-Consenting Party.

(B)                                In
addition to the payment required under Article 7.5(A), immediately following
the exercise of its option under Article 7.4(C) each such Non-Consenting Party
shall be liable to reimburse the Consenting Parties who took the risk of such
Exclusive Operations (in proportion to their respective Participating
Interests) an amount equal to the total of:

(1)                                  fifty
percent (50%) of such Non-Consenting Party’s Participating Interest share of
all liabilities and expenses that were incurred in any Exclusive Operation
relating to the obtaining of the portion of the G & G Data which pertains
to the Discovery, and that were not previously paid by such Non-Consenting
Party; plus

(2)                                  one
hundred percent (100%) of such Non-Consenting Party’s Participating Interest
share of all liabilities and expenses that were incurred in any Exclusive
Operation relating to the drilling, Deepening, Testing, Completing,
Sidetracking, Plugging Back, Recompleting and Reworking of the Exploration Well
which made the Discovery in which the Non-Consenting Party desires to reinstate
the rights it relinquished pursuant to Article 7.4(B), and that were not
previously paid by such Non-Consenting Party; plus

(3)                                  one
hundred percent (100%) of the Non-Consenting Party’s Participating Interest
share of all liabilities and expenses that were incurred in any Exclusive
Operation relating to the drilling, Deepening, Testing, Completing,
Sidetracking, Plugging Back, Recompleting and Reworking of the Appraisal
Well(s) which delineated the Discovery in which the Non-Consenting Party
desires to reinstate the rights it relinquished pursuant to Article 7.4(B), and
that were not previously paid by such Non-Consenting Party.

(C)                                Each
such Non-Consenting Party who is liable for the amounts set out in Article
7.5(B) shall:

 39

 

Check one Alternative.

x                                  ALTERNATIVE
NO. 1        

within thirty (30) Days of the exercise of its option under Article 7.4(C), pay
in immediately available funds the full amount due from it under Article 7.5(B)
to such Consenting Parties, in the currency designated by such Consenting
Parties.

o                                    ALTERNATIVE
NO. 2        

bear one hundred percent (100%) of the cash calls made on each Consenting Party
in respect of both Joint Operations and Exclusive Operations until each
Non-Consenting Party has reimbursed the full amount due from it under Article
7.5(B).  Unless otherwise agreed, any
balance remaining unreimbursed at the end of, or upon a Party’s withdrawal
from, the subject Exploration Period will be reimbursed by cash payment in the
currency designated by the Consenting Parties who took the risk of such
Exclusive Operations.  The due date for
any such payment shall be fifteen (15) Days after notice from Operator of the
balance remaining unreimbursed.  Unpaid
amounts shall accrue interest at the Agreed Interest Rate from the due date
until timely paid in full.  With respect
to Parties who are participants in an on-going Exploitation Period, any balance
remaining unreimbursed after twenty-four (24) months from the date of the
notice under Article 7.4(C) shall be settled through allocation from the
Non-Consenting Parties to the Consenting Parties of an additional share of
Profit Hydrocarbons, such allocation timed to enable the reimbursement to be
completed in not more than thirty (30) months from the date of the notice under
Article 7.4(C).

(D)                               The
Non-Consenting Party exercising its option under Article 7.4(C) shall, in
accordance with Article 19, be entitled to all Cost Hydrocarbons derived from
reimbursements made under Article 7.5(A). 
Such Non-Consenting Party shall not be entitled to Cost Hydrocarbons
associated with payments made under Article 7.5(B), unless the Contract or
any Laws / Regulations require otherwise. 
Each Consenting Party shall have the right to refuse to accept all or
any portion of its share of amounts paid under Articles 7.5(A) and
7.5(B).  In such case the refused amount
shall be distributed to each non-refusing Consenting Party on a pro-rata basis.

7.6                               Order
of Preference of Operations

(A)                              Except
as otherwise specifically provided in this Agreement, if any Party desires to
propose the conduct of an operation that will conflict with an existing
proposal for an Exclusive Operation, such Party shall have the right
exercisable for five (5) Days (or twenty-four (24) hours for Urgent Operational
Matters) from receipt of the proposal for the Exclusive Operation, to deliver
such Party’s alternative proposal to all Parties entitled to participate in the
proposed operation.  Such alternative
proposal shall contain the information required under Article 7.2(A).

(B)                                Each
Party receiving such proposals shall elect by delivery of notice to Operator
and to the proposing Parties within the appropriate response period set out in
Article 7.2(B) to participate in one of the competing proposals.  Any Party not notifying Operator and the
proposing Parties within the response period shall be deemed to have voted
against the proposals.

(C)                                The
proposal receiving the largest aggregate Participating Interest vote shall have
priority over all other competing proposals. 
In the case of a tie vote, Operator shall choose among the proposals
receiving the largest aggregate Participating Interest vote.  Operator shall deliver notice of such result
to all Parties entitled to participate in the operation within five (5) Days
(or twenty-four (24) hours for Urgent Operational Matters).

(D)                               Each
Party shall then have two (2) Days (or twenty-four (24) hours for Urgent
Operational Matters) from receipt of such notice to elect by delivery of notice
to Operator and the proposing Parties whether such Party will participate in
such Exclusive Operation, or will relinquish its interest pursuant to Article
7.4(B).  Failure by a Party to deliver
such notice within such period 

 40
 

 

shall be deemed an election not to participate in the
prevailing proposal.

Check Paragraph (E), if desired.

x                                  OPTIONAL
PROVISION

(E)                                 Notwithstanding
the provisions of Article 7.4(B), if for reasons other than the encountering of
granite or other practically impenetrable substance or any other condition in
the hole rendering further operations impracticable, a well drilled as an
Exclusive Operation fails to reach the deepest objective Zone described in the
notice proposing such well, Operator shall give notice of such failure to each
Non-Consenting Party who submitted or voted for an alternative proposal under
this Article 7.6 to drill such well to a shallower Zone than the deepest
objective Zone proposed in the notice under which such well was drilled.  Each such Non-Consenting Party shall have the
option exercisable for forty-eight (48) hours from receipt of such notice to
participate for its Participating Interest share in the initial proposed
Completion of such well.  Each such
Non-Consenting Party may exercise such option by notifying Operator that it
wishes to participate in such Completion and by paying its Participating
Interest share of the cost of drilling such well to its deepest depth drilled
in the Zone in which it is Completed. 
All liabilities and expenses for drilling and Testing the Exclusive Well
below that depth shall be for the sole account of the Consenting Parties.  If any such Non-Consenting Party does not
properly elect to participate in the first Completion proposed for such well,
the relinquishment provisions of Article 7.4(B) shall continue to apply to such
Non-Consenting Party’s interest.

7.7                               Stand-By
Costs

(A)                              When
an operation has been performed, all tests have been conducted and the results
of such tests furnished to the Parties, stand by costs incurred pending
response to any Party’s notice proposing an Exclusive Operation for Deepening,
Testing, Sidetracking, Completing, Plugging Back, Recompleting, Reworking or
other further operation in such well (including the period required under
Article 7.6 to resolve competing proposals) shall be charged and borne as part
of the operation just completed.  Stand
by costs incurred subsequent to all Parties responding, or expiration of the
response time permitted, whichever first occurs, shall be charged to and borne
by the Parties proposing the Exclusive Operation in proportion to their
Participating Interests, regardless of whether such Exclusive Operation is
actually conducted.

(B)                                If
a further operation related to Urgent Operational Matters is proposed while the
drilling rig to be utilized is on location, any Party may request and receive
up to five (5) additional Days after expiration of the applicable response
period specified in Article 7.2(B)(1) within which to respond by notifying
Operator that such Party agrees to bear all stand by costs and other costs
incurred during such extended response period. 
Operator may require such Party to pay the estimated stand by costs in
advance as a condition to extending the response period.  If more than one Party requests such
additional time to respond to the notice, stand by costs shall be allocated
between such Parties on a Day-to-Day basis in proportion to their Participating
Interests.

 41
 

 

Check Article 7.8, if desired.
Renumber following articles if Article 7.8 is not selected.

x           OPTIONAL PROVISION

7.8                               Special
Considerations Regarding Deepening and Sidetracking

(A)                              An
Exclusive Well shall not be Deepened or Sidetracked without first affording the
Non-Consenting Parties in accordance with this Article 7.8 the opportunity to
participate in such operation.

(B)                                In
the event any Consenting Party desires to Deepen or Sidetrack an Exclusive
Well, such Party shall initiate the procedure contemplated by Article 7.2.  If a Deepening or Sidetracking operation is
approved pursuant to such provisions, and if any Non-Consenting Party to the
Exclusive Well elects to participate in such Deepening or Sidetracking
operation, such Non-Consenting Party shall not owe amounts pursuant to Article
7.5(B), and such Non-Consenting Party’s payment pursuant to Article 7.5(A)
shall be such Non-Consenting Party’s Participating Interest share of the
liabilities and expenses incurred in connection with drilling the Exclusive
Well from the surface to the depth previously drilled which such Non-Consenting
Party would have paid had such Non-Consenting Party agreed to participate in
such Exclusive Well; provided, however, all liabilities and expenses for
Testing and Completing or attempting Completion of the well incurred by
Consenting Parties prior to the commencement of actual operations to Deepen or
Sidetrack beyond the depth previously drilled shall be for the sole account of
the Consenting Parties.

7.9                               Use
of Property

(A)                              The
Parties participating in any Deepening, Testing, Completing, Sidetracking,
Plugging Back, Recompleting or Reworking of any well drilled under this
Agreement shall be permitted to use (free of cost) all casing, tubing and other
equipment in the well that is not needed for operations by the owners of the
wellbore, but the ownership of all such equipment shall remain unchanged.  On abandonment of a well in which operations
with differing participation have been conducted, the Parties abandoning the
well shall account for all equipment in the well to the Parties owning such
equipment by tendering to them their respective Participating Interest shares
of the value of such equipment less the cost of salvage.

Check Paragraph (B), if desired.
Renumber following paragraphs if Paragraph (B) is not selected.

x                                  OPTIONAL
PROVISION

(B)                                Any
Party (whether owning interests in the platform or not) shall be permitted to
use spare slots in a platform constructed pursuant to this Agreement for
purposes of drilling Exploration Wells and/or Appraisal Wells and running tests
in the Contract Area.  No Party except an
owner of a platform may drill Development Wells or run production from a well
(except production resulting from initial well tests) from the platform without
the prior written consent of all platform owners.  If all owners of the platform participate in
the drilling of a well, then no fee shall be payable under this Article
7.9(B).  Otherwise, each time a well is
drilled from a platform, the Consenting Parties in the well shall pay to the
owners of the platform until all wells drilled by such Parties have been plugged
and abandoned a monthly fee equal to (1) that portion of the total cost of the
platform (including costs of material, fabrication, transportation and
installation), divided by the number of months of useful life established for
the platform under the tax law of the host country, that one well slot bears to
the total number of slots on the platform plus (2) that proportionate part of
the monthly cost of operating, maintaining and financing the platform that the
well drilled under this Article 7.9(B) bears to the total number of wells 

 42
 

 

served by such
platform.  Consenting Parties who have
paid to drill a well from a platform under this Article 7.9(B) shall be
entitled to Deepen or Sidetrack that well for no additional charge if done
prior to moving the drilling rig off of location.

Check Paragraph (C), if desired.
Renumber following paragraphs if Paragraph (C) is not selected.

x                                  OPTIONAL
PROVISION

(C)                                Spare
capacity in equipment that is constructed pursuant to this Agreement and used
for processing or transporting Crude Oil and Natural Gas after it has passed
through primary separators and dehydrators (including treatment facilities, gas
processing plants and pipelines) shall be available for use by any Party for
Hydrocarbon production from the Contract Area on the terms set forth below.  All Parties desiring to use such equipment
shall nominate capacity in such equipment on a monthly basis by notice to
Operator at least ten (10) Days prior to the beginning of each month.  Operator may nominate capacity for the owners
of the equipment if they so elect.  If at
any time the capacity nominated exceeds the total capacity of the equipment,
the capacity of the equipment shall be allocated in the following
priority:  (1) first, to the owners of
the equipment up to their respective Participating Interest shares of total
capacity, (2) second, to owners of the equipment desiring to use capacity in
excess of their Participating Interest shares, in proportion to the
Participating Interest of each such Party and (3) third, to Parties not owning
interests in the equipment, in proportion to their Participating Interests in
the Agreement.  Owners of the equipment
shall be entitled to use up to their Participating Interest share of total
capacity without payment of a fee under this Article 7.9(C). Otherwise, each
Party using equipment pursuant to this Article 7.9(C) shall pay to the owners
of the equipment monthly throughout the period of use an arm’s-length fee based
upon third party charges for similar services in the vicinity of the Contract
Area.  If no arm’s-length rates for such
services are available, then the Party desiring to use equipment pursuant to
this Article 7.9(C) shall pay to the owners of the equipment a monthly fee
equal to (1) that portion of the total cost of the equipment, divided by the
number of months of useful life established for such equipment under the tax
law of the host country, that the capacity made available to such Party on a
fee basis under this Article 7.9(C) bears to the total capacity of the
equipment plus (2) that portion of the monthly cost of maintaining, operating
and financing the equipment that the capacity made available to such Party on a
fee basis under this Article 7.9(C) bears to the total capacity of the
equipment.

Check, if desired, Paragraph (D)
in conjunction with Paragraph (B) or (C). Renumber following paragraph if
Paragraph (D) is not selected.

x                                  OPTIONAL
PROVISION

(D)                               Payment
for the use of a platform under Article 7.9(B) or the use of equipment under
Article 7.9(C) shall not result in an acquisition of any additional interest in
the equipment or platform by the paying Parties.  However, such payments shall be included in
the costs which the paying Parties are entitled to recoup under Article 7.5.

Check, if desired, Paragraph (E)
in conjunction with Paragraph (C) or (D).

x                                  OPTIONAL
PROVISION

(E)                                 Parties
electing to use spare capacity on platforms or in equipment pursuant to
Article 7.9(B) or Article 7.9(C) shall indemnify the owners of the
equipment or platform against any and all costs and liabilities incurred as a
result of such use (including any Consequential Loss and Environmental Loss)
but excluding costs and liabilities for which 

 43
 

 

Operator is solely
responsible under Article 4.6.

7.10                        Lost
Production During Tie-In of Exclusive Operation Facilities

If, during the tie-in of Exclusive Operation
facilities with the existing production facilities of another operation, the
production of Hydrocarbons from such other pre-existing operations is
temporarily lessened as a result, then the Consenting Parties shall compensate
the parties to such existing operation for such loss of production in the
following manner.  Operator shall
determine the amount by which each Day’s production during the tie-in of
Exclusive Operation facilities falls below the previous month’s average daily
production from the existing production facilities of such operation.  The so-determined amount of lost production
shall be recovered by all Parties who experienced such loss in proportion to
their respective Participating Interest. 
Upon completion of the tie-in, such lost production shall be recovered
in full by Operator deducting up to one hundred percent (100%) of the
production from the Exclusive Operation, prior to the Consenting Parties being
entitled to receive any such production.

Check Article 7.11, if desired.
Renumber following article if Article 7.11 is not selected.

x                                  OPTIONAL PROVISION:

7.11                        Production
Bonuses

The bonus payable by the
Parties under the Contract (“Production Bonus”)
shall be charged to the Joint Account if there is no Hydrocarbon production
from an Exclusive Operation at the time they are incurred.  If there is Hydrocarbon production from one
or more Exclusive Operations, then any Production Bonus which becomes payable
under the Contract shall be borne

Check one
Alternative.

o                                    ALTERNATIVE
NO. 1        

totally by the Exploitation Area(s) in which the average daily commercial
production of Hydrocarbons during the      Day period
preceding the date on which liability for the Production Bonus is incurred
exceeded their average daily production of Hydrocarbons during the immediately
preceding      Day period, in proportion to the amount of
the increase for each such Exploitation Area.

o                                    ALTERNATIVE
NO. 2        

by each Exploitation Area, in the proportion that its average daily production
of Hydrocarbons bears to the total average daily production of Hydrocarbons
from the Contract Area during the      Day period preceding
the date on which liability for the Production Bonus is incurred.

x                                  ALTERNATIVE
NO. 3        

by each Exploitation Area that produced Hydrocarbons during the thirty Day
period preceding the date on which liability for the Production Bonus is
incurred, in the proportion that its cumulative production of Hydrocarbons
through that date bears to the total cumulative production of Hydrocarbons
through that date from all Exploitation Areas liable for the Production Bonus.

o                                    ALTERNATIVE NO.
4        

by the Parties in accordance with their Participating Interests.

The Parties in an
Exploitation Area shall bear the Production Bonus allocated to that Exploitation
Area in accordance with their Participating Interests in that Exploitation Area
as of the date on which liability for the Production Bonus was incurred.  Only types, grades and qualities of 

 44
 

 

Hydrocarbons used for the
determination of the Production Bonus under the Contract shall be utilized in
the calculations in this Article 7.11.

7.12                        Conduct of
Exclusive Operations

(A)                              Each
Exclusive Operation shall be carried out by the Consenting Parties acting as
the Operating Committee, subject to the provisions of this Agreement applied mutatis mutandis to such Exclusive Operation and subject to
the terms and conditions of the Contract.

(B)                                The
computation of liabilities and expenses incurred in Exclusive Operations,
including the liabilities and expenses of Operator for conducting such
operations, shall be made in accordance with the principles set out in the
Accounting Procedure.

(C)                                Operator
shall maintain separate books, financial records and accounts for Exclusive
Operations which shall be subject to the same rights of audit and examination
as the Joint Account and related records, all as provided in the Accounting
Procedure.  Said rights of audit and
examination shall extend to each of the Consenting Parties and each of the
Non-Consenting Parties so long as the latter are, or may be, entitled to elect
to participate in such Exclusive Operations.

(D)                               Operator,
if it is conducting an Exclusive Operation for the Consenting Parties,
regardless of whether it is participating in that Exclusive Operation, shall be
entitled to request cash advances and shall not be required to use its own
funds to pay any cost and expense and shall not be obliged to commence or
continue Exclusive Operations until cash advances requested have been made, and
the Accounting Procedure shall apply to Operator in respect of any Exclusive
Operations conducted by it.

(E)                                 Should
the submission of a Development Plan be approved in accordance with Article
6.2, or should any Party propose (but not yet have the right to commence) a
development in accordance with this Article 7 where neither the
Development Plan nor the development proposal call for the conduct of
additional appraisal drilling, and should any Party wish to drill an additional
Appraisal Well prior to development, then the Party proposing the Appraisal
Well as an Exclusive Operation shall be entitled to proceed first, but without
the right (subject to the following sentence) to future reimbursement pursuant
to Article 7.5.  If such an
Appraisal Well is produced, any Consenting Party shall own and have the right
to take in kind and separately dispose of all of the Non-Consenting Party’s
Entitlement from such Appraisal Well until the value received in sales to
purchasers in arm-length transactions equals one hundred percent (100%) of such
Non-Consenting Party’s Participating Interest shares of all liabilities and
expenses that were incurred in any Exclusive Operations relating to the
Appraisal Well.  Following the completion
of drilling such Appraisal Well as an Exclusive Operation, the Parties may
proceed with the Development Plan approved pursuant to Article 5.9, or (if
applicable) the Parties may complete the procedures to propose an Exclusive
Operation to develop a Discovery.  If, as
the result of drilling such Appraisal Well as an Exclusive Operation, the Party
or Parties proposing to develop the Discovery decide(s) not to do so, then each
Non-Consenting Party who voted in favor of such Development Plan prior to the
drilling of such Appraisal Well shall pay to the Consenting Party the amount
such Non-Consenting Party would have paid had such Appraisal Well been drilled
as a Joint Operation.

(F)                                 If
Operator is a Non-Consenting Party to an Exclusive Operation to develop a
Discovery, then  Operator

Check one
Alternative.

o                                    ALTERNATIVE NO.
1        

may resign, but in any event shall resign on the unanimous request of the
Consenting Parties, as Operator for the Exploitation Area for such Discovery,
and the Consenting Parties shall select a Consenting Party to serve as Operator
for such Exclusive Operation only.

 45
 

 

 

x                                  ALTERNATIVE NO. 2        

shall resign as Operator for the Exploitation Area for such Discovery.  If Operator so resigns, the Consenting
Parties shall select a Consenting Party to serve as Operator for such Exclusive
Operation only.

Any such
resignation of Operator and appointment of a Consenting Party to serve as
Operator for such Exclusive Operation shall be subject to the Parties having
first obtained any necessary Government approvals.

ARTICLE 8

DEFAULT

8.1                               Default
and Notice

(A)          Any
Party that fails to:

(1)                                  pay
when due its share of Joint Account expenses (including cash advances and
interest); or

(2)                                  obtain
and maintain any Security required of such Party under the Contract or this
Agreement;

shall be in default under
this Agreement (a “Defaulting Party”).
Operator, or any non-defaulting Party in case Operator is the Defaulting Party,
shall promptly give notice of such default (the “Default
Notice”) to the Defaulting Party and each of the non-defaulting
Parties.

(B)                                For
the purposes of this Article 8, “Default Period”
means the period beginning five (5) Business Days from the date that the
Default Notice is issued in accordance with this Article 8.1 and ending when
all the Defaulting Party’s defaults pursuant to this Article 8.1 have been
remedied in full.

8.2                               Operating
Committee Meetings and Data

(A)                              Notwithstanding
any other provision of this Agreement, the Defaulting Party shall have no
right, during the Default Period, to:

(1)                                  call
or attend Operating Committee or subcommittee meetings;

(2)                                  vote
on any matter coming before the Operating Committee or any subcommittee;

(3)                                  access
any data or information relating to any operations under this Agreement;

(4)                                  consent
to or reject data trades between the Parties and third parties, nor access any
data received in such data trades;

(5)                                  Transfer
(as defined in Article 12.1) all or part of its Participating Interest, except
to non-defaulting Parties in accordance with this Article 8;

(6)                                  consent
to or reject any Transfer (as defined in Article 12.1) or otherwise exercise
any other rights in respect of Transfers under this Article 8 or under Article
12;

(7)                                  receive
its Entitlement in accordance with Article 8.4;

(8)                                  withdraw
from this Agreement under Article 13; or

 46
 

 

(9)                                  take
assignment of any portion of another Party’s Participating Interest in the
event such other Party is either in default or withdrawing from this Agreement
and the Contract.

(B)                                Notwithstanding
any other provisions in this Agreement, during the Default Period:

(1)                                  unless
agreed otherwise by the non-defaulting Parties, the voting interest of each
non-defaulting Party shall be equal to the ratio such non-defaulting Party’s
Participating Interest bears to the total Participating Interests of the
non-defaulting Parties;

(2)                                  any
matters requiring a unanimous vote or approval of the Parties shall not require
the vote or approval of the Defaulting Party;

(3)                                  the
Defaulting Party shall be deemed to have elected not to participate in any
operations that are voted upon during the Default Period, to the extent such an
election would be permitted by Article 5.13 and Article 7; and

(4)                                  the
Defaulting Party shall be deemed to have approved, and shall join with the
non-defaulting Parties in taking, any other actions voted on during the Default
Period.

8.3                               Allocation
of Defaulted Accounts

(A)                              The
Party providing the Default Notice pursuant to Article 8.1 shall include in the
Default Notice to each non-defaulting Party a statement of: (i) the sum of
money that the non-defaulting Party shall pay as its portion of the Amount in
Default; and (ii) if the Defaulting Party has failed to obtain or maintain any
Security required of such Party in order to maintain the Contract in full force
and effect, the type and amount of the Security the non-defaulting Parties
shall post or the funds they shall pay in order to allow Operator, or (if
Operator is in default) the notifying Party, to post and maintain such
Security.  Unless otherwise agreed, the
obligations for which the Defaulting Party is in default shall be satisfied by
the non-defaulting Parties in proportion to the ratio that each non-defaulting
Party’s Participating Interest bears to the Participating Interests of all
non-defaulting Parties.  For the purposes
of this Article 8:

“Amount in Default”
means the Defaulting Party’s share of Joint Account expenses which the
Defaulting Party has failed to pay when due pursuant to the terms of this
Agreement (but excluding any interest owed on such amount); and

“Total
Amount in Default” means the following amounts: (i) the
Amount in Default; (ii) third-party costs of obtaining and maintaining any
Security incurred by the non-defaulting Parties or the funds paid by such
Parties in order to allow Operator to obtain or maintain Security, in
accordance with Article 8.3(A)(ii); plus (iii) any interest at the Agreed
Interest Rate accrued on the amount under (i) from the date this amount is due
by the Defaulting Party until paid in full by the Defaulting Party and on the
amount under (ii) from the date this amount is incurred by the non-defaulting
Parties until paid in full by the Defaulting Party.

(B)                                If
the Defaulting Party remedies its default in full before the Default Period
commences, the notifying Party shall promptly notify each non-defaulting Party
by facsimile or telephone and by email, and the non-defaulting Parties shall be
relieved of their obligations under Article 8.3(A).  Otherwise, each non-defaulting Party shall
satisfy its obligations under Article 8.3(A)(i) before the Default Period
commences and its obligations under Article 8.3(A)(ii) within ten (10) Days
following the Default Notice.  If any
non-defaulting Party fails to timely satisfy such obligations, such Party shall
thereupon be a Defaulting Party subject to the provisions of this Article
8.  The non-defaulting Parties shall be
entitled to receive their respective shares of the Total Amount in Default
payable by such Defaulting Party pursuant to this Article 8.

(C)                                If
Operator is a Defaulting Party, then all payments otherwise payable to Operator
for Joint 

 47
 

 

Account costs pursuant to this Agreement shall be made
to the notifying Party instead until the default is cured or a successor
Operator appointed.  The notifying Party
shall maintain such funds in a segregated account separate from its own funds
and shall apply such funds to third party claims due and payable from the Joint
Account of which it has notice, to the extent Operator would be authorized to
make such payments under the terms of this Agreement.  The notifying Party shall be entitled to bill
or cash call the other Parties in accordance with the Accounting Procedure for
proper third party charges that become due and payable during such period to
the extent sufficient funds are not available. 
When Operator has cured its default or a successor Operator is
appointed, the notifying Party shall turn over all remaining funds in the
account to Operator and shall provide Operator and the other Parties with a
detailed accounting of the funds received and expended during this period.  The notifying Party shall not be liable for
damages, losses, costs, expenses or liabilities arising as a result of its
actions under this Article 8.3(C), except to the extent Operator would be
liable under Article 4.6.

8.4                               Remedies

(A)                              During
the Default Period, the Defaulting Party shall not have a right to its
Entitlement, which shall vest in and be the property of the non-defaulting
Parties.  Operator (or the notifying
Party if Operator is a Defaulting Party) shall be authorized to sell such
Entitlement in an arm’s-length sale on terms that are commercially reasonable
under the circumstances and, after deducting all costs, charges and expenses
incurred in connection with such sale, pay the net proceeds to the
non-defaulting Parties in proportion to the amounts they are owed by the
Defaulting Party as a part of the Total Amount in Default (in payment of first
the interest and then the principal) and apply such net proceeds toward the
establishment of the Reserve Fund (as defined in Article 8.4(C)), if
applicable, until all such Total Amount in Default is recovered and such
Reserve Fund is established.  Any surplus
remaining shall be paid to the Defaulting Party, and any deficiency shall
remain a debt due from the Defaulting Party to the non-defaulting Parties.  When making sales under this Article 8.4(A),
the non-defaulting Parties shall have no obligation to share any existing
market or obtain a price equal to the price at which their own production is
sold.

(B)                                If
Operator disposes of any Joint Property or if any other credit or adjustment is
made to the Joint Account during the Default Period, Operator (or the notifying
Party if Operator is a Defaulting Party) shall be entitled to apply the
Defaulting Party’s Participating Interest share of the proceeds of such
disposal, credit or adjustment against the Total Amount in Default (against
first the interest and then the principal) and toward the establishment of the
Reserve Fund (as defined in Article 8.4(C)), if applicable.  Any surplus remaining shall be paid to the
Defaulting Party, and any deficiency shall remain a debt due from the
Defaulting Party to the non-defaulting Parties.

(C)                                The
non-defaulting Parties shall be entitled to apply the net proceeds received
under Articles 8.4(A) and 8.4(B) toward the creation of a reserve fund
(the “Reserve Fund”) in an amount equal
to the Defaulting Party’s Participating Interest share of: (i) the estimated
cost to abandon any wells and other property in which the Defaulting Party
participated; (ii) the estimated cost of severance benefits for local
employees upon cessation of operations; and (iii) any other identifiable costs
that the non-defaulting Parties anticipate will be incurred in connection with
the cessation of operations. Upon the conclusion of the Default Period, all
amounts held in the Reserve Fund shall be returned to the Party previously in
Default.

Check one Alternative for
Paragraph (D).

o                                    ALTERNATIVE
1 — Forfeiture

(D) (1)              If a Defaulting
Party fails to fully remedy all its defaults by the thirtieth (30th) Day
following the date of the Default Notice, then, without prejudice to any other
rights available to each non-defaulting Party to recover its portion of the
Total Amount in Default,

 48
 

 

Check one Alternative.

o                                    ALTERNATIVE
1-1             

each non-defaulting Party

x                                  ALTERNATIVE
NO. 1-2     

a majority in interest of the non-defaulting Parties (after excluding
Affiliates of the Defaulting Party)

shall have the option,
exercisable at anytime thereafter during the Default Period, to require that
the Defaulting Party completely withdraw from this Agreement and the
Contract.  Such option shall be exercised
by notice to the Defaulting Party and each non-defaulting Party.  If such option is exercised, the Defaulting
Party shall be deemed to have transferred, pursuant to Article 13.6,
effective on the date of the non-defaulting Party’s or Parties’ notice, its
Participating Interest to the non-defaulting Parties.  Notwithstanding the terms of Article 13, in
the absence of an agreement among the non-defaulting Parties to the contrary,
any transfer to the non-defaulting Parties following a withdrawal pursuant to
this Article 8.4(D)(1) shall be in proportion to the Participating
Interests of the non-defaulting Parties.

Check if desired in conjunction
with Alternative 1.

o                                    OPTIONAL
PROVISION — Expedited Forfeiture for Subsequent Default

(2)                                  A
Party which is held in default under this Agreement (and subsequently cures
such default) shall be subject to the provisions of this Article 8.4(D)(2) for
a period of      Days following the last Day of the Default
Period associated with such initial occurrence of default.  If such Party fails to remedy a subsequent
default by the fifteenth (15th) Day following the date of the Default Notice
associated with such subsequent occasion of default (a “Repeat
Defaulting Party”), then, without prejudice to any other rights
available to each non-defaulting Party to recover its portion of the Total
Amount in Default,

Check one Alternative.

o                                    ALTERNATIVE
NO. 1        

each non-defaulting Party

o                                    ALTERNATIVE
NO. 2        

a majority in interest of the non-defaulting Parties (after excluding
Affiliates of the Repeat Defaulting Party)

shall have the option,
exercisable at any time thereafter until the Repeat Defaulting Party has
completely cured its defaults, to require that the Repeat Defaulting Party
completely withdraw from this Agreement and the Contract.  Such option shall be exercised by notice to
the Repeat Defaulting Party and each non-defaulting Party.  If such option is exercised, the Repeat
Defaulting Party shall be deemed to have transferred, pursuant to
Article 13.6, effective on the date of the non-defaulting Party’s or
Parties’ notice, its Participating Interest to the non-defaulting Parties.  Notwithstanding the terms of Article 13, in
the absence of an agreement among the non-defaulting Parties to the contrary,
any transfer to the non-defaulting Parties following a 

 49
 

 

withdrawal pursuant to
this Article 8.4(D)(2) shall be in proportion to the Participating
Interests of the non-defaulting Parties

o                                    ALTERNATIVE
NO. 2 — Buy-Out of Defaulting Party’s Participating Interest

(D)                               Each
Party grants to each of the other Parties the right and option to acquire (the “Buy-Out Option”) all of its
Participating Interest for a value (the “Appraised Value”)
as determined in this Article 8.4(D) in the event that such Party becomes
a Defaulting Party and fails to fully remedy all its defaults by the thirtieth
(30th) Day following the date of the Default Notice.  If a Defaulting Party fails to remedy its
default by the thirtieth (30th) Day following the date of the Default Notice,
then, without prejudice to any other rights available to each non-defaulting
Party to recover its portion of the Total Amount in Default,

Check one
Alternative.

o            ALTERNATIVE NO. 2-1

each
non-defaulting Party may, but shall not be obligated to, exercise such Buy-Out
Option by notice to the Defaulting Party and each non-defaulting Party (the “Option Notice”). The Defaulting
Party shall be obligated to transfer, pursuant to Article 13.6, effective on
the date of the Option Notice, its Participating Interest to the non-defaulting
Parties having exercised the Buy-Out Option (each, an “Acquiring
Party”). If, within thirty (30) Days after the Buy-Out Option is
first exercised by an Acquiring Party, other non-defaulting Parties become an
Acquiring Party, each Acquiring Party shall acquire a proportion of the
Participating Interest of the Defaulting Party equal to the ratio of its own
Participating Interest to the total Participating Interests of all Acquiring
Parties and pay such proportion of the Appraised Value (as defined below),
unless they otherwise agree.  Each
Acquiring Party shall specify in its Option Notice a value for the Defaulting
Party’s Participating Interest.  Within
five (5) Days of the Option Notice, the Defaulting Party shall (i) notify
the Acquiring Parties that it accepts, with respect to each Acquiring Party,
the value specified by such Acquiring Party in its Option Notice (in which case
this value is, with respect to such Acquiring Party, the “Appraised
Value”); or (ii) refer the Dispute to an independent expert
pursuant to Article 18.3 for determination of the value of its Participating
Interest (in which case the value determined by such expert shall be deemed the
“Appraised Value”).  If the Defaulting Party fails to so notify
the Acquiring Parties, then the Defaulting Party shall be deemed to have
accepted, with respect to each Acquiring Party, such Acquiring Party’s proposed
value as the Appraised Value.

o                                    ALTERNATIVE
NO. 2-2

a
majority in interest of the non-defaulting Parties (after excluding Affiliates
of the Defaulting Party) may, but shall not be obligated to, exercise such
Buy-Out Option by notice to the Defaulting Party and each non-defaulting Party
(the “Option Notice”).  If more than one non-defaulting Party elects
to exercise the Buy-Out Option, each electing non-defaulting Party
(collectively, the “Acquiring Parties”) shall
acquire a proportion of the Participating Interest of the Defaulting Party
equal to the ratio of its own Participating Interest to the total Participating
Interests of all Acquiring Parties and pay such proportion of the Appraised
Value (as defined below), unless they otherwise agree.  The Defaulting Party shall be obligated to
transfer, pursuant to Article 13.6, effective on the date of the Option Notice,
its Participating Interest to the Acquiring Parties in consideration of the
payment to the Defaulting Party of the Appraised Value.  In the Option Notice the Acquiring Parties
shall specify a value for the Defaulting Party’s Participating Interest.  Within five (5) Days of the Option 

 50
 

 

Notice,
the Defaulting Party shall (i) notify the Acquiring Parties that it accepts the
value specified in the Option Notice (in which case such value is the “Appraised Value”); or (ii) refer the
Dispute to an independent expert pursuant to Article 18.3 for determination of
the value of its Participating Interest (in which case the value determined by
such expert shall be deemed the “Appraised Value”).  If the Defaulting Party fails to so notify
the Acquiring Parties, the Defaulting Party shall be deemed to have accepted
the Acquiring Parties’ value as the Appraised Value.

If the valuation of the
Defaulting Party’s Participating Interest is referred to an expert, such expert
shall determine the Appraised Value which shall be equal to the fair market
value of the Defaulting Party’s Participating Interest, less the following: (i)
the Total Amount in Default; (ii) all costs, including the costs of the expert,
to obtain such valuation; and (iii)     percent (  %) of
the fair market value of the Defaulting Party’s Participating Interest.

The Appraised Value shall
be paid to the Defaulting Party in four (4) installments, each equal to 25% of
the Appraised Value as follows:

(1)                                  the
first installment shall be due and payable to the Defaulting Party within
[15 Days] after the date on which the Defaulting Party’s Participating
Interest is effectively transferred to the Acquiring Parties (the “Transfer Date”);

(2)                                  the
second installment shall be due and payable to the Defaulting Party within [180
Days] after the Transfer Date;

(3)                                  the
third installment shall be due and payable to the Defaulting Party within [365
Days] after the Transfer Date; and

(4)                                  the
fourth installment shall be due and payable to the Defaulting Party within [545
Days] after the Transfer Date.

Check
Paragraph (E), if desired. Renumber following paragraphs if Paragraph (E) is
not selected.

o                                    OPTIONAL
PROVISION- Security Interest

(E)                                 In
addition to the other remedies available to the non-defaulting Parties under
this Article 8 and any other rights available to each non-defaulting Party
to recover its portion of the Total Amount in Default, in the event a
Defaulting Party fails to remedy its default within thirty (30) Days of the
Default Notice, the non-Defaulting Parties may elect to enforce a mortgage and
security interest on the Defaulting Party’s Participating Interest as set forth
below, subject to the Contract and the Laws / Regulations.

(1)                                  Each
Party grants to each of the other Parties, in pro rata shares based on their
relative Participating Interests, a mortgage and security interest on its
Participating Interest, whether now owned or hereafter acquired, together with
all products and proceeds derived from that Participating Interest
(collectively, the “Collateral”) as security for
(i) the payment of all amounts owing by such Party (including interest and
costs of collection) under this Agreement; and (ii) any Security which
such Party is required to provide under the Contract.

(2)                                  Should
a Defaulting Party fail to remedy its default by the thirtieth (30th) Day
following the date of the Default Notice, then, each non-defaulting Party shall
have the option, exercisable at any time thereafter during the Default Period,
to foreclose its mortgage and security interest against its prorata share of
the 

 51
 

 

Collateral by any means permitted under the Contract
and the Laws / Regulations and to sell all or any part of that Collateral in
public or private sale after providing the Defaulting Party and other creditors
with any notice required by the Contract or the Laws / Regulations, and subject
to the provisions of Article 12.  
Except as may be prohibited by the Contract or the Laws / Regulations,
the non-defaulting Party that forecloses its mortgage and security interest
shall be entitled to become the purchaser of the Collateral sold and shall have
the right to credit toward the purchase price the amount to which it is
entitled under Article 8.4.   Any
deficiency in the amounts received by the foreclosing party shall remain a debt
due by the Defaulting Party.  The
foreclosure of mortgages and security interests by one non-defaulting Party
shall neither affect the amounts owed by the Defaulting Party to the other
non-defaulting Parties nor in any way limit the rights or remedies available to
them.  Each Party agrees that, should it
become a Defaulting Party, it waives the benefit of any appraisal, valuation,
stay, extension or redemption law and any other debtor protection law that
otherwise could be invoked to prevent or hinder the enforcement of the mortgage
and security interest granted above.

(3)                                  Each
Party agrees to execute such memoranda, financing statements and other
documents, and make such filings and registrations, as may be reasonably
necessary to perfect, validate and provide notice of the mortgages and security
interests granted by this Article 8.4(E).

(F)                                 For
purposes of [Articles 8.4(D) and 8.4(E), as elected], the Defaulting Party
shall, without delay following any request from the non-defaulting Parties, do
any act required to be done by the Laws / Regulations and any other applicable
laws in order to render the transfer of its Participating Interest legally
valid, including obtaining all governmental consents and approvals, and shall
execute any document and take such other actions as may be necessary in order
to effect a prompt and valid transfer. 
The Defaulting Party shall be obligated to promptly remove any liens and
encumbrances which may exist on its assigned Participating Interests.  In the event all Government approvals are not
timely obtained, the Defaulting Party shall hold the assigned Participating
Interest in trust for the non-defaulting Parties who are entitled to receive
it.  Each Party constitutes and appoints
each other Party its true and lawful attorney to execute such instruments and
make such filings and applications as may be necessary to make such transfer
legally effective and to obtain any necessary consents of the Government.  Actions under this power of attorney may be
taken by any Party individually without the joinder of the others.  This power of attorney is irrevocable for the
term of this Agreement and is coupled with an interest.  If requested, each Party shall execute a form
prescribed by the Operating Committee setting forth this power of attorney in
more detail.

(G)                                The
non-defaulting Parties shall be entitled to recover from the Defaulting Party
all reasonable attorneys’ fees and all other reasonable costs sustained in the
collection of amounts owing by the Defaulting Party.

(H)                               The
rights and remedies granted to the non-defaulting Parties in this Article 8
shall be cumulative, not exclusive, and shall be in addition to any other
rights and remedies that may be available to the non-defaulting Parties,
whether at law, in equity or otherwise. 
Each right and remedy available to the non-defaulting Parties may be
exercised from time to time and so often and in such order as may be considered
expedient by the non-defaulting Parties in their sole discretion.

8.5                               Survival

The obligations of the Defaulting Party and the rights
of the non-defaulting Parties shall survive the surrender of the Contract,
abandonment of Joint Operations and termination of this Agreement.

 52
 

 

8.6                               No
Right of Set Off

Each Party acknowledges
and accepts that a fundamental principle of this Agreement is that each Party
pays its Participating Interest share of all amounts due under this Agreement
as and when required.  Accordingly, any
Party which becomes a Defaulting Party undertakes that, in respect of either any
exercise by the non-defaulting Parties of any rights under or the application
of any of the provisions of this Article 8, such Party hereby waives any
right to raise by way of set off or invoke as a defense, whether in law or
equity, any failure by any other Party to pay amounts due and owing under this
Agreement or any alleged claim that such Party may have against Operator or any
Non-Operator, whether such claim arises under this Agreement or otherwise.  Each Party further agrees that the nature and
the amount of the remedies granted to the non-defaulting Parties hereunder are
reasonable and appropriate in the circumstances.

ARTICLE 9

DISPOSITION OF PRODUCTION

9.1                               Right
and Obligation to Take in Kind

Except as otherwise provided in this Article 9 or in Article
8, each Party shall have the right and obligation to own, take in kind and
separately dispose of its Entitlement.

9.2                               Disposition
of Crude Oil

Check one Alternative.

o                                    ALTERNATIVE
NO. 1        

Crude Oil to be produced from an Exploitation Area shall be taken and disposed
of in accordance with the rules and procedures set forth in Exhibit D.

o            ALTERNATIVE NO. 2

If Crude Oil is to
be produced from an Exploitation Area, the Parties shall in good faith, and not
less than three (3) months prior to the anticipated first delivery of Crude
Oil, as promptly notified by Operator, negotiate and conclude the terms of a
lifting agreement to cover the offtake of Crude Oil produced under the
Contract.  The lifting procedure shall be
based on the AIPN Model Form Lifting Procedure and shall contain all such terms
as may be negotiated and agreed by the Parties, consistent with the Development
Plan and subject to the terms of the Contract. 
The Government Oil & Gas Company may, if necessary and practicable,
also be party to the lifting agreement; if the Government Oil & Gas Company
is a party to the lifting agreement, then the Parties shall endeavor to obtain
its agreement to the principles set forth in this Article 9.2.  If a lifting agreement has not been entered
into by the date of first delivery of Crude Oil, the Parties shall nonetheless
be obligated to take and separately dispose of such Crude Oil as provided in
Article 9.1 and in addition shall be bound by the terms set forth in the AIPN
Model Form Lifting Procedure until a lifting agreement is executed by the
Parties.

o                                    ALTERNATIVE
NO. 3        

If Crude Oil is to be produced from an Exploitation Area, the Parties shall in
good faith, and not less than three (3) months prior to the anticipated first
delivery of Crude Oil, as promptly notified by Operator, negotiate and conclude
the terms of a lifting agreement to cover the offtake of Crude Oil produced
under the Contract.  The Government Oil
& Gas Company may, if necessary and practicable, also be party to the
lifting agreement; if the Government Oil & Gas Company is party to the
lifting agreement, then the Parties shall endeavor to obtain its agreement to
the principles set forth in this Article 9.2.  The lifting agreement shall, to the extent
consistent with the Development Plan and subject to the terms of the Contract,
make provision for:

(a)                                  the
delivery point at which title and risk of loss of each Party’s Entitlement of
Crude Oil 

 53
 

 

shall pass to such Party;

(b)                                 Operator’s
regular periodic advice to the Parties of estimates of total available
production for succeeding periods, quantities of each type and/or grade of
Crude Oil and each Party’s Entitlement for as far ahead as is necessary for
Operator and the Parties to plan lifting arrangements.  Such advice shall also cover, for each type
and/or grade of Crude Oil, the total available production and deliveries for
the preceding period, and overlifts and underlifts;

(c)                                  nomination
by the Parties to Operator of acceptance of their shares of total available
production for the succeeding period. 
Such nominations shall in any one period be for each Party’s entire
Entitlement of available production during that period, subject to operational
tolerances and agreed minimum economic cargo sizes or as the Parties may
otherwise agree;

(d)                                 timely
mitigation of the effects of overlifts and underlifts and any related
re-allocation of Cost Hydrocarbons and Profit Hydrocarbons;

(e)                                  if
offshore loading or a shore terminal for vessel loading is involved, risks
regarding acceptability of tankers, demurrage and (if applicable) availability
of berths;

(f)                                    distribution
to the Parties of available grades, gravities and qualities of Crude Oil to
ensure, to the extent Parties take delivery of their Entitlements as they
accrue, that each Party shall receive in each period Entitlements of grades,
gravities and qualities of Crude Oil from each Exploitation Area in which it
participates similar to the grades, gravities and qualities of Crude Oil
received by each other Party from that Exploitation Area in that period;

(g)                                 to
the extent that distribution of Entitlements on such basis is impracticable due
to availability of facilities and minimum cargo sizes, a method of making
periodic adjustments; and

(h)                                 the
right of the other Parties to sell an Entitlement which a Party fails to
nominate for acceptance pursuant to (c) above or of which a Party fails to take
delivery, in accordance with applicable agreed procedures, provided that such
failure either constitutes a breach of Operator’s or such Party’s obligations
under the terms of the Contract, or is likely to result in the curtailment or
shut-in of production.  Such sales shall
be made only to the limited extent necessary to avoid disruption in Joint
Operations.  Operator shall give all
Parties as much notice as is practicable of such situation and that a right of
sale option has arisen.  Any sale shall
be of the unnominated or undelivered Entitlement (as the case may be) and for
reasonable periods of time (in no event to exceed twelve (12) months).  Payment terms for production sold under this
option shall be established in the lifting agreement.

If a lifting agreement has not been entered into by
the date of first delivery of Crude Oil, the Parties shall nonetheless be
obligated to take and separately dispose of such Crude Oil as provided in
Article 9.1 and in addition shall be bound by the principles set forth in this
Article 9.2 until a lifting agreement is executed by the Parties.

x                                  ALTERNATIVE
NO. 4        

The Parties shall in good faith, and not less than three (3) months prior to
the anticipated first delivery of Crude Oil, as promptly notified by Operator,
negotiate and endeavor to conclude the terms of a lifting agreement to cover
the offtake of Crude Oil produced under the Contract.

 54

 

9.3          Disposition
of Natural Gas

Check one
Alternative.

o            ALTERNATIVE
NO. 1 (From Paragraph (A) to (B))

(A)          Natural
Gas to be produced from an Exploitation Area shall be taken and disposed of in
accordance with the rules and procedures set forth in this Article 9.3.  The Parties recognize that, in the event of
individual disposition of Natural Gas, imbalances may arise with the result
being that a Party will temporarily have disposed of more than its
Participating Interest share of production of Natural Gas.  Accordingly, if Natural Gas is to be produced
from an Exploitation Area, the Parties shall, in good faith and no later than
the date on which the Development Plan for Natural Gas production is approved
by the Operating Committee, negotiate and conclude the terms of a balancing
agreement to cover the disposition of Natural Gas produced under the Contract,
regardless of whether all of the Parties have entered into a sales arrangement
or sales contract for their respective Entitlement of Natural Gas.  The Natural Gas balancing agreement shall,
subject to the terms of the Contract, make provision for:

(1)           the
right of a Party not in default to take delivery of Natural Gas (and to thereby
use all relevant facilities) in excess of its Participating Interest share of
production, subject to the right of an under-taking Party to take later
delivery of make-up Natural Gas; provided that, such make-up Natural Gas shall
in no month exceed                     
percent of total Natural Gas production produced monthly from the Exploitation
Area, and further provided the such under-taking Party shall lose its right to
such make-up Natural Gas if it has not taken delivery of the make-up Natural
Gas within                     
[months/years] after the excess Natural Gas was originally taken;

Check if desired.

o            OPTIONAL
PROVISION

and further provided that
in the event any Party takes delivery of Natural Gas in excess of its
Participating Interest share of production, such overproduction shall in no
month exceed             
percent of such Party’s Participating Interest share of production;

(2)           balancing
of overproduction and underproduction on a gross calorific value basis,
determined by comparison of the Natural Gas taken by a Party with that Party’s
Participating Interest share of production for the period of time;

(3)           Natural
Gas taken by a Party being regarded as Natural Gas taken and owned exclusively
for its own account with title thereto being in such Party, regardless of
whether such Natural Gas is (i) attributable to such Party’s Participating
Interest share of production; (ii) taken as overproduction; or (iii) taken as
make-up for past underproduction;

(4)           unless
otherwise agreed, no agency relationship or other relationship of trust and
confidence being created between the Parties in regard to disposition of
Natural Gas;

(5)           unless
otherwise agreed, the delivery point (at which title and risk of loss of
Entitlements of Natural Gas shall pass to the Party taking delivery of such
Natural Gas) being the point where fiscal calculations are made consistent with
the Contract;

 55
 

 

(6)           each
Party’s provision to Operator of such information respecting such Party’s
arrangements for the disposition of its Entitlement of Natural Gas production
as Operator may reasonably require in order to conduct Joint Operations in
accordance with Article 4.2;

(7)           each
Party’s regular periodic nominations to Operator of the amount of such Party’s
Entitlement of total available Natural Gas production which it wishes to accept
during a defined future period, along with Operator’s regular periodic advice
to the Parties of estimates of total Natural Gas production (as reasonably in
advance as practicable in order to assist the Parties to plan Natural Gas
disposition arrangements); provided, however, that the Parties recognize that
Operator’s estimates may vary from the actual Natural Gas volumes produced and
that the Parties may rely upon any such information at their own risk; and

(8)           the
allocation of Cost Hydrocarbons and Profit Hydrocarbons in relation to such
individual Natural Gas disposition.

If such balancing
agreement has not been entered into by the date of first delivery of Natural
Gas, the Parties shall nonetheless be bound by the principles set forth in this
Article 9.3(A) until a Natural Gas balancing agreement has been entered into
between the Parties in accordance with this Agreement.

(B)           Unless
prohibited by the Laws / Regulations, the Parties may, by unanimous execution
of a multiparty Natural Gas disposition agreement, agree to dispose of Natural
Gas produced under the Contract on a multiparty basis to a common purchaser or
purchasers.  The multiparty Natural Gas
disposition agreement shall, subject to the Contract, make provision for:

(1)           the
terms of sale or disposition of Natural Gas on a multiparty basis;

(2)           the
Parties’ rights and obligations with respect to the disposition of Natural Gas
on a multiparty basis, including the extent to which Operator is designated as
the Parties’ authorized representative for the purpose of conducting marketing
studies, designing and constructing necessary facilities, investigating
financing opportunities, and negotiating sales agreements;

(3)           the
managerial structure for making decisions governing the multiparty disposal
venture;

(4)           the
scope and duration of the multiparty disposal venture;

(5)           the
extent, if any, to which the costs of the multiparty disposal venture are
chargeable to the Joint Account;

(6)           the
obligation of the Parties to participate in all Natural Gas infrastructure
necessary for such multiparty Natural Gas disposal, and the multiparty
disposition venture governing only such Natural Gas infrastructure as is
necessary to deliver Natural Gas to the point where fiscal calculations are
made for the purposes of the Contract;

(7)           the
extent to which a Party shall have, or shall be permitted to hold itself out as
having, the authority to create any obligation on behalf of the multiparty
disposal venture;

(8)           confirmation
that the relationship among the Parties shall be contractual only

 56
 

 

and shall not be
construed as creating a partnership or other recognized association;

(9)           confirmation
that formation of the multiparty disposal venture shall not create any rights
in any persons not a party thereto; and

(10)         the
allocation of Cost Hydrocarbons and Profit Hydrocarbons in relation to the
multiparty Natural Gas disposal.

x           ALTERNATIVE
NO. 2

The Parties recognize
that if Natural Gas is discovered it may be necessary for the Parties to enter
into special arrangements for the disposal of the Natural Gas, which are
consistent with the Development Plan and subject to the terms of the Contract.

9.4          Principles
of Natural Gas Agreement(s) with the Government

(A)          The
Government Oil & Gas Company may, if necessary and practicable, also be
party to the balancing agreement under Article 9.3(A) and/or the multiparty
disposition venture under Article 9.3(B). 
If the Government Oil & Gas Company is party to the balancing
agreement, then the Parties shall endeavor to obtain its agreement to the
principles set forth in Article 9.3(A). 
Furthermore, if the Government Oil & Gas Company is party to the
multiparty disposition venture, then the Parties shall endeavor to obtain its
agreement to the principles set forth in Article 9.3(B).

(B)           In
addition, the Parties shall endeavor to include in the Contract, and in any
other agreement with the Government Oil & Gas Company in relation to the
disposition of Natural Gas, the following principles:

(1)           assured
access to a fair share of the available Natural Gas market, including suitable
assurances for Government controlled sales;

(2)           the right
to market Natural Gas, including purchase of the Government’s share, to the
highest value outlets (domestic or export) and the right to export the Parties’
Entitlements of Natural Gas;

(3)           a minimum
contractual term which provides a reasonable period to develop a Natural Gas
market and enables Natural Gas reserves to be produced for their full economic
life; and

(4)           assured
access to infrastructure for the purposes of processing and/or transporting
Natural Gas at a competitive tariff.

ARTICLE 10

ABANDONMENT

10.1        Abandonment
of Wells Drilled as Joint Operations

(A)          A decision
to plug and abandon any well which has been drilled as a Joint Operation shall
require the approval of the Operating Committee.

(B)           Should any
Party fail to reply within the period prescribed in Article 5.12(A)(1) or
Article 5.12(A)(2), whichever is applicable, after delivery of notice of
Operator’s proposal to plug and abandon such well, such Party shall be deemed
to have consented to the proposed abandonment.

(C)           If the
Operating Committee approves a decision to plug and abandon an Exploration Well
or Appraisal Well, subject to the Laws / Regulations, any Party voting against
such decision may

 57
 

 

propose (within the time periods allowed by
Article 5.13(A)) to conduct an alternate Exclusive Operation in the
wellbore.  If no Exclusive Operation is
timely proposed, or if an Exclusive Operation is timely proposed but is not
commenced within the applicable time periods under Article 7.2, such well shall
be plugged and abandoned.

(D)          Any well
plugged and abandoned under this Agreement shall be plugged and abandoned in
accordance with the Laws / Regulations and at the cost, risk and expense of the
Parties who participated in the cost of drilling such well.

Check Paragraph (E), if desired.

x           OPTIONAL
PROVISION

(E)           Notwithstanding
anything to the contrary in this Article 10.1:

(1)           If
the Operating Committee approves a decision to plug and abandon a well from
which Hydrocarbons have been produced and sold, subject to the Laws /
Regulations, any Party voting against the decision may propose (within five (5)
Days after the time specified in Article 5.6, Article 5.12(A)(1) or Article
5.12(A)(2), whichever is applicable, has expired) to take over the entire well
as an Exclusive Operation.  Any Party
originally participating in the well shall be entitled to participate in the
operation of the well as an Exclusive Operation by response notice within ten
(10) Days after receipt of the notice proposing the Exclusive Operation.

Check one
Alternative.

o            ALTERNATIVE
NO. 1

In such event, the
Consenting Parties shall be entitled to continue producing only from the Zone
open to production at the time they assumed responsibility for the well and
shall not be entitled to drill a substitute well in the event that the well
taken over becomes impaired or fails.

x           ALTERNATIVE
NO. 2

In such event, the
Consenting Parties shall be entitled to conduct an Exclusive Operation in the
well; provided that the proposed operation may not be in the same Zone from
which production was previously obtained nor be in a Zone which is produced by
any other Joint Operation wells.

(2)           Each
Non-Consenting Party shall be deemed to have relinquished free of cost to the
Consenting Parties in proportion to their Participating Interests all of its
interest in the wellbore of a produced well and related equipment in accordance
with Article 7.4(B).  The Consenting
Parties shall thereafter bear all cost and liability of plugging and abandoning
such well in accordance with the Laws / Regulations, to the extent the Parties
are or become obligated to contribute to such costs and liabilities, and shall
indemnify the Non-Consenting Parties against all such costs and liabilities.

(3)           Subject
to Article 7.12(F), Operator shall continue to operate a produced well for the
account of the Consenting Parties at the rates and charges contemplated by this
Agreement, plus any additional cost and charges which may arise as the result
of the separate allocation of interest in such well.

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10.2        Abandonment
of Exclusive Operations

This Article 10 shall apply mutatis
mutandis to the abandonment of an Exclusive Well or any well in
which an Exclusive Operation has been conducted (in which event all Parties
having the right to conduct further operations in such well shall be notified
and have the opportunity to conduct Exclusive Operations in the well in
accordance with the provisions of this Article 10).

Check Article 10.3, if desired.

o            OPTIONAL
PROVISION

10.3        Abandonment
Security

If under the Contract or
the Laws / Regulations, the Parties are or become obliged to pay or contribute
to the cost of ceasing operations, then during preparation of a Development
Plan, the Parties shall negotiate a security agreement, which shall be
completed and executed by all Parties participating in such Development Plan
prior to application for an Exploitation Area. 
The security agreement shall incorporate the following principles:

(A)          a
Security shall be provided by each such Party for each Calendar Year commencing
with the Calendar Year in which the Discounted Net Value equals       
percent (       %) of the Discounted Net
Cost; and

(B)           the
amount of the Security required to be provided by each such Party in any
Calendar Year (including any security previously provided which will still be
current throughout such Calendar Year) shall be equal to the amount by which        
percent (       %) of the Discounted Net
Cost exceeds the Discounted Net Value.

“Discounted
Net Cost” means that portion of each Party’s anticipated
before tax cost of ceasing operations in accordance with the Laws / Regulations
which remains after deduction of salvage value. 
Such portion should be calculated at the anticipated time of ceasing
operations and discounted at the Discount Rate to December 31 of the
Calendar Year in question.

“Discounted
Net Value” means the value of each Party’s estimated
Entitlement which remains after payment of estimated liabilities and expenses
required to win, save and transport such production to the delivery point and
after deduction of estimated applicable taxes, royalties, imposts and levies on
such production.  Such Entitlement shall
be calculated using estimated market prices and including taxes on income,
discounted at the Discount Rate to December 31 of the Calendar Year in
question.  No account shall be taken of
tax allowances expected to be available in respect of the costs of ceasing
operations.

“Discount
Rate” means the rate per annum equal to the one (1) month
term, London Interbank Offered Rate (LIBOR rate) for U.S. dollar deposits
applicable to the date falling thirty (30) Business Days prior to the start of
a Calendar Year as published in London by the Financial Times or if not
published then by The Wall Street Journal.

ARTICLE
11

SURRENDER, EXTENSIONS AND RENEWALS

11.1        Surrender

(A)          If
the Contract requires the Parties to surrender any portion of the Contract
Area, Operator shall advise the Operating Committee of such requirement at
least one hundred and twenty (120) Days in advance of the earlier of the date
for filing irrevocable notice of such surrender or the date of such
surrender.  Prior to the end of such
period, the Operating Committee shall determine pursuant

 59
 

 

to Article 5 the
size and shape of the surrendered area, consistent with the requirements of the
Contract.  If a sufficient vote of the
Operating Committee cannot be attained, then the proposal supported by a simple
majority of the Participating Interests shall be adopted.  If no proposal attains the support of a
simple majority of the Participating Interests, then the proposal receiving the
largest aggregate Participating Interest vote shall be adopted.  In the event of a tie, Operator shall choose
among the proposals receiving the largest aggregate Participating Interest
vote.  The Parties shall execute any and
all documents and take such other actions as may be necessary to effect the
surrender.  Each Party renounces all
claims and causes of action against Operator and any other Parties on account
of any area surrendered in accordance with the foregoing but against its
recommendation if Hydrocarbons are subsequently discovered under the
surrendered area.

(B)           A
surrender of all or any part of the Contract Area which is not required by the
Contract shall require the unanimous consent of the Parties.

11.2        Extension
of the Term

(A)          A proposal
by any Party to enter into or extend the term of any Exploration or
Exploitation Period or any phase of the Contract, or a proposal to extend the
term of the Contract, shall be brought before the Operating Committee pursuant
to Article 5.

(B)           Any Party
shall have the right to enter into or extend the term of any Exploration or
Exploitation Period or any phase of the Contract or to extend the term of the
Contract, regardless of the level of support in the Operating Committee.  If any Party takes such action, any Party not
wishing to extend shall have a right to withdraw, subject to the requirements
of Article 13.

ARTICLE
12

TRANSFER OF INTEREST OR RIGHTS AND CHANGES IN CONTROL

12.1        Obligations

(A)          Subject
to the requirements of the Contract,

(i)            any
Transfer (except Transfers pursuant to Article 7, Article 8 or Article 13)
shall be effective only if it satisfies the terms and conditions of Article
12.2; and

(ii)           a
Party subject to a Change in Control must satisfy the terms and conditions of
Article 12.3.

Should a Transfer subject
to this Article or a Change in Control occur without satisfaction (in all
material respects) by the transferor or the Party subject to the Change in Control,
as applicable, of the requirements hereof, then:

Check one
Alternative.

x           ALTERNATIVE NO. 1

each other Party shall be
entitled to enforce specific performance of the terms of this Article, in
addition to any other remedies (including damages) to which it may be
entitled.  Each Party agrees that
monetary damages alone would not be an adequate remedy for the breach of any
Party’s obligations under this Article.

o            ALTERNATIVE NO. 2

the
transferor or Party subject to the Change in Control shall pay to the other
Parties in proportion to their Participating Interests, as their exclusive
remedy, liquidated damages in an amount equal to          
percent (      %) of the Cash Value of the
Participating Interest that is the subject of the Transfer or Change in Control.  The Parties agree that it

 60
 

 

would
be difficult if not impossible to determine accurately the actual amount of
damages suffered by the other Parties as a result of the failure to comply with
the terms of this Article 12 and that these liquidated damages constitute a
reasonable approximation of the damages that would be suffered by such other
Parties.

(B)           For
purposes of this Agreement:

“Cash
Transfer” means any Transfer where the sole consideration
(other than the assumption of obligations relating to the transferred
Participating Interest) takes the form of cash, cash equivalents, promissory
notes or retained interests (such as production payments) in the Participating
Interest being transferred; and

“Cash
Value” means

Check one Alternative.

x           ALTERNATIVE
NO. 1        

the portion of the total monetary value (expressed in U.S. dollars) of the
consideration being offered by the proposed transferee (including any cash,
other assets, and tax savings to the transferor from a non-cash deal) that
reasonably should be allocated to the Participating Interest subject to the
proposed Transfer or Change in Control.

o            ALTERNATIVE
NO. 2        

the market value (expressed in U.S. dollars) of the Participating Interest
subject to the proposed Transfer or Change in Control, based upon the amount in
cash a willing buyer would pay a willing seller in an arm’s length transaction.

“Change
in Control” means any direct or indirect change in
Control of a Party (whether through merger, sale of shares or other equity
interests, or otherwise) through a single transaction or series of related
transactions, from one or more transferors to one or more transferees, in which
the market value of the Party’s Participating Interest represents more than
sixty five percent (65%) of the aggregate market value of the assets of such
Party and its Affiliates that are subject to the change in Control.   For the purposes of this definition, market
value shall be determined based upon the amount in cash a willing buyer would
pay a willing seller in an arm’s length transaction.

“Encumbrance”
means a mortgage, lien, pledge, charge or other encumbrance.  “Encumber” and
other derivatives shall be construed accordingly.

“Transfer”
means any sale, assignment, Encumbrance or other disposition by a Party of any
rights or obligations derived from the Contract or this Agreement (including
its Participating Interest), other than its Entitlement and its rights to any
credits, refunds or payments under this Agreement, and excluding any direct or
indirect change in Control of a Party.

12.2.       Transfer

(A)          Except in
the case of a Party transferring all of its Participating Interest, no Transfer
shall be made by any Party which results in the transferor or the transferee
holding a Participating Interest of less than five percent (5%) or any interest
other than a Participating Interest in the Contract and this Agreement.

(B)           Subject to
the terms of Articles 4.9 and 4.10, the Party serving as Operator shall
remain Operator following Transfer of a portion of its Participating Interest.  In the event of a Transfer of all of its
Participating Interest, except to an Affiliate, the Party serving as Operator
shall be deemed to have resigned as Operator, effective on the date the
Transfer becomes effective under this Article 12, in

 61
 

 

which event a successor Operator shall be appointed in
accordance with Article 4.11.  If
Operator transfers all of its Participating Interest to an Affiliate, that
Affiliate shall automatically become the successor Operator, provided that the
transferring Operator shall remain liable for its Affiliate’s performance of
its obligations.

(C)           Both the
transferee, and, notwithstanding the Transfer, the transferring Party, shall be
liable to the other Parties for the transferring Party’s Participating Interest
share of any obligations (financial or otherwise) which have vested, matured or
accrued under the provisions of the Contract or this Agreement prior to such
Transfer.  Such obligations, shall
include any proposed expenditure approved by the Operating Committee prior to
the transferring Party notifying the other Parties of its proposed Transfer

Check one alternative

o            ALTERNATIVE
NO. 1        

and shall also include

x           ALTERNATIVE
NO. 2        

but shall not include

costs of plugging and abandoning wells or portions of
wells and decommissioning facilities in which the transferring Party
participated (or with respect to which it was required to bear a share of the
costs pursuant to this sentence) to the extent such costs are payable by the
Parties under the Contract.

(D)          A
transferee shall have no rights in the Contract or this Agreement (except any
notice and cure rights or similar rights that may be provided to a Lien Holder
(as defined in Article 12.2(E)) by separate instrument signed by all Parties)
unless and until:

(1)           it
expressly undertakes in an instrument reasonably satisfactory to the other
Parties to perform the obligations of the transferor under the Contract and
this Agreement in respect of the Participating Interest being transferred and
obtains any necessary Government approval for the Transfer and furnishes any
guarantees required by the Government or the Contract on or before the
applicable deadlines; and

(2)           except
in the case of a Transfer to an Affiliate, each Party has consented in writing
to such Transfer, which consent shall not be unreasonably denied.

No consent shall be
required under this Article 12.2(D)(2) for a Transfer to an Affiliate if the
transferring Party agrees in an instrument reasonably satisfactory to the other
Parties to remain liable for its Affiliate’s performance of its obligations.

(E)           Nothing
contained in this Article 12 shall prevent a Party from Encumbering all or any
undivided share of its Participating Interest to a third party (a “Lien  Holder”)
for the purpose of security relating to finance, provided that:

(1)           such
Party shall remain liable for all obligations relating to such interest;

(2)           the
Encumbrance shall be subject to any necessary approval of the Government and be
expressly subordinated to the rights of the other Parties under this Agreement;

(3)           such
Party shall ensure that any Encumbrance shall be expressed to be without
prejudice to the provisions of this Agreement; [and]

Check paragraph (4), if desired.

 62
 

 

o            OPTIONAL
PROVISION

(4)           the
Lien Holder shall first enter into and deliver a subordination agreement in
favor of the other Parties, substantially in the form attached to this
Agreement as Exhibit       . [NOTE: If
possible, the Parties should agree in advance to the form of such subordination
agreement and attach such form as an Exhibit to this Agreement ]

Check one Optional Alternative
for Paragraph (F), if desired.

o            OPTIONAL
ALTERNATIVE NO. 1 - Preemptive Rights

(F)           Any
Transfer of all or a portion of a Party’s Participating Interest, other than a
Transfer to an Affiliate or the granting of an Encumbrance as provided in
Article 12.2(E), shall be subject to the following procedure.

(1)           Once
the final terms and conditions of a Transfer have been fully negotiated, the
transferor shall disclose all such final terms and conditions as are relevant
to the acquisition of the Participating Interest (and, if applicable, the
determination of the Cash Value of the Participating Interest) in a notice to
the other Parties, which notice shall be accompanied by a copy of all
instruments or relevant portions of instruments establishing such terms and
conditions.  Each other Party shall have
the right to acquire the Participating Interest subject to the proposed
Transfer from the transferor on the terms and conditions described in
Article 12.2(F)(3) if, within thirty (30) Days of the transferor’s notice,
such Party delivers to all other Parties a counter-notification that it accepts
such terms and conditions without reservations or conditions (subject to
Articles 12.2(F)(3) and 12.2(F)(4), where applicable).  If no Party delivers such
counter-notification, the Transfer to the proposed transferee may be made,
subject to the other provisions of this Article 12, under terms and
conditions no more favorable to the transferee than those set forth in the
notice to the Parties, provided that the Transfer shall be concluded within one
hundred eighty (180) Days from the date of the notice plus such additional
period as may be required to secure governmental approvals.  No Party shall have a right under this Article 12.2(F)
to acquire any asset other than a Participating Interest, nor may any Party be
required to acquire any asset other than a Participating Interest, regardless
of whether other properties are included in the Transfer.

(2)           If
more than one Party counter-notifies that it intends to acquire the
Participating Interest subject to the proposed Transfer, then each such Party
shall acquire a proportion of the Participating Interest to be transferred
equal to the ratio of its own Participating Interest to the total Participating
Interests of all the counter-notifying Parties, unless the counter-notifying
Parties otherwise agree.

(3)           In
the event of a Cash Transfer that does not involve other properties as part of
a wider transaction, each other Party shall have a right to acquire the
Participating Interest subject to the proposed Transfer on the same final terms
and conditions as were negotiated with the proposed transferee.  In the event of a Transfer that is not a Cash
Transfer or involves other properties included in a wider transaction (package
deal), the transferor shall include in its notification to the other Parties a
statement of the Cash Value of the Participating Interest subject to the
proposed Transfer, and each other Party shall have a right to acquire such
Participating Interest on the same final terms and conditions as were
negotiated with the proposed transferee except that it shall pay the Cash Value
in immediately available funds at the closing of the Transfer in lieu of the
consideration payable in the third party offer, and the terms and conditions of
the applicable instruments shall be modified as necessary to reflect the

 63
 

 

acquisition of a
Participating Interest for cash.  In the
case of a package sale, no Party may acquire the Participating Interest subject
to the proposed package sale unless and until the completion of the wider
transaction (as modified by the exclusion of properties subject to preemptive
rights or excluded for other reasons) with the package sale transferee.  If for any reason the package sale terminates
without completion, the other Parties’ rights to acquire the Participating
Interest subject to the proposed package sale shall also terminate.

(4)           For
purposes of Article 12.2(F)(3), the Cash Value proposed by the transferor
in its notice shall be conclusively deemed correct unless any Party (each a “Disagreeing Party”) gives notice to
the transferor with a copy to the other Parties within ten (10) Days of receipt
of the transferor’s notice stating that it does not agree with the transferor’s
statement of the Cash Value, stating the Cash Value it believes is correct, and
providing any supporting information that it believes is helpful.  In such event, the transferor and the
Disagreeing Parties shall have fifteen (15) Days in which to attempt to
negotiate an agreement on the applicable Cash Value.  If no agreement has been reached by the end
of such fifteen (15) Day period, either the transferor or any Disagreeing Party
shall be entitled to refer the matter to an independent expert as provided in
Article 18.3 for determination of the Cash Value.

(5)           If
the determination of the Cash Value is referred to an independent expert and
the value submitted by the transferor is no more than five percent (5%) above
the Cash Value determined by the independent expert, the transferor’s value
shall be used for the Cash Value and the Disagreeing Parties shall pay all
costs of the expert.  If the value
submitted by the transferor is more than five percent (5%) above the Cash Value
determined by the independent expert, the independent expert’s value shall be
used for the Cash Value and the transferor shall pay all costs of the
expert.  Subject to the independent
expert’s value being final and binding in accordance with Article 18.3, the
Cash Value determined by the procedure shall be final and binding on all
Parties.

(6)           Once
the Cash Value is determined under Article 12.2(F)(5), Operator shall
provide notice of such Cash Value to all Parties and

Check one Alternative.

o            ALTERNATIVE
NO. 1        

the transferor shall be obligated to sell and the Parties which provided notice
of their intention to purchase the transferor’s Participating Interest pursuant
to Article 12.2(F)(1) shall be obligated to buy the Participating Interest at
said value.

o            ALTERNATIVE
NO. 2        

if the Cash Value that was submitted to the independent expert by the
transferor is more than five percent (5%) above the Cash Value determined by
the independent expert, the transferor may elect to terminate its proposed
Transfer by notice to all other Parties within five (5) Days after notice to
the Parties of the final Cash Value. 
Similarly, if the Cash Value that was determined by the independent
expert is more than five percent (5%) above the Cash Value submitted to the
independent expert by a Disagreeing Party (or, in the case of a Party

 64
 

 

that
is not a Disagreeing Party, is more than five percent (5%) above the Cash Value
originally proposed by the transferor), such Party may elect to revoke its
notice of intention to purchase the transferor’s Participating Interest
pursuant to Article 12.2(F)(1).  If the
transferor does not properly terminate the proposed Transfer and one or more
Parties which provided notices of their intention to purchase the transferor’s
Participating Interest pursuant to Article 12.2(F)(1) have not properly revoked
their notices of such intention, then the transferor shall be obligated to sell
and such Parties shall be obligated to buy the Participating Interest at the
Cash Value as determined in accordance with Article 12.2(F)(5).  If all Parties which provided notice of their
intention to purchase the transferor’s Participating Interest pursuant to
Article 12.2(F)(1) properly revoke their notices of such intention, the
transferor shall be free to sell the interest to the third party at the
determined Cash Value or a higher value and under conditions not more favorable
to the transferee than those set forth in the notice of Transfer sent by the
transferor to the other Parties, provided that the Transfer shall be concluded
within one hundred eighty (180) Days from the date of the determination plus
such additional period as may be required to secure governmental approvals.

o            OPTIONAL
ALTERNATIVE NO. 2 - Right of First Negotiation

(F)           Any
Transfer (other than a Transfer to an Affiliate and the granting of an
Encumbrance as provided in Article 12.2(E)) shall be subject to the following
procedure.

(1)           In
the event that a Party wishes to transfer any part or all of its Participating
Interest, prior to the transferor entering into a written agreement providing
for such a Transfer (whether or not such agreement is binding) the transferor
shall send the other Parties notice of its intention and invite them to submit
offers for the Participating Interest subject to the Transfer.  The other Parties shall have thirty (30) Days
from the date of such notification to deliver a counter-notification with a
binding offer in accordance with Article 12.2(F)(3).  If the transferor notifies the offering Party
or Parties that the binding offer presents an acceptable basis for negotiating
a Transfer agreement, the transferor and that offering Party or Parties shall
have the next sixty (60) Days in which to negotiate in good faith and execute
the terms and conditions of a mutually acceptable Transfer agreement.  If the transferor does not find that any
Party’s offer presents an acceptable basis for negotiating a Transfer
agreement, or if the above sixty (60) Days elapse and the transferor in its
sole discretion believes that a fully negotiated agreement based on the offer
deemed acceptable by the transferor with all offering Parties is not imminent,
the transferor shall be entitled for a period of one hundred eighty (180) Days
from the expiration of the thirty (30) Day offer period or the sixty (60) Day
negotiation period, respectively, plus such additional period as may be
necessary to secure governmental approvals, to Transfer all or such portion of
its Participating Interest to a third party, subject to the obligations set
forth in this Article 12,

Check if
desired.

o            OPTIONAL PROVISION

provided that the
terms and conditions of any such Transfer must be more favorable to the
transferor than the best terms and conditions offered by any Party.

(2)           If
more than one Party counter-notifies the transferor that it intends to acquire

 65
 

 

the Participating
Interest subject to the proposed Transfer, then each such Party shall acquire a
proportion of the Participating Interest to be transferred equal to the ratio
of its own Participating Interest to the total Participating Interests of all
the counter-notifying Parties, unless the counter-notifying Parties otherwise
agree.

(3)           All
Parties desiring to give such a counter-notice shall meet to formulate a joint
offer.  Each such Party shall make known
to the other Parties the highest price or value that it is willing to offer to
the transferor.  The proposal with the
highest price or value shall be offered to the transferor as the joint proposal
of the Parties still willing to participate in such offer under the provisions
of Article 12.2(F)(1) above.

Check
Paragraph (G), if desired, in conjunction with Paragraph (F).

o            OPTIONAL
PROVISION

(G)           Notwithstanding
anything to the contrary contained therein, the terms of Article 12.2(F)
shall only apply to Cash Transfers and shall not apply to Transfers that are
not Cash Transfers.

12.3        Change
in Control

(A)          A Party
subject to a Change in Control shall obtain any necessary Government approval
with respect to the Change in Control and furnish any replacement Security
required by the Government or the Contract on or before the applicable
deadlines.

Check
Paragraph (B), if desired. Renumber following paragraphs if Paragraph (B) is
not selected.

o            OPTIONAL
PROVISION

(B)           A
Party subject to a Change in Control shall provide evidence reasonably
satisfactory to the other Parties that following the Change in Control such
Party shall continue to have the financial capability to satisfy its payment
obligations under the Contract and this Agreement.  Should the Party that is subject to the Change
in Control fail to provide such evidence, any other Party, by notice to such
Party, may require such Party to provide Security satisfactory to the other
Parties with respect to its Participating Interest share of any obligations or
liabilities which the Parties may reasonably be expected to incur under the
Contract and this Agreement during the then-current Exploration or Exploitation
Period or phase of the Contract.

Check one Optional Alternative
for Paragraph (C), if desired.

o            OPTIONAL
ALTERNATIVE NO. 1 - Preemptive Rights

(C)           Any
Change in Control of a Party, other than one which results in ongoing Control
by an Affiliate, shall be subject to the following procedure.  For purposes of this Article 12.3, the term “acquired Party” shall refer
to the Party that is subject to a Change in Control and the term “acquiror” shall refer to the
Party or third party proposing to acquire Control in a Change in Control.

(1)           Once
the final terms and conditions of a Change in Control have been fully
negotiated, the acquired Party shall disclose all such final terms and
conditions as are relevant to the acquisition of such Party’s Participating
Interest and the determination of the Cash Value of that Participating Interest
in a notice to the other Parties, which notice shall be accompanied by a copy
of all instruments or

 66
 

 

relevant
portions of instruments establishing such terms and conditions.  Each other Party shall have the right to
acquire the acquired Party’s Participating Interest on the terms and conditions
described in Article 12.3(C)(3) if, within thirty (30) Days of the
acquired Party’s notice, such Party delivers to all other Parties a
counter-notification that it accepts such terms and conditions without
reservations or conditions (subject to Articles 12.3(C)(3) and 12.3(C)(4),
where applicable).  If no Party delivers
such counter-notification, the Change in Control may proceed without further
notice, subject to the other provisions of this Article 12, under terms and
conditions no more favorable to the acquiror than those set forth in the notice
to the Parties, provided that the Change in Control shall be concluded within
one hundred eighty (180) Days from the date of the notice plus such additional
period as may be required to secure governmental approvals.  No Party shall have a right under this
Article 12.3(C) to acquire any asset other than a Participating Interest,
nor may any Party be required to acquire any asset other than a Participating
Interest, regardless of whether other properties are subject to the Change in
Control.

(2)           If
more than one Party counter-notifies that it intends to acquire the
Participating Interest subject to the proposed Change in Control, then each
such Party shall acquire a proportion of that Participating Interest equal to
the ratio of its own Participating Interest to the total Participating
Interests of all the counter-notifying Parties, unless the counter-notifying
Parties otherwise agree.

(3)           The
acquired Party shall include in its notification to the other Parties a
statement of the Cash Value of the Participating Interest subject to the
proposed Change in Control, and each other Party shall have a right to acquire
such Participating Interest for the Cash Value, on the final terms and
conditions negotiated with the proposed acquiror that are relevant to the
acquisition of a Participating Interest for cash.  No Party may acquire the acquired Party’s
Participating Interest pursuant to this Article 12.3(C) unless and until
completion of the Change in Control.  If
for any reason the Change in Control agreement terminates without completion,
the other Parties’ rights to acquire the Participating Interest subject to the
proposed Change in Control shall also terminate.

(4)           For
purposes of Article 12.3(C)(3), the Cash Value proposed by the acquired
Party in its notice shall be conclusively deemed correct unless any Party (each
a “Disagreeing Party”)
gives notice to the acquired Party with a copy to the other Parties within ten
(10) Days of receipt of the acquired Party’s notice stating that it does not
agree with the acquired Party’s statement of the Cash Value, stating the Cash
Value it believes is correct, and providing any supporting information that it
believes is helpful.  In such event, the
acquired Party and the Disagreeing Parties shall have fifteen (15) Days in
which to attempt to negotiate an agreement on the applicable Cash Value.  If no agreement has been reached by the end
of such fifteen (15) Day period, either the acquired Party or any Disagreeing
Party shall be entitled to refer the matter to an independent expert as
provided in Article 18.3 for determination of the Cash Value.

(5)           If
the determination of Cash Value is referred to an independent expert, and the
value submitted by the acquired Party is no more than five percent (5%) above
the Cash Value determined by the independent expert, the acquired Party’s value
shall be used for the Cash Value and the Disagreeing Parties shall pay all
costs of the expert.  If the value
submitted by the acquired Party is more than five percent (5%) above the Cash
Value determined by the independent expert, the independent expert’s value
shall be used for the Cash Value and the acquired Party shall pay all costs of
the expert.  Subject to the independent
expert’s value

 67
 

 

being
final and binding in accordance with Article 18.3, the Cash Value determined by
the procedure shall be final and binding on all Parties.

(6)           Once
the Cash Value is determined under Article 12.3(C)(4), Operator shall
provide notice of such Cash Value to all Parties and

Check one Alternative.

o            ALTERNATIVE
NO. 1        

the acquired Party shall be obligated to sell and the Parties which provided
notice of their intention to purchase the acquired Party’s Participating
Interest pursuant to Article 12.3(C)(1) shall be obligated to buy the
Participating Interest at said value.

o            ALTERNATIVE
NO. 2        

if the Cash Value that was submitted by the acquired Party to the independent
expert is more than five percent (5%) above the Cash Value determined by the
independent expert, the acquired Party and its Affiliates may elect to
terminate the proposed Change in Control by notice to all other Parties within
five (5) Days after notice to the Parties of the final Cash Value. Similarly,
if the Cash Value that was determined by the independent expert is more than
five percent (5%) above the Cash Value submitted to the independent expert by a
Disagreeing Party (or, in the case of a Party that is not a Disagreeing Party,
is more than five percent (5%) above the Cash Value originally proposed by the
acquiror), such Party may elect to revoke its notice of intention to purchase
the acquired Party’s Participating Interest pursuant to Article
12.3(C)(1).  If the acquired Party and
its Affiliates do not properly terminate the proposed Change in Control and one
or more Parties which provided notices of their intention to purchase the
acquired Party’s Participating Interest pursuant to Article 12.3(C)(1) have not
properly revoked their notices of such intention, then the acquired Party shall
be obligated to sell and such Parties shall be obligated to buy the
Participating Interest at the Cash Value as determined in accordance with
Article 12.3(C)(5).  If all Parties which
provided notice of their intention to purchase the acquired Party’s
Participating Interest pursuant to Article 12.3(C)(1) properly revoke their
notices of such intention, the Change in Control may proceed without further
notice, under terms and conditions no more favorable to the acquiror than those
in effect at the time of the determination, provided that the Change in Control
shall be concluded within one hundred eighty (180) Days from the date of the
determination plus such additional period as may be required to secure
governmental approvals.

o            OPTIONAL
ALTERNATIVE NO. 2 - Right of First Negotiation

(C)           Any
Change in Control of a Party, other than to an Affiliate, shall be subject to
the following procedure.  For purposes of
this 12.3, the term “acquired
Party” shall refer to the Party that is subject to the
Change in Control.

(1)           In
the event that the Affiliates of a Party wish to enter into a transaction that
will result in a Change in Control of the Party, prior to such Affiliates
entering into a written agreement (whether or not such agreement is binding)
the acquired Party shall send the other Parties notice of its Affiliates’
intention and invite them to submit offers for the Participating Interest
subject to the Change in Control.  The
other Parties shall have thirty (30) Days from the date of such notification to

 68
 

 

deliver
a counter-notification with a binding offer in accordance with
Article 12.3(C)(3).  If the acquired
Party notifies an offering Party or Parties that their binding offer presents
an acceptable basis for negotiating a transfer agreement, the acquired Party
and the offering Party or Parties shall have the next sixty (60) Days in which
to negotiate in good faith and execute the terms and conditions of a mutually
acceptable transfer agreement.  If the
acquired Party does not find that any Party’s offer presents an acceptable basis
for negotiating a transfer agreement, or if the above sixty (60) Days elapse
and the acquired Party in its sole discretion believes that a fully negotiated
agreement with an offering Party or Parties is not imminent, the Change in
Control may proceed without further notice, subject to the obligations set
forth in this Article 12, provided that the Change in Control shall be
concluded within one hundred eighty (180) Days from the expiration of the
thirty (30) Day offer period or the sixty (60) Day negotiation period,
respectively, plus such additional period as may be necessary to secure
governmental approvals.

(2)           If
more than one Party counter-notifies the acquired Party that it intends to
acquire the Participating Interest subject to the proposed Change in Control,
then each such Party shall acquire a proportion of the Participating Interest
equal to the ratio of its own Participating Interest to the total Participating
Interests of all the counter-notifying Parties, unless the counter-notifying
Parties otherwise agree.

(3)           All
Parties desiring to give such a counter-notice shall meet to formulate a joint
offer.  Each such Party shall make known
to the other Parties the highest price or value which it is willing to offer to
the acquired Party.  The proposal with
the highest price or value shall be offered to the acquired Party as the joint
proposal of the Parties still willing to participate in such offer under the
provisions of Article 12.3(C)(1) above.

ARTICLE
13

WITHDRAWAL FROM AGREEMENT

13.1        Right
of Withdrawal

(A)          Subject to
the provisions of this Article 13 and the Contract, any Party not in default
may at its option withdraw from this Agreement and the Contract by giving
notice to all other Parties stating its decision to withdraw.  Such notice shall be unconditional and
irrevocable when given, except as may be provided in Article 13.7.

(B)           The
effective date of withdrawal for a withdrawing Party shall be the end of the
calendar month following the calendar month in which the notice of withdrawal
is given, provided that if all Parties elect to withdraw, the effective date of
withdrawal for each Party shall be the date determined by Article 13.9.

13.2        Partial
or Complete Withdrawal

(A)          Within
thirty (30) Days of receipt of each withdrawing Party’s notification, each of
the other Parties may also give notice that it desires to withdraw from this
Agreement and the Contract.  Should all
Parties give notice of withdrawal, the Parties shall proceed to abandon the
Contract Area and terminate the Contract and this Agreement.  If less than all of the Parties give such
notice of withdrawal, then the withdrawing Parties shall take all steps to
withdraw from the Contract and this Agreement on the earliest possible date and
execute and deliver all necessary instruments and documents to assign their
Participating Interest to the Parties which are not withdrawing, without any
compensation whatsoever, in accordance with the provisions of Article 13.6.

 

 69

 

(B)           Any
Party withdrawing under Article 11.2 or under this Article 13 shall

Check one
Alternative

o            ALTERNATIVE
NO. 1        

withdraw from the entirety of the Contract Area, including all Exploitation
Areas and all Discoveries made prior to such withdrawal, and thus abandon to
the other Parties not joining in its withdrawal all its rights to Cost
Hydrocarbons and Profit Hydrocarbons generated by operations after the
effective date of such withdrawal and all rights in associated Joint Property.

x           ALTERNATIVE
NO. 2        

at its option, (1) withdraw from the entirety of the Contract Area, or (2)
withdraw only from all exploration activities under the Contract, but not from
any Exploitation Area, Commercial Discovery, or Discovery (whether appraised or
not) made prior to such withdrawal.  Such
withdrawing Party shall retain its rights in Joint Property, but only insofar
as they relate to any such Exploitation Area, Commercial Discovery or
Discovery, and shall abandon all other rights in Joint Property.

13.3        Rights
of a Withdrawing Party

A withdrawing Party shall have the right to receive
its Entitlement produced through the effective date of its withdrawal.  The withdrawing Party shall be entitled to
receive all information to which such Party is otherwise entitled under this
Agreement until the effective date of its withdrawal.  After giving its notification of withdrawal,
a Party shall not be entitled to vote on any matters coming before the
Operating Committee, other than matters for which such Party has financial
responsibility.

13.4        Obligations
and Liabilities of a Withdrawing Party

(A)          A
withdrawing Party shall, following its notification of withdrawal, remain
liable only for its share of the following:

(1)           costs of
Joint Operations, and Exclusive Operations in which it has agreed to
participate, that were approved by the Operating Committee or Consenting
Parties as part of a Work Program and Budget (including a multi-year Work
Program and Budget under Article 6.5) or AFE prior to such Party’s notification
of withdrawal, regardless of when they are incurred;

(2)           any
Minimum Work Obligations for the current period or phase of the Contract, and
for any subsequent period or phase which has been approved pursuant to Article
11.2 and with respect to which such Party has failed to timely withdraw under
Article 13.4(B);

(3)           expenditures
described in Articles 4.2(B)(13) and 13.5 related to an emergency occurring
prior to the effective date of a Party’s withdrawal, regardless of when such
expenditures are incurred;

(4)           all other
obligations and liabilities of the Parties or Consenting Parties, as
applicable, with respect to acts or omissions under this Agreement prior to the
effective date of such Party’s withdrawal for which such Party would have been
liable, had it not withdrawn from this Agreement; and

(5)           in the
case of a partially withdrawing Party, any costs and liabilities with respect
to Exploitation Areas, Commercial Discoveries and Discoveries from which it has
not withdrawn.

 70
 

 

The obligations and liabilities for which a withdrawing
Party remains liable shall specifically include its share of any costs of
plugging and abandoning wells or portions of wells in which it participated (or
was required to bear a share of the costs pursuant to Article 13.4(A)(1)) to
the extent such costs of plugging and abandoning are payable by the Parties
under the Contract.  Any mortgages,
liens, pledges, charges or other encumbrances which were placed on the
withdrawing Party’s Participating Interest prior to such Party’s withdrawal
shall be fully satisfied or released, at the withdrawing Party’s expense, prior
to its withdrawal.  A Party’s withdrawal
shall not relieve it from liability to the non-withdrawing Parties with respect
to any obligations or liabilities attributable to the withdrawing Party under
this Article 13 merely because they are not identified or identifiable at the
time of withdrawal.

(B)           Notwithstanding
the foregoing, a Party shall not be liable for any operations or expenditures
it voted against (other than operations and expenditures described in
Article 13.4(A)(2) or Article 13.4(A)(3)) if it sends notification of
its withdrawal within five (5) Days (or within twenty-four (24) hours for
Urgent Operational Matters) of the Operating Committee vote approving such
operation or expenditure.  Likewise, a
Party voting against voluntarily entering into or extending of an Exploration
Period or Exploitation Period or any phase of the Contract or voluntarily
extending the Contract shall not be liable for the Minimum Work Obligations
associated therewith provided that it sends notification of its withdrawal
within thirty (30) Days of such vote pursuant to Article 11.2.

13.5        Emergency

If a well goes out of control or a fire, blow out,
sabotage or other emergency occurs prior to the effective date of a Party’s
withdrawal, the withdrawing Party shall remain liable for its Participating
Interest share of the costs of such emergency, regardless of when they are
incurred.

13.6        Assignment

A withdrawing Party shall assign its Participating
Interest free of cost to each of the non-withdrawing Parties in the proportion
which each of their Participating Interests (prior to the withdrawal) bears to
the total Participating Interests of all the non-withdrawing Parties (prior to
the withdrawal), unless the non-withdrawing Parties agree otherwise.  The expenses associated with the withdrawal
and assignments shall be borne by the withdrawing Party.

13.7        Approvals

A withdrawing Party shall
promptly join in such actions as may be necessary or desirable to obtain any
Government approvals required in connection with the withdrawal and
assignments.  The non-withdrawing Parties
shall use reasonable endeavors to assist the withdrawing Party in obtaining
such approvals.  Any penalties or
expenses incurred by the Parties in connection with such withdrawal shall be
borne by the withdrawing Party.  If the
Government does not approve a Party’s withdrawal and assignment to the other
Parties, then the withdrawing Party shall at its option either (1) retract its
notice of withdrawal by notice to the other Parties and remain a Party as if
such notice of withdrawal had never been sent, or (2) hold its Participating
Interest in trust for the sole and exclusive benefit of the non-withdrawing
Parties with the right to be reimbursed by the non-withdrawing Parties for any
subsequent costs and liabilities incurred by it for which it would not have
been liable, had it successfully withdrawn.

13.8        Security

A Party withdrawing from this Agreement and the
Contract pursuant to this Article 13 shall provide Security satisfactory to the
other Parties to satisfy any obligations or liabilities for which the
withdrawing Party remains liable in accordance with Article 13.4, but which
become due after its withdrawal, including Security to cover the costs of an
abandonment, if applicable.

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13.9        Withdrawal
or Abandonment by All Parties

In the event all Parties decide to withdraw, the
Parties agree that they shall be bound by the terms and conditions of this
Agreement for so long as may be necessary to wind up the affairs of the Parties
with the Government, to satisfy any requirements of the Laws / Regulations and
to facilitate the sale, disposition or abandonment of property or interests
held by the Joint Account, all in accordance with Article 2.

ARTICLE
14

RELATIONSHIP OF PARTIES AND TAX

14.1        Relationship
of Parties

The rights, duties,
obligations and liabilities of the Parties under this Agreement shall be
individual, not joint or collective.  It
is not the intention of the Parties to create, nor shall this Agreement be
deemed or construed to create, a mining or other partnership, joint venture or
association or (except as explicitly provided in this Agreement) a trust.  This Agreement shall not be deemed or construed
to authorize any Party to act as an agent, servant or employee for any other
Party for any purpose whatsoever except as explicitly set forth in this
Agreement.  In their relations with each
other under this Agreement, the Parties shall not be considered fiduciaries
except as expressly provided in this Agreement.

14.2        Tax

Each Party shall be responsible for reporting and
discharging its own tax measured by the profit or income of the Party and the
satisfaction of such Party’s share of all contract obligations under the
Contract and under this Agreement.  Each
Party shall protect, defend and indemnify each other Party from any and all
loss, cost or liability arising from the indemnifying Party’s failure to report
and discharge such taxes or satisfy such obligations.  The Parties intend that all income and all
tax benefits (including deductions, depreciation, credits and capitalization)
with respect to the expenditures made by the Parties hereunder will be
allocated by the Government tax authorities to the Parties based on the share
of each tax item actually received or borne by each Party.  If such allocation is not accomplished due to
the application of the Laws / Regulations or other Government action, the
Parties shall attempt to adopt mutually agreeable arrangements that will allow
the Parties to achieve the financial results intended.  Operator shall provide each Party, in a
timely manner and at such Party’s sole expense, with such information with
respect to Joint Operations as such Party may reasonably request for
preparation of its tax returns or responding to any audit or other tax
proceeding.

Check Article 14.3, if desired.

o            OPTIONAL PROVISION

14.3        United
States Tax Election

(A)          If,
for United States federal income tax purposes, this Agreement and the
operations under this Agreement are regarded as a partnership and if the
Parties have not agreed to form a tax partnership, each U.S. Party elects to be
excluded from the application of all of the provisions of Subchapter “K”,
Chapter 1, Subtitle “A” of the United States Internal Revenue Code of 1986, as
amended (the “Code”), to the extent permitted
and authorized by Section 761(a) of the Code and the regulations promulgated
under the Code.  Operator, if it is a
U.S. Party, is authorized and directed to execute and file for each U.S. Party
such evidence of this election as may be required by the Internal Revenue
Service, including all of the returns, statements, and data required by United
States Treasury Regulations Sections 1.761-2 and 1.6031(a)-1(b)(5) and
shall provide a copy thereof to each U.S. Party.  However, if Operator is not a U.S. Party, the
Party who holds the greatest Participating Interest among the U.S. Parties
shall fulfill the obligations of Operator under this Article 14.3.  Should there be any requirement that any U.S.
Party

 72
 

 

give
further evidence of this election, each U.S. Party shall execute such documents
and furnish such other evidence as may be required by the Internal Revenue
Service or as may be necessary to evidence this election.

(B)           No
Party shall give any notice or take any other action inconsistent with the
foregoing election.  If any income tax
laws of any state or other political subdivision of the United States or any
future income tax laws of the United States or any such political subdivision
contain provisions similar to those in Subchapter “K”, Chapter 1, Subtitle “A”
of the Code, under which an election similar to that provided by Section 761(a)
of the Code is permitted, each U.S. Party shall make such election as may be
permitted or required by such laws.  In
making the foregoing election or elections, each U.S. Party states that the
income derived by it from operations under this Agreement can be adequately
determined without the computation of partnership taxable income.

(C)           Unless
approved by every Non-U.S. Party, no activity shall be conducted under this
Agreement that would cause any Non-U.S. Party to be deemed to be engaged in a
trade or business within the United States under United States income tax laws
and regulations.

(D)          A
Non-U.S. Party shall not be required to do any act or execute any instrument
which might subject it to the taxation jurisdiction of the United States.

(E)           For
the purposes of this Article 14.3, “U.S. Party”
shall mean any Party that is subject to the income tax law of the United States
in respect with operations under this Agreement.  “Non-U.S. Party”
shall mean any Party that is not subject to such income tax law.

ARTICLE
15

VENTURE INFORMATION - CONFIDENTIALITY - INTELLECTUAL PROPERTY

15.1        Venture
Information

Check one
Alternative for Paragraph (A).

o            ALTERNATIVE NO. 1

(A)          Except
as otherwise provided in this Article 15 or in Articles 4.4 and 8.4(A), each
Party will be entitled to receive all Venture Information related to operations
in which such party is a participant.  “Venture Information” means
any information and results developed or acquired as a result of Joint
Operations and shall be Joint Property, unless provided otherwise in accordance
with this Agreement and the Contract. 
Each Party shall have the right to use all Venture Information it
receives without accounting to any other Party, subject to any applicable
patents and any limitations set forth in this Agreement and the Contract. For
purposes of this Article 15, such right to use shall include, the rights to
copy, prepare derivative works, disclose, license, distribute, and sell.

x           ALTERNATIVE NO. 2

(A)          Each
Party may use all information it receives under Article 4.4(A) (the “Venture Information”) without
the approval of any other Party, subject to any applicable restrictions and
limitations set forth in this Article 15, the Agreement and the Contract. For
purposes of this Article 15, the right to use shall entail the right to copy
and prepare derivative works.

(B)           Each Party
may, subject to any applicable restrictions and limitations set forth in the
Contract, extend the right to use Venture Information to each of its Affiliates
which are obligated to terms not less restrictive that this Article 15.

 73
 

 

Check if
desired.

o            OPTIONAL PROVISION

Except as
otherwise provided in the Contract, each Party may extend the right to use
Venture Information to members of joint ventures or production sharing
arrangements in which such Party or its Affiliates have an ownership or equity
interest, provided that each such member agrees in writing to keep the Venture
Information in confidence at least to the same extent as required in Article
15.2 and to use the Venture Information only for the benefit of that joint
venture or production sharing arrangement.

(C)           The
acquisition or development of Venture Information under terms other than as
specified in this Article 15 shall require the approval of the Operating
Committee.  The request for approval
submitted by a Party shall be accompanied by a description of, and summary of
the use and disclosure restrictions which would be applicable to, the Venture
Information, and any such Party will be obligated to use all reasonable efforts
to arrange for rights to use which are not less restrictive than specified in
this Article 15.

(D)          All
Venture Information received by a Party under this Agreement is received on an “as
is” basis without warranties, express or implied, of any kind. Any use of such
Venture Information by a Party shall be at such Party’s sole risk.

15.2        Confidentiality

(A)          Subject
to the provisions of the Contract and this Article 15, the Parties agree that
all information in relation with Joint Operations or Exclusive Operations shall
be considered confidential and shall be kept confidential and not be disclosed
during the term of the Contract and for a period of one (1) year thereafter to
any person or entity not a Party to this Agreement, except:

(1)           to
an Affiliate pursuant to Article 15.1(B);

(2)           to
a governmental agency or other entity when required by the Contract;

(3)           to
the extent such information is required to be furnished in compliance with the
applicable law or regulations, or pursuant to any legal proceedings or because
of any order of any court binding upon a Party;

(4)           to
prospective or actual attorneys engaged by any Party where disclosure of such
information is essential to such attorney’s work for such Party;

(5)           to
prospective or actual contractors and consultants engaged by any Party where
disclosure of such information is essential to such contractor’s or consultant’s
work for such Party;

(6)           to
a bona fide prospective transferee of a Party’s Participating Interest to the
extent appropriate in order to allow the assessment of such Participating
Interest (including an entity with whom a Party and/or its Affiliates are conducting
bona fide negotiations directed toward a merger, consolidation or the sale of a
majority of its or an Affiliate’s shares);

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

(8)           to
the extent such information must be disclosed pursuant to any rules or
requirements of any government or stock exchange having jurisdiction over such
Party, or its Affiliates; provided that if any Party desires to disclose
information in an annual or periodic report to its or its Affiliates’
shareholders and to the public and such disclosure is not required

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pursuant to any rules or requirements of any
government or stock exchange, then such Party shall comply with Article 20.3;

(9)           to
its respective employees for the purposes of Joint Operations or Exclusive
Operations as the case may be, subject to each Party taking customary
precautions to ensure such information is kept confidential; and

(10)         any
information which, through no fault of a Party, becomes a part of the public
domain.

(B)           Disclosure
as pursuant to Articles 15.2(A)(5), (6), and (7) shall not be made unless prior
to such disclosure the disclosing Party has obtained a written undertaking from
the recipient party to keep the information strictly confidential for at least one
(1) year and to use the information for the sole purpose described in Articles
15.2(A)(5), (6), and (7), whichever is applicable, with respect to the
disclosing Party.

15.3        Intellectual
Property

Check one
Alternative for Paragraph (A).

x         ALTERNATIVE
NO. 1

(A)       Subject
to Articles 15.3(C) and 15.5 and unless provided otherwise in the Contract, all
intellectual property rights in the Venture Information shall be Joint
Property.  Each Party and its Affiliates
have the right to use all such intellectual property rights in their own
operations (including joint operations or a production sharing arrangement in
which the Party or its Affiliates has an ownership or equity interest) without
the approval of any other Party. 
Decisions regarding obtaining, maintaining and licensing such
intellectual property rights shall be made by the Operating Committee, and the
costs thereof shall be for the Joint Account. 
Upon unanimous consent of the Operating Committee as to ownership,
licensing rights, and income distribution, the ownership of intellectual
property rights in the Venture Information may be assigned to the Operator or
to a Party.

o          ALTERNATIVE NO. 2

(A)       Subject
to Articles 15.3(C) and 15.5, all intellectual property rights in the Venture
Information shall be owned by Operator unless provided otherwise in the
Contract.  Each Party and its Affiliates
shall have a perpetual, royalty-free, irrevocable license to use, all such
intellectual property rights in their own operations (including joint venture operations
or a production sharing arrangement in which such Party has an ownership or
equity interest) without the approval of any other Party.  If any Venture Information amounts to a
patentable invention, Operator shall be entitled to seek patent protection for
such invention. If Operator does not intend to seek patent protection, Operator
shall offer its rights to such invention for assignment to the other Parties
and shall assign such rights to any requesting Party or Parties.  In case of the granting of a license under
such rights to a third party other than Affiliates of a Party, the license
income shall be shared among the Parties in proportion to their respective
Participating Interest.  The Party
granting any such license shall (i) be entitled to deduct its reasonable costs
incurred in registering and maintaining the rights licensed prior to the
aforementioned sharing among the Parties; (ii) keep records of any license
income received for any such license; and (iii) if requested, provide each Party
with a statement, certified by its statutory auditor to be correct and in
accordance with this Article 15.3, regarding such income received.

(B)        Nothing
in this Agreement shall be deemed to require a Party to (i) divulge proprietary
technology to any of the other Parties; or (ii) grant a license or other rights
under any intellectual property rights owned or controlled by such Party or its
Affiliates to any of the other Parties.

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Check one
Alternative for Paragraph (C).

x         ALTERNATIVE NO. 1

(C)        If
a Party or an Affiliate of a Party has proprietary technology applicable to
activities carried out under this Agreement which the Party or its Affiliate
desires to make available on terms and conditions other than as specified in
Article 15.3(A), the Party or Affiliate may, with the prior approval of the
Operating Committee, make the proprietary technology available on terms to be
agreed.  If the proprietary technology is
so made available, then any inventions, discoveries, or improvements which
relate to such proprietary technology and which result from Joint Account
expenditures shall belong to such Party or Affiliate.  In such case, each other Party shall have a
perpetual, royalty-free, irrevocable license to practice such inventions,
discoveries, or improvements, but only in connection with the Joint Operations.

o          ALTERNATIVE NO. 2

(C)        If
in the course of carrying out activities charged to the Joint Account, a Party
or an Affiliate of a Party makes or conceives any inventions, discoveries, or
improvements which primarily relate to or are primarily based on the
proprietary technology of such Party or its Affiliates, then all intellectual
property rights to such inventions, discoveries, or improvements shall vest
exclusively in such Party and each other Party shall have a perpetual,
royalty-free, irrevocable license to use such inventions, discoveries, or
improvements, but only in connection with the Joint Operations.

(D)        Subject
to Article 4.6(B), all costs and expenses of defending, settling or otherwise
handling any claim which is based on the actual or alleged infringement of any
intellectual property right shall be for the account of the operation from
which the claim arose, whether Joint Operations or Exclusive Operations.

15.4        Continuing
Obligations

Any Party ceasing to own
a Participating Interest during the term of this Agreement shall nonetheless
remain bound by the obligations of confidentiality in Article 15.2, and any
disputes in relation thereto shall be resolved in accordance with Article 18.2.

15.5        Trades

Operator may, with approval of the Operating
Committee, make well trades and data trades for the benefit of the Parties,
with any data so obtained to be furnished to all Parties who participated in
the cost of the data that was traded. 
Operator shall cause any third party to such trade to enter into an
undertaking to keep the traded data confidential.

ARTICLE 16

FORCE MAJEURE

16.1        Obligations

If as a result of Force Majeure any Party is rendered
unable, wholly or in part, to carry out its obligations under this Agreement,
other than the obligation to pay any amounts due or to furnish Security, then
the obligations of the Party giving such notice, so far as and to the extent
that the obligations are affected by such Force Majeure, shall be suspended
during the continuance of any inability so caused and for such reasonable
period thereafter as may be necessary for the Party to put itself in the same
position that it occupied prior to the Force Majeure, but for no longer period.  The Party claiming Force Majeure shall notify
the other Parties of the Force Majeure within a reasonable time after the
occurrence of the facts

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relied on and shall keep all Parties informed of all
significant developments.  Such notice
shall give reasonably full particulars of the Force Majeure and also estimate
the period of time which the Party will probably require to remedy the Force
Majeure.  The affected Party shall use
all reasonable diligence to remove or overcome the Force Majeure situation as
quickly as possible in an economic manner but shall not be obligated to settle
any labor dispute except on terms acceptable to it, and all such disputes shall
be handled within the sole discretion of the affected Party.

16.2        Definition
of Force Majeure

Check one
Alternative.

o            ALTERNATIVE NO. 1        

For the purposes of this Agreement, “Force Majeure”
shall have the same meaning as is set out in the Contract.

x           ALTERNATIVE NO. 2        

For the purposes of this Agreement, “Force Majeure”
shall mean circumstances which were beyond the reasonable control of the Party
concerned and shall include strikes, lockouts and other industrial disturbances
even if they were not “beyond the reasonable control” of the Party.

ARTICLE 17

NOTICES

Except as otherwise specifically provided, all notices
authorized or required between the Parties by any of the provisions of this
Agreement shall be in writing (in English) and delivered in person or by
courier service or by any electronic means of transmitting written
communications which provides written confirmation of complete transmission,
and addressed to such Parties.  Oral
communication does not constitute notice for purposes of this Agreement, and
e-mail addresses and telephone numbers for the Parties are listed below as a
matter of convenience only.  A notice
given under any provision of this Agreement shall be deemed delivered only when
received by the Party to whom such notice is directed, and the time for such
Party to deliver any notice in response to such originating notice shall run
from the date the originating notice is received.  “Received”
for purposes of this Article 17 shall mean actual delivery of the notice to the
address of the Party specified hereunder or to be thereafter notified in
accordance with this Article 17.  Each
Party shall have the right to change its address at any time and/or designate
that copies of all such notices be directed to another person at another
address, by giving written notice thereof to all other Parties.

	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
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ARTICLE
18

APPLICABLE LAW - DISPUTE RESOLUTION - WAIVER OF SOVEREIGN IMMUNITY

18.1        Applicable
Law

[NOTE: The provisions of this Agreement must be
analyzed taking into consideration the law chosen in this Article 18.1 and any
other applicable law.]

Check one Alternative.

x           ALTERNATIVE
NO. 1        

The substantive laws of Alberta, Canada, exclusive of any conflicts of laws
principles that could require the application of any other law, shall govern
this Agreement for all purposes, including the resolution of all Disputes
between or among Parties.

o            ALTERNATIVE
NO. 2        

The laws of                      ,
to the extent consistent with international law, shall govern this Agreement
for all purposes, including the resolution of all Disputes between or among
Parties. To the extent the laws of                      
are not consistent with international law, then international law shall
prevail.

18.2        Dispute
Resolution

Check Paragraph (A) if Paragraphs
18.2 (B) or (C) are selected. Renumber following paragraphs if Paragraph (A) is
not selected.

x           OPTIONAL
PROVISION - Notification

(A)          Notification.  A Party who desires to submit a Dispute for
resolution shall commence the dispute resolution process by providing the other
parties to the Dispute written notice of the Dispute (“Notice
of Dispute”).  The Notice
of Dispute shall identify the parties to the Dispute and contain a brief
statement of the nature of the Dispute and the relief requested. The submission
of a Notice of Dispute shall toll any applicable statutes of limitation related
to the Dispute, pending the conclusion or abandonment of dispute resolution proceedings
under this Article 18.

 78
 

 

Check
Paragraph (B), if desired. Renumber following paragraphs if Paragraph (B) is
not selected.

x           OPTIONAL PROVISION -
Senior Executive Negotiations

(B)           Negotiations.  The parties to the Dispute shall seek to
resolve any Dispute by negotiation between Senior Executives.  A “Senior Executive”
means any individual who has authority to negotiate the settlement of the
Dispute for a Party.  Within thirty (30)
Days after the date of the receipt by each party to the Dispute of the Notice
of Dispute (which notice shall request negotiations among Senior Executives),
the Senior Executives representing the parties to the Dispute shall meet at a
mutually acceptable time and place to exchange relevant information in an
attempt to resolve the Dispute.  If a
Senior Executive intends to be accompanied at the meeting by an attorney, each
other party’s Senior Executive shall be given written notice of such intention
at least three (3) Days in advance and may also be accompanied at the meeting by
an attorney.  Notwithstanding the above,
any Party may initiate arbitration proceedings pursuant to Article 18.2 (D) [NOTE: Alternative, if paragraph (C) is selected: mediation
proceedings pursuant to Article 18.2 (C)] concerning such Dispute within thirty
(30) Days after the date of receipt of the Notice of Dispute.

Check
Paragraph (C), if desired. Renumber following paragraphs if Paragraph (C) is
not selected.

x           OPTIONAL PROVISION -
Mediation

(C)           Mediation.  Subject to the requirements of negotiation between
Senior Executives pursuant to Article 18(B), the parties to the Dispute shall
seek to resolve the Dispute by mediation. Within thirty (30) Days after the
date of the first negotiation meeting among Senior Executives pursuant to
Article 18(B), any party to the Dispute may initiate such mediation pursuant by
sending all other parties to the Dispute a written request that the Dispute be
mediated.  The Parties receiving such
written request will promptly respond to the requesting Party so that all
parties to the Dispute may jointly select a neutral mediator and schedule the
mediation session.  The mediator shall
meet with the parties to the Dispute to mediate the Dispute within thirty (30)
Days after the date of receipt of the written request for mediation.
Notwithstanding the above, any Party may initiate arbitration proceedings
pursuant to Article 18.2 (D) concerning such Dispute within sixty (60) Days
after the date of receipt of the Notice of Dispute.

(D)          Arbitration.  Any Dispute [not finally resolved by
alternative dispute resolution procedures set forth in Articles 18.2(B) and
18.2(C)] shall be exclusively and definitively resolved through final and
binding arbitration, it being the intention of the Parties that this is a broad
form arbitration agreement designed to encompass all possible disputes.

(1)           Rules.  The arbitration shall be conducted in
accordance with the following arbitration rules (as then in effect) (the “Rules”):

Check one
Alternative.

o            ALTERNATIVE
NO. 1        

Rules of Arbitration of the International Chamber of Commerce (ICC).

x           ALTERNATIVE
NO. 2        

Arbitration Rules of the London Court of International Arbitration (LCIA).

o            ALTERNATIVE
NO. 3        

International Arbitration Rules of the American Arbitration Association (AAA).

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o            ALTERNATIVE
NO. 4        

Arbitration Rules of the Singapore International Arbitration Centre (SIAC).

o            ALTERNATIVE
NO. 5        

Arbitration Rules of the Institute of the Stockholm Chamber of Commerce (SCC
Institute).

o            ALTERNATIVE
NO. 6        

United Nations Commission of International Trade Law (UNCITRAL) Arbitration
Rules. The appointing authority shall be [                    
Arbitral Institution].

(2)           Number
of Arbitrators.  The arbitration
shall be conducted by three arbitrators, unless all parties to the Dispute
agree to a sole arbitrator within thirty (30) Days after the filing of the
arbitration. For greater certainty, for purposes of this Article 18.2(D), the
filing of the arbitration means the date on which the claimant’s request for
arbitration is received by the other parties to the Dispute.

(3)           Method
of Appointment of the Arbitrators. 
If the arbitration is to be conducted by a sole arbitrator, then the
arbitrator will be jointly selected by the parties to the Dispute.  If the parties to the Dispute fail to agree
on the arbitrator within thirty (30) Days after the filing of the arbitration,
then the London Court of International Arbitration shall appoint the
arbitrator.

If the arbitration is to be conducted by three
arbitrators and there are only two parties to the Dispute, then each party to
the Dispute shall appoint one arbitrator within thirty (30) Days of the filing
of the arbitration, and the two arbitrators so appointed shall select the
presiding arbitrator within thirty (30) Days after the latter of the two
arbitrators has been appointed by the parties to the Dispute.  If a party to the Dispute fails to appoint
its party-appointed arbitrator or if the two party-appointed arbitrators cannot
reach an agreement on the presiding arbitrator within the applicable time
period, then the London Court of Arbitral Institution shall appoint the
remainder of the three arbitrators not yet appointed.

If the arbitration is to be conducted by three
arbitrators and there are more than two parties to the Dispute, then within
thirty (30) Days of the filing of the arbitration, all claimants shall jointly
appoint one arbitrator and all respondents shall jointly appoint one
arbitrator, and the two arbitrators so appointed shall select the presiding
arbitrator within thirty (30) Days after the latter of the two arbitrators has
been appointed by the parties to the Dispute. 
If either all claimants or all respondents fail to make a joint
appointment of an arbitrator or if the party-appointed arbitrators cannot reach
an agreement on the presiding arbitrator within the applicable time period,
then London Court Arbitral Institution shall appoint

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Check one
Alternative.

o            ALTERNATIVE NO. 1        

all three arbitrators.

x           ALTERNATIVE NO. 2        

the remainder of the three arbitrators not yet appointed.

[NOTE: If
the laws of France (and possibly other jurisdictions that have not yet
addressed the “Dutco”  problem) are
applicable to the arbitration, Alternative 2 may result in an unenforceable
arbitral award.]

Check
Paragraph (4), if desired. Renumber following paragraphs if Paragraph (4) is
not selected.

x           OPTIONAL
PROVISION (Paragraph (4))

(4)           Consolidation.  If the Parties initiate multiple arbitration
proceedings, the subject matters of which are related by common questions of
law or fact and which could result in conflicting awards or obligations, then
all such proceedings may be consolidated into a single arbitral proceeding.

(5)           Place
of Arbitration.  Unless otherwise
agreed by all parties to the Dispute, the place of arbitration shall be Calgary,
Alberta, Canada.

(6)           Language.  The arbitration proceedings shall be
conducted in the English language and the arbitrator(s) shall be fluent in the
English language.

(7)           Entry
of Judgment.  The award of the
arbitral tribunal shall be final and binding. 
Judgment on the award of the arbitral tribunal may be entered and
enforced by any court of competent jurisdiction.

(8)           Notice.  All notices required for any arbitration
proceeding shall be deemed properly given if sent in accordance with Article
17.

(9)           Qualifications
and Conduct of the Arbitrators.  All
arbitrators shall be and remain at all times wholly impartial, and, once
appointed, no arbitrator shall have any ex parte communications
with any of the parties to the Dispute concerning the arbitration or the
underlying Dispute other than communications directly concerning the selection
of the presiding arbitrator, where applicable.

Check if
desired.

o            OPTIONAL
PROVISION

Whenever the parties to
the Dispute are of more than one nationality, the single arbitrator or the
presiding arbitrator (as the case may be) shall not be of the same nationality
as any of the parties or their ultimate parent entities, unless the parties to
the Dispute otherwise agree.

(10)         Interim
Measures.  [Notwithstanding any
requirements for alternative dispute resolution procedures as set forth in
Articles 18(B) and (C)], [a]ny party to the Dispute may apply to a court for
interim measures (i) prior to the constitution of the arbitral tribunal (and
thereafter as necessary to enforce the arbitral tribunal’s rulings); or (ii) in
the absence of the jurisdiction of the arbitral tribunal to rule on interim
measures in a given jurisdiction.  The
Parties agree that seeking and obtaining such interim measures shall not waive
the right to arbitration.  The
arbitrators (or in an emergency the presiding arbitrator acting alone in the
event one or more of the other arbitrators is unable to be involved in a timely

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fashion) may grant
interim measures including injunctions, attachments and conservation orders in
appropriate circumstances, which measures may be immediately enforced by court
order.  Hearings on requests for interim
measures may be held in person, by telephone, by video conference or by other
means that permit the parties to the Dispute to present evidence and arguments.

Check if
desired.

o            OPTIONAL
PROVISION

Without limiting the generality of the foregoing, any
party to the Dispute may have recourse to and shall be bound by the
Pre-arbitral Referee Procedure of the International Chamber of Commerce in
accordance with its rules then in effect.

(11)         Costs and
Attorneys’ Fees.  The arbitral
tribunal is authorized to award costs and attorneys’ fees and to allocate them
between the parties to the Dispute.  The
costs of the arbitration proceedings, including attorneys’ fees, shall be borne
in the manner determined by the arbitral tribunal.

(12)         Interest.  The award shall include interest, as
determined by the arbitral award, from the date of any default or other breach
of this Agreement until the arbitral award is paid in full.  Interest shall be awarded at the Agreed
Interest Rate.

(14)         Currency
of Award.  The arbitral award shall
be made and payable in United States dollars, free of any tax or other
deduction.

(15)         Exemplary
Damages.  The Parties waive their
rights to claim or recover, and the arbitral tribunal shall not award, any
punitive, multiple, or other exemplary damages (whether statutory or common
law) except to the extent such damages have been awarded to a third party and
are subject to allocation between or among the parties to the Dispute.

(16)         Waiver of
Challenge to Decision or Award.  To
the extent permitted by law, any right to appeal or challenge any arbitral
decision or award, or to oppose enforcement of any such decision or award
before a court or any governmental authority, is hereby waived by the Parties
except with respect to the limited grounds for modification or non-enforcement
provided by any applicable arbitration statute or treaty.

Check
Paragraph (E), if desired.

x           OPTIONAL PROVISION

(E)           Confidentiality.  All negotiations, mediation, arbitration, and
expert determinations relating to a Dispute (including a settlement resulting
from negotiation or mediation, an arbitral award, documents exchanged or
produced during a mediation or arbitration proceeding, and memorials, briefs or
other documents prepared for the arbitration) are confidential and may not be
disclosed by the Parties, their employees, officers, directors, counsel,
consultants, and expert witnesses, except (in accordance with Article 15.2) to the extent necessary to enforce this Article 18 or any
arbitration award, to enforce other rights of a Party, or as required by law;
provided, however, that breach of this confidentiality provision shall not void
any settlement, expert determination or award.

 82
 

 

Check Article 18.3, if any of
Article 8.4 - Alternative No. 2, Article 12.2(F) - Alternative No. 2, or
Article 12.3(C) - Alternative No. 2 is selected. Renumber following article if
Article 18.3 is not selected.

x           OPTIONAL
PROVISION (Article 18.3)

18.3        Expert
Determination

For
any decision referred to an expert under Articles [8.4, 12.2 or 12.3], the
Parties hereby agree that such decision shall be conducted expeditiously by an
expert selected unanimously by the parties to the Dispute.  The expert is not an arbitrator of the
Dispute and shall not be deemed to be acting in an arbitral capacity. The Party
desiring an expert determination shall give the other parties to the Dispute
written notice of the request for such determination.  If the parties to the Dispute are unable to
agree upon an expert within ten (10) Days after receipt of the notice of
request for an expert determination, then, upon the request of any of the
parties to the Dispute, the International Centre for Expertise of the International
Chamber of Commerce (ICC) shall appoint such expert and shall administer such
expert determination through the ICC’s Rules for Expertise.  The expert, once appointed, shall have no ex parte communications with any of the parties to the
Dispute concerning the expert determination or the underlying Dispute.  All Parties agree to cooperate fully in the
expeditious conduct of such expert determination and to provide the expert with
access to all facilities, books, records, documents, information and personnel
necessary to make a fully informed decision in an expeditious manner.  Before issuing his final decision, the expert
shall issue a draft report and allow the parties to the Dispute to comment on
it.  The expert shall endeavor to resolve
the Dispute within thirty (30) Days (but no later than sixty (60) Days) after
his appointment, taking into account the circumstances requiring an expeditious
resolution of the matter in dispute.  The
expert’s decision shall be final and binding on the parties to the Dispute
unless challenged in an arbitration pursuant to Article 18.2(D) within sixty
(60) Days of the date the expert’s final decision is received by the parties to
the Dispute and until replaced by such subsequent arbitral award. In such
arbitration (i) the expert determination on the specific matter under Articles
[8.4, 12.2 or 12.3] shall be entitled to a rebuttable presumption of
correctness; and (ii) the expert shall not (without the written consent of the
parties to the Dispute) be appointed to act as an arbitrator or as adviser to
the parties to the Dispute.

18.4        Waiver
of Sovereign Immunity

Any Party that now or hereafter has a right to claim
sovereign immunity for itself or any of its assets hereby waives any such
immunity to the fullest extent permitted by the laws of any applicable
jurisdiction.  This waiver includes
immunity from (i) any expert determination, mediation, or arbitration
proceeding commenced pursuant to this Agreement; (ii) any judicial, administrative
or other proceedings to aid the expert determination, mediation, or arbitration
commenced pursuant to this Agreement; and (iii) any effort to confirm, enforce,
or execute any decision, settlement, award, judgment, service of process,
execution order or attachment (including pre-judgment attachment) that results
from an expert determination, mediation, arbitration or any judicial or
administrative proceedings commenced pursuant to this Agreement.  Each Party acknowledges that its rights and
obligations hereunder are of a commercial and not a governmental nature.

 83
 

 

ARTICLE
19

ALLOCATION OF COST & PROFIT HYDROCARBONS

Check one Alternative for
Articles 19.1 and 19.2.

o            ALTERNATIVE
NO. 1 (Article 19.1 and Article 19.2) - Allocation by Exploitation Area

19.1                        Allocation
of Total Production

(A)                              The
total quantity of Hydrocarbons produced and measured at the delivery point (as
determined in accordance with Article 9) from each Exploitation Area and to
which the Parties are collectively entitled under the Contract shall be
composed of Cost Hydrocarbons and Profit Hydrocarbons in accordance with the
provisions of the Contract.

(B)                                Operator
shall develop and the Operating Committee shall approve procedures for
allocating such Cost Hydrocarbons and Profit Hydrocarbons during each Calendar
Quarter among the individual Exploitation Areas based upon the following
principles.

(1)                                  Cost
Hydrocarbons and Profit Hydrocarbons shall first be allocated to Exploitation
Areas based on the principle that an earlier established operation shall not be
enhanced or impaired in any way through the subsequent establishment of any
Exploitation Area, whether the subsequently established Exploitation Areas are
Exclusive Operations or Joint Operations.

(2)                                  All
allocations made pursuant to this Article 19 shall incorporate adjustments to
reflect differences in value if different qualities of Hydrocarbons are
produced.

19.2                        Allocation
of Hydrocarbons to Parties

(A)                              Cost
Hydrocarbons and Profit Hydrocarbons allocated to Exploitation Areas pursuant
to Article 19.1 shall be allocated to the Parties in proportion to their
Participating Interests in each such Exploitation Area.

(B)                                Notwithstanding
anything to the contrary contained in this Article 19, and to the extent
allowed under the Contract, Cost Hydrocarbons which are not specifically attributable
to an Exploitation Area, if any, shall be allocated to the Parties in
proportion to their respective participation in the operations which underlie
any such Cost Hydrocarbons, provided, however, that the rights of a Party to
Cost Hydrocarbons or Profit Hydrocarbons from an Exploitation Area to which it
is a participant shall not be impaired by the rights of any other Party to
recover Cost Hydrocarbons which are not specifically attributable to such
Exploitation Area.

x           ALTERNATIVE
NO. 2 (Article 19.1 and Article 19.2) - Allocation by Type of Operation

19.1                        Allocation
of Total Production

(A)                              The
total quantity of Hydrocarbons produced and measured at the delivery point (as
determined in accordance with Article 9) from each Exploitation Area and to
which the Parties are collectively entitled under the Contract shall be
composed of Cost Hydrocarbons and Profit Hydrocarbons in accordance with the
provisions of the Contract.

(B)                                Operator
shall develop and the Operating Committee shall approve procedures for
allocating such Cost Hydrocarbons and Profit Hydrocarbons during each Calendar
Quarter among the individual operations based upon the following principles.

(1)                                  Cost
Hydrocarbons and Profit Hydrocarbons shall first be allocated to Joint
Operations based on the principle that Joint Operations shall not be enhanced
or impaired in any way by the execution of any Exclusive Operations.  Any remaining Cost Hydrocarbons and Profit
Hydrocarbons shall be allocated to

 84
 

 

Exclusive Operations
based on the principle that an earlier executed Exclusive Operation shall not
be enhanced or impaired in any way by the subsequent execution of another
Exclusive Operation.

(2)                                  All
allocations made pursuant to this Article 19 shall incorporate adjustments to
reflect differences in value if different qualities of Hydrocarbons are
produced.

19.2                        Allocation
of Hydrocarbons to Parties

(A)                              Cost
Hydrocarbons and Profit Hydrocarbons allocated to Joint Operations or Exclusive
Operations pursuant to Article 19.1 shall be allocated to the Parties in
proportion to their respective Participating Interests in such operations.

(B)                                Notwithstanding
anything to the contrary contained in this Article 19, and to the extent
allowed under the Contract, Cost Hydrocarbons which are not specifically attributable
to an operation, if any, shall be allocated to the Parties in proportion to
their respective participation in the operations which underlie any such Cost
Hydrocarbons, provided, however, that the rights of a Party to Cost
Hydrocarbons or Profit Hydrocarbons from an operation to which it is a
participant shall not be impaired by the rights of any other Party to recover
Cost Hydrocarbons which are not specifically attributable to an operation.

19.3                        Use of
Estimates

Initial
distribution of Hydrocarbons pursuant to this Article 19 shall be based upon
estimates furnished by Operator pursuant to Article 9, with adjustments for
actual figures to be made in kind within forty-five (45) Days after the end of
the Calendar Quarter and at any later date when adjustments must be made with
the Government under the Contract.

19.4                        Principles

If no allocation procedure is approved by the
Operating Committee in accordance with Article 19.1, the Parties shall
nonetheless be bound by the principles set forth in this Article 19 with regard
to the allocation of Cost Hydrocarbons and Profit Hydrocarbons.

ARTICLE 20

GENERAL PROVISIONS

20.1                        Conduct of
the Parties

(A)                              Each
Party warrants that it and its Affiliates have not made, offered, or authorized
and will not make, offer, or authorize with respect to the matters which are
the subject of this Agreement, any payment, gift, promise or other advantage,
whether directly or through any other person or entity, to or for the use or
benefit of any public official (i.e., any
person holding a legislative, administrative or judicial office, including any
person employed by or acting on behalf of a public agency, a public enterprise
or a public international organization) or any political party or political
party official or candidate for office, where such payment, gift, promise or
advantage would violate (i) the applicable laws of Canada; (ii) the laws of the
country of incorporation of such Party or such Party’s ultimate parent company
and of the principal place of business of such ultimate parent company; or
(iii) the principles described in the Convention on Combating Bribery of
Foreign Public Officials in International Business Transactions, signed in
Paris on December 17, 1997, which entered into force on February 15, 1999, and the
Convention’s Commentaries.  Each Party
shall defend, indemnify and hold the other Parties harmless from and against
any and all claims, damages, losses, penalties, costs and expenses arising from
or related to, any breach by such first Party of such warranty.  Such indemnity obligation shall survive
termination or expiration of this Agreement.

 85
 

 

(B)                                Each
Party agrees to (i) maintain adequate internal controls; (ii) properly record
and report all transactions; and (iii) comply with the laws applicable to it.  Each Party must rely on the other Parties’
system of internal controls, and on the adequacy of full disclosure of the
facts, and of financial and other data regarding the Joint Operations
undertaken under this Agreement.  No
Party is in any way authorized to take any action on behalf of another Party
that would result in an inadequate or inaccurate recording and reporting of
assets, liabilities or any other transaction, or which would put such Party in
violation of its obligations under the laws applicable to the operations under
this Agreement.

20.2                        Conflicts
of Interest

(A)                              Operator
undertakes that it shall avoid any conflict of interest between its own
interests (including the interests of Affiliates) and the interests of the
other Parties in dealing with suppliers, customers and all other organizations
or individuals doing or seeking to do business with the Parties in connection
with activities contemplated under this Agreement.

(B)                                The
provisions of the preceding paragraph shall not apply to:  (1) Operator’s performance which is in
accordance with the local preference laws or policies of the Government; or (2)
Operator’s acquisition of products or services from an Affiliate, or the sale
thereof to an Affiliate, made in accordance with the terms of this Agreement.

(C)                                Unless
otherwise agreed, the Parties and their Affiliates are free to engage or invest
(directly or indirectly) in an unlimited number of activities or businesses,
any one or more of which may be related to or in competition with the business
activities contemplated under this Agreement, without having or incurring any
obligation to offer any interest in such business activities to any Party.

20.3                        Public
Announcements

(A)                              Operator
shall be responsible for the preparation and release of all public
announcements and statements regarding this Agreement or the Joint Operations;
provided that no public announcement or statement shall be issued or made
unless, prior to its release, all the Parties have been furnished with a copy
of such statement or announcement and the approval of at least two (2) Parties
which are not Affiliates of Operator holding fifty percent (50%) or more of the
Participating Interests not held by Operator or its Affiliates has been
obtained.  Where a public announcement or
statement becomes necessary or desirable because of danger to or loss of life,
damage to property or pollution as a result of activities arising under this
Agreement, Operator is authorized to issue and make such announcement or
statement without prior approval of the Parties, but shall promptly furnish all
the Parties with a copy of such announcement or statement.

(B)                                If
a Party wishes to issue or make any public announcement or statement regarding
this Agreement or the Joint Operations, it shall not do so unless, prior to the
release of the public announcement or statement, such Party furnishes all the
Parties with a copy of such announcement or statement, and obtains the approval
of at least two (2) Parties which are not Affiliates holding fifty percent (50%)
or more of the Participating Interests not held by such announcing Party or its
Affiliates; provided that, notwithstanding any failure to obtain such approval,
no Party shall be prohibited from issuing or making any such public
announcement or statement if it is necessary to do so in order to comply with
the applicable laws, rules or regulations of any government, legal proceedings
or stock exchange having jurisdiction over such Party or its Affiliates as set
forth in Article 15.2.

20.4                        Successors
and Assigns

Subject to the limitations on Transfer contained in
Article 12, this Agreement shall inure to the benefit of and be binding upon
the successors and assigns of the Parties.

 86
 

 

20.5        Waiver

 

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

20.6                        No Third
Party Beneficiaries

Except as provided under Article 4.6 (B), the
interpretation of this Agreement shall exclude any rights under legislative
provisions conferring rights under a contract to persons not a party to that
contract.

20.7                        Joint
Preparation

Each provision of this Agreement shall be construed as
though all Parties participated equally in the drafting of the same.  Consequently, the Parties acknowledge and
agree that any rule of construction that a document is to be construed against
the drafting party shall not be applicable to this Agreement.

20.8        Severance of Invalid Provisions

If and for so long
as any provision of this Agreement shall be deemed to be judged invalid for any
reason whatsoever, such invalidity shall not affect the validity or operation
of any other provision of this Agreement except only so far as shall be
necessary to give effect to the construction of such invalidity, and any such
invalid provision shall be deemed severed from this Agreement without affecting
the validity of the balance of this Agreement.

20.9                        Modifications

Except as is
provided in Articles 11.2(B) and 20.8, there shall be no modification of this
Agreement or the Contract except by written consent of all Parties.

20.10                 Interpretation

(A)                              Headings.  The topical headings used in this Agreement
are for convenience only and shall not be construed as having any substantive
significance or as indicating that all of the provisions of this Agreement
relating to any topic are to be found in any particular Article.

(B)                                Singular
and Plural.  Reference to the
singular includes a reference to the plural and vice versa.

(C)                                Gender.  Reference to any gender includes a reference
to all other genders.

(D)                               Article.  Unless otherwise provided, reference to any
Article or an Exhibit means an Article or Exhibit of this Agreement.

(E)                                 Include.  “include”
and “including” shall mean include or
including without limiting the generality of the description preceding such
term and are used in an illustrative sense and not a limiting sense.

20.11                 Counterpart
Execution

This Agreement may
be executed in any number of counterparts and each such counterpart shall be
deemed an original Agreement for all purposes; provided that no Party shall be
bound to this Agreement unless and until all Parties have executed a
counterpart.  For purposes of assembling
all counterparts into one

 87
 

 

document, Operator
is authorized to detach the signature page from one or more counterparts and,
after signature thereof by the respective Party, attach each signed signature
page to a counterpart.

20.12                 Entirety

With respect to the subject matter contained herein,
this Agreement (i) is the entire agreement of the Parties; and (ii) supersedes
all prior understandings and negotiations of the Parties.

IN WITNESS of their
agreement each Party has caused its duly authorized representative to sign this
instrument on the date indicated below such representative’s signature.

	
   

  	
   

  	
   

  
	
   

  	
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 88

 

 

EXHIBIT A

2004

AIPN MODEL FORM

MODEL
FORM INTERNATIONAL ACCOUNTING PROCEDURE

Offshore Nova Scotia

 

DISCLAIMER

This
model contract has been prepared only as a suggested guide and may not contain
all of the provisions that may be required by the parties to an actual
agreement. This model contract has not been endorsed by the Association of
International Petroleum Negotiators (AIPN) or by any members of the AIPN. Use
of this model contract or any portion or variation thereof shall be at the sole
discretion and risk of the user parties. Users of the model contract or any
variation thereof are encouraged to seek the advice of legal counsel to ensure
that the final document reflects the actual agreement of the parties. The AIPN
disclaims any and all interests or liability whatsoever for loss or damages
that may result from use of this model contract or portions or variations
thereof.  All logos and references to the
AIPN must be removed from this model contract when used as an actual agreement.

© Association of International Petroleum
Negotiators

EXHIBIT “A”

ACCOUNTING PROCEDURE

TABLE OF CONTENTS

	
  SECTION

  	
   

  	
  PAGE

  
	
   

  	
   

  	
   

  
	
  SECTION 1 GENERAL PROVISIONS

  	
  1

  
	
  1.1

  	
  Purpose.

  	
  1

  
	
  1.2

  	
  Conflict with Agreement.

  	
  1

  
	
  1.3

  	
  Definitions.

  	
  1

  
	
  1.4

  	
  Joint Account Records and Currency Exchange.

  	
  1

  
	
  1.5

  	
  Statements and Billings.

  	
  3

  
	
  1.6

  	
  Payments and Advances.

  	
  3

  
	
  1.7

  	
  Adjustments.

  	
  6

  
	
  1.8

  	
  Audits.

  	
  6

  
	
  1.9

  	
  Allocations.

  	
  9

  
	
  SECTION 2 DIRECT CHARGES

  	
  10

  
	
  2.1

  	
  Licenses, Permits, Etc.

  	
  10

  
	
  2.2

  	
  Salaries, Wages and Related Costs.

  	
  10

  
	
  2.3

  	
  Employee Relocation Costs.

  	
  11

  
	
  2.4

  	
  Offices, Camps, and Miscellaneous Facilities.

  	
  12

  
	
  2.5

  	
  Material.

  	
  12

  
	
  2.6

  	
  Exclusively Owned Equipment and Facilities of
  Operator and Affiliates.

  	
  12

  
	
  2.7

  	
  Services.

  	
  13

  
	
  2.8

  	
  Insurance.

  	
  14

  
	
  2.9

  	
  Damages and Losses to Property.

  	
  14

  
	
  2.10

  	
  Litigation, Dispute Resolution and Legal
  Expenses.

  	
  14

  
	
  2.11

  	
  Taxes and Duties.

  	
   

  
	
  2.12

  	
  Ecological and Environmental.

  	
   

  
	
  2.13

  	
  Decommissioning (Abandonment) and Reclamation.

  	
   

  
	
  2.14

  	
  Other Expenditures.

  	
   

  
	
  SECTION 3 INDIRECT CHARGES

  	
   

  
	
  3.1

  	
  Purpose.

  	
   

  
	
  3.2

  	
  Amount.

  	
  15

  
	
  3.3

  	
  Exclusions.

  	
  16

  
	
  SECTION 4 ACQUISITION OF MATERIAL

  	
  17

  
	
  4.1

  	
  Acquisitions.

  	
  17

  
	
  4.2

  	
  Materials Furnished by Operator.

  	
  17

  
	
  4.3

  	
  Premium Prices.

  	
  23

  
	
  4.4

  	
  Warranty of Material Furnished by Operator.

  	
  23

  
	
  SECTION 5 DISPOSAL OF MATERIALS

  	
  24

  
	
  5.1

  	
  Disposal.

  	
  24

  
	
  5.2

  	
  Material Purchased by a Party or Affiliate.

  	
  24

  
	
  5.3

  	
  Division In Kind.

  	
  24

  
	
  5.4

  	
  Sales to Third Parties.

  	
  24

  
	
  SECTION 6 INVENTORIES

  	
  25

  
	
  6.1

  	
  Periodic Inventories - Notice and
  Representation.

  	
  25

  
	
  6.2

  	
  Special Inventories.

  	
  25

  
	
   

  	
   

  
	
  APPENDIX 1

  	
  26

  

 2

EXHIBIT “A”

 

ACCOUNTING PROCEDURE

Attached to and made part
of the Operating Agreement, hereinafter called the “Agreement,” effective as of
the 17th day of November, 2004, by and between
Challenger Energy Corp. and Canadian Superior Energy, Inc.

SECTION 1 

GENERAL PROVISIONS

1.1           PURPOSE.

1.1.1                                 The purpose of this
Accounting Procedure is to establish equitable methods for determining charges
and credits applicable to operations under the Agreement which reflect the
costs of Joint Operations to the end that no Party shall gain or lose in
relation to other Parties.

1.1.2                                 The Parties agree,
however, that if the methods prove unfair or inequitable to Operator or
Non-Operators, the Parties shall meet and in good faith endeavor to agree on
changes in methods deemed necessary to correct any unfairness or inequity.

1.2           CONFLICT WITH AGREEMENT.

In the event of a conflict between the provisions of
this Accounting Procedure and the provisions of the Agreement to which this
Accounting Procedure is attached, the provisions of the Agreement shall
prevail.

1.3           DEFINITIONS.

The definitions contained in the Agreement to which this Accounting
Procedure is attached shall apply to this Accounting Procedure and have the
same meanings when used herein.  Certain
terms used herein are defined as follows:“Accrual basis”
means that basis of accounting under which costs and benefits are regarded as
applicable to the period in which the liability for the cost is incurred or the
right to the benefit arises, regardless of when invoiced, paid, or received.

“Cash basis” means that basis of
accounting under which only costs actually paid and revenue actually received
are included for any period.

“Country of Operations” means                                        .

“Material” means machinery,
equipment and supplies acquired and held for use in Joint Operations.

“Section” means a section of
this Accounting Procedure.

1.4           JOINT ACCOUNT RECORDS AND CURRENCY
EXCHANGE.

1.4.1                                 Operator shall at all
times maintain and keep true and correct records of the production and
disposition of all liquid and gaseous Hydrocarbons, and of all costs and
expenditures under the Agreement, as well as other data necessary or proper for
the settlement of accounts between the Parties hereto in connection with their
rights and obligations under the Agreement and to enable Parties to comply with
their respective applicable income tax and other laws.

 1
 

 

1.4.2                                 Operator shall
maintain accounting records pertaining to Joint Operations in accordance with
generally accepted accounting practices used in the international petroleum
industry and any applicable statutory obligations of the Country of Operations
as well as the provisions of the Contract and the Agreement.

1.4.3                                 The Joint Account
shall be maintained by Operator in the                                   
language and in United States of America (“U.S.”) currency and in such other
language and currency as may be required by the laws of the Country of
Operations or the Contract.  Conversions
of currency shall be recorded at the rate actually experienced in that
conversion.  Currency translations are
used to express the amount of expenditures and receipts for which a currency
conversion has not actually occurred. Currency translations for expenditures and
receipts shall be recorded

Check one Alternative.

o        ALTERNATIVE NO. 1

in accordance with Operator’s normal practice.  A statement describing the practice will be
provided to the Non-Operators upon request.

o        ALTERNATIVE NO. 2

at the arithmetic average of the buying and selling exchange rates at
the close of business on the                                            
Day of the                          
(insert “month of” or “month
preceding”) the current accounting period as published by                                                  ,
or if not published by                                               ,
then by
                                   .

o        ALTERNATIVE NO. 3

at the arithmetic average of the buying and selling exchange rates at
the close of business on the                          
(insert “first” or “last”)
Business Day of the                         
(insert “month of” or
“month preceding”) the current accounting period as published by                                                   ,
or if not published by                                                   ,
then by                                    .

o        ALTERNATIVE NO. 4

at the arithmetic average of the buying and selling
exchange rates at the close of each Business Day of the                         
(insert “month of” or
“month preceding”) the current accounting period as published by                                               ,
or if not published by                                              ,
then by                                            .

x                      ALTERNATIVE NO. 5

in accordance with the Contract.

1.4.4                                 Any
currency exchange gains or losses shall be credited or charged to the Joint
Account, except as otherwise specified in this Accounting Procedure.

Check if desired.

x       OPTIONAL PROVISION

 2
 

 

Any such exchange gains or losses shall be separately
identified as such.

1.4.5                                 This Accounting
Procedure shall apply, mutatis mutandis,
to Exclusive Operations in the same manner that it applies to Joint Operations;
provided, however, that the charges and credits applicable to Consenting
Parties shall be separately maintained. 
For the purpose of determining and calculating the remuneration of the
Consenting Parties, including the premiums for Exclusive Operations, the costs
and expenditures shall be expressed in U.S. currency (irrespective of the
currency in which the expenditure was incurred).

1.4.6                                 The Accrual basis for
accounting shall be used in preparing accounts concerning the Joint
Operations.  If a Cash basis for
accounting is used, Operator shall show accruals as memorandum items.

1.5           STATEMENTS AND BILLINGS.

1.5.1                                 Unless otherwise
agreed by the Parties, Operator shall submit monthly to each Party, on or
before the 25th Day of each month, statements of the costs and
expenditures incurred during the prior month, indicating by appropriate
classification the nature thereof, the corresponding budget category, and the
portion of such costs charged to each of the Parties.

These statements, as a minimum, shall contain the following
information:

·                              advances
of funds setting forth the currencies received from each Party,

·                              the
share of each Party in total expenditures,

·                              the
accrued expenditures,

·                              the
current account balance of each Party,

·                              summary
of costs, credits, and expenditures on a current month, year-to-date, and
inception-to-date basis or other periodic basis, as agreed by Parties (such
expenditures shall be grouped by the categories and line items designated in
the approved Work Program and Budget submitted by Operator in accordance with
Article 6.4 of the Agreement so as to facilitate comparison of actual
expenditures against that Work Program and Budget), and

·                              details
of unusual charges and credits in excess of 
U.S. $50,000.00.

1.5.2                                 Operator shall, upon
request, furnish a description of the accounting classifications used by it.

1.5.3                                 Amounts included in
the statements and billings shall be expressed in U.S. currency and reconciled
to the currencies advanced.

1.5.4                                 Each Party shall be
responsible for preparing its own accounting and tax reports to meet the
requirements of the Country of Operations and of all other countries to which
it may be subject.  Operator, to the
extent that the information is reasonably available from the Joint Account
records, shall provide Non-Operators in a timely manner with the necessary
information to facilitate the discharge of such responsibility.

1.6           PAYMENTS AND ADVANCES.

1.6.1                                 Upon approval of any
Work Program and Budget, if Operator so requests, each Non-Operator shall
advance its share of estimated cash requirements for the succeeding month’s operations.  Each such cash call shall be equal to the
Operator’s estimate of the money to be spent in the currencies required to
perform its duties under the approved Work Program and Budget during

 3
 

 

the month concerned.  For
informational purposes the cash call shall contain an estimate of the funds
required for the succeeding 2 months detailed by the categories designated in
the approved Work Program and Budget submitted by Operator in accordance with
Article 6.4 of the Agreement.

1.6.2                                 Each such cash call,
detailed by the categories designated in the approved Work Program and Budget
submitted by Operator in accordance with Article 6.4 of the Agreement, shall be
made in writing and delivered to all Non-Operators not less than 15 Days before
the payment due date.  The due date for
payment of such advances shall be set by Operator but shall be no sooner than
the first Business Day of the month for which the advances are required.  All advances shall be made without bank
charges.  Any charges related to receipt
of advances from a Non-Operator shall be borne by that Non-Operator.

1.6.3                                 Each Non-Operator
shall wire transfer its share of the full amount of each such cash call to
Operator on or before the due date, in the currencies requested or any other
currencies acceptable to Operator and at a bank designated by Operator.  If currency provided by a Non-Operator is
other than the requested currency, then the entire cost of converting to the
requested currency shall be charged to that Non-Operator.

1.6.4                                 Notwithstanding the
provisions of Section 1.6.2, should Operator be required to pay any sums of
money for the Joint Operations which were unforeseen at the time of providing
the Non-Operators with said estimates of its requirements, Operator may make a
written request of the Non-Operators for special advances covering the
Non-Operators’ share of such payments. 
Each such Non-Operator shall make its proportional special advances
within 10 Days after receipt of such notice.

Check if
desired.

o        OPTIONAL PROVISION

When
the total of such cash calls for any month is U.S. $                   
or less, each Non-Operator shall advance its share thereof in accordance with
Section 1.6.  When the total cash
requirements exceed the aforesaid amount, each Non-Operator shall advance its
share of the estimated funds required in 3 installments of amounts to be
specified by Operator, the first installment to be paid not later than the
first Business Day of the month for which the advance is required and the
second installment to be paid not later than the tenth Day of the month for
which the advance is required or if such Day is not a Business Day, then the
following Business Day and the third installment to be paid not later than the
twentieth Day of the month for which the advance is required or if such Day is
not a Business Day, then the following Business Day.  The third installment can be adjusted by
Operator by notifying the Non-Operators of the adjusted amount no later than
the fifteenth Day of the month for which the advance is required.

1.6.5                                 If a Non-Operator’s
advances exceed its share of cash expenditures, the next succeeding cash
advance requirements, after such determination, shall be reduced
accordingly.  However, if the amount of
such excess advance is greater than the amount of the next month’s estimated
cash requirements for such Non-Operator, the Non-Operator may request a refund
of the difference, which refund shall be made by Operator within 10 Days after
receipt of the Non-Operator’s request provided that the amount is in excess of
U.S. $25,000.00.

Check if
desired.

o        OPTIONAL PROVISION

If Operator does not refund the money within the time
required, the unpaid balance shall bear and accrue interest at the Agreed
Interest Rate from the due date until the payment is received by the
Non-Operator who requested the refund.

 4
 

 

1.6.6                                 If Non-Operator’s
advances are less than its share of cash expenditures, the deficiency shall, at
Operator’s option, be added to subsequent cash advance requirements or be paid
by Non-Operator within 10 Days following the receipt of Operator’s billing to
Non-Operator for such deficiency.

1.6.7                                 If, under the
provisions of the Agreement, Operator is required to segregate funds received
from the Parties, any interest received on such funds shall be applied against
the next succeeding cash call or, if directed by the Operating Committee,
distributed quarterly.  The interest thus
received shall be allocated to the Parties on an equitable basis taking into
consideration date of funding by each Party to the accounts in proportion to
the total funding into the account.  A
monthly statement summarizing receipts, disbursements, transfers to each joint
bank account and beginning and ending balances thereof shall be provided by
Operator to the Parties.

Check if desired.

x       OPTIONAL PROVISION 

Any
interest received by Operator from interest-bearing accounts containing
commingled funds received from the Parties shall be credited to the Parties in
accordance with the allocation procedure as set forth above.

1.6.8                                 If Operator does not
request Non-Operators to advance their share of estimated cash requirements,
each Non-Operator shall pay its share of cash expenditures within 10 Days
following receipt of Operator’s billing.

1.6.9                                 Payments of advances
or billings shall be made on or before the due date. In accordance with Article
8 of the Agreement, if these payments are not received by the due date the
unpaid balance shall bear and accrue interest from the due date until the
payment is received by Operator at the Agreed Interest Rate.  For the purpose of determining the unpaid
balance and interest owed, Operator shall translate to U.S. currency all
amounts owed in other currencies using the currency exchange rate, determined
in accordance with Section 1.4.3, at the close of the last Business Day prior
to the due date for the unpaid balance.

1.6.10                          Subject to governmental
regulation, Operator shall have the right, at any time and from time to time,
to convert the funds advanced or any part thereof to other currencies to the extent
that such currencies are then required for operations.  The cost of any such conversion shall be
charged to the Joint Account.

1.6.11                          Operator shall endeavor to
maintain funds held for the Joint Account in bank accounts at a level
consistent with that required for the prudent conduct of Joint Operations.

1.6.12                          If under the Agreement,
Operator is required to segregate funds received from or for the Joint Account,
the provisions under Section 1.6 for payments and advances by Non-Operators
shall apply also to Operator.

Check if desired.

x       OPTIONAL PROVISION

 5
 

 

1.6.13 Funding By Operator

 

The Parties may agree on additional funding mechanisms including
funding by Operator.

1.7           ADJUSTMENTS.

Payments of any advances
or billings shall not prejudice the right of any Non-Operator to protest or
question the correctness thereof; provided, however, all bills and statements
rendered to Non-Operators by Operator during any Calendar Year shall
conclusively be presumed to be true and correct after 24 months following the
end of such Calendar Year, unless within the said 24 month period a
Non-Operator takes written exception thereto and makes claim on Operator for
adjustment.  Failure on the part of a
Non-Operator to make claim on Operator for adjustment within such period shall
establish the correctness thereof and preclude the filing of exceptions thereto
or making claims for adjustment thereon. 
No adjustment favorable to Operator shall be made unless it is made
within the same prescribed period.  The
provisions of this paragraph shall not prevent adjustments resulting from a
physical inventory of the Material as provided for in Section 6.  Operator shall be allowed to make adjustments
to the Joint Account after such 24 month period if these adjustments result
from audit exceptions outside of this Accounting Procedure, third party claims,
or Government or Government Oil & Gas Company requirements.  Any such adjustments shall be subject to
audit within the time period specified in Section 1.8.1.

1.8           AUDITS.

1.8.1                                 A Non-Operator, upon
at least 60 Days advance notice in writing to Operator and all other
Non-Operators, shall have the right to audit the Joint Accounts and records of
Operator relating to the accounting hereunder for any Calendar Year within the
24 month period following the end of such Calendar Year except as otherwise
provided in Section 3.1.
Non-Operators shall have reasonable access to Operator’s personnel and to the
facilities, warehouses, and offices directly or indirectly serving Joint
Operations. The cost of each such audit shall be borne by Non-Operators
participating in the audit.  Where there
are two or more Non-Operators, the Non-Operators shall make a reasonable effort
to conduct joint or simultaneous audits in a manner that will result in a
minimum of inconvenience to the Operator. 
Non-Operators must take written exception to and make claim upon the
Operator for all discrepancies disclosed by said audit within said 24 month
period.  Non-Operators may request
information from the Operator prior to the commencement of the audit.  Operator will provide the information in
electronic format or hard copy documents, if electronic format is not
available.  Operator will provide the information
requested within 30 Days before commencement of the audit but in no event
sooner than 30 Days after the written request. 
The information requested shall be limited to that normally used for
pre-audit work such as trial balance, general ledger, and sub-ledger data.

1.8.2                                 Operator shall
endeavor to produce information from its Affiliates reasonably necessary to
support charges from those Affiliates to the Joint Account other than those
charges referred to in Section 3.1.

1.8.3                                 Except for charges
under Section 2.5.1, if selected, and Section 2.7.1, the following provisions
apply to all charges from Operator for its Affiliates.

Check one Alternative

o
ALTERNATIVE NO. 1 – RESTRICTED AFFILIATE AUDIT

 6
 

 

In addition to the information provided by the
Operator under Section 1.8.2, a Non-Operator may seek to audit the books and
records of an Affiliate of Operator relating to the charges by the Affiliate to
the Joint Account for the same Calendar Year as provided in Section 1.8.1
above.  The charges of the Affiliate
shall be subject to audit in accordance with (a), (b), or (c) below or any
combination thereof.

(a)       If the Affiliate of Operator consents to
the audit, the audit may be conducted in the same manner as the audit of the
books and records of Operator.

 

If all or part of the
charges are not audited under (a) above, the unaudited portion may be audited
under (b) and/or (c) below.

 

(b)       The Affiliate may require use of an
internationally recognized independent public accounting firm to confirm
confidential or proprietary information and charges.  The cost of the internationally recognized
independent public accounting firm shall be                 
(insert “borne by Operator”, “borne by
Non-Operators who requested the confirmation”, or “charged to the Joint Account”).   The Non-Operator will seek agreement with
the Affiliate on the audit scope to confirm the details and facts relating to
such information and charges.

 

If the independent public
accounting firm of the Affiliate declines to conduct the audit or is not
internationally recognized, the Non-Operator will seek agreement with the
Affiliate on an accounting firm that is internationally recognized .  The cost of using such firm shall be                      
(insert 
“borne by Operator”, “borne by the Non-Operator who requested the audit”,
or “charged to the Joint Account”).

Operator will endeavor to
cause its Affiliate to not unreasonably withhold approval of the use of an
internationally recognized independent public accounting firm or the scope of
examination requested by Non-Operators.

 

If all or part of the
charges are not audited under (a) or (b) above, the unaudited portion may be
audited under (c) below.

 

(c)       Operator may request its
Affiliate to provide Non-Operators an annual report from an internationally
recognized independent public accounting firm attesting that charges billed
from such Affiliate to the Joint Account represent a complete and accurate
allocation of its costs to the Joint Operations, exclude any element of profit,
exclude any duplication of costs covered under Sections 2 and 3, and are
consistent in application to all of its activities.  The report will be furnished by the Operator
within 12 months of the request from the Non-Operator.  The cost of providing the annual report shall
be                   
(insert “borne by Operator” “borne by the
Non-Operator who requested the audit”, or “charged to the Joint Account”).

No amounts paid to an Affiliate of Operator, which the Non-Operator
seeks to audit, may be charged to the Joint Account if the Affiliate of the
Operator does not allow audit of such amounts as provided above.

o  ALTERNATIVE NO. 2 – AUDIT
REPORT

The internal records of
an Operator’s Affiliate providing services to the Joint Operations may not be
audited by the Non-Operator.  However, in
addition to the information provided by the Operator under Section 1.8.2, and
upon request by a Non-Operator within 24 months following the end of the same
Calendar Year as provided in Section 1.8.1 above Operator will cause its
Affiliate to provide Non-Operator an annual report from an internationally
recognized independent public accounting firm. 
The report will attest that charges billed from such Affiliate to the
Joint Account represent a complete and accurate allocation of its costs to the
Joint Operations, exclude any element of profit, exclude any duplication of
costs covered under Sections 2 and 3, and are consistent in application to all
of its activities.  The report will be
furnished by the Operator within 12 months of the request from the
Non-Operator.  The cost of providing the
annual report shall be                      
(insert “borne by Operator” “borne by the
Non-Operator who requested the audit”, or “charged to the Joint Account”).

No amounts paid to an Affiliate of Operator, which the
Non-Operator seeks to audit, may be charged to the Joint Account if the
Affiliate of the Operator does not furnish the audit report as provided above.

 7
 

 

o  ALTERNATIVE NO. 3 –
INDEPENDENT PUBLIC AUDITOR

In addition to the
information provided by the Operator under Section 1.8.2, a Non-Operator may
seek to audit the books and records of an Affiliate of Operator relating to the
charges by the Affiliate to the Joint Account for the same Calendar Year as
provided in Section 1.8.1.  The audit
shall be conducted by an independent public accounting firm designated by the
Affiliate.  The cost of such firm shall
be                
(insert “borne by Operator”, “borne by
Non-Operators who requested the confirmation”, or “charged to the Joint Account”).   The Non-Operator will seek agreement with
the Affiliate on the audit scope to confirm the details and facts relating to
such charges. The audit scope proposed by Non-Operator shall be fair and
reasonable.

If the independent public
accounting firm of the Affiliate declines to conduct the audit or is not
internationally recognized, the Non-Operator will seek agreement with the
Affiliate on a firm that is an internationally recognized independent public
accounting firm.  The cost of using such
firm shall be                          
(insert 
“borne by Operator”, “borne by the Non-Operator who requested the audit”,
or “charged to the Joint Account”).

Operator will endeavor to
cause its Affiliate to not unreasonably withhold approval of the use of an
internationally recognized independent public accounting firm or of the scope
of examination requested by Non-Operators.

No amounts paid to an
Affiliate of Operator, which the Non-Operator seeks to audit, may be charged to
the Joint Account if the Affiliate of the Operator does not allow audit of such
amounts as provided above and the scope of audit proposed by the Non-Operator
was fair and reasonable.

x  ALTERNATIVE NO. 4 – FULL
AUDIT

In addition to the
information provided by the Operator under Section 1.8.2, and upon request by a
Non-Operator, Operator will cause its Affiliate to allow the Non-Operator to
audit the books and records of the Affiliate relating to the charges by the
Affiliate to the Joint Account for the same Calendar Year as provided in
Section 1.8.1 above.  The audit may be
conducted in the same manner as the audit of the books and records of Operator.

No amounts paid to an Affiliate of Operator, which the
Non-Operator seeks to audit, may be charged to the Joint Account if the
Affiliate of the Operator does not allow audit of such amounts as provided
above.

1.8.4                                 Any
Party may audit the records of Operator’s Affiliate relating to charges under
Section 2.5.1, if selected.  The
provisions of Section 1.8.3 shall apply mutatis mutandis
to such audit unless otherwise agreed by the Parties.

Any Party may audit the records of an Affiliate of
another Party relating to that Affiliate’s charges under Section 2.7.1.  The provisions of Section 1.8.3 shall apply mutatis mutandis to such audits unless otherwise agreed by
the Parties. Should such charges be rejected under the provisions of 1.8.3,
such charges shall be charged back to the Party whose Affiliate provided the
service.

Any Party may audit the records of Operator’s
Affiliate relating to charges under Section 2.6.  The provisions of Section 1.8.3 shall apply mutatis mutandis to such audits unless otherwise agreed by
the Parties.

Any Party may audit the records of a Non-Operator or
its Affiliate relating to charges under Section 2.7.3.  The provisions of Section 1.8.3 shall apply mutatis mutandis to such audit, unless

 8
 

 

otherwise agreed by the Parties.  Should such charges be rejected under the
provisions of 1.8.3, such charges shall be charged back to the Party whose
Affiliate provided the service.

1.8.5                                 Any information
obtained by a Party under the provisions of Section 1.8 which does not relate
directly to the Joint Operations shall be kept confidential and shall not be
disclosed to any party, except as would otherwise be permitted by Article
15.2(A)(3) and (10) of the Agreement.

1.8.6                                 In the event that the
Operator is required by law or the Contract to employ a public accounting firm
to audit the Joint Account and records of Operator relating to the accounting
hereunder, the cost thereof shall be a charge against the Joint Account, and a
copy of the audit shall be furnished to each Party.

1.8.7                                 At the conclusion of
each audit, the Parties shall endeavor to settle outstanding matters
expeditiously.  To this end the Parties
conducting the audit will make a reasonable effort to prepare and distribute a
written report to the Operator and all the Parties who participated in the
audit as soon as possible and in any event within 90 Days after the conclusion
of each audit.  The report shall include
all claims, with supporting documentation, arising from such audit together
with comments pertinent to the operation of the accounts and records.  Operator shall make a reasonable effort to
reply to the report in writing as soon as possible and in any event no later
than 90 Days after receipt of the report. 
Should the Non-Operators consider that the report or reply requires
further investigation of any item therein, the Non-Operators shall have the
right to conduct further investigation in relation to such matter
notwithstanding the provisions of Sections 1.7 and 1.8.1 that the period of 24
months may have expired.  However,
conducting such further investigation shall not extend the 24 month period for
taking written exception to and making a claim upon the Operator for all
discrepancies disclosed by said audit. Such further investigations shall be
commenced within 30 Days and be concluded within 60 Days after the receipt of
such report or reply, as the case may be.

1.8.8                                 All adjustments
resulting from an audit agreed between the Operator and the Non-Operator
conducting the audit shall be reflected promptly in the Joint Account by the
Operator and reported to the Non-Operator(s). 
If any dispute shall arise in connection with an audit, it shall be
reported to and discussed by the Operating Committee, and, unless otherwise
agreed by the parties to the dispute, resolved in accordance with the
provisions of Article 18 of the Agreement. If all the parties to the dispute so
agree, the adjustment(s) may be referred to an independent expert agreed to by
the parties to the dispute e.g. an independent accounting firm.  At the election of the parties to the dispute,
the decision of the expert will be binding upon such parties.  Unless otherwise agreed, the cost of such
expert will be shared equally by all parties to the dispute.

1.8.9                                 The
provisions of this Section 1.8 apply to audits conducted under Article 4.11(D)
of the Agreement except that the 60 Day advance notice and the advance
information provisions of Section 1.8.1 shall not apply.

1.9           ALLOCATIONS.

If it becomes necessary
to allocate any costs or expenditures to or between Joint Operations and any
other operations, such allocation shall be made on an equitable basis.  For informational purposes only, Operator
shall furnish a description of its allocation procedures pertaining to these
costs and expenditures and its rates for personnel and other charges, along
with each proposed Work Program and Budget. Such allocation basis shall be
subject to audit under Section 1.8.

 9
 

 

SECTION 2  

DIRECT CHARGES

 

Operator shall charge the
Joint Account for all costs and expenditures incurred by Operator for the
conduct of Joint Operations within the limits of approved Work Programs and
Budgets or as otherwise specified in the Agreement.  Charges for services normally provided by an
operator such as those contemplated in Sections 2.7.2 and 2.7.3 which are
provided by a Party’s Affiliate shall reflect the cost to the Affiliate,
excluding profit, for performing such services, except as otherwise provided in
Section 2.6, Section 2.7.1, and Section 2.5.1 if selected.

The costs and expenditures
shall be recorded as required for the settlement of accounts between the
Parties hereto in connection with the rights and obligations under the
Agreement and for purposes of complying with the tax laws of the Country of
Operations and of such other countries to which any of the Parties may be
subject.

Chargeable costs and
expenditures may include:

2.1           LICENSES, PERMITS, ETC.

All costs, if any,
attributable to the acquisition, maintenance, renewal or relinquishment of
licenses, permits, contractual and/or surface rights acquired for Joint
Operations and bonuses paid in accordance with the Contract when paid by
Operator in accordance with the provisions of the Agreement.

2.2           SALARIES, WAGES AND RELATED COSTS.

Salaries, wages and related costs include everything constituting the
employees’ total compensation, as well as the cost to Operator of holiday,
vacation, sickness, disability benefits, living and housing allowances, travel
time, bonuses, and other customary allowances applicable to the salaries and
wages chargeable hereunder, as well as the costs to Operator for employee
benefits, including but not limited to employee group life insurance, group
medical insurance, hospitalization, retirement, severance payments required by
the laws or regulations of the Country of Operations

(Check only one of the following Alternative
Provisions.)

o            (additional
severance payments in excess of those provided by the laws or regulations of
the Country of Operations shall be chargeable to the Joint Account to the
extent that they are in accordance with Operator’s benefit policies),

o            (additional
severance payments in excess of those provided by the laws or regulations of
the Country of Operations, which are made in accordance with Operator’s benefit
policies, shall be allocated to the Joint Account in the proportion that the
time the employee was directly engaged in Joint Operations on a full time basis
bears to the employee’s total tenure with the Operator and its Affiliates),

x          (approval
of the Parties shall be required to charge the Joint Account with any severance
payments in excess of those provided by the laws or regulations of the Country
of Operations),

and
other benefit plans of a like nature applicable to labor costs of Operator.

All costs associated with organizational restructuring (e.g.,
separation benefits, relocation costs, asset disposition costs) of Operator or
its Affiliates, other than those costs which are directly related to employees
of Operator who are directly engaged in Joint Operations on a full time basis,
will require the approval of the Parties to be chargeable to the Joint Account.

 

 10

Any costs associated with Country of Operations benefit plans which are
not currently funded shall be accrued and not be paid by Non-Operators, unless
otherwise approved by the Operating Committee, until the same are due and
payable to the employee, upon withdrawal of a Party pursuant to the Agreement
and then only by the withdrawing Party, or upon termination of the Agreement,
whichever occurs first.

Expenditures or
contributions made pursuant to assessments imposed by governmental authority
for payments with respect to or on account of employees described in Section
2.2.1 and Section 2.2.2 shall be chargeable to the Joint Account.

Check if desired.

o                         OPTIONAL PROVISION

Because the funding of a
defined benefit plan is not necessarily representative of the cost to the
Operator for the retirement plan, the actuarially determined service cost shall
be charged to the Joint Account instead of the amount of cash paid to fund the
retirement plan.

2.2.1                                 The salaries, wages
and related costs of employees of Operator and its Affiliates temporarily or
permanently assigned in the Country of Operations and directly engaged in Joint
Operations shall be chargeable to the Joint Account.

2.2.2                                 The salaries, wages
and related costs of employees of Operator and its Affiliates temporarily or
permanently assigned outside the Country of Operations directly engaged in
Joint Operations and not otherwise covered in Section 2.7.2 shall be chargeable
to the Joint Account.

2.2.3                                 Costs for salaries,
wages and related costs may be charged to the Joint Account on an actual basis
or at a rate based upon the average cost in accordance with Operator’s usual
practice.  In determining the average
cost, expatriate and national employees’ rates shall be calculated separately
and reviewed at least annually.

2.2.4                                 Reasonable expenses
(including related travel costs) of those employees whose salaries and wages
are chargeable to the Joint Account under Sections 2.2.1 and 2.2.2 and for
which expenses the employees are reimbursed under the usual practice of
Operator shall be chargeable to the Joint Account.

2.2.5                                 If employees are
engaged in other activities in addition to the Joint Operations, the cost of
such employees shall be allocated on an equitable basis.

2.3           EMPLOYEE RELOCATION COSTS.

2.3.1                                 Except as provided in
Section 2.3.3, Operator’s cost of employees’ relocation to or from an
assignment with the Joint Operations, whether within or outside the Country of
Operations and whether permanently or temporarily assigned to the Joint
Operations, shall be chargeable to the Joint Account. If such employee works on
other activities in addition to Joint Operations, such relocation costs shall
be allocated on an equitable basis.

2.3.2                                 Such relocation costs
shall include transportation of employees, families, personal and household
effects of the employee and family, transit expenses, and all other related
costs in accordance with Operator’s usual practice.

 11
 

 

2.3.3                                 Relocation costs to an
assignment that is not with the Joint Operations shall not be chargeable to the
Joint Account unless the place of the new assignment is the point of origin of
the employee or unless otherwise agreed by the Operating Committee.

2.4           OFFICES,
CAMPS, AND MISCELLANEOUS FACILITIES.

 

Cost of maintaining any
offices, sub-offices, camps, warehouses, housing, and other facilities of the
Operator and/or Affiliates directly serving the Joint Operations.  If such facilities serve operations in
addition to the Joint Operations the costs shall be allocated to the properties
served on an equitable basis.

2.5           MATERIAL.

Cost, net of discounts taken by Operator, of Material purchased or
furnished by Operator.  Such costs shall
include, but are not limited to, export brokers’ fees, transportation charges,
loading, unloading fees, export and import duties and license fees associated
with the procurement of Material and in-transit losses, if any, not covered by
insurance.  So far as it is reasonably
practical and consistent with efficient and economical operation, only such
Material shall be purchased for, and the cost thereof charged to, the Joint
Account as may be required for immediate use.

Check if desired.

o                         OPTIONAL
PROVISION

2.5.1                                 Purchasing
Fee.

When economical to do so, and required for the benefit of the Joint
Operations, Operator may request its Affiliates to provide purchasing,
expediting and traffic coordination services. 
Charges to the Joint Account for the provision of these purchasing
services shall be based on the Affiliate’s standard purchasing fee currently
set at:

           %
on the amount of each purchase order subject to a minimum fee of $           
and a maximum fee of $           
per purchase order.

The fee shall be reviewed periodically by Operator’s Affiliates, and
future changes shall be made upward or downward as indicated by the Affiliate’s
cost experience for the provision of these purchasing services.  Any changes affecting the charges to the
Joint Account shall be subject to notification by Operator and approval by the
Parties.  Such charges shall be in lieu
of any charges for the same or similar services provided herein.

2.6           EXCLUSIVELY
OWNED EQUIPMENT AND FACILITIES OF OPERATOR AND AFFILIATES.

Charges for exclusively
owned equipment, facilities, and utilities of Operator or any of its Affiliates
at rates not to exceed the average commercial rates of non-affiliated third
parties then prevailing for like equipment, facilities, and utilities for use
in the area where the same are used hereunder. 
On request, Operator shall furnish Non-Operators a list of rates and the
basis of application.  Such rates shall
be revised from time to time if found to be either excessive or insufficient,
but not more than once every six months.

Exclusively owned
drilling tools and other equipment lost in the hole or damaged beyond repair
may be charged at replacement cost less depreciation plus transportation costs
to deliver like equipment to the location where used.

 12
 

 

2.7           SERVICES.

 

2.7.1                                 The charges for
services provided by third parties, including the Affiliates of the respective
Parties which have contracted with Operator to perform services that are
normally provided by third parties, other than those services covered by
Section 2.7.2 and Section 2.7.3, shall be chargeable to the Joint Account.  Such charges for services by the Affiliates
of the respective Parties shall not exceed those currently prevailing if
performed by non-affiliated third parties, considering quality and availability
of services.

2.7.2                                 The
cost of services performed by Operator’s Affiliates technical and professional
staffs not located within the Country of Operation and not otherwise covered
under Section 2.2.2, shall be chargeable to the Joint Account. The individual
rates shall include salaries and wages of such technical and professional
personnel, lost time, governmental assessments, and employee benefits.  Costs shall also include all support costs
necessary for such technical and professional personnel to perform such
services, such as, but not limited to, rent, utilities, support staff,
drafting, telephone and other communication expenses, computer support,
supplies, depreciation, and other reasonable expenses.  Examples of such services include the
following:

Geologic Studies and
Interpretation

Seismic Data Processing

Well Log Analysis,
Correlation and Interpretation

Laboratory Services

Ecological and
Environmental Engineering

Decommissioning
(Abandonment) and Reclamation

Well Site Geology

Project Management and
Engineering

Source Rock Analysis

Petrophysical Analysis

Geochemical Analysis

Drilling Supervision

Development Evaluation

Project Accounting and
Professional Services

Other Data Processing

Check if desired.

o   OPTIONAL PROVISION 

Costs incurred as payment for access to, and use of, technical data,
intellectual property and know-how of the Operator’s group of Affiliates in
accordance with the technology participation agreement between the Operator and
its Affiliates and in accordance with the customary cost sharing system
applicable to operating companies within the Operator’s group of
Affiliates.  Such costs shall be included
in annual Work Program and Budgets as a separate line item subject to the
approval of the Operating Committee.

2.7.3                                 The cost of services
performed with the approval of Operator by the technical and professional
staffs of the Non-Operators and the Affiliates of the respective Non-Operators,
including the cost to such Affiliates and Non-Operators of their respective
secondees, shall be chargeable to the Joint Account.  The individual rates shall include salaries
and wages of such technical and professional personnel and secondees, lost
time, governmental assessments, and employee benefits.  Costs (other than for secondees) shall also
include all support costs necessary for such technical and professional personnel
to perform such services, such as, but not limited, to rent, utilities, support
staff, drafting, telephone and other communication expenses, computer support,
supplies, depreciation, and other reasonable expenses.

 13
 

 

2.7.4                                 A
Non-Operator shall bill Operator for direct costs of services and of secondees
charged under the provisions of Section 2.7.3 on or before the last Day of each
month for charges for the preceding month, to which charges Non-Operator shall
(Option - insert
“not”, place a period after the word “rate” and delete the
remainder of this sentence) add an administrative overhead rate of
5.0%.  Within 30 Days after receipt of a
bill for such charges, Operator shall pay the amount due thereon.

Check if desired.

x           OPTIONAL PROVISION

2.7.5                                 The
charges for services under Section 2.7.2 and Section 2.7.3 shall not exceed
those currently prevailing if performed by non-affiliated third parties,
considering the quality and availability of such services.

2.8           INSURANCE.

Premiums paid for
insurance required by law, the Contract or the Agreement to be carried for the
benefit of the Joint Operations.

2.9           DAMAGES AND LOSSES TO PROPERTY.

2.9.1                                 All costs or
expenditures necessary to replace or repair damages or losses incurred by fire,
flood, storm, theft, accident, or any other cause shall be chargeable to the
Joint Account.  Operator shall furnish
Non-Operators written notice of damages or losses incurred in excess of U.S.
$50,000.00 as soon as practical after report of the same has been received by
Operator.  All losses in excess of U.S.
$50,000.00 shall be listed separately in the monthly statement of costs and
expenditures.

2.9.2                                 Credits for
settlements received from insurance carried for the benefit of Joint Operations
and from others for losses or damages to Joint Property or Materials shall be chargeable
to the Joint Account.  Each Party shall
be credited with its Participating Interest share thereof except where such
receipts are derived from insurance purchased by Operator for less than all
Parties in which event such proceeds shall be credited to those Parties for
whom the insurance was purchased in the proportion of their respective
contributions toward the insurance coverage.

2.9.3                                 Expenditures incurred
in the settlement of all losses, claims, damages, judgments, and other expenses
for the account of Joint Operations shall be chargeable to the Joint Account.

2.10         LITIGATION, DISPUTE RESOLUTION AND
ASSOCIATED LEGAL EXPENSES.

The costs and expenses
of litigation, dispute resolution and associated legal services necessary for
the protection of the Joint Operations under the Agreement as follows:

2.10.1                          Legal services, other than
those provided by the Parties or their Affiliate employees, necessary or
expedient for the protection of the Joint Operations, and all costs and
expenses of litigation, arbitration or other alternative dispute resolution
procedure, including reasonable attorneys’ fees and expenses, together with all
judgments obtained against the Parties or any of them arising from the Joint
Operations.

2.10.2                          If the Parties agree, litigation,
arbitration or other alternative dispute resolution procedures resulting from
actions or claims affecting the Joint Operations hereunder may be handled by
the legal staff of one or any of the Parties or their respective Affiliates;
and a charge commensurate

 14
 

 

with the reasonable costs of providing and furnishing such services
rendered may be made by the Party or its Affiliates providing such service to
Operator for the Joint Account.

3.2           AMOUNT.

3.2.1                     The indirect charge under Section
3.1 for any month shall equal the greater of the total amount of indirect
charges for the period beginning at the start of the Calendar Year through the
end of the period covered by Operator’s invoice (“Year-to-Date”) determined
under Section 3.2.2, less indirect charges previously made under
Section 3.1 for the Calendar Year in question, or the amount of the
minimum assessment determined under Section 3.2.3, calculated on an
annualized basis (but reduced pro rata for periods of less than one year), less
indirect charges previously made under Section 3.1 for the Calendar Year
in question.

3.2.2                     Unless exceeded by the minimum
assessment under Section 3.2.3, the aggregate Year-to-Date indirect
charges shall be a percentage of the Year-to-Date expenditures, calculated on
the following scale (U.S. Dollars):

Annual
Expenditures

$0 to $250,000 of
expenditures = [*]

Next $250,000 of
expenditures = [*]

Excess above $500,000 of expenditures = [*]

3.2.3                     A minimum amount of U.S. [*] shall be assessed each
Calendar Year calculated from the Effective Date and shall be reduced pro rata
for periods of less than a year.

 3.2.4                  Indirect Charge for Projects.

As to major projects (such as, but not limited to, pipelines, gas
reprocessing and processing plants, final loading and terminalling facilities,
and dismantling for decommissioning of platforms and related facilities) when
the estimated cost of each project amounts to more than U.S. $30,000,00, a
separate indirect charge for such project shall be approved by the Parties                              
(here insert either “Operating Committee”
or “Parties”) at the time of approval of
the project.

Check if
desired.

o            OPTIONAL PROVISION

During its process of winding-up Joint Operations Operator shall have
the right to charge the greater of the sliding scale percentage rate or the
minimum indirect charge for a period of      
months.  If the winding-up process
continues beyond the end of such period, the charge shall be confined to and
based upon the sliding scale percentage rate.

Check if desired.

o            OPTIONAL PROVISION

Notwithstanding the foregoing, the indirect rates and related
calculation method for development operations, production operations, and
dismantling for decommissioning of platforms and related facilities shall be
agreed upon by the                    
(here insert either “Operating Committee”
or “Parties”) prior to the submission of
the first annual budget for those phases of operations.

Check if desired.

o            OPTIONAL PROVISION

 15
 

 

At
the beginning of each year, the dollar amounts noted in Section 3.2 shall be
adjusted based on the previous year’s annual change in the                                   
Index as published by                                                   .  For this purpose, the starting index base
shall be                                   
as published on                           ,
20        .

3.3           EXCLUSIONS.

The expenditures used to calculate the monthly indirect charge shall
not include the indirect charge (calculated either as a percentage of
expenditures or as a minimum monthly charge), rentals on surface rights
acquired and maintained for the Joint Account, guarantee deposits, pipeline
tariffs, concession acquisition costs, bonuses paid in accordance with the
Contract, royalties and taxes on production or revenue to the Joint Account
paid by Operator, expenditures associated with major construction projects for
which a separate indirect charge is established hereunder, payments to third
parties in settlement of claims, and other similar items.

Credits arising from any
government subsidy payments, disposition of Material, and receipts from third
parties for settlement of claims shall not be deducted from total expenditures
in determining such indirect charge.

 16
 

 

 

SECTION 4  

ACQUISITION OF MATERIAL

4.1           ACQUISITIONS.

Materials
purchased for the Joint Account shall be charged at net cost paid by the
Operator.  The price of Materials
purchased shall include, but shall not be limited to export broker’s fees,
insurance, transportation charges, loading and unloading fees, import duties,
license fees, and demurrage (retention charges) associated with the procurement
of Materials,

(Check the following Optional Provision only if the
Optional Provision for Section 2.5.1 is selected.)

o            OPTIONAL
PROVISION

the purchasing fee provided for in Section 2.5.1,

and
applicable taxes, less all discounts taken.

4.2           MATERIALS
FURNISHED BY OPERATOR.

Materials required for
operations shall be purchased for direct charge to the Joint Account whenever
practicable, except the Operator may furnish such Materials from its stock
under the following conditions:

4.2.1           New Materials (Condition
“A”).

New Materials transferred from the warehouse or other properties of
Operator shall be priced at net cost determined in accordance with Section 4.1
as if Operator had purchased such new Material just prior to its transfer.

Such net costs shall in
no event exceed the then current market price.

4.2.2           Used
Materials (Conditions “B” and “C”).

4.2.2.1                Material
which is in sound and serviceable condition and suitable for use without repair
or reconditioning shall be classed as Condition “B” and priced at 75% of such
new purchase net cost at the time of transfer.

4.2.2.2                Materials
not meeting the requirements of Section 4.2.2.1, but which can be made suitable
for use after being repaired or reconditioned, shall be classed as Condition
“C” and priced at 50% of such new purchase net cost at the time of
transfer.  The cost of reconditioning
shall also be charged to the Joint Account provided the Condition “C” price,
plus cost of reconditioning, does not exceed the Condition “B” price; and
provided that Material so classified meet the requirements for Condition “B”
Material upon being repaired or reconditioned.

4.2.2.3                Material,
which cannot be classified as Condition “B” or Condition “C”, shall be priced
at a value commensurate with its use.

4.2.2.4                Tanks,
derricks, buildings, and other items of Material involving erection costs, if
transferred in knocked-down condition, shall be graded as to condition as 

 17
 

 

 

provided in Section 4.2.2, and priced on the basis of
knocked-down price of like new Material.

4.2.2.5                Material
including drill pipe, casing and tubing, which is no longer useable for its
original purpose but is useable for some other purpose, shall be graded as to
condition as provided in Section 4.2.2. 
Such Material shall be priced on the basis of the current price of items
normally used for such other purpose if sold to third parties.

4.3           PREMIUM PRICES.

Whenever
Material is not readily obtainable at prices specified in Sections 4.1 and 4.2
because of national emergencies, strikes or other unusual causes over which
Operator has no control, Operator may charge the Joint Account for the required
Material at Operator’s actual cost incurred procuring such Material, in making
it suitable for use, and moving it to the Contract Area, provided that notice
in writing, including a detailed description of the Material required and the
required delivery date, is furnished to Non-Operators of the proposed charge at
least 30 Days (or such shorter period as may be specified by Operator) before
the Material is projected to be needed for operations and prior to billing
Non-Operators for such Material the cost of which exceeds U.S. $100,000.  Each Non-Operator shall have the right, by so
electing and notifying Operator within 20 Days (or such shorter period as may
be specified by Operator) after receiving notice from Operator, to furnish in
kind all or part of his share of such Material per the terms of the notice
which is suitable for use and acceptable to Operator both as to quality and
time of delivery.  Such acceptance by
Operator shall not be unreasonably withheld. 
If Material furnished is deemed unsuitable for use by Operator, all
costs incurred in disposing of such Material or returning Material to owner
shall be borne by the Non-Operator furnishing the same unless otherwise agreed
by the Parties.  If a Non-Operator fails
to properly submit an election notification within the designated period, Operator
is not required to accept Material furnished in kind by that Non-Operator.  If Operator fails to submit proper
notification prior to billing Non-Operators for such Material, Operator shall
only charge the Joint Account on the basis of the price allowed during a
“normal” pricing period in effect at time of movement.

4.4           WARRANTY OF MATERIAL FURNISHED BY
OPERATOR.

Operator
does not warrant the condition or fitness for the purpose intended of the
Material furnished. In case defective Material is furnished by Operator for the
Joint Account, credit shall not be passed to the Joint Account until adjustment
has been received by Operator from the manufacturers or their agents.

 18
 

 

 

SECTION 5  

DISPOSAL OF MATERIALS

5.1           DISPOSAL.

Operator shall be under
no obligation to purchase the interest of Non-Operators in new or used surplus
Materials.  Operator shall have the right
to dispose of Materials but shall advise and secure prior agreement of the
Operating Committee of any proposed disposition of Materials having an original
cost to the Joint Account either individually or in the aggregate of U.S.
$25,000 or more.  When Joint Operations
are relieved of Material charged to the Joint Account, Operator shall advise
each Non-Operator of the original cost of such Material to the Joint Account so
that the Parties may eliminate such costs from their asset records.  Credits for Material sold by Operator shall
be made to the Joint Account in the month in which payment is received for the
Material.  Any Material sold or disposed
of under this Section 5 shall be on an “as is, where is” basis without
guarantees or warranties of any kind or nature. 
Costs and expenditures incurred by Operator in the disposition of
Materials shall be charged to the Joint Account.

5.2           MATERIAL PURCHASED BY A PARTY OR
AFFILIATE.

Proceeds received from Material purchased from the Joint Property by a
Party or an Affiliate thereof shall be credited by Operator to the Joint
Account, with new Material valued in the same manner as new Material under
Section 4.2.1 and used Material valued in the same manner as used Material
under Section 4.2.2, unless otherwise agreed by the Parties (insert either “Operating Committee” or “Parties”).

5.3           DIVISION IN KIND.

Division of Material in kind, if made between the Parties, shall be in
proportion to their respective interests in such Material.  Each Party will thereupon be charged
individually with the value (determined in accordance with the procedure set
forth in Section 5.2) of the Material received or receivable by it.

5.4           SALES TO THIRD PARTIES.

Proceeds received from
Material purchased from the Joint Property by third parties shall be credited
by Operator to the Joint Account at the net amount collected by Operator from
the buyer.  If the sales price is less
than the value determined in accordance with the procedure set forth in Section
5.2, then approval by the Parties (insert either “Operating
Committee” or “Parties”)
shall be required prior to the sale.  Any
claims by the buyer for defective materials or otherwise shall be charged back
to the Joint Account if and when paid by Operator.

 19
 

 

 

SECTION 6  

INVENTORIES

6.1           PERIODIC INVENTORIES - NOTICE AND
REPRESENTATION.

At reasonable intervals,

Check the following Optional Provision if desired.

x           OPTIONAL PROVISION

but
at least annually,

inventories
shall be taken by Operator of all Material held in warehouse stock on which
detailed accounting records are normally maintained.  The expense of conducting periodic
inventories shall be charged to the Joint Account.  Operator shall give Non-Operators written
notice at least 60 Days in advance of its intention to take inventory, and
Non-Operators, at their sole cost and expense, shall each be entitled to have a
representative present.  The failure of
any Non-Operator to be represented at such inventory shall bind such
Non-Operator to accept the inventory taken by Operator.  Operator shall in any event furnish each
Non-Operator with a reconciliation of overages and shortages.  Inventory adjustments to the Joint Account
shall be made for overages and shortages. 
Any adjustment equivalent to U.S. $25,000 or more shall be brought to
the attention of the Operating Committee.

6.2           SPECIAL INVENTORIES.

Whenever
there is a sale or change of a Participating Interest in the Agreement, a
special inventory may be taken by the Operator provided the seller and/or
purchaser of such interest agrees to bear all of the expense thereof.  In such cases, both the seller and the
purchaser shall be entitled to be represented and shall be governed by the
inventory so taken.

 20
 

 

 

APPENDIX 1

1.6.13     Funding by Operator

EXAMPLE NO. 1

1.6.13.1                                        Notwithstanding
any of the provisions of Sections 1.6.1 through 1.6.6 to the contrary, Operator
may elect to fund the costs of the Joint Operations and bill each Non-Operator
for its Participating Interest share of such funding pursuant to the provisions
of Section 1.6.13.  Operator shall
exercise such election by submission of notice to  Non-Operators at the time of submission of
any proposed Work Program and Budget to the Parties pursuant to Article 6 of
the Agreement.  In consideration for such
funding, each Non-Operator shall pay Operator the financing charge specified in
Section 1.6.13.3.

1.6.13.2                                        Not
later than the 10th Day after the end of any month for which the
Operator has funded the Joint Operations, Operator shall bill each Non-Operator
for (1) its share of the cash expenditure, and (2) the financing charge
calculated in accordance with Section 1.6.13.3.

1.6.13.3                                        Operator’s
financing charge to a Non-Operator for funding the Joint Operations shall be
calculated in accordance with the following formula:

F = (C  ́
P)  ́ I  ́ S/365

Where:

F = the finance charge payable by the Non-Operator.

C = cash expenditures funded by the Operator on behalf
of the Parties in accordance with Section 1.6.13.1.

P = the Participating Interest of the Non-Operator.

I = interest at the London Interbank Offered U S Dollar rate (“LIBOR”)
for 1 month specified in the Financial Times or if not published, then by The
Wall Street Journal, applicable on the 15th Day of the month during which such
funding cost was incurred, or if such Day is not a Business Day, the first such
Business Day thereafter.

S = the number of Days from the fifteenth Day of the
month during which such funding costs were incurred until the due date for the
payment (both dates inclusive).

1.6.13.4                                        Notwithstanding
the provisions of Section 1.6.8, each bill under Section 1.6.13 shall be due on
the 20th Day of the month in which the bill was issued,
or if such Day is not a Business Day in the Country of Operations, the first
Business Day thereafter.

1.6.13.5                                        In
any subsequent Calendar Year, Operator may elect to adopt a cash call procedure
in accordance with Sections 1.6.1 through 1.6.6 by notice submitted to the
Non-Operators at the time of submission of any proposed Work Program and Budget
to the Parties pursuant to Article 7 of the Agreement.

 21
 

 

 

1.6.13.6                                        Whenever
a successor Operator is appointed pursuant to Article 4.11 of the Agreement,
such successor Operator shall notify the Non-Operators, within 30 Days of its
appointment, as to whether it intends to adopt a cash call procedure or an
Operator funding procedure for the Joint Operations.

EXAMPLE NO. 2

1.6.13.1                                        Notwithstanding
any of the provisions of Sections 1.6.1 through 1.6.6 to the contrary, the
Operator may elect to fund the costs of Joint Operations on behalf of the
Parties during each accounting period subject to reimbursement of such costs by
the Parties pursuant to Section 1.6.13.

1.6.13.2                                         Not later than
the 10th Day after the end of any month for which the
Operator has funded the Joint Operations, Operator shall bill each Non-Operator
for (1) its share of the cash expenditure, and (2) the financing charge
calculated in accordance with Section 1.6.13.4.

1.6.13.3                                                                                                                                                                                                                                                                                                                                                                                        When significant expenditures are envisaged
during a year Operator may request a funding payment that will remain with
Operator for a fixed period of time. However, such payment, if any, will be
periodically reviewed and adjustments made as appropriate between Operator and
the other Parties. Any funding payment requested by Operator will be called for
receipt on the first Day of a calendar month subject to the provision of 10
Days notice of settlement.

1.6.13.4                                        Operator’s financing charge to a Non-Operator for
funding the Joint Operations shall be calculated in accordance with the
following formula:

F = [(C ́P)  ́ (I  ́ S/365)] less [D  ́ (I  ́ T/365)]

Where:

F = the financing charge or credit to be settled between the relevant
Non-Operator and Operator.

C = cash expenditures funded by the Operator on behalf of the Parties
in accordance with Section 1.6.13.1.

D = the funding payment received by the Operator from the Non-Operator
pursuant to Section 1.6.13.3.

P = the Participating Interest of the relevant Non-Operator under the
Agreement;

I = interest at London Interbank Offered U.S. Dollar rate (“LIBOR”) for
1 month specified in the Financial Times or if not published, the by The Wall
Street Journal applicable on the 15th Day of the month during which such
funding cost was incurred, or if such Day is not a Business Day, the first such
Business Day in London, the first such Business Day thereafter.

S =
the number of Days from the 15th Day of the month during which funding was
incurred until the due date for the payment (both dates inclusive).

 22
 

 

 

T = the number of Days in the month relating to the invoice.

1.6.13.5                                         Notwithstanding
the provisions of Section 1.6.8, each bill under Section 1.6.13 shall be due on
the 20th Day of the month in which the bill was issued,
or if such Day is not a Business Day in the Country of Operations, the first
Business Day thereafter.

1.6.13.6                                        In
times of major expenditures, Operator reserves the right to introduce cash call
advances as provided in Section 1.6.1 through 1.6.6 as an alternative method of
funding Joint Operations.

o                                  OPTIONAL PROVISION

“Similarly cash calls
shall also be applied upon the unanimous request of all Non-Operators.

1.6.13.7                                         In
any subsequent Calendar Year, Operator may elect to adopt a cash call procedure
in accordance with Sections 1.6.1 through 1.6.6 by notice submitted to the
Non-Operators at the time of submission of any proposed Work Program and Budget
to the Parties pursuant to Article 7 of the Agreement.

1.6.13.8                                        Whenever a successor Operator is appointed
pursuant to Article 4.11 of the Agreement, such successor Operator shall notify
Non-Operators, within 30 Days of its appointment, as to whether it intends to
adopt a cash call procedure or an Operator funding procedure for the Joint
Operations.

 23

 

* * * * * * * * * * * * * * * * * * * *

THIS PAGE IS NOT A PART OF

THE ACCOUNTING PROCEDURE OR

THE OPERATING AGREEMENT

* * * * * * * * * * * * * * * * *
* * * * *

References to the
following Model Operating Agreement Articles may be found in this Accounting
Procedure in the Sections indicated.

	
  Article 4.11

  	
  Section 1.6.13.5, 1.6.13.8 (Appendix 1)

  
	
  Article 6

  	
  Section 1.6.13.1 (Appendix 1)

  
	
  Article 6.4

  	
  Sections 1.5.1, 1.6.1 and 1.6.2

  
	
  Article 7

  	
  Sections 1.6.13.5, 1.6.13.7 (Appendix 1)

  
	
  Article 8

  	
  Section 1.6.9

  
	
  Article 15

  	
  Section 2.7.2 Optional

  
	
  Article
  15.1(A)(3) and (10)

  	
  Section 1.8.4

  
	
  Article 18

  	
  Section 1.8.8

  

 

 

 

Schedule “C”

This is
Schedule “C” forming part of the Amended and Restated Farmout and Option

Agreement
dated December 30, 2005 between Canadian Superior Energy Inc. and

Challenger Energy Corp.

 

ARDAL
OVERRIDING ROYALTY

 

 

PURCHASE
OF EXPLORATION PROSPECTS

AND

PARTICIPATION AGREEMENT

This Agreement made as of
the 21st day of September, 2000.

BETWEEN:

ARDAL PETROLEUM INC.,
a body corporate having an office in the City of Calgary; in the Province of
Alberta, (hereinafter, called “Ardal”),

and

CANADIAN SUPERIOR ENERGY INC.,
a body corporate having an office in the City of Calgary, in the Province of
Alberta, (hereinafter called “Superior” or the “Licensee”),

WHEREAS
Ardal and Superior are both in the business of investing in mineral leases,
participating in exploration projects, drilling, leasing lands, developing
plays and leads to actively explore and participate in the development and
production of oil and gas.

WHEREAS
Ardal has compiled and developed technical geologic and remote sensing
information and has interpreted this information (herein after collectively
called the “Ardal Information”) covering certain oil and gas exploratory
drilling prospects within the Scotian Shelf of Eastern Canada.

WHEREAS
Ardal has incurred specific costs related to the development of the Ardal
Information including:  Geophysical
consultants and interpretation, assimilation of geologic, geophysical, and
other raw data, interpretive workstation, interpretive software, office space,
support staff and technicians, plotting, external mapping vendors, processing
of data and other similar exploration expenses associated with the development
oil and gas plays and leads.

WHEREAS
Superior has conducted an independent evaluation of the Ardal Information and
agrees and accepts the Information in an “as is state” as a copy of the
information available for the exclusive use of Superior during the term of this
agreement, which shall not preclude Ardal’s use of the information after the
term of this agreement.  Further,
Superior has agreed that it has arrived at the consideration paid herein
independently and accepts the consideration as fair and reasonable.

WHEREAS
Superior wishes to acquire the Ardal Information and has offered and shall pay
[*] (the “Purchase Price”) which payment shall be made at the time set
forth in this agreement or at such time as the parties may otherwise agree; and
in lieu of Ardal participating directly with Superior, Superior has agreed to
grant to Ardal a non-convertible gross overriding royalty under the terms and conditions
set forth in this Agreement.

NOW
THEREFORE in consideration of the premises, of the terms and conditions of this
Agreement, and of the benefits and advantages to be derived by each party from
the furtherance of this Agreement, the parties do hereby agree as follows:

1.             DEFINITIONS

Throughout this
Agreement, unless the context requires otherwise, the definitions set forth in
the Canadian Association of Petroleum Landmen 1990 Standard Form Operating
Procedure shall apply, any terms defined in the schedules attached hereto are
duly incorporated, and are in addition the following terms which shall have the
following meanings, namely:

 

 

(a)                                  “Abenaki
Reef” means that area so identified in Schedule ”A” attached hereto and
made a part hereof.

(b)                                 “Affiliate”
means, with respect to the relationship between corporations, that one of them
is controlled by the other or that both of them are controlled by the same
person, partnership, corporation or body politic; and for this purpose a
corporation shall be deemed to be controlled by those persons, partnerships,
corporations or bodies politic which own or effectively control, other than by
way of security.  only, sufficient voting
shares of the corporation (whether directly through the ownership of shares of
the corporation or indirectly through the ownership of shares of another
corporation which owns shares of the corporation) to elect the majority of its
board of directors, provided that a partnership one or more of the partners of
which is a Party or an Affiliate of a Party as described above shall be deemed
to be an Affiliate of the Party means any corporation, partnership, trust or
other entity which (i) is wholly owned by the Licensee; or
(ii) wholly owns the Licensee.

(c)                                  “AMI”
means an area of mutual interest, being the area defined herein as the Scotian
Shelf.

(d)                                 “Ardal
Information” means the maps, interpretations, reports, and all other
information as detailed in Schedule ”C” attached hereto and made a part
hereof and includes any information or material provided to Superior prior to
the effective date.

(e)                                  “Non-Convertible
Overriding Royalty Procedure” means the form which is attached hereto as
Schedule ”B” and hereby made a part.

(f)                                    “Scotian
Shelf” means the area enclosed by the following 5 points:

	
  Longitude

  	
   

  	
  Latitude

  
	
  1.56° 0’W

  	
   

  	
  44° 0’ N

  
	
  2.57° 0’W

  	
   

  	
  45° 30’N

  
	
  3.66° 0’W

  	
   

  	
  43° 15’N

  
	
  4.65° 15’W

  	
   

  	
  41° 0’N

  
	
  5.63° 0’W

  	
   

  	
  41° 0’N

  

 

if straight lines are
drawn in a circular fashion connecting the foregoing points.

2.             EFFECTIVE DATE

This
Agreement shall become effective when it has been executed by both parties and
a fully executed copy delivered to each party.

3.                                      DELIVERY
OF DATA

On
or within a reasonable time after the Effective Date, Ardal shall deliver the
Ardal Information to Superior and Superior shall, concurrently with such
delivery, pay the Purchase Price.  The
use of the Ardal Information shall be subject to the following conditions:

(a)           Superior shall enjoy exclusive right
to the Ardal Information within the AMI until October 1, 2002.  During that period, Ardal shall not sell,
display, or in any way dispose of the Ardal Information covering the AMI to any
third party without Superior’s written permission, which permission may be
arbitrarily withheld; and

(b)           Superior shall be free to further
develop and interpret the Ardal Information, and shall not be required to
deliver to Ardal any copies of its further developments or interpretations
except pursuant to Clause 6 hereof.

 

 

4.                                      AREA
OF MUTUAL INTEREST NON-COMPETITION

During
the period commencing on the date of this Agreement and terminating on October
1, 2002 Ardal shall not compete against Superior in acquiring interests in
lands within the area defined as the Abenaki Reef.  If Ardal acquires any interest in lands
within the Abenaki Reef prior to that date other than as set forth in this
Agreement, Ardal shall immediately offer such interests to Superior at the same
cost which Ardal paid.  Superior may
accept the offer to acquire such interests by serving written notice of
acceptance and reimbursing Ardal’s costs within fifteen days of receipt of the
offer from Ardal.  Failure to accept the
offer within the fifteen days-shall be deemed an election not to acquire the
interests.

5.             NON-CONVERTIBLE GROSS OVERRIDING ROYALTY

The
parties acknowledge that the grant of the Non-convertible Gross Overriding
Royalty (“NCGORR”) to Ardal is in lieu of Ardal’s direct participation in the
development of the lands covered by the Ardal Information.  Subject to the exception set forth in the
immediately following paragraph, Superior hereby reserves and grants to Ardal a
NCGORR of one-half of one percent (0.5%) of all Petroleum Substances within,
upon or under any lands within the Scotian Shelf, based upon the full
(100%) interests held by Superior, its partners and its Affiliates, from
all such lands which from time to time become owned by Superior or its
Affiliates, in part or in whole by means of any interest whatsoever.  Subject to the exception set forth in the
immediately following paragraph, the said NCGORR shall be an interest in all
such lands held, earned, purchased or otherwise acquired by Superior and its
Affiliates.

Superior
has represented that it does not currently have any interests in lands within
the Scotian Shelf.  Based upon that
representation the parties have agreed that the NCGORR shall not apply to the
lands subject to a currently existing Exploration Licence, Production Licence,
Significant Discovery Licence or other crown lease, such that in essence the
NCGORR applies solely to any unleased Lands; provided, however, that if any
currently existing Exploration Licence, Significant Discovery Licence,
Production Licence or other crown lease shall hereafter terminate, lapse,
expire or otherwise be at an end, without being renewed, converted or otherwise
maintained, the NCGORR shall thereafter apply to the lands formerly subject
thereto.  Notwithstanding the foregoing,
Superior acknowledges that it intends to acquire the interests currently held
by Richland Oil Company under Exploration Licences EL 2392, El 2391, EL 2388,
and EL 2375.  If Superior or any of its
Affiliates are successful in acquiring interests in these Exploration Licences
then the NCGORR shall apply to all of the lands included in the said four
Exploration Licences which are acquired.

6.             RETURN OF ARDAL INFORMATION

Notwithstanding
the provisions of Clause 3 hereof, if Superior or an Affiliate has not
acquired any interests in any lands within the Scotian Shelf prior to
September 1, 2010, Superior shall immediately thereafter return to Ardal
the Ardal Information, and return or destroy all subsequently developed
information and interpretations of the Ardal information.

7.             CONFIDENTIALITY AND USE OF INFORMATION

Except
for that portion of the Ardal Information which was previously published by
other persons without being in breach of any confidentiality or non-disclosure
obligations to any party, Superior agrees that it shall keep the Ardal
Information strictly secret and confidential at all times and it shall not
reveal the Ardal Information except to persons previously authorized in writing
by Ardal to receive such information, or to persons from whom Superior has
first obtained commitments of confidentiality, non-disclosure and
non-competition satisfactory to Ardal. 
Superior shall be responsible for any unauthorized disclosure or use of
the Ardal Information by itself or any person obtaining the Ardal Information
through it.  In the event of disclosure
to an Affiliate, such disclosure shall not be made unless and until such
Affiliate has executed an agreement with Ardal in form and content satisfactory
to Ardal and containing essentially the same terms and conditions as provided
for in this Agreement.

The terms of this
Agreement shall be kept confidential at all times, and shall not be disclosed
or divulged to any third party or parties without the express prior written
permission of Ardal, which permission may be arbitrarily withheld.  If Ardal or Superior are required by law to
make a disclosure, the party required to make such disclosure (“Disclosing
Party”) shall provide the other party with written notice thereof so that
the other party may seek a protective order or other appropriate remedy or
waive compliance by the Disclosing Party with respect to this

 

 

clause.  If any court or administrative body requires
and is legally entitled to such disclosure, then the Disclosing Party shall
furnish only that minimum information which is legally required and shall
exercise its reasonable efforts to obtain reasonable assurance that confidential
treatment will be accorded to such information.

8.             INTEREST
IN LAND

The
NCGORR granted to Ardal pursuant to this Agreement shall be an interest in
land, and shall be subject to all the provisions of this Agreement, including
the provisions of the Overriding Royalty Procedure attached hereto as
Schedule ”B”.

9.             CONFLICT

In
the event of a conflict between the provisions of this Agreement and the
provisions of any Schedule hereof, the provisions of this Agreement shall
prevail.

10.          ARBITRATION

If
there is a dispute between the parties with respect to the terms and conditions
of this Agreement, which cannot be resolved by agreement between the parties,
then a party may, by notice to the other party, cause the matter to be referred
to arbitration under the Arbitration Act (Alberta), as amended from time to
time.  The conduct of such arbitration
shall be subject to and governed by all the provisions of the said Act but
shall in any event permit a right of examination for discovery provided that
the period during which such right may be exercised shall not exceed thirty
days.

11.          JURISDICTION

This
Agreement and the relationship of the parties shall for all purposes be
construed and interpreted in accordance with the laws of the Province of
Alberta.  The Parties attorn to the
jurisdiction of the courts of the Province of Alberta and all courts of appeal
therefrom.

12.          NO WARRANTY

Ardal
does not warrant or guarantee the Ardal Information as complete or
accurate.  Superior acknowledges that it
has inspected and reviewed the Ardal Information and it accepts the Ardal
Information on an “as-is” basis without conditions of any kind.  Superior further agrees that Ardal shall not
be liable in any manner for any representation or warranty of any kind whether
arising by operation of law or otherwise including without limitation any
warranty of merchantability, quality, or fitness for a particular purpose, or
that the Ardal Information will be error free.

13.          NOTICES

All
notices given hereunder shall be in writing to the addresses set forth below
(or to such other address as a party shall have notified the other) and
shall be deemed received as follows:

(a)           if delivered by hand, on the first
business day following the date of delivery,

(b)                                 if
delivered by written facsimile telecommunication on the first business day
following the date of delivery;

(c)           if sent by mail, on the fourth
business day following the date of posting,

(d)           if delivered in any other manner, on
the date of actual receipt by the addressee:

 

 

(i)            if
to Ardal, at:

Geophysical Service Incorporated

206, 525 — 11th Avenue S.W.

Calgary, Alberta T2R 0C9.

Attention:  President

Phone:    (403) 215-2720 

Fax:         (403) 215-2724

(ii)           if to the Licensee, at:

Canadian Superior Energy Inc.

Suite 3300, 400 — 3rd Avenue S.W.

Calgary, Alberta,

Attention:  Manager

Phone:    (403) 294-1411

Fax:         (403) 266-2374.

14.          MISCELLANEOUS

(a)                                  Time
shall be of the essence hereof.

(b)                                 No
amendment or variation of this Agreement or of the Schedules hereof shall be
binding until and unless it is expressed in writing executed by the parties.

(c)                                  This
Agreement shall enure to the benefit of and be binding upon the parties hereto
and their respective successors and assigns.

(d)                                 If
any term, covenant or condition of this Agreement or the application thereof to
any person or circumstance shall to any extent be invalid or unenforceable, the
remainder of this Agreement, or the application of such term, covenant or
condition to the persons or circumstances other than those to which it is held
invalid or unenforceable, shall not be affected thereby and such term, covenant
or condition of this Agreement shall be valid and enforced to the fullest
extent permitted by law.

(e)                                  Paragraph
headings are inserted for convenience of reference only and shall not be used
in any way in construing or interpreting any provision of this Agreement.

(f)                                    Whenever
the singular or masculine or neuter is used in this Agreement the same shall be
construed as meaning the plural, feminine or body politic or corporate, and
vice versa, as the context requires.

(g)                                 The
parties acknowledge that any default or forfeiture provisions contained in this
Agreement are reasonable and equitable in view of the risks inherent in the oil
and gas industry, and each party waives any and all rights which it may have at
law, in equity or by governmental regulation against default or forfeiture if
such provisions are invoked.

(h)                                 No
failure by Ardal in exercising any right, power or privilege of this Agreement
shall operate as a waiver thereof, nor shall any single-or partial exercise
thereof preclude any other or future exercise of any right (equitable or
otherwise), power or privilege hereunder.

(i)                                     This
Agreement comprises the entire agreement between the parties, and as such it
supersedes and replaces all other agreements, documents, writings and verbal
understandings between the parties with respect to the subject matter hereof.

 

 

IN
WITNESS WHEREOF the parties have executed these presents.

	
  ARDAL PETROLEUM INC.

  	
   

  
	
   

  	
   

  
	
  Per:

  	
  /s/ [illegible]

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  CANADIAN
  SUPERIOR ENERGY INC.

  	
   

  
	
   

  	
   

  
	
  Per:

  	
  /s/ Paul Moller

  	
   

  	
   

  
	
   

  	
  General Manager

  	
   

  	
   

  

 

 

This is
Schedule ”A” attached to and forming a part of the Purchase of Exploration
Prospects and Participation Agreement dated September 21, 2000 between
Ardal Petroleum Inc. and Canadian Superior Energy Inc.

ABENAKI REEF

Located between the
following coordinates:

	
  NW corner:

  	
  .61° 0’ W Longitude

  	
  440 20’ N Latitude

  
	
   

  	
   

  	
   

  
	
  NE corner:

  	
  59° 40’ W Longitude

  	
  44° 20’ N Latitude

  
	
   

  	
   

  	
   

  
	
  SE corner:

  	
  59° 40’ W Longitude

  	
  44° 5’ N Latitude

  
	
   

  	
   

  	
   

  
	
  SW corner:

  	
  61° 0’ W Longitude

  	
  43° 50’ N Latitude

  

 

 

This is
Schedule ”B” attached to and forming part of the Purchase of Exploration
Prospects and Participation Agreement dated September 21, 2000 between
Ardal Petroleum Inc. and Canadian Superior Energy Inc.

GROSS
OVERRIDING ROYALTY PROCEDURE

1.00         DEFINITIONS AND INTERPRETATION

1.01         Definitions

In this Gross
Overriding Royalty Procedure:

(a)           “Agreement” means the Head Agreement
and the Schedules attached to it.

(b)           “Effective Date” means
September 21, 2000.

(c)           “Facility Fees” means, as applicable:

1.                                       for
Facility Usage of facility capacity owned by third parties (other than
Affiliates of the Royalty Payor), all costs and expenses paid by the Royalty
Payor for that Facility Usage; and

2.                                       for
Facility Usage of facility capacity owned by the Royalty Payor (or an Affiliate
of the Royalty Payor), an expense equal to the lowest fee charged or chargeable
to any third party for the same or similar use as the Facility Usage, provided
that any dispute respecting the Facility Usage fee shall be resolved under
Clause 7.01.

(d)                                 “Facility
Usage” means the Royalty Payor’s use of facilities downstream of the Royalty
Delivery Point to make merchantable and to deliver to market Petroleum
Substances produced from a Royalty Well, including, as applicable, the
compression, treatment, processing, and transportation of those Petroleum
Substances, but excluding any basis adjustments made in the determination of
the Market Price of natural gas.

(e)                                  “Head
Agreement” means the Purchase of Exploration Prospects and Participation
Agreement to which this Gross Overriding Royalty “Procedure is attached, but
does not include the Schedules attached thereto.

(f)                                    “Market
Price” means at any time the greater of:

1.                                                                                       the
price at which the Royalty Payor sells its share of Petroleum Substances
pursuant to any arrangement made at arm’s length between Royalty Payor and a
third party provided such price is not unreasonable having regard to market
conditions applicable to similar production in aim’s length transactions at the
time of such disposition, or if such price is unreasonable or is not made at
arm’s length, then

2.                                                                                       the
price at which Petroleum Substances would reasonably be sold in an arm’s length
transaction at the time of such disposition taking into account all relevant
factors including, without restricting the generality thereof, such factors as
the volume of the Royalty Payor’s production, the kind and quality of Petroleum
Substances to be sold, the effective date of the sale, the term of the sale
agreement, the point of sale, and.  the
type of transportation service available for delivery of the Petroleum
Substances to be sold, which price shall not be less than any minimum amount
accepted from time to time by any governmental

 

body collecting royalties or taxes on production or
sales of production from the same or adjacent lands.

(g)                                 “Gross
Overriding Royalty” means that interest in a portion of the Petroleum.  Substances within, upon, under or attributed
to the Royalty Lands that is reserved by or granted to the Royalty Owner
pursuant to the Head Agreement, as more particularly outlined in
Article 2.00.

(h)                                 “Gross
Overriding Royalty Procedure” means this Schedule.

(i)                                     “Party”
means a person, firm, partnership, corporation, trust or other body politic or
corporate which is bound by this Gross Overriding Royalty Procedure.

(j)                                     “Royalty
Delivery Point” means the first onshore mainland point at which the Petroleum Substances
are or can be measured or allocated after, as applicable: (i) any
treatment of crude oil for the separation, removal and disposal of basic
sediment and water; (ii) any extraction of liquid hydrocarbons from
natural gas and any separation, removal and disposal of basic sediment and
water from those liquid hydrocarbons; and (iii) any dehydration of natural
gas.

(k)                                  “Royalty
Determination Point” means the wellhead or the first point downstream
thereafter at which the Petroleum Substances are or can be measured or
allocated.

(l)                                     “Royalty
Lands” means the aerial, stratigraphic and substance rights made subject to the
Gross Overriding Royalty in the manner outlined in the Head Agreement and so
much of those rights as remain subject to the Agreement and the Title
Documents.

(m)                               “Royalty
Owner” means the party identified in the Head Agreement to receive the Gross
Overriding Royalty.

(n)                                 “Royalty
Payor” means the party identified in the Head Agreement to pay the Gross
Overriding Royalty.

(o)                                 “Royalty
Well” means any well from which production is obtained from the Royalty Lands
or through which production may be allocated to the Royalty Owner or the
Royalty Lands pursuant to a pooling, unit or other arrangement.

(p)                                 “Title
Documents” means the documents of title relating to the Royalty Lands and all
renewals, extensions, continuations or documents of title issued in
substitution or in replacement therefor or by selection therefrom.

1.02                           Incorporation
of Provisions From CAPL 1988 Model Frontier Joint Operating Procedure

The following
provisions of the standard form 1988 CAPL Model Frontier Joint Operating
Procedure are incorporated herein by reference, as may be modified below:

1.01                           “Affiliate”

“Petroleum
Substances”

“the Regulations”

1.03                           References

1.04                           Headings

1.05                           Singular/Plural

1.06                           
Reference To Entities

1.07                           Derivatives

1.08                           Time

1.09                            Use of
Canadian Funds

1.11                           References
To Days

 

 

1.12                           Conflicts

6.02                           Operations
Conducted In Proper Manner

6.03                           Books
and Records

6.04                           Protection
from Liens

6.05                           Non-Operator’s
Rights of Access

6.06                           Maintenance
Of Documents Of Title

6.16                           Operator
To Hold Joint Property In Trust

17.01                     Waiver Must
Be In Writing

18.00                     Notices (The
Parties’ Addresses.  For Service will be
as set forth in the Head Agreement)

20.00                     Disposition
Of Interests (with election 20.02 B) 23.01 Time Of Essence

23.02                     No Amendment
Except In Writing 23.03 Enurement

23.05                     Supersedes
Earlier Agreements

23.06                     Perpetuities

23.07                     Applicable
Laws

23.08                     Use Of Names

23.09                     Further
Assurances

23.10       Waiver Of Relief

In those incorporated provisions, “Operating Procedure”
will be read as “Gross Overriding Royalty Procedure”, “Operator” will be read
as “Royalty Payor”, “Non-Operator” will be read as “Royalty Owner”, “Working
Interests” will be read as “Interests”, “Agreement Lands” will be read as “Royalty
Lands”, “joint operations” will be read as “operations”, and “title documents
will be read as “Title Documents”. 
References to “Authority For Expenditure”, “for the Joint Account” and “production
facility” will be deleted.  Nothing in
any of those incorporated provisions will require the Royalty Owner to assume
any cost, risk or expense associated with an operation conducted hereunder
unless otherwise provided herein or in the Head Agreement.

1.03         Multiple Royalty Payor Parties

If the Royalty Payor subsequently disposes of a
portion of its interest hereunder, or contracts with a third party to share the
responsibility to pay the Gross Overriding Royalty on some or all of the
Royalty Lands, the Royalty Payor shall remain responsible for the payment of
the entire Gross Overriding Royalty until such third party has been novated
into this Agreement or has entered into a separate agreement with the Royalty
Owner covering the portion of responsibility, whereupon the Royalty Owner’s
responsibility shall be proportionately reduced in respect of that portion of
the Royalty Lands.

2.00         GROSS OVERRIDING ROYALTY

2.01         Quantification Of Gross Overriding
Royalty

The Gross Overriding Royalty is created effective as
of the date and in the manner provided in the Head Agreement and this Gross
Overriding Royalty Procedure.  Subject to
the other provisions of this Article, including modified calculation under
Subclause 2.02 for production of Petroleum Substances allocated to the
Royalty Lands, the Gross Overriding Royalty shall be [*]
of all Petroleum Substances within, upon, under, or allocated to the Royalty
Lands (based on [*] working interest). 
The amount to be paid or delivered to the Royalty Owner from time to
time shall be determined on a well by well basis at the Royalty Determination
Point as [*] of the gross monthly production of crude oil, natural gas,
hydrocarbon liquids, and all other commercial substances produced from each
Royalty Well or otherwise allocated to the Royalty Lands.

Notwithstanding the
calculation at the Royalty Determination Point, the Gross Overriding Royalty
which shall be delivered to the Royalty Owner at the Royalty Delivery Point
will not include Petroleum Substances that the Royalty Payor reasonably uses or
unavoidably loses in the Royalty Payor’s drilling and production operations for
the Royalty Lands.  Those drilling and
production operations include the proportionate use of Petroleum Substances in
offshore treatment facilities such as batteries, treaters,

 

compressors, separators, and similar equipment serving
Royalty Wells, but-do not include the use of Petroleum Substances for any
enhanced recovery operations.

2.02         Effect Of Pooling On Calculation

The Royalty Payor may pool the Petroleum Substances in
a zone underlying any portion of the Royalty Lands provided that the pooling
allocates production therefrom to the applicable Royalty Lands in no less
proportion than the proportion that the surface area of the Royalty Lands
placed in the pooling bears to the total surface area of the pooling.

The Royalty Payor shall promptly dive: notice to the
Royalty Owner describing the pooling and the extent to which the Royalty Lands
are affected.  Upon such pooling,
Clause 2.01 will be deemed to be amended to calculate the volume of the
Gross Overriding Royalty by applying the percentages set forth in that
Clause to the quantity of Petroleum Substances thereby allocated to the
affected Royalty Lands.

2.03         Royalty Owner’s Rights To Take Gross
Overriding Royalty In Kind

(a)                                  Subject
to the provisions of this Clause, the Royalty Payor is appointed as the agent
of the Royalty Owner for the handling and disposition of the Gross Overriding
Royalty share of Petroleum Substances. 
All acts of the Royalty Payor under this Clause in the handling and
disposition of those Petroleum Substances and the receipt of proceeds of sale
therefrom shall be as trustee for the Royalty Owner.

(b)                                 The
Royalty Owner may, on a minimum of 60 days’ notice to the Royalty Payor, revoke
the agency established in Subclause 2.03(a) and elect to take delivery and
separately dispose of the Petroleum Substances comprising the Gross Overriding
Royalty at its choice of either the Royalty Determination Point or the Royalty
Delivery Point.  This right may be
exercised separately for each type of Petroleum Substance, effective at the
first day of the calendar month next following that minimum 60 day period.  The Royalty Owner will supply the Royalty
Payor with such information regarding the Royalty Owner’s arrangements for
disposition of those Petroleum Substances as the Royalty Payor may reasonably
require to coordinate custody transfer and shipping arrangements for those
Petroleum Substances.  Failure to provide
the Royalty Payor with that information will be deemed to be a failure by the
Royalty Owner to take those Petroleum Substances in kind.

(c)                                  If
the Royalty Owner takes in kind its Gross Overriding Royalty share of crude oil
or other liquid products, the Royalty Payor shall, at the Royalty Payor’s cost,
remove basic sediment and water from those Petroleum Substances in accordance
with good oilfield practice so that relevant pipeline specifications can be
met.  The Royalty Payor shall provide to
the Royalty Owner, at the Royalty Payor’s cost, production tankage capacity for
an accumulation of the Gross Overriding Royalty share of those Petroleum
Substances consistent with the Royalty Payor’s shipping schedule for its
own share of those Petroleum Substances. 
Subject to Subclause 2.04(c), the Royalty Payor shall deliver the
Gross Overriding Royalty share of those Petroleum Substances to the Royalty
Owner or the Royalty Owner’s nominee, at the Royalty Delivery Point, in
accordance with the usual and customary pipeline and shipping practice, free
and clear of all charges.  If the Royalty
Owner takes its Gross Overriding Royalty share of natural gas in kind, the
Royalty Payor shall deliver that gas to the Royalty Owner, or the Royalty Owner’s
nominee, at the Royalty Delivery Point for the relevant well at the Royalty
Payor’s cost.

(d)                                 Notwithstanding
any other, provision of this Article, if the Royalty Payor is required to incur
costs to enrich the: Gross Overriding Royalty share of Petroleum Substances to
increase the heating value or to facilitate transportation or Marketing of
those Petroleum Substances, the Royalty Owner shall reimburse its proportionate
share of those costs, with the intention that neither the Royalty Payor nor the
Royalty Owner suffer a loss as a result of that enrichment.  Enrichment operations include, without
limitation, condensate blending in the case of heavy oil and enrichment by
propane or butane in the case of gas with low heating value.

 

 

(e)                                  Except
to the extent otherwise agreed by the Royalty Payor and the Royalty Owner,
insofar as the Royalty Payor takes possession of Petroleum Substances
comprising the Gross Overriding Royalty as agent of the Royalty Owner, the
Royalty Payor will dispose of those Petroleum Substances by:

1.                                                                                       selling
those Petroleum Substances at Market Price and accounting to the Royalty Owner
for the proceeds of the sale; or

2.                                                                                       purchasing
those Petroleum Substances for the Royalty Payor’s own account (or the account
of an Affiliate) at Market Price and accounting to the Royalty Owner
therefor.

(f)                                    Insofar
as the Royalty Owner has elected to revoke the agency established by this
Subclause 2.03, the Royalty Owner may re-establish that agency on a
minimum of 60 days’ notice to the Royalty Payor, effective as of the first day
of the calendar month next following that minimum 60 day period.  This right may be exercised separately for
each type of Petroleum Substance.

2.04         Royalty Payor’s Allowed Deductions If
Gross Overriding Royalty Not Taken In Kind

(a)                                  To
the extent that the Royalty Payor disposes of the Petroleum Substances
comprising the Gross Overriding Royalty on behalf of the Royalty Owner, the
Royalty Owner’s share of those Petroleum Substances shall be free and clear of
any deductions for costs and expenses incurred by the Royalty Payor to and
including the Royalty Delivery Point. 
Subject to the limits prescribed below, the Royalty Payor may deduct,
and the Royalty Owner will be responsible, on a well by well basis, for the
following costs and expenses incurred after the Royalty.  Delivery Point with respect to the Royalty
Owner’s share of those Petroleum Substances:

1.                                       for
crude oil and other liquid products, any associated Facility Fees and any
transportation costs to transport those Petroleum Substances from the Royalty
Delivery Point to the point of sale; and

2.                                       for
all other Petroleum Substances, any associated Facility Fees.

A cost or expense attributable to more than one
Petroleum Substance being sold by the Royalty Payor may only be deducted
once.  The total of all deductions for
each type of Petroleum Substance as set forth in this
Subclause 2.04(a) shall not exceed 25% of the Market Price for that
type of Petroleum Substance.

(b)                                 Notwithstanding
any other provision of this Article, if the Royalty Payor is required to incur
costs to enrich the Gross Overriding Royalty share of Petroleum Substances to
increase the heating value or to facilitate transportation or marketing of
those Petroleum Substances, those costs will be deductible by the Royalty Payor
against the gross proceeds of sale applicable to those enriched Petroleum
Substances, with the intention that neither the Royalty Payor nor the Royalty
Owner suffer a loss as a result of that enrichment.

(c)                                  The
location of the Royalty Determination Point, the Royalty Delivery Point, and
the Royalty Payor’s right to make the deductions set forth in this
Clause pertains to the costs and expenses that would otherwise be incurred
by the Royalty Payor and the Royalty Owner to bring those Petroleum Substances
to the point of sale if the Royalty Owner were taking those Petroleum
Substances in kind.  The allowable
deductions from the proceeds of sale of the Royalty Owner’s Gross Overriding
Royalty share of Petroleum Substances are expressed as, cash obligations for
convenience of record keeping and audit, and are not to be construed as
altering the nature of the Gross Overriding Royalty as an interest in land.

 

 

2.05                           Royalty
Payor To Account To Royalty Owner Monthly

If the Royalty Payor receives funds on account of or
as the proceeds of the sale of the production of Petroleum Substances
comprising the Gross Overriding Royalty, the Royalty Payor shall receive the
Royalty Owner’s share of those funds as trustee for the Royalty Owner.  The Royalty Payor must remit to the Royalty
Owner all funds accruing to the Royalty Owner on account of the Gross
Overriding Royalty on or before the 25th day of the calendar month next
following the calendar month in which those funds were received by the Royalty
Payor, provided that for the purpose of the timing of receipt of proceeds in
this Clause “received” will be read as “normally received” if the
purchaser of those Petroleum Substances fails to pay the Royalty Payor for that
production.  The Royalty Payor must
provide the Royalty Owner with a statement in written or electronic format
showing in reasonable detail the manner in which the Royalty Payor calculated
that payment, including the unit sale price for those Petroleum Substances and,
if requested by the Royalty Owner, a copy of all reports the Royalty Payor is
required to submit under the Regulations for the production of those Petroleum
Substances.

2.06         Royalty Owner’s Lien

As of the effective date
that the Gross Overriding Royalty is created, the Royalty Owner will have a
first and prior lien on the Royalty Payor’s interest in the Royalty Lands, the
Petroleum Substances within, upon or under the Royalty Lands, or produced
therefrom, and the wells and other equipment thereon to secure the Gross
Overriding Royalty.  The Gross Overriding
Royalty and the lien are interests in land that attach to the Title Documents.

2.07         Royalty Owner’s Rights Upon Surrender

If the Royalty Payor proposes to surrender all or a
portion of the Royalty Lands to the grantor of the Title Documents, the
provisions of Article 11.00 of the standard form.  CAPL 1988 Model Frontier Joint Operating
Agreement shall apply between the Royalty, Payor and the Royalty Owner, except
that the notice and reply periods in Clause 1.1.01 and 11.02 are reduced
from 60 and 30 days to 20 and 10 days respectively.

2.08         Audits Of Gross Overriding Royalty

(a)                                  The
Royalty Payor shall; with respect to the production, disposition or sale of the
Gross Overriding Royalty, keep and maintain in Canada true and correct books,
records and accounts showing credits and charges with respect thereto and
evidence of all payment of all applicable claims and accounts.

(b)                                 The
Royalty Owner may, upon reasonable notice to the Royalty Payor and at the
Royalty Owner’s own expense, audit the books, records and accounts of the
Royalty Payor with respect to the production, disposition or sale of the Gross
Overriding Royalty within 24 months next following the end of the applicable
calendar year.  The Royalty Owner will
conduct any such audit in accordance with PASC Joint Venture Audit Protocol
Bulletin No. 6 (or any replacement therefor).

(c)                                  Any
statement issued by the Royalty Payor to the Royalty Owner respecting the
calculation of the Gross Overriding Royalty will be presumed to be true and
correct 26 months following the end of the calendar year in which that
statement was issued, unless the Royalty Owner takes written exception thereto
and requests an adjustment pursuant to this Clause within that 26 month
period.  If a Party discovers during that
period that there was an error in the calculation of the Gross Overriding
Royalty and can demonstrate that the error applied both to that period and
prior period, the Royalty Payor shall make the required adjustment retroactively
to either the inception of that error or such other time as the Parties may
agree, provided that any dispute respecting the proposed retroactive adjustment
shall be resolved pursuant to Clause 7.01. 
Except to the extent required to confirm the adjustment proposed by the
Royalty Payor, the retroactive adjustment

 

 

contemplated by the previous sentence shall not extend
the Royalty, Owner’s audit rights beyond the 24 month limitation provided for
in Subclause 2.08(a).

3.00                           WELL
INFORMATION TO ROYALTY OWNER

3.01         Royalty Owner’s Notification

The Royalty Payor shall supply to the Royalty Owner
notice of its intention to drill each Royalty Well on the Royalty Lands prior
to the spudding of that well.

4.00         LIABILITY AND INDEMNITY

4.01         Royalty Payor’s Responsibility

The Royalty Payor
will:

(a)                                  be
liable to the Royalty Owner for all losses, costs, damages and expenses
whatsoever (whether contractual or otherwise) that the Royalty Owner may
suffer, sustain, pay or incur; and, in addition

(b)                                 indemnify
and hold harmless the Royalty Owner and its directors, officers, agents and
employees against all actions, causes of action, proceedings, claims, demands,
losses, costs, damages and expenses whatsoever that may be brought against or
suffered by the Royalty Owner, its directors, officers, agents and employees or
that they may sustain, pay or incur;

insofar as they are a direct result of: (i) any
act or omission (whether negligent or otherwise) of the Royalty Payor with
respect to operations or activities conducted by it or on behalf or it
hereunder; (ii) a breach of a provision herein by the Royalty Payor; or
(iii) the willful or wanton misconduct of the Royalty Payor, its
employees, agents or contractors. 
However, this obligation shall not apply to the extent that the
particular act or omission was done or omitted to be done in accordance with
the.  Royalty Owner’s written
instructions or written concurrence. 
Costs described in this Clause will include reasonable legal costs
on a solicitor-client basis.

4.02         Royalty Owner’s Responsibility

The provisions of the preceding Clause shall
apply mutatis mutandis to the Royalty Owner’s operations, activities and
obligations with respect to the Royalty Lands.

5.00         ASSIGNMENT

5.01         Incorporation of Assignment Procedure

The 1993 CAPL Assignment Procedure is incorporated by
reference into the Agreement, and will be deemed to apply as if it had been
included as a Schedule to the Agreement. 
Article 20.00 (election 20.02B) of the standard form 1988 CAPL
Model Frontier Joint Operating Procedure shall apply mutatis mutandis to any
disposition of Royalty Lands by either the Royalty Owner or the Royalty Payor.

6.00         DEFAULT

6.01         Royalty Owner’s Default Remedies

If the Royalty Payor
fails to pay the Gross Overriding Royalty or any other amount required to be
paid to the Royalty Owner by the Royalty Payor hereunder, Subclauses 8.04B, C,
and D of the standard form 1988 CAPL Model Frontier Joint Operating Procedure
will apply mutatis mutandis to that default as if the Royalty Owner is the Operator
and the Royalty Payor the defaulting Party thereunder, except that the
reference in Paragraph 8.04B c) of that document to “Subclause A of
this Clause 8.04” shall be amended to

 

read “Clause 2.06”.  The rights ranted to, the Royalty Owner in
this Clause shall be in addition to, and not in substitution for any other
right or remedy that the Royalty Owner may have under this Agreement.

7.00         DISPUTE RESOLUTION

7.01                           Disputes
Initially Referred to Mediation

The Parties will attempt
to resolve any dispute arising under this Agreement through consultation and
negotiation in good faith.  If those
attempts fail, the Parties will then attempt to resolve that dispute through
mediation, with costs of the mediation being shared equally by the Parties,
however any Party may terminate the mediation at any time upon reasonable
notice to the other Party.  Upon
termination of the mediation the dispute may be referred to Arbitration under
the Arbitration Act of the Province of Alberta, as amended from time to time,
or a Party may resort to judicial proceedings to resolve the dispute.

 

 

This is
Schedule “C” attached to and forming part of the Purchase of Exploration
Prospects and Participation Agreement dated September 21, 2000 between
Ardal Petroleum Inc. and Canadian Superior Energy Inc.

ARDAL INFORMATION

Data on the Scotian Shelf
in general

Technical Summaries of
Scotian Shelf, Significant and Commercial Discoveries

Map showing the
Bathymetry of the Scotian Shelf

Well Location Map

Regional Geology and
Geophysics Information

Gravity and Magnetic Maps

Bedrock Geology Map

Various Stratigraphic
Maps with picks

Various Pa
lynostratigraphic Cross-Sections

Abenaki Formation Isopach
Map

Various Interpreted
Cross-Sections

 

Specific Data on the
Abenaki Reef Play

Interpretive Seismic Maps
derived from remote sensing Data

Structure Map of the
Abenaki Reef Complex

Isochron Maps of Abenaki
Reef Complex

Stratigraphic Column
Description

Interpretation of remote sensing data

 

 

Schedule “D”

This is Schedule “D” forming part of the Amended and Restated
Farmout

and Option Agreement dated December 30, 2005 between Canadian Superior
Energy Inc.

and Challenger Energy Corp.

Amended and Restated
Block 5(c) Participation

 

 

AMENDED
AND RESTATED PARTICIPATION AGREEMENT

This Agreement dated this
30
day of December,
2005

Between:

CHALLENGER ENERGY CORP.,
a corporation incorporated under the laws of Alberta, Canada (hereinafter “CNE”)

-and-

CANADIAN SUPERIOR ENERGY INC.,
a corporation incorporated under the laws of Alberta, Canada and having an
office in the City of Calgary (hereinafter “Canadian Superior”)

WHEREAS each Party recognizes
the abilities and expertise that the other Party possesses with respect to the
exploration and development of oil and gas properties;

AND WHEREAS each Party wishes to
secure the benefits of the abilities and expertise offered by the other Party
and to apply such benefits collectively to the Project;

AND WHEREAS CNE has agreed to
participate with Canadian Superior in the Mariner Test Well as defined in a
Farmout and Option Agreement between the Parties and dated November 17,
2004 as amended and restated as of the date hereof (“Mariner Farmout”);

AND WHEREAS in furtherance of
the foregoing mutually beneficial opportunities, Canadian Superior has entered
into a Production Sharing Contract with respect to the Lands;

AND WHEREAS, in consideration of
the terms and provisions of the Rights Issuance the Parties have agreed to
amend, restate and extend the provisions of the Participation Agreement dated November 17,
2004 made between them in respect of the joint participation by them in the
acquisition, exploration and development of the Lands (the “Prior Agreement”);

AND WHEREAS the Parties wish to
confirm the terms of the Parties’ agreement and more formally provide for the
respective rights, obligations and benefits of each of them in connection with
the acquisition, exploration and development of the Lands;

NOW THEREFORE, in consideration
of the premises and the mutual covenants set forth herein, the Parties hereto
covenant and agree as follows:

ARTICLE 1

INTERPRETATION

1.1          Definitions

Capitalized
words and phrases used in this Agreement, including in the recitals hereto,
have the meaning set forth in this Section 1.1, namely:

(a)                                  “Affiliate” means a subsidiary company, a parent company, or
a sister company of or to a Party hereto. 
For the purposes of this definition:

(i)                                                                                     a
parent company is a company that controls or ultimately controls a Party
hereto;

(ii)                                                                                  a
sister company is a company that is controlled by or ultimately controlled by
the same parent company as a Party hereto;

 

 

(iii)                                                                               a
subsidiary company is a company controlled by a Party hereto, a parent company
or a sister company; and

(iv)                                                                              “control”
means that a company owns at least 50% of share capital (either directly or
through other companies which confers upon it a majority of the votes at the
shareholders’ meetings) of a company which is controlled or which has a
common majority shareholder.

(b)                                 “Agreement” means the main body of this agreement together
with all Schedules and attachments hereto, as amended from time to time;

(c)                                  “AMI Interests” means any right or interest in and/or to any
Petroleum Substances related to the Area of Mutual Interest;

(d)                                 “Area of Mutual Interest” means all lands within the area
designated as such on Schedule “C” attached hereto;

(e)                                  “Block 5(c)” means that area of land located offshore
Trinidad and designated as “Block 5(c) in the Competitive Bidding Order;

(f)                                    “Business Day” means any day other than a Saturday, Sunday
or statutory holiday in Calgary, Alberta, Canada;

(g)                                 “Commitment” has the meaning ascribed to it in
Section 3.1;

(h)                                 “Competitive Bidding Order” means the Petroleum Regulations
(Competitive Bidding) Order, 2003 made by the Minister of the Ministry;

(i)                                     “Effective Date” means the 17th day of November 2004;

(j)                                     “Existing Data Package” means the seismic data, well
information, reports, studies and other documentation made available to
Canadian Superior from the Ministry prior to submitting a bid on Block 5(c) at
the Competitive Bidding Order;

(k)                                  “Joint Operating Agreement” means the 2002 Model Form
International Operating Agreement distributed by the Association of
International Petroleum Negotiators (“AIPN”) along with the 2004 AIPN Model
Form International Accounting Procedure (“Accounting Procedure”), as amended,
copies of which are attached and marked as Schedule “B” hereto with
specific agreed upon elections indicated in the documents;

(l)                                     “Lands” means Block 5(c) and the right to produce Petroleum
Substances therefrom;

(m)                               “Ministry” means the Ministry of Energy and Energy
Industries of Trinidad;

(n)                                 “Operator” shall have the meaning ascribed to it in the
Joint Operating Agreement;

(o)                                 “Party” means a party bound by this Agreement;

(p)                                 “Person” means a natural person, corporation, company,
partnership, trust, unincorporated association, sole proprietorship, union,
government or governmental department, ministry, board, commission or agency;

(q)                                 “Petroleum Substances” means petroleum, natural gas, natural
gas liquids, condensate and every other mineral or substance, or any of them,
in which an interest in or right to explore for is granted or acquired under
the Title Documents;

 

 

(r)                                    “Project” means the joint acquisition, exploration and
development of Block 5(c);

(s)                                  “Production Sharing Contract” means that agreement between
the President of Trinidad, the Minister of the Ministry and Canadian Superior
for the Lands, a copy of which is attached as Schedule “A” hereto, all
schedules attached thereto and any agreement entered into between the
aforementioned parties concerning the Lands, and if applicable, any documents
replacing and/or amending the said agreement;

(t)                                    “Regulations” means all laws, statutes, regulations,
accords, instruments, agreements, orders or documents of a regulatory nature
issued, made or granted by a Regulatory Authority from time to time;

(u)                                 “Regulatory Authority” means a government, or a government
department, agency or other authority including courts, tribunals, boards or
panels having apparent or actual jurisdiction over the Parties, the Lands, the
Title Documents, and the Production Sharing Contract or otherwise in relation
to the subject matter hereof, including without limitation the Ministry;

(v)                                 “Rights Issuance” means the proposed issuance by CNE to
Canadian Superior (and, subsequently, to Canadian Superior’s
shareholders) (to occur immediately following the completion by CNE of a
registration statement with the Securities and Exchange Commission, but in any
event, no later than December 31, 2006) of the right to acquire
common shares in the share capital of CNE, either by way of right, warrant or
convertible preferred share, or such other matter of convertible security of
CNE as mutually agreed to between Canadian Superior and CNE, acting reasonably,
such rights to be distributed by Canadian Superior to its shareholders by way
of an in specie dividend and/or distribution, subject to requisite regulatory
approvals, as applicable, and subject to compliance with all requisite securities
laws;

(w)                               “Third Party” means a Person other than a Party;

(x)                                   “Title Documents” means any and all documents of title,
including but not limited to the Production Sharing Contract under and by
virtue of which the holder thereof is entitled to explore for, win, take,
remove, or sell Petroleum Substances produced from the Lands, and any and all
renewals, extensions or continuations thereof, or further documents of title
issued pursuant to, subsequent to, or in substitution therefore in whole or in part,
from time to time;

(y)                                 “Trinidad” means the Republic of Trinidad and Tobago;

(z)                                   “Working Interest” means with respect to each Party, the
following undivided interest of such Party in the rights and obligations
derived from the Production Sharing Contract and shall be:

	
  CNE

  	
   

  	
  25%

  
	
  Canadian
  Superior

  	
   

  	
  75%

  

 

(aa)                            “Work Programme” shall have the meaning ascribed to it in
the Production Sharing Contract;

1.2          Interpretation

In
this Agreement, unless the contrary intention appears from the context or
express provisions of this Agreement:

(a)                                  the
inclusion of headings and a table of contents are for convenience of reference
only and are not to be considered or taken into account in construing the
provisions of this Agreement or to in any way qualify, modify or explain the
effect of any such provisions;

(b)                                 references
to an Article, Section or Schedule are references to an Article,
Section or Schedule, as the case may be, in this Agreement;

 

 

(c)                                  words
importing the singular shall include the plural and vice versa and words
importing a particular gender shall include all genders;

(d)                                 with
the exception of the amount set out in clauses 4.1(a) and 4.1(b)(ii), all
monetary amounts are expressed in lawful currency of the Canada;

(e)                                  where
a period of time is specified, dated or calculated from a date or event, the
period shall be calculated excluding such date or the date on which such event
occurs, as the case may be;

(f)                                    time
shall be of the essence; and

(g)                                 where
a term is defined in this Agreement, a derivative of that term shall have a
corresponding meaning unless the context otherwise requires.

1.3          Business Day

If,
pursuant to this Agreement, a Notice must be given or an action taken within a
specified period or on or before a specified date and such period ends on, or
such date falls on, a day that is not a Business Day, such Notice may be given
or such action may be taken on the next succeeding Business Day.

1.4          Governing Law

Regardless
of where executed or delivered, this Agreement and the rights and obligations
of the Parties hereunder shall be governed by, and construed and interpreted in
accordance with the laws of Alberta, Canada.

1.5          Conflicts

If
there is a conflict or inconsistency between any provision of the main body of
this Agreement and any of the Schedules, the provision contained in the main
body of this Agreement shall govern and prevail to the extent of the conflict
or inconsistency.

1.6          Schedules

The
following Schedules are attached to and form part of this Agreement:

	
  Schedule “A”

  	
  Production Sharing Contract

  
	
  Schedule “B”

  	
  Joint Operating Agreement

  
	
  Schedule “C”

  	
  Area of Mutual Interest

  

ARTICLE 2

PARTICIPATION

2.1          Grant of Participation Rights

The
Parties acknowledge that CNE has agreed to participate with Canadian Superior
in certain operations described in the Mariner Farmout.  In consideration of entering into the Mariner
Farmout, the premises hereof and the payment of $1.00 by CNE to Canadian
Superior, the receipt of which is hereby acknowledged, Canadian Superior hereby
rants to CNE the participation rights described in Section 4 of this
Agreement.

2.2          Agreement
to Participate

CNE hereby acknowledges
that Canadian Superior has fulfilled the Commitment set out in clause 3.1
of the Prior Agreement and agrees to participate with Canadian Superior in the
acquisition, exploration and development of the Lands and the Project, in
accordance with the provisions hereof.

 

 

 

2.3                               Rights
Issuance

Canadian
Superior agrees that it shall cooperate fully with CNE in all matters relating
to the Rights Issuance and that it will take such steps as are required to give
effect to it in as timely a manner as possible.

2.4                               Interest
Held in Trust

(a)                                  Canadian
Superior agrees that Canadian Superior holds and stands possessed, and will
continue to hold and stand possessed of the interest of CNE in and to the
Production Sharing Contract, the Lands, and the Title Documents and Canadian
Superior shall hold such interests in trust for and on behalf of CNE.

(b)                                 Canadian
Superior covenants and agrees that it will not sell, assign, transfer, convey,
encumber or surrender the Production Sharing Contract, the Lands, and the Title
Documents insofar as same affects or relates to the interests held in trust
hereunder for CNE, except upon the written instructions of CNE.

ARTICLE 3

DELIVERY OF INFORMATION

3.1                               Delivery
of Existing Data Package to CNE

Provided
that CNE has complied with the provisions of clause 4.1(a) hereof:

(a)                                  As
soon as is reasonably practical following such compliance by CNE, Canadian
Superior shall, at Canadian Superior’s expense, deliver to CNE a copy of:
i) the Existing Data Package, ii) geological and geophysical mapping
of the Lands, iii) interpreted seismic sections covering the Land,
iv) a complete copy of the bid and any revisions of the bid submitted to
the Ministry on Block 5(c), and v) a copy of information, documents and
all other data generated by Canadian Superior respecting the Lands; and

(b)                                 Canadian
Superior shall deliver copies of all data and documents acquired or produced by
or on behalf of Canadian Superior in fulfilling the Commitment and copies of
all Regulatory fillings made in respect of same to CNE or the nominee of CNE
immediately upon Canadian Superior’s receipt of such data and documents.

ARTICLE 4

WORK PROGRAMME PARTICIPATION

4.1                               CNE
Initial Commitment

(a)                                  on
or before April 1, 2006 CNE shall pay to Canadian Superior the sum of Two
Million Five Hundred Thousand (US$2,500,000.00) Dollars US to be credited
to CNE’s one third share of the costs incurred to date by Canadian Superior in
respect of the Production Sharing Contract;

(b)                                 on
the earlier of;

(i)                                     April 30,
2006; or

(ii)                                  within
14 business days of CNE having successfully raised a minimum of Twelve Million
(US $12,000,000.00) Dollars US by way of the Rights Issuance

CNE shall pay to Canadian Superior the balance of
CNE’s one-third share of the costs incurred by Canadian Superior to that date
in respect of the Production Sharing Contract;

(c)                                  CNE
shall, not less than 10 business days prior to the scheduled spud date of the
first Exploration Well to be drilled pursuant to the Work Programme (as defined
in the Production Sharing Contract), pay to

 

 

Canadian Superior one third of the anticipated dry
hole costs of such first Exploration Well, provided that if drilling operations
are not commenced within 30 days of such payment, such monies shall be returned
to CNE forthwith.  For greater clarity,
the Parties acknowledge that in calculating such anticipated dry hole costs, no
amounts in respect of anticipated testing or completing costs of such well
shall be included; and

(d)                                 CNE
further commits to participate for one third of the balance of the costs
directly attributable to the Work Programme and the second and third
Exploration Wells drilled pursuant thereto.

(e)                                  During
the course of the Work Programme Canadian Superior shall consult on a regular
basis (no less often than monthly) with CNE concerning progress and fulfillment
of the Work Programme and Canadian Superior’s activities as Operator in respect
thereof.

4.2                               Default/Early
Termination

(a)                                  In
the event that CNE fails to pay when due the amounts required pursuant to
clause 4.2(c) above, this Agreement shall terminate without further
notice, and CNE shall have forfeited its right to participate in the Project or
to earn any interest hereunder.

(b)                                 In
all other respects, should CNE fail to pay within 30 days any other amounts
payable by it pursuant to this Article 4 during the Work Programme,.  Canadian Superior shall be entitled to give
notice of such default (the “Default Notice”) to CNE.  Should CNE fail to remedy such default within
30 days of the date the Default Notice is issued, the provisions of
Article 8 of the Joint Operating Agreement shall apply.

4.3                               Ongoing
Participation

In the event that CNE has complied with the provisions
of clause 4.1 hereof, upon completion of the Work Programme:

(a)                                  all
rights, duties, obligations, elections and privileges to which Canadian
Superior is entitled under the Production Sharing Contract shall be shared and
may be separately exercised by each Party as to their Working Interest;

(b)                                 the
Parties agree that Canadian Superior shall be Operator and shall represent CNE
under the Production Sharing Contract until CNE is formally recognized by the
Ministry; and all benefits and obligations arising from any and all operations
conducted by the Parties on or in respect of the Lands, including without
limitation all revenues from sales of Petroleum Substances produced therefrom
and all costs and expenses (including without limitation the Crown Royalty and
all applicable operating expenses) associated therewith, shall be shared
by the Parties on the basis of their Working Interest, and shall be governed by
and conducted in accordance with the Joint Operating Agreement.  Notwithstanding the generality of the
foregoing; to the extent that the parties are entitled to apply the Cost
Recovery provisions of Article 18 of the Production Sharing Contract to
the costs of the Project, such recovered costs shall be for the account of, and
be credited to, the parties in the same proportions that such costs were
originally borne by them.

ARTICLE 5

TITLE AND OPERATIONAL MATTERS

5.1                               Transfer
and Registration of Earned Interests

(a)                                  Canadian
Superior agrees to use its best efforts to transfer and convey to CNE the
interests CNE is entitled to hereunder and shall use documentation in form and
content acceptable to CNE to complete such task, and Canadian Superior shall
execute, deliver and register as required under the Regulations or otherwise by
a Regulatory Authority, all assignments, transfers and other documents as may
be necessary to fully and properly transfer and convey such interests to CNE,
when requested to do so in writing by CNE, the cost of which shall be borne
equally by the parties.

 

 

(b)                                 Provided
that CNE has earned its Working Interest, upon receipt of a Notice from CNE,
Canadian Superior agrees to use its best efforts to have CNE recognized as a
party to the Production Sharing Contract, and any costs relating thereto shall
be borne equally by the parties.

5.2                               Joint
Operating Agreement and Appointment of Operator

The Parties hereby appoint Canadian Superior as
Operator under and for the purposes of the Joint Operating Agreement.  Canadian Superior shall properly perform and
discharge its duties and obligations as Operator in accordance with the terms
of this Agreement, the Production Sharing Contract and good offshore oilfield
practices.  In addition to the
applicability of Article 8 of the Joint Operating Agreement pursuant to
clause 4.2(b) hereof, the following provisions of the Joint Operating
Agreement and the Accounting Procedure are hereby incorporated and shall be
applicable to Article 4 hereof, the Work Program and all costs incurred
and operations conducted pursuant thereto:

 

 

a)                                       Joint
Operating Agreement

	
  Article 1

  	
  Definitions (to the extent required for
  interpretation of the relevant provisions of the Joint Operating Agreement
  incorporated herein

  
	
   

  	
   

  
	
  Clause 4.4

  	
  Information Supplied by Operator

  
	
   

  	
   

  
	
  Clause 6.7

  	
  Authorization for Expenditure Procedure

  
	
   

  	
   

  
	
  Article 15

  	
  Venture information — Confidentiality — Intellectual
  Property

  
	
   

  	
   

  
	
  Article 16

  	
  Force Majeure

  

 

b)                                     Accounting
Procedure

All provisions

5.3                               Access
to Pipelines

In consideration of CNE paying to Canadian Superior
its proportionate share of all costs and expenses related thereto, Canadian
Superior shall provide to CNE access, on the same basis and terms as Canadian
Superior, to any pipelines as may be necessary to transport all Petroleum
Substances produced from the Lands to any applicable sales point(s) for such
Petroleum Substances.

5.4                               Marketing
of Petroleum Substances

Canadian Superior shall provide to CNE access, on the
same basis and terms as Canadian Superior, to any marketing arrangements for
Petroleum Substances produced from the Lands.

ARTICLE 6

ENCUMBRANCES

6.1                               No
Encumbrances

At all times while this Agreement remains in force,
neither Party shall do or cause to be done any act, or make or cause to be made
any act or omission, whereby the Title Documents or any of them become
encumbered in such a way as to adversely affect the Title Documents or any of
them or to make them or the Lands subject to termination or forfeiture in any
respect, except as may be expressly provided for in the Production Sharing
Contract.

 

 

ARTICLE 7

LIABILITY AND INDEMNITY

7.1                               Canadian
Superior’s Responsibility

Canadian Superior will:

(a)                                  be
liable to CNE for all losses, costs, damages and expenses whatsoever (whether
contractual or otherwise), excepting consequential damages, that CNE may
suffer, sustain, pay or incur; and, in addition

(b)                                 indemnify
and hold harmless CNE against all actions, causes of action, proceedings,
claims, demands, losses, costs, damages and expenses whatsoever that may be
brought against or suffered by CNE, or that it may sustain, pay or incur;

insofar as they are, in respect of operations or
activities conducted by Canadian Superior or on behalf of Canadian Superior
hereunder, a result of, the gross negligence or willful or wanton misconduct of
Canadian Superior, its employees, agents or contractors.  However, this obligation will not apply to the
extent that the particular act or omission was done or omitted to be done in
accordance with CNE’s instructions or concurrence.  Costs in this Article will include legal
costs on a solicitor-client basis.

7.2                               CNE’s
Responsibility

CNE will:

(a)                                  be
liable to Canadian Superior for all losses, costs, damages and expenses
whatsoever (whether contractual or otherwise), excepting consequential damages,
that Canadian Superior may suffer, sustain, pay or incur; and, in addition

(b)                                 indemnify
and hold harmless Canadian Superior and its directors, officers, agents,
consultants, and employees against all actions, causes of action, proceedings,
claims, demands, losses, costs, damages and expenses whatsoever that may be
brought against or suffered by Canadian Superior, its directors, officers,
agents, consultants, and employees or that they may sustain, pay or incur;

insofar as they are, in respect of operations or
activities conducted by CNE or on behalf of CNE hereunder, a result of the
gross negligence or willful or wanton misconduct of CNE, its employees, agents
or contractors.  However, this obligation
will not apply to the extent that the particular act or omission was done or
omitted to be done in accordance with Canadian Superior’s instructions or
concurrence.  Costs in this Article will
include legal costs on a solicitor-client basis.

 

 

ARTICLE 8

NOTICES

8.1                               Notice

All demands, notices or other communications (in each
case a “Notice”) to be given in connection with this Agreement shall be in
writing and shall be sufficiently given or made if:

(a)                                  delivered
to the intended recipient personally or by courier during normal business hours
on a Business Day at the intended recipient’s address as set forth below; or

(b)                                 sent
by facsimile transmission or sent to the intended recipient by other means of
recorded electronic communication:

	
  Canadian Superior Energy
  Inc.:

  	
  Suite 3300, 400 — 3rd Avenue SW Calgary,

  
	
   

  	
  Alberta T2P 4H2

  
	
  Attention:

  	
  President

  
	
  Fax No.:

  	
  (403) 216-2374

  
	
   

  	
   

  
	
  Challenger Energy Corp.

  	
  Suite 3300, 400 - 3rd Avenue SW Calgary,

  
	
   

  	
  Alberta T2P 4H2

  
	
  Attention:

  	
  President

  
	
  Fax No.:

  	
  (403) 216-2374

  

 

8.2                               Deemed
Delivery

Any Notice given or made in the manner set forth in
Section 8.1 shall be deemed to have been given or made and to have been
received on the day of its delivery or transmission, as the case may be, if
such day is a Business Day and such Notice is received prior to 2:00 p.m.
Calgary time, and, if not, on the first Business Day thereafter.

8.3                               Change
of Address

A Party may change its address or telecopier number by
Notice to the other Party given in accordance with Section 8.1.

ARTICLE 9

AREA OF MUTUAL INTEREST

9.1                               Creation
of Area of Mutual Interest

The Parties hereby establish the Area of Mutual
Interest.  Except in accordance with the
terms of this Agreement, a Party shall not acquire any rights, directly or
indirectly, in any exploration licences, wells, or other petroleum and or
natural gas interests in the “Area of Mutual Interest” or the “AMI”) at any
time for a period commencing on the Effective Date and ending 120 days
after the rig release date of the last well drilled pursuant to the Work
Programme (the “AMI Period”).  For the
purposes hereof each Party shall be deemed to have acquired any AMI Interests
acquired by its Affiliates, and shall at all times be required to comply with
all obligations provided for hereunder as if those AMI Interests constituted
property of that Party.

9.2                               Acquisition
of Interests within AMI

(a)                                  If
a Party (the “Acquiring Party”) acquires an AMI Interest during the AMI
Period, that Party shall, within ten (10) days of acquiring such interest,
notify in writing (the “AMI Notice”) the other Party (the “Non-Acquiring Party”) and
offer to the other Party their Working Interest percent of the AM] Interest
acquired by the Acquiring Party, on the same terms and conditions as apply to
the Acquiring Party under the

 

 

applicable licence, agreement or arrangement.  The Non-Acquiring Party shall have thirty
(30) days from receipt of such AMI Notice to accept or decline to exercise
its option to acquire such interest from the Acquiring Party.  To be considered a valid AMI Notice, the AMI
Notice shall contain such sufficient information and detail of the terms and
conditions of the acquisition of the AMI Interest by the Acquiring Party such
that the Non-Acquiring Party may reasonably assess the acquisition opportunity.

(b)                                 If
the consideration stipulated in the licence, agreement or arrangement referred
to in Section 9.2(a) of this Agreement cannot be matched in kind by
the other Party, or involves an allocation of cash value to the applicable AMC
Interest where it forms a portion only of the assets subject to the applicable
transaction, the Acquiring Party shall, in its AMI Notice issued to the
Non-Acquiring Party, set out its bona-fide estimate of the cash equivalent of
such consideration, and acceptance of the offer and payment of the relevant
portion of that cash consideration shall constitute a valid acceptance and
satisfaction of the Non-Acquiring Party’s obligations in acquiring the share of
the relevant interest.

(c)                                  AMI
Interests which are acquired by a Party, in compliance with the terms hereof,
with or from a -Third Party shall be governed by and subject to any agreement
that may be entered into between them with respect to those AMI Interests
separate and apart from this Agreement.

ARTICLE 10

COVENANTS

10.1                        Covenants

The Parties will use their reasonable commercial
efforts to proceed with the Rights Issuance contemplated pursuant to this
Agreement.

ARTICLE 11

MISCELLANEOUS

11.1                        Amendments

All amendments to this Agreement shall be made in a
written instrument signed by both Parties.

11.2                        Waiver
in Writing

No waiver of any provision, or the breach of any
provision; of this Agreement shall be effective unless contained in a written
instrument signed by the Party granting the waiver.  Such waiver shall affect only the matter
specifically identified in the instrument granting the waiver and shall not
extend to any other matter, provision or breach.

113                           Delay
Not Waiver

The failure of a Party to give Notice to any other
Party or to take any other steps in exercising any right, or in respect of the
breach or nonfulfillment of any provision of this Agreement, shall not operate
as a waiver of that right, breach or provision nor shall any single or partial
exercise of any right preclude any other or future exercise of that right or
the exercise of any other right, whether in law or in equity or otherwise.

11.4                        Acceptance
of Payment Not Waiver

Acceptance of payment by a Party after the breach or
nonfulfillment of any provision of this Agreement by another Party shall not
constitute a waiver of the provisions of this Agreement, other than any breach
cured by such payment.

 

 

11.5                        Primacy
of Participation Agreement

In the event of a conflict between the provisions of
this Agreement, the Production Sharing Contract and the Joint Operating
Agreement, the provisions of this Agreement shall prevail.  In the event of a conflict between the
provisions of the Production Sharing Contract and the Joint Operating
Agreement, the provisions of the Production Sharing Contract shall prevail.

11.6                        Entire
Agreement

This Agreement constitutes the entire agreement of the
Parties in respect of the subject matter hereof and supersedes all prior oral
or written agreements and understandings of the Parties.

11.7                        Further
Assurances

Each Party shall do all such things and execute and
deliver all such further instruments as the other Parties may reasonably
request to give effect to and implement this Agreement.

11.8                        Assignment

This Agreement may not be assigned by either Party
without the prior written consent of the other Party, which consent shall not
be unreasonably delayed or withheld.

11.9                        Enurement

This Agreement is binding upon and shall enure to the
benefit of the Parties hereto and their respective successors and permitted
assigns.

11.10                 Counterpart
and Facsimile Execution

This Agreement may be executed in counterpart and all
counterparts shall together constitute one and the same Agreement.  Any copies executed in counterpart may be
delivered via facsimile transmission and, if so delivered, shall be considered
to be originals for all purposes.

11.11                 Delivery

A Party which has executed this Agreement may deliver
it to the other Party by facsimile transmission at its address for such
transmissions set out in Section 8, and any copy so delivered shall be
deemed an original for all purposes.  A
Party so delivering this Agreement shall thereafter forthwith deliver to the
other Party an original execution page hereof with its original signature
located thereon provided, however, that any failure by a Party to so deliver
such original execution page shall not affect the validity or enforceability of
this Agreement against that Party.

11.12                 Severability

The invalidity or unenforceability of any
Section or provision of this Agreement shall not affect the validity or
enforceability of any other Section, provision or whole of this Agreement.

11.13                 Authority

Each of the Parties agrees and acknowledges that it
has the requisite capacity, power and authority to enter into this Agreement
and to take such further steps as are required to give effect to the provisions
hereof.

IN WITNESS WHEREOF the Parties have hereby executed
this Agreement as of the year and date first above written.

 

 

CHALLENGER ENERGY CORP.

 

	
  Per:

  	
   /s/ Neil
  MacKenzie

  	
   

  
	
   

  
	
  CANADIAN SUPERIOR ENERGY INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
  Per:

  	
   /s/
  Michael E. Coolen

  	
   

  
	
   

  	
  Michael E. Coolen, Director

  	
   

  

 

 

 

Schedule “E”

This is
Schedule “E” forming part of the Amended and Restated Farmout and Option

Agreement dated December 30, 2005 between Canadian Superior Energy Inc.
and

Challenger Energy Corp.

Amended
and Restated MGB Participation

 

 

AMENDED
AND RESTATED PARTICIPATION IN A FARMOUT AGREEMENT 

This Agreement
dated this 30 day of December, 2005.

Between:

CHALLENGER ENERGY CORP, a
corporation incorporated under the laws of Alberta, Canada (hereinafter “CNE”)

— and —

CANADIAN SUPERIOR TRINIDAD AND TOBAGO LTD,
a corporation incorporated under the laws of Alberta, Canada (hereinafter
“Canadian Superior”)

                WHEREAS
each Party recognizes the abilities and expertise that the other Party
possesses with respect to the exploration and development of oil and gas
properties;

                AND
WHEREAS each Party wishes to secure the benefits of the
abilities and expertise offered by the other Party and to apply such benefits
collectively to the Project;

                AND
WHEREAS CNE has agreed to participate with Canadian Superior
in the Mariner Test Well as defined in an Amended and Restated Farmout and
Option Agreement between the Parties and dated December
30,
2005
(“Mariner Farmout”);

                AND
WHEREAS in furtherance of the foregoing mutually beneficial
opportunities, Canadian Superior, on behalf of the Parties, is in the process
of finalizing an agreement to acquire the Lands and Licences;

                AND
WHEREAS in consideration of the terms and provisions of the
Rights Issuance the Parties have agreed to amend the provisions of the
Participation in a Farmout Agreement made by them and dated November 17,
2004 (the “Prior Agreement”);

                AND
WHEREAS the Parties wish to confirm the terms of the Parties’
agreement and more formally provide for the respective rights, obligations and
benefits of each of them in connection with the acquisition, exploration and
development of the Lands and Licences;

                NOW
THEREFORE, in consideration of the premises and the mutual
covenants set forth herein, the Parties hereto covenant and agree as follows:

ARTICLE 1

INTERPRETATION

1.1                               Definitions

                Capitalized words and phrases used in this Agreement,
including in the recitals hereto, have the meaning set forth in this
Section 1.1; namely:

(a)                                  “Abandon”
means the proper plugging and abandonment of a well including the salvage of
salvageable material and equipment therefrom and the restoration of the
applicable well site, all in accordance with the Regulations and good offshore
oilfield practices;

(b)                                 “Additional
Exploration Well” means those wells or well which may or may not be drilled
pursuant to Article 2.1(g) of the Farmout Agreement;

(c)                                  “Affiliate”
means a subsidiary company, a parent company, or a sister company of or to a
Parry hereto.  For the purposes of this
definition:

 

 

(i)                                      a
parent company is a company that controls or ultimately controls a Party
hereto;

(ii)                                   a
sister company is a company that is controlled by or ultimately controlled by
the same parent company as a Party hereto;

(iii)                                a
subsidiary company is a company controlled by a Party hereto, a parent company
or a sister company; and

(iv)                               “control”
means that a company owns at least 30% of share capital (either directly or
through other companies which confers upon it a majority of the votes at the
shareholders’ meetings) of a company which is controlled or which has a
common majority shareholder.

(d)                                 “Agreement”
means the main body of this agreement together with all Schedules and
attachments hereto, as amended from time to time;

(e)                                  “AMI
Interests” means any right or interest in and/or to any Petroleum Substances
related to the Area of Mutual Interest;

(f)                                    “Area
of Mutual Interest” means all lands within the area designated as such on
Schedule “D” attached hereto;

(g)                                 “Business
Day” means any day other than a Saturday, Sunday or statutory holiday m
Calgary, Alberta, Canada;

(h)                                 “Cap”
means, with respect to a well, the installation of such production-quality
casing, plugs and equipment as are necessary to enable the well to be used for
the production of Petroleum Substances at a later date;

(i)                                      “Commitment”
has the meaning ascribed to it in Section 3.1;

(j)                                     “Crown
Royalty” means the royalty payable or royalty share of Petroleum Substances
deliverable to the Ministry pursuant to the Regulations;

(k)                                  “Earned
Interest” means an undivided 70% interest in that portion of the Lands and
Licences that Canadian Superior is entitled to pursuant to Article 2.1 of
the Farmout Agreement;

(l)                                     “Earning
Date” means the date on which Canadian Superior has completed the Minimum Work
Obligations and earned the Earned Interest pursuant to the Farmout Agreement;

(m)                               “Effective
Date” means the 17th day of November, 2004;

(n)                                 “Existing
Seismic Data” means the seismic data delivered to Canadian Superior from
Petrotrin respecting the Lands and all seismic records, data and information
associated with such seismic data;

(o)                                 “Exploration
Period” means the period of time described in the Farmout Agreement;

(p)                                 “Exploration
Well” shall have the meaning ascribed to it in the Farmout Agreement;

(q)                                 “Farmout
Agreement” means the final draft of the Farmout Agreement between Canadian
Superior and Petrotrin for the Mayaro Lands and the Guayaguayare Bay Lands a
copy of which is attached as Schedule “B” hereto, all schedules attached
thereto and any agreements entered into between Petrotrin and Canadian Superior
covering the Lands and Licences or, if applicable any documents replacing
and/or amending the Farmout Agreement in whole or in part;

 

 

(r)                                    “Field”
shall have the meaning ascribed to it in the Farmout Agreement;

(s)                                  “Guayaguayare
Bay Lands” means all lands within the area designated as such on Schedule “A”
hereto and located offshore the Republic of Trinidad and Tobago;

(t)                                    “Guayaguayare
Bay Licence” means the licences, leases, permits and other documents of title
by virtue of which the holder thereof is entitled to drill for, win, take, own
or remove the Petroleum Substances within, upon, or under the Guayaguayare Bay
Lands or by virtue of which the holder thereof is deemed to be entitled to a
share of Petroleum Substances removed from the Guayaguayare Bay Lands or any
lands with which the Guayaguayare Bay Lands are pooled or unitized and includes
all renewals and extensions of such documents, and all documents issued in
substitution therefor;

(u)                                 “Joint
Operating Agreement” means the Joint Operating Agreement between Canadian
Superior and Petrotrin that is applicable to the Mayaro Lands and the
Guayaguayare Bay Lands a final draft of which is attached as Schedule “C”
hereto;

(v)                                 “Lands”
means, collectively, the Guayaguayare Bay Lands and the Mayaro Lands;

(w)                               “Lands
and Licences” means, collectively, the Guayaguayare Bay Licence, the Mayaro
Licence, the Guayaguayare Bay Lands, and the Mayaro Lands;

(x)                                   “Mayaro
Lands” means all lands within the area designated as such on Schedule “A”
hereto and located offshore the Republic of Trinidad and Tobago;

(y)                                 “Mayaro
Licence” means the licences, leases, permits and other documents of title by
virtue of which the holder thereof is entitled to drill for, win, take, own or
remove the Petroleum Substances within, upon, or under the Mayaro Lands or by
virtue of which the holder thereof is deemed to be entitled to a share of
Petroleum Substances removed from the Mayaro Lands or any lands with which the
Mayaro Lands are pooled or unitized and includes all renewals and extensions of
such documents, and all documents issued in substitution;

(z)                                   “Minimum
Work Obligations” shall have the meaning ascribed to it in the Farmout
Agreement;

(aa)                            “Ministry”
means the Ministry of Energy and Energy Industries of the Republic of Trinidad
and Tobago;

(bb)                          “New
Seismic Data” means approximately one hundred and sixty (160) square
kilometres of three-dimensional, seismic data covering such locations within
the Guayaguayare Bay Lands and the Mayaro Lands as Canadian Superior may
determine and as committed to be acquired by Canadian Superior as part of the
Minimum Work Obligations in the Farmout Agreement and all seismic records, data
and information associated with such seismic data;

(cc)                            “Operator”
has the meaning ascribed to it in the Farmout Agreement; (dd) “Party”
means a party bound by this Agreement;

(dd)                          “Permitted
Encumbrance” means the Crown Royalty, the Overriding Royalty (as described in
the Farmout Agreement) and the Petrotrin Royalty (as described in the Farmout
Agreement;

(ee)                            “Person”
means a natural person, corporation, company, partnership, trust,
unincorporated association, sole proprietorship, union, government or
governmental department, ministry, board, commission or agency;

(ff)                                “Petroleum
Substances” means petroleum, natural gas, natural gas liquids, condensate and
every other mineral or substance, or any of them, in which an interest in or
right to explore for is granted or acquired under the Title Documents;

(gg)                          “Petrotrin”
means Petroleum Company of Trinidad and Tobago Limited;

 

 

(hh)                          “Project”
means the joint acquisition and development of the State Licence as
contemplated by this Agreement and the Farmout Agreement;

(ii)                                  “Regulations”
means all laws, statutes, regulations, accords, instruments, agreements, orders
or documents of a regulatory nature issued, made or granted by a Regulatory
Authority from time to time;

(jj)                                  “Regulatory
Authority” means a government, or a government department, agency or other
authority including courts, tribunals, boards or panels having apparent or
actual jurisdiction over the Parties, the State Licence, or otherwise in
relation to the subject matter hereof, including without limitation the
Ministry;

(kk)                            “Rights
Issuance” means the proposed issuance by - CNE to Canadian Superior (and,
subsequently, to Canadian Superior’s shareholders) (to occur immediately
following the completion by CNE of a registration statement with the Securities
and Exchange Commission, but in any event, no later than December 31,
2006) of the right to acquire common shares in the share capital of CNE, either
by way of right, warrant or convertible preferred share, or such other matter
of convertible security of CNE as mutually agreed to between Canadian Superior
and CNE, acting reasonably, such rights to be distributed by Canadian Superior
to its shareholders by way of an in specie dividend and/or distribution,
subject to requisite regulatory approvals, as applicable, and subject to
compliance with all requisite securities laws;

(ll)                                  “Seismic
Data” means, collectively, the Existing Seismic Data and the New Seismic Data
and all interpretations and processed versions thereof;

(mm)                      “State
Licence” shall have the meaning ascribed to it in the Farmout Agreement;

(nn)                          “Test”
means an operation, conducted to the reasonable satisfaction of CNE, Canadian
Superior and any Regulatory Authority and in accordance with the Regulations
and good offshore oilfield practices, undertaken in respect of a well drilled
to evaluate the presence of Petroleum Substances in an interpreted geological
structure or stratigraphic trap and to evaluate the capacity thereof to produce
such Petroleum Substances from such well;

(oo)                          “Third
Party” means a Person other than a Party;

(pp)                          “Title
Documents” means any and all documents of title, including but not limited to
the State Licence, the Guayaguayare Bay Licence and the Mayaro Bay Licence
under and by virtue of which the holder thereof is entitled to explore for,
win, take, remove, or sell Petroleum Substances produced from the Guayaguayare
Bay Lands and/or the Mayaro Bay Lands, and any and all renewals, extensions or
continuations thereof, or further documents of title issued pursuant to,
subsequent to, or in substitution therefore in whole or in part, from time to
time;

(qq)                          “Well
Data” means all data and information gathered from or in connection with the
drilling and Testing of a well; and

(rr)                                “Working
Interest” means with respect to each Party, the following undivided interest of
such Party in the rights and obligations derived from the Farmout Agreement,
the Joint Operating Agreement and the State Licence and shall be:

	
  CNE

  	
   

  	
  33.33

  	
  %

  
	
  Canadian
  Superior

  	
   

  	
  66.67

  	
  %

  

 

1.2                               Interpretation

In this Agreement,
unless the contrary intention appears from the context or express provisions of
this Agreement:

 

 

(a)                                  the
inclusion of headings and a table of contents are for convenience of reference
only and are not to be considered or taken into account in construing the
provisions of this Agreement or to in any way qualify, modify or explain the
effect of any such provisions;

(b)                                 references
to an Article, Section or Schedule are references to an Article,
Section or Schedule, as the case may be, in this Agreement;

(c)                                  words
importing the singular shall include the plural and vice versa and words
importing a particular gender shall include all genders;

(d)                                 all
monetary amounts are expressed in lawful currency of the United States of
America;

(e)                                  where
a period of time is specified, dated or calculated from a date or event, the
period shall be calculated excluding such date or the date on which such event
occurs, as the case may be;

(f)                                    time
shall be of the essence; and

(g)                                 where
a term is defined in this Agreement, a derivative of that term shall have a
corresponding meaning unless the context otherwise requires.

1.3                               Business
Day

                If, pursuant to this Agreement, a Notice must be
given or an action taken within a specified period or on or before a specified
date and such period ends on, or such date falls on, a day that is not a
Business Day, such Notice may be given or such action may be taken on the next
succeeding Business Day.

1.4                               Governing
Law

                Regardless of where executed or delivered, this
Agreement and the rights and obligations of the Parties hereunder shall be
governed by, and construed and interpreted in accordance with the laws of
Alberta, Canada.

1.5                               Conflicts

                If there is a conflict or inconsistency between any
provision of the main body of this Agreement and any of the Schedules, the
provision contained in the main body of this Agreement shall govern and prevail
to the extent of the conflict or inconsistency.

1.6                               Schedules

The following Schedules
are attached to and form part of this Agreement:

	
  Schedule “A”

  	
  Lands

  
	
  Schedule “B”

  	
  Farmout
  Agreement

  
	
  Schedule “C”

  	
  Joint Operating
  Agreement

  
	
  Schedule “D”

  	
  Area of Mutual
  Interest

  

 

ARTICLE 2

GRANT OF OPTION

2.1                               Grant
of Option

CNE has agreed to
participate with Canadian Superior in certain operations described in the
Mariner Farmout and in consideration of entering into the Mariner Farmout and
$1.00, the receipt of which is hereby

 

 

acknowledged, Canadian
Superior hereby agrees to fulfill the Commitment described in this Agreement
and hereby grants to CNE the option described in Section 4 of this
Agreement.

2.2                               Acceptance
of Option

                CNE hereby accepts the obligation of Canadian
Superior to fulfill the Commitment and the granting of the option described in
Section 4 of this Agreement.

2.3                               Interest
Held in Trust

(a)                                  During
the period of time from the Effective Date until the termination of the option
described in Section 4 of this Agreement, Canadian Superior agrees that
Canadian Superior holds and stands possessed of the interest of CNE in and to
the Farmout Agreement, the Joint Operating Agreement, the Lands and Licences
and the Title Documents and Canadian Superior shall hold such interests in
trust for and on behalf of CNE.

(b)                                 Canadian
Superior covenants and agrees that it will not sell, assign, transfer, convey,
encumber or surrender the Farmout Agreement, the Joint Operating Agreement, the
Title Documents or Lands and Licences insofar as same affects or relates to the
interests held in trust hereunder for CNE, except upon the written instructions
of CNE.

ARTICLE 3

COMMITMENT

3.1                               Commitment

                On or before the Effective Date, Canadian Superior
shall at its sole risk, cost and expense, and subject to the terms and
conditions of this Agreement, commence the following operations and initiate
the timely fulfillment of the following obligations (collectively, the “Commitment”)
on or with respect to the Guayaguayare Bay Lands and the Mayaro Lands and shall
conclude such operations and fulfill such obligations prior to
December 31, 2006:

(a)                                  use
best efforts to finalize and execute the Farmout Agreement ;

(b)                                 reprocess
the Existing Seismic Data; and

(c)                                  fulfill
any and all requirements from the Ministry and/or Petrotrin relating to
security deposits, guarantees or similar instruments that may be necessary in
the issuance of the State Licence.

3.2                               Consultation
with CNE

                During the course of conducting the Commitment,
Canadian Superior shall consult on a regular basis (and no less often than
every two weeks) with CNE concerning progress and fulfillment of the
Commitment.

3.3                               Delivery
of Seismic and Other Data to CNE

(a)                                  Within
60 days following completion of the Commitment, Canadian Superior shall deliver
copies of the Existing Seismic Data and any reprocessed copies thereof at no
expense to CNE.

(b)                                 Within
a reasonable time following the completion of the Commitment, Canadian Superior
shall deliver copies of all data and documents acquired or produced by or on
behalf of Canadian Superior in relation to the Farmout Agreement and copies of
all Regulatory fillings made in respect of same to CNE or the nominee of CNE
immediately upon Canadian Superior’s receipt of such data and documents and
thereafter provide such aforesaid data and documents on a regular basis to CNE.

 

 

ARTICLE 4

OPTION

4.1                               Option
Upon Completion of Commitment

                Within fifteen (15) days of Canadian Superior
completing the Commitment and after delivery of all information to CNE pursuant
to Section 3.3, Canadian Superior shall provide to CNE written notice
thereof (“CS Notice”)and CNE shall have the option to elect within 60 days of
receipt of the CS Notice, to either:

(a)                                  participate
for its Working Interest in that portion of the Minimum Work Obligations that
have not been completed by Canadian Superior as of the date of such election by
CNE; or

(b)                                 terminate
its rights and obligations hereunder.

4.2                               Participation
in Farmout Agreement

                In the event CNE elected pursuant to
Section 4.1(a) of this Agreement and prior to the Earning Date, all
rights, duties, obligations, elections and privileges to which Canadian
Superior is entitled under the Farmout Agreement shall be shared and may be
separately exercised by each Party as to their Working Interest.  The Parties agree that Canadian Superior
shall be Operator and shall represent CNE under the Farmout Agreement until CNE
is formally recognized by Petrotrin.

4.3                               Interests
of Parties in the Event CNE Participates

                In the event CNE elected pursuant to Section 4.1
(a) of this Agreement, then on the Earning Date, the interest of the
Parties and Petrotrin in the Lands and Licences (or any part thereof), the
Title Documents and the Farmout Agreement shall be:

	
  Canadian Superior

  	
   

  	
  52.5

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  CNE

  	
   

  	
  17.5

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  Petrotrin

  	
   

  	
  30.0

  	
  %

  
	
   

  	
   

  	
   

  	
   

  
	
  (hereinafter
  referred to as “Joint Interests”)

  	
   

  	
   

  	
   

  

 

4.4                               Option
to Drill Additional Exploration Wells

                In the event that Canadian Superior elects to drill
one or more Additional Exploration Well(s) pursuant to the Farmout Agreement;
then for each such Additional Exploration Well, Canadian Superior shall deliver
a written Notice (“Well Notice”) of such election to CNE.  The Well Notice shall contain all relevant
information necessary for CNE to make an informed decision to participate or
not in the particular Additional Exploration Well including but not limited to:
a geological and geophysical discussion along with supporting data, economic
data, expected well performance data, expected reservoir data, exact location,
detailed cost estimate, estimate of commencement date, estimated duration of
the drilling operation and expected total depth.  Within 120 days from receipt of delivery of
each Well Notice, CNE shall have the option to elect, by written notice to
Canadian Superior, to either:

(a)                                  participate
for its Working Interest in each Additional Exploration Well on a well by well
basis; however, in the event Petrotrin elects to participate in such Additional
Exploration Well, then the interests of each party shall be the Joint
Interests; or

(b)                                 terminate
such option to participate and forfeit any rights and obligations pursuant to
the Farmout Agreement in relation to such Additional Exploration Well.

 

 

4.5                               Interests
of Parties in the Event CNE Participates in Additional Exploration Wells)

 

                In the event CNE elected pursuant to
Section 4.4(a) of this Agreement, then, upon Canadian Superior earning an
interest pursuant to Article 2.1(h) of the Farmout Agreement, the
resultant interest in any applicable Field(s) related to such Additional
Exploration Well(s) shall be apportioned as per the Joint Interests.  However, in the event Petrotrin does not
participate in such Additional Exploration Well(s) then the Parties shall share
the Petrotrin interest proportionately to their Working Interest percentage.

4.6                               Participation
after Earning

                Once Canadian Superior has earned the Earned Interest
pursuant to the Farmout Agreement all benefits and obligations arising from any
and all operations conducted by the Parties on or in respect of the Lands,
including without limitation all revenues from sales of Petroleum Substances
produced therefrom and all costs and expenses (including without limitation the
Crown Royalty and all applicable operating expenses) associated therewith,
shall be shared by the Parties on the basis of their respective Joint
Interests, and all operations conducted on the Lands shall be governed by and
conducted in accordance with the Joint Operating Agreement.

ARTICLE 5

PETROTRIN ROYALTIES

5.1                               Overriding
Royalty

                The Parties hereto in proportion to each other’s
Joint Interests agree to be each responsible for the payment to Petrotrin of
the Overriding Royalty described in the Farmout Agreement.  In addition, in the event Petrotrin elects to
convert its participating interest to an Overriding Royalty in accordance with
Article 7 of the Farmout Agreement, the Parties hereto in proportion to
each other’s Joint Interests shall be each entitled to all rights and benefits
of such conversion along with being each responsible for all obligations
pertaining to such conversion.

5.2                               Petrotrin
1.25% Royalty

                The Parties hereto in proportion to each other’s
Joint Interests agree to be each responsible for the payment to Petrotrin of
the 1.25% Petrotrin Royalty described in the Farmout Agreement.

ARTICLE 6

TITLE AND OPERATIONAL MATTERS

6.1                               Transfer
and Registration of Earned Interests

(a)                                  Canadian
Superior agrees to use its best efforts to transfer and convey to CNE the
interests CNE is entitled to hereunder and shall use documentation in form and
content acceptable to CNE to complete such task, and Canadian Superior shall
execute, deliver and register as required under the Regulations or otherwise by
a Regulatory Authority, all assignments, transfers and other documents as may
be necessary to fully and properly transfer and convey such interests to CNE,
when requested to do so in writing by CNE and at no cost to CNE.

(b)                                 Provided
that CNE has earned its Working Interest, upon receipt of a Notice from CNE,
Canadian Superior agrees to use its best efforts to have CNE recognized as a
party to the Farmout Agreement and any costs relating thereto shall be borne
equally by the parties.

(c)                                  All
rights, duties, obligations, elections and privileges to which Canadian
Superior is entitled or subject under the Farmout Agreement and the Joint
Operating Agreement shall be shared and may be separately exercised by each
Party in accordance with their Working Interest or, if applicable, their Joint
Interests.

(d)                                 As
of the Effective Date, Canadian Superior shall provide to CNE, on a timely and
regular basis (no less than monthly), copies of and access to all Seismic Data,
well information, geological and geophysical mapping, aeromagnetic surveys and
interpretations thereof in which Canadian Superior creates, produces or

 

 

acquires pursuant to the
Farmout Agreement and the Joint Operating Agreement or in performing the Commitment
and the Minimum Work Obligations.

6.2                               Operations

                Subject to the terms and conditions of this
Agreement, and during the period of time from the Effective Date until the
Earning Date, the following provisions of the Joint Operating Agreement shall apply
to any operations conducted under this Agreement:

	
  Article 1

  	
  Definitions (to
  the extent required for interpretation of the by 

  
	
   

  	
  relevant
  provisions of the Joint Operating Agreement adopted 

  
	
   

  	
  this Section)

  
	
   

  	
   

  
	
  Article 4

  	
  Operator

  
	
   

  	
   

  
	
  Article 8

  	
  Default

  
	
   

  	
   

  
	
  Article 13

  	
  Transfer of
  Interests or Rights and Changes in Control

  
	
   

  	
   

  
	
  Article 16

  	
  Venture
  Information — Confidentiality — Intellectual 

  
	
   

  	
  Property

  
	
  Article 17

  	
  Force Majeure

  

 

6.3                               Joint
Operating Agreement and Appointment of Operator

                The Parties hereby appoint Canadian Superior as
operator under and for the purposes of the Joint Operating Agreement and the
Farmout Agreement.  Canadian Superior
shall properly perform and discharge its duties and obligations as Operator in
accordance with the terms of this Agreement, the Farmout Agreement, the Joint
Operating Agreement, the Regulations and good offshore oilfield practices.

6.4                               Access
to Pipelines

                In consideration of CNE paying to Canadian Superior
its proportionate share of all costs and expenses related thereto, Canadian
Superior shall provide to CNE access, on the same basis and terms as Canadian
Superior, to any pipelines as may be necessary to transport all Petroleum
Substances produced from the Lands to any applicable sales point(s) for
such Petroleum Substances.

6.5                               Marketing
of Petroleum Substances

                Canadian Superior shall provide to CNE access, on the
same basis and terms as Canadian Superior, to any marketing arrangements for
Petroleum Substances produced from the Lands.

ARTICLE 7

ENCUMBRANCES

7.1                               No
Encumbrances

                At all times while this Agreement remains in force,
neither Party shall do or cause to be done any act, or make or cause to be made
any act or omission, whereby the Title Documents or any of them become
encumbered (other than by a Permitted Encumbrance) in such a way as to
adversely affect the Title Documents or any of them or to make them or the
Lands and Licences subject to termination or forfeiture in any respect.

 

 

ARTICLE 8

LIABILITY AND INDEMNITY

8.1                               Canadian
Superior’s Responsibility Canadian Superior will:

(a)                                  be
liable to CNE for all losses, costs, damages and expenses whatsoever (whether
contractual or otherwise), excepting consequential damages, that CNE may
suffer, sustain, pay or incur; and, in addition

(b)                                 indemnify
and hold harmless CNE against all actions, causes of action, proceedings,
claims, demands, losses, costs, damages and expenses whatsoever that may be
brought against or suffered by CNE, or that it may sustain, pay or incur;

                insofar as they are, in respect of operations or
activities conducted by Canadian Superior or on behalf of Canadian Superior
hereunder, a result of: the gross negligence or willful or wanton misconduct of
Canadian Superior, its employees, agents or contractors.  However, this obligation will not apply to
the extent that the particular act or omission was done or omitted to be done
in accordance with CNE’s instructions or concurrence.  Costs in this Article will include legal
costs on a solicitor-client basis.

8.2                               CNE’s
Responsibility

                CNE will:

(a)                                  be
liable to Canadian Superior for all losses, costs, damages and expenses
whatsoever (whether contractual or otherwise), excepting consequential damages,
that Canadian Superior may suffer, sustain, pay or incur; and, in addition

(b)                                 indemnify
and hold harmless Canadian Superior and its directors, officers, agents,
consultants, and employees against all actions, causes of action, proceedings,
claims, demands, losses, costs; damages and expenses whatsoever that may be
brought against or suffered by Canadian Superior, its directors, officers,
agents, consultants, and employees or that they may sustain, pay or incur;

                insofar as they are, in respect of operations or
activities conducted by CNE or on behalf of CNE hereunder, a result of the
gross negligence or willful or wanton misconduct of CNE, its employees, agents
or contractors.  However, this obligation
will not apply to the extent that the particular act or omission was done or
omitted to be done in accordance with Canadian Superior’s instructions or
concurrence.  Costs in this
Article will include legal costs on a solicitor-client basis.

ARTICLE 9

AREA OF MUTUAL INTEREST

9.1                               Creation
of Area of Mutual Interest

                The Parties hereby establish the Area of Mutual
Interest.  Except in accordance with the
terms of this Agreement, a Party shall not acquire any rights, directly or
indirectly, in any exploration licences, wells, or other petroleum and or
natural gas interests in the “Area of Mutual Interest” or the “AMI”) at any
time for the period from the Effective Date until 120 days after the date of
completion of the Minimum Work Obligation (the “AMI Period”).  For the purposes hereof each Party shall be
deemed to have acquired any AMI Interests acquired by its Affiliates,  and shall at all times be required to comply
with all obligations provided for hereunder as if those AMI Interests
constituted property of that Party.

9.2                               Acquisition
of Interests within AMC

(a)                                  If
a Party (the “Acquiring Party”) acquires an AMI Interest during the AMI Period,
that Party shall, within ten (10) days of acquiring such interest, notify
in writing (the “AMI Notice”) the other Party (the “Non-Acquiring Party”)
and offer to the other Party their Working Interest percent of the AMI Interest
acquired

 

by the Acquiring Party, on the same terms and
conditions as apply to the Acquiring Party under the applicable licence,
agreement or arrangement.  The
Non-Acquiring Party shall have thirty (30) days from receipt of such AMI
Notice to accept or decline to exercise its option to acquire such interest
from the Acquiring Party.  To be
considered a valid AMT Notice, the AMI Notice shall contain such sufficient
information and detail of the terms and conditions of the acquisition of the
AMI Interest by the Acquiring Party such that the Non-Acquiring Party may
reasonably assess the acquisition opportunity.

(b)                                 If
the consideration stipulated in the licence, agreement or arrangement referred
to in Section 9.2(a) of this Agreement cannot be matched in kind by the
other Party, or involves an allocation of cash value to the applicable AMI
Interest where it forms a portion only of the assets subject to the applicable
transaction, the Acquiring Party shall, in its AMI Notice issued to the
Non-Acquiring Party, set out its bona-fide estimate of the cash equivalent of
such consideration, and acceptance of the offer and payment of the relevant
portion of that cash consideration shall constitute a valid acceptance and
satisfaction of the Non-Acquiring Party’s obligations in acquiring the share of
the relevant interest.

(c)                                  AMI
Interests which are acquired by a Party, in compliance with the terms hereof,
with or from a Third Party shall be governed by and subject to any agreement
that may be entered into between them with respect to those AMI Interests
separate and apart from this Agreement.

ARTICLE 10

NOTICES

10.1                        Notice

                All demands, notices or other communications (in each
case a “Notice”) to be given in connection with this Agreement shall be in
writing and shall be sufficiently given or made if:

(a)                                  delivered
to the intended recipient personally or by courier during normal business hours
on a Business Day at the intended recipient’s address as set forth below; or

(b)                                 sent
by facsimile transmission or sent to the intended recipient by other means of
recorded electronic communication:

	
  Canadian Superior Trinidad
  and Tobago Ltd.

  	
  Suite 3300, 400
  — 3rd Avenue SW

  
	
   

  	
  Calgary, Alberta
  T2P 4112

  
	
  Attention:

  	
  President

  
	
  Fax No.:

  	
  (403) 216-2374

  
	
   

  	
   

  
	
  Challenger
  Energy Corp.

  	
  Suite 3300, 400
  — 31-d Avenue SW

  
	
   

  	
  Calgary, Alberta
  T2P 4112

  
	
  Attention:

  	
  President

  

 

10.2                        Deemed
Delivery

                Any Notice given or made in the manner set forth in
Section 10.1 shall be deemed to have been given or made and to have been
received on the day of its delivery or transmission, as the case may be, if
such day is a Business Day and such Notice is received prior to 2:00 p.m.,
Calgary time, and, if not, on the first Business Day thereafter.

10.3                        Change
of Address

(a)                                  A
Party may change its address or telecopier number by Notice to the other Party
given in accordance with Section 10.1.

 

 

ARTICLE 11

COVENANTS

11.1                        Covenants

                The Parties will use their reasonable commercial
efforts to proceed with the Rights Issuance contemplated pursuant to this
Agreement.

ARTICLE 12

MISCELLANEOUS

12.1                        Amendments

                All amendments to this Agreement shall be made in a
written instrument signed by both Parties.

12.2                        Waiver
in Writing

                No waiver of any provision, or the breach of any provision,
of this Agreement shall be effective unless contained in a written instrument
signed by the Party granting the waiver. 
Such waiver shall affect only the matter specifically identified in the
instrument granting the waiver and shall not extend to any other matter,
provision or breach.

12.3                        Delay
Not Waiver

                The failure of a Party to give Notice to any other
Party or to take any other steps in exercising any right, or in respect of the
breach or nonfulfillment of any provision of this Agreement, shall not operate
as a waiver of that right, breach or provision nor shall any single or partial
exercise of any right preclude any other or future exercise of that right or
the exercise of any other right, whether in law or in equity or otherwise.

12.4                        Acceptance
of Payment Not Waiver

                Acceptance of payment by a Party after the breach or
nonfulfillment of any provision of this Agreement by another Party shall not
constitute a waiver of the provisions of this Agreement, other than any breach
cured by such payment.

12.5                        Primacy
of Participation Agreement

                In the event of a conflict between the provisions of
this Agreement and the Farmout Agreement and the Joint Operating Agreement, the
provisions of this Agreement shall prevail.

12.6                        Entire
Agreement

                This Agreement constitutes the entire agreement of
the Parties in respect of the subject matter hereof and supersedes all prior
oral or written agreements and understandings of the Parties.

12.7                        Further
Assurances

                Each Party shall do all such things and execute and deliver
all such further instruments as the other Parties may reasonably request to
give effect to and implement this Agreement.

12.8                        Assignment

                This Agreement may not be assigned by either Party
without the prior written consent of the other Party, which consent shall not
be unreasonably withheld or delayed.

 

 

12.9                        Enurement

                This Agreement is binding upon and shall enure to the
benefit of the Parties hereto and their respective successors and permitted
assigns.

12.10                 Counterpart
and Facsimile Execution

                This Agreement may be executed in counterpart and all
counterparts shall together constitute one and the same Agreement.  Any copies executed in counterpart may be
delivered via facsimile transmission and, if so delivered, shall be considered
to be originals for all purposes.

12.11                 Delivery

                A Party which has executed this Agreement may deliver
it to the other Party by facsimile transmission at its address for such
transmissions set out in Section 11, and any copy so delivered shall be
deemed an original for all purposes.  A
Party so delivering this Agreement shall thereafter forthwith deliver to the
other Party an original execution page hereof with its original signature
located thereon provided, however, that any failure by a Party to so deliver
such original execution page shall not affect the validity or enforceability of
this Agreement against that Party.

12.12                 Severability

                The invalidity or unenforceability of any Section or
provision of this Agreement shall not affect the validity or enforceability of
any other Section, provision or whole of this Agreement.

12.13                 Authority

                Each of the Parties agrees and acknowledges that it
has the requisite capacity, power and authority to enter into this Agreement
and to take such further steps as are required to give effect to the provisions
hereof.

                IN WITNESS WHEREOF the Parties have hereby executed
this Agreement as of the year and date first above written.

	
  CHALLENGER ENERGY CORP.

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Neil MacKenzie

  	
   

  
	
   

  	
  President

  
	
   

  	
   

  
	
   

  
	
  CANADIAN SUPERIOR
  TRINIDAD AND TOBAGO LTD.

  
	
   

  
	
  By:

  	
  /s/ Michael E. Coolen

  	
   

  
	
   

  	
  Michael E. Coolen,
  DirectorEXHIBIT 4(B)

PARTICIPATION AGREEMENT

[*] Denotes confidential
information which has been filed separately with the Securities and Exchange
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as
amended.  

 

AMENDED AND RESTATED PARTICIPATION AGREEMENT

This Agreement dated this 30th day of December, 2005.

Between:

CHALLENGER ENERGY CORP., a
corporation incorporated under the laws of Alberta, Canada (hereinafter “CNE”)

-
and –

CANADIAN SUPERIOR ENERGY INC., a corporation
incorporated under the laws of Alberta, Canada and having an office in
the City of Calgary (hereinafter “Canadian Superior”)

WHEREAS each Party recognizes the abilities and
expertise that the other Party possesses with respect to the exploration and
development of oil and gas properties;

AND WHEREAS
each Party wishes to
secure the benefits of the abilities and expertise offered by the other Party
and to apply such benefits collectively to the Project;

AND WHEREAS
CNE has agreed to
participate with Canadian Superior in the Mariner Test Well as defined in a
Farmout and Option Agreement between the Parties and dated November 17,
2004 as amended and restated as of the date hereof (“Mariner Farmout”);

AND WHEREAS
in furtherance of the
foregoing mutually beneficial opportunities, Canadian Superior has entered into
a Production Sharing Contract with respect to the Lands;

AND
WHEREAS, in
consideration of the terms and provisions of the Rights Issuance the Parties
have agreed to amend, restate and extend the provisions of the Participation
Agreement dated November 17, 2004 made between them in respect of the
joint participation by them in the acquisition, exploration and development of
the Lands (the “Prior Agreement”);

AND WHEREAS
the Parties wish to
confirm the terms of the Parties’ agreement and more formally provide for the
respective rights, obligations and benefits of each of them in connection with
the acquisition, exploration and development of the Lands;

NOW
THEREFORE, in
consideration of the premises and the mutual covenants set forth herein, the
Parties hereto covenant and agree as follows:

ARTICLE 1

INTERPRETATION

1.1                                                                               Definitions

Capitalized words and
phrases used in this Agreement, including in the recitals hereto, have the
meaning set forth in this Section 1.1, namely:

(a)                                  “Affiliate” means a subsidiary company, a parent
company, or a sister company of or to a Party hereto. For the purposes of this
definition:

(i)                                     a parent company is a company that controls
or ultimately controls a Party hereto;

 

(ii)                                  a sister company is a company that is
controlled by or ultimately controlled by the same parent company as a Party
hereto;

(iii)                               a subsidiary company is a company controlled
by a Party hereto, a parent company or a sister company; and

(iv)                              “control” means that a company owns at least
50% of share capital (either directly or through other companies which confers
upon it a majority of the votes at the shareholders’ meetings) of a company
which is controlled or which has a common majority shareholder.

(b)                                 “Agreement” means the main body of this agreement
together with all Schedules and attachments hereto, as amended from time to
time;

(c)                                  “AMI Interests” means any right or interest in and/or to any Petroleum
Substances related to the Area of Mutual Interest;

(d)                                 “Area of Mutual Interest” means all lands within the area designated as
such on Schedule ”C” attached hereto;

(e)                                  “Block 5(c)” means that area of land located offshore
Trinidad and designated as “Block 5(c) in the Competitive Bidding Order;

(f)                                    “Business Day” means any day other than a Saturday, Sunday
or statutory holiday in Calgary, Alberta, Canada;

(g)                                 “Commitment” has the meaning ascribed to it in Section 3.1;

(h)                                 “Competitive Bidding Order” means the Petroleum Regulations (Competitive
Bidding) Order, 2003 made by the Minister of the Ministry;

(i)                                     “Effective Date” means the 17th day of November 2004;

(j)                                     “Existing Data Package” means the seismic data, well information,
reports, studies and other documentation made available to Canadian Superior
from the Ministry prior to submitting a bid on Block 5(c) at the
Competitive Bidding Order;

(k)                                  “Joint Operating Agreement” means the 2002 Model Form International
Operating Agreement distributed by the Association of International Petroleum
Negotiators (“AIPN”) along with the 2004 AIPN Model Form International
Accounting Procedure (“Accounting Procedure”), as amended, copies of which are
attached and marked as Schedule ”B” hereto with specific agreed upon
elections indicated in the documents;

(l)                                     “Lands” means Block 5 (c) and the right to
produce Petroleum Substances therefrom;

(m)                               “Ministry” means the Ministry of Energy and Energy
Industries of Trinidad;

(n)                                 “Operator” shall have the meaning ascribed to it in the
Joint Operating Agreement;

(o)                                 “Party” means a party bound by this Agreement;

 2
 

 

(p)                                 “Person” means a natural person, corporation, company,
partnership, trust, unincorporated association, sole proprietorship, union,
government or governmental department, ministry, board, commission or agency;

(q)                                 “Petroleum Substances” means petroleum, natural gas, natural gas liquids, condensate and every
other mineral or substance, or any of them, in which an interest in or right to
explore for is granted or acquired under the Title Documents;

(r)                                    “Project” means the joint acquisition, exploration and
development of Block 5(c);

(s)                                  “Production Sharing Contract”
means that agreement between
the President of Trinidad, the Minister of the Ministry and Canadian Superior
for the Lands, a copy of which is attached as Schedule ”A” hereto, all
schedules attached thereto and any agreement entered into between the
aforementioned parties concerning the Lands, and if applicable, any documents
replacing and/or amending the said agreement;

(t)                                    “Regulations” means all laws, statutes, regulations,
accords, instruments, agreements, orders or documents of a regulatory nature
issued, made or granted by a Regulatory Authority from time to time;

(u)                                 “Regulatory Authority” means a government, or a government
department, agency or other authority including courts, tribunals, boards or
panels having apparent or actual jurisdiction over the Parties, the Lands, the
Title Documents, and the Production Sharing Contract or otherwise in relation
to the subject matter hereof, including without limitation the Ministry;

(v)                                 “Rights Issuance” means the proposed issuance by CNE to
Canadian Superior (and, subsequently, to Canadian Superior’s shareholders) (to
occur immediately following the completion by CNE of a registration statement
with the Securities and Exchange Commission, but in any event, no later than December 31,
2006) of the right to acquire common shares in the share capital of CNE, either
by way of right, warrant or convertible preferred share, or such other matter
of convertible security of CNE as mutually agreed to between Canadian Superior
and CNE, acting reasonably, such rights to be distributed by Canadian Superior
to its shareholders by way of an in specie dividend
and/or distribution, subject to requisite regulatory approvals, as applicable,
and subject to compliance with all requisite securities laws;

(w)                               “Third Party” means a Person other than a Party;

(x)                                   “Title Documents” means any and all documents of title,
including but not limited to the Production Sharing Contract under and by
virtue of which the holder thereof is entitled to explore for, win, take,
remove, or sell Petroleum Substances produced from the Lands, and any and all
renewals, extensions or continuations thereof, or further documents of title
issued pursuant to, subsequent to, or in substitution therefore in whole or in
part, from time to time;

(y)                                 “Trinidad” means the Republic of Trinidad and Tobago;

(z)                                   “Working Interest” means with respect to each Party, the
following undivided interest of such Party in the rights and obligations
derived from the Production Sharing Contract and shall be:

	
  CNE

  	
   

  	
  25

  	
  %

  

 

 3
 

 

 

 

	
  Canadian Superior

  	
   

  	
  75

  	
  %

  

 

(aa)                            “Work Programme” shall have the meaning ascribed to it in the
Production Sharing Contract;

1.2                                                                               Interpretation

In this Agreement, unless
the contrary intention appears from the context or express provisions of this
Agreement:

(a)                                  the inclusion of headings and a table of
contents are for convenience of reference only and are not to be considered or
taken into account in construing the provisions of this Agreement or to in any way
qualify, modify or explain the effect of any such provisions;

(b)                                 references to an Article. Section or Schedule are
references to an Article. Section or Schedule, as the case may be, in
this Agreement;

(c)                                  words importing the singular shall include
the plural and vice versa and words importing a particular gender shall include
all genders;

(d)                                 with the exception of the amount set out in
clauses 4.1(a) and 4.1(b)(ii), all monetary amounts are expressed in
lawful currency of the Canada;

(e)                                  where a period of time is specified, dated or
calculated from a date or event, the period shall be calculated excluding such
date or the date on which such event occurs, as the case may be;

(f)                                    time shall be of the essence; and

(g)                                 where a term is defined in this Agreement, a
derivative of that term shall have a corresponding meaning unless the context
otherwise requires.

1.3                                                                               Business Day

If, pursuant to this
Agreement, a Notice must be given or an action taken within a specified period
or on or before a specified date and such period ends on, or such date falls
on, a day that is not a Business Day, such Notice may be given or such
action may be taken on the next succeeding Business Day.

1.4                                                                               Governing Law

Regardless of where executed
or delivered, this Agreement and the rights and obligations of the Parties
hereunder shall be governed by, and construed and interpreted in accordance
with the laws of Alberta, Canada.

1.5                                                                               Conflicts

If there is a conflict or
inconsistency between any provision of the main body of this Agreement and any
of the Schedules, the provision contained in the main body of this Agreement
shall govern and prevail to the extent of the conflict or inconsistency.

1.6                                                                               Schedules

The following Schedules are
attached to and form part of this Agreement:

 4
 

 

 

	
  

  	
  Schedule ”A”

  	
  Production Sharing Contract

  
	
   

  	
  Schedule ”B”

  	
  Joint Operating Agreement

  
	
   

  	
  Schedule ”C”

  	
  Area of Mutual Interest

  

 

ARTICLE 2
PARTICIPATION

2.1                                                                               Grant of Participation
Rights

The Parties acknowledge that
CNE has agreed to participate with Canadian Superior in certain operations
described in the Mariner Farmout. In consideration of entering into the Mariner
Farmout, the premises hereof and the payment of $1.00 by CNE to Canadian
Superior, the receipt of which is hereby acknowledged, Canadian Superior hereby
grants to CNE the participation rights described in Section 4 of this
Agreement.

2.2                                                                               Agreement to Participate

CNE hereby acknowledges that
Canadian Superior has fulfilled the Commitment set out in clause 3.1 of the
Prior Agreement and agrees to participate with Canadian Superior in the
acquisition, exploration and development of the Lands and the Project, in
accordance with the provisions hereof.

2.3                                                                               Rights Issuance

Canadian Superior agrees
that it shall cooperate fully with CNE in all matters relating to the Rights
Issuance and that it will take such steps as are required to give effect to it
in as timely a manner as possible.

2.4                                                                               Interest Held in Trust

(a)                                  Canadian Superior agrees that Canadian
Superior holds and stands possessed, and will continue to hold and stand
possessed of the interest of CNE in and to the Production Sharing Contract, the
Lands, and the Title Documents and Canadian Superior shall hold such interests
in trust for and on behalf of CNE.

(b)                                 Canadian Superior covenants and agrees that
it will not sell, assign, transfer, convey, encumber or surrender the
Production Sharing Contract, the Lands, and the Title Documents insofar as same
affects or relates to the interests held in trust hereunder for CNE, except
upon the written instructions of CNE.

ARTICLE 3

DELIVERY OF INFORMATION

3.1                                                                               Delivery of Existing Data
Package to CNE

Provided that CNE has
complied with the provisions of clause 4.1(a) hereof:

(a)                                  As soon as is reasonably practical following
such compliance by CNE. Canadian Superior shall, at Canadian Superior’s
expense, deliver to CNE a copy of: i) the Existing Data Package, ii) geological
and geophysical mapping of the Lands, iii) interpreted seismic sections
covering the Land, iv) a complete copy of the bid and any revisions of the bid
submitted to the Ministry on

 5
 

 

 

Block 5(c). and v) a
copy of information, documents and all other data generated by Canadian
Superior respecting the Lands; and

(b)                                 Canadian Superior shall deliver copies of all
data and documents acquired or produced by or on behalf of Canadian Superior in
fulfilling the Commitment and copies of all Regulatory fillings made in respect
of same to CNE or the nominee of CNE immediately upon Canadian Superior’s
receipt of such data and documents.

ARTICLE 4

WORK PROGRAMME PARTICIPATION

4.1                                                                               CNE Initial Commitment

(a)                                  on or before April 1, 2006 CNE shall pay
to Canadian Superior the sum of Two Million Five Hundred Thousand (US$2,500,000.00)
Dollars US to be credited to CNE’s one third share of the costs incurred to date
by Canadian Superior in respect of the Production Sharing Contract;

(b)                                 on the earlier of;

(i)                                     April 30, 2006; or

(ii)                                  within 14 business days of CNE having successfully
raised a minimum of Twelve Million (US $12,000,000.00) Dollars US by way of the
Rights Issuance

CNE shall pay to Canadian Superior the balance of CNE’s one-third share
of the costs incurred by Canadian Superior to that date in respect of the
Production Sharing Contract;

(c)                                  CNE shall, not less than 10 business days
prior to the scheduled spud date of the first Exploration Well to be drilled
pursuant to the Work Programme (as defined in the Production Sharing Contract),
pay to Canadian Superior one third of the anticipated dry hole costs of such
first Exploration Well, provided that if drilling operations arc not commenced
within 30 days of such payment, such monies shall be returned to CNE forthwith.
For greater clarity, the Parties acknowledge that in calculating such
anticipated dry hole costs, no amounts in respect of anticipated testing or
completing costs of such well shall be included; and

(d)                                 CNE further commits to participate for one
third of the balance of the costs directly attributable to the Work Programme
and the second and third Exploration Wells drilled pursuant thereto.

(e)                                  During the course of the Work Programme
Canadian Superior shall consult on a regular basis (no less often than monthly)
with CNE concerning progress and fulfillment of the Work Programme and Canadian
Superior’s activities as Operator in respect thereof.

4.2                                                                               Default/Early Termination

(a)                                  In the event that CNE fails to pay when due
the amounts required pursuant to clause 4.2(c) above, this Agreement shall
terminate without further notice, and CNE shall have forfeited its right to participate
in the Project or to earn any interest hereunder.

(b)                                 In all other respects, should CNE fail to pay
within 30 days any other amounts payable by it pursuant to this Article 4
during the Work Programme, Canadian Superior shall be entitled to give notice
of such default (the “Default Notice”) to CNE. Should CNE fail to remedy such
default

 6
 

 

 

within 30 days of the date the Default Notice is issued, the provisions
of Article 8 of the Joint Operating Agreement shall apply.

4.3                                                                               Ongoing Participation

In the event that CNE has
complied with the provisions of clause 4.1 hereof, upon completion of the Work
Programme:

(a)                                  all rights, duties, obligations, elections
and privileges to which Canadian Superior is entitled under the Production
Sharing Contract shall be shared and may be separately exercised by each Party
as to their Working Interest;

(b)                                 the Parties agree that Canadian Superior
shall be Operator and shall represent CNE under the Production Sharing Contract
until CNE is formally recognized by the Ministry; and

(c)                                  all benefits and obligations arising from any
and all operations conducted by the Parties on or in respect of the Lands, including
without limitation all revenues from sales of Petroleum Substances produced
therefrom and all costs and expenses (including without limitation the Crown
Royalty and all applicable operating expenses) associated therewith, shall be
shared by the Parties on the basis of their Working Interest, and shall be
governed by and conducted in accordance with the Joint Operating Agreement.
Notwithstanding the generality of the foregoing, to the extent that the parties
are entitled to apply the Cost Recovery provisions of Article 18 of the Production
Sharing Contract to the costs of the Project, such recovered costs shall be for
the account of, and be credited to, the parties in the same proportions that
such costs were originally borne by them.

ARTICLE 5

TITLE AND OPERATIONAL MATTERS

5.1                                                                               Transfer and Registration of
Earned Interests

(a)                                  Canadian Superior agrees to use its best
efforts to transfer and convey to CNE the interests CNE is entitled to
hereunder and shall use documentation in form and content acceptable to
CNE to complete such task, and Canadian Superior shall execute, deliver and
register as required under the Regulations or otherwise by a Regulatory
Authority, all assignments, transfers and other documents as may be
necessary to fully and properly transfer and convey such interests to CNE, when
requested to do so in writing by CNE, the cost of which shall be borne equally
by the parties.

(b)                                 Provided that CNE has earned its Working
Interest, upon receipt of a Notice from CNE, Canadian Superior agrees to use
its best efforts to have CNE recognized as a party to the Production Sharing
Contract, and any costs relating thereto shall be borne equally by the parties.

5.2                                                                               Joint Operating Agreement
and Appointment of Operator

The Parties hereby appoint
Canadian Superior as Operator under and for the purposes of the Joint Operating
Agreement. Canadian Superior shall properly perform and discharge its
duties and obligations as Operator in accordance with the terms of this
Agreement, the Production Sharing Contract and good offshore oilfield
practices. In addition to the applicability of Article 8 of the Joint
Operating Agreement pursuant to clause 4.2(b) hereof, the following
provisions of the Joint Operating Agreement

 7
 

 

and the Accounting Procedure are hereby incorporated
and shall be applicable to Article 4 hereof, the Work Program and all
costs incurred and operations conducted pursuant thereto:

a)                                      Joint Operating Agreement

	
  Article 1

  	
   

  	
  Definitions (to the extent required for
  interpretation of the relevant provisions of the Joint Operating Agreement
  incorporated herein

  
	
   

  	
   

  	
   

  
	
  Clause 4.4

  	
   

  	
  Information Supplied by Operator

  
	
   

  	
   

  	
   

  
	
  Clause 6.7

  	
   

  	
  Authorization for Expenditure Procedure

  
	
   

  	
   

  	
   

  
	
  Article 15

  	
   

  	
  Venture Information – Confidentiality –
  Intellectual Property

  
	
   

  	
   

  	
   

  
	
  Article 16

  	
   

  	
  Force Majcure

  

 

b)                                     Accounting Procedure

All provisions

5.3                                                                               Access to Pipelines

In consideration of CNE
paying to Canadian Superior its proportionate share of all costs and expenses
related thereto, Canadian Superior shall provide to CNE access, on the same
basis and terms as Canadian Superior, to any pipelines as may be necessary
to transport all Petroleum Substances produced from the Lands to any applicable
sales point(s) for such Petroleum Substances.

5.4                                                                               Marketing of Petroleum
Substances

Canadian Superior shall
provide to CNE access, on the same basis and terms as Canadian Superior, to any
marketing arrangements for Petroleum Substances produced from the Lands.

ARTICLE 6

ENCUMBRANCES

6.1                                                                               No Encumbrances

At all times while this
Agreement remains in force, neither Party shall do or cause to be done any act,
or make or cause to be made any act or omission, whereby the Title Documents or
any of them become encumbered in such a way as to adversely affect the Title
Documents or any of them or to make them or the Lands subject to termination or
forfeiture in any respect, except as may be expressly provided for in the
Production Sharing Contract.

ARTICLE 7

LIABILITY AND INDEMNITY

7.1                                                                               Canadian Superior’s
Responsibility

Canadian Superior will:

 8
 

 

 

(a)                                  be liable to CNE for all losses, costs,
damages and expenses whatsoever (whether contractual or otherwise), excepting
consequential damages, that CNE may suffer, sustain, pay or incur and in addition

(b)                                 indemnify and hold harmless CNE against all
actions, causes of action, proceedings, claims, demands, losses, costs, damages
and expenses whatsoever that may be brought against or suffered by CNE, or
that it may sustain, pay or incur;

insofar as they are, in respect of operations or activities conducted
by Canadian Superior or on behalf of Canadian Superior hereunder, a result of:
the gross negligence or wilful or wanton misconduct of Canadian Superior, its
employees, agents or contractors. However, this obligation will not apply to
the extent that the particular act or omission was done or omitted to be done
in accordance with CNE’s instructions or concurrence. Costs in this Article will
include legal costs on a solicitor-client basis.

7.2                                                                               CNE’s Responsibility

CNE will:

(a)                                  be liable to Canadian Superior for all
losses, costs, damages and expenses whatsoever (whether contractual or
otherwise), excepting consequential damages, that Canadian Superior may suffer,
sustain, pay or incur; and, in addition

(b)                                 indemnify and hold harmless Canadian Superior
and its directors, officers, agents, consultants, and employees against all
actions, causes of action, proceedings, claims, demands, losses, costs, damages
and expenses whatsoever that may be brought against or suffered by
Canadian Superior, its directors, officers, agents, consultants, and employees
or that they may sustain, pay or incur;

insofar as they are, in respect of operations or activities conducted
by CNE or on behalf of CNE hereunder, a result of: the gross negligence or
wilful or wanton misconduct of CNE, its employees, agents or contractors.
However, this obligation will not apply to the extent that the particular act
or omission was done or omitted to be done in accordance with Canadian Superior’s
instructions or concurrence. Costs in this Article will include legal
costs on a solicitor-client basis.

ARTICLE 8

NOTICES

8.1                                                                               Notice

All demands, notices or
other communications (in each case a “Notice”) to be given in connection with
this Agreement shall be in writing and shall be sufficiently given or made if:

(a)                               delivered to the intended recipient personally
or by courier during normal business hours on a Business Day at the intended
recipient’s address as set forth below; or

(b)                                 sent by facsimile transmission or sent to the
intended recipient by other means of recorded electronic communication:

	
  

  	
  Canadian Superior Energy Inc.:

  	
  Suite 3300, 400 – 3rd Avenue SW

  Calgary, Alberta T2P 4H2

  

 

 9
 

 

 

 

	
  

  	
  Attention:

  	
  President

  
	
   

  	
  Fax No.:

  	
  (403) 216-2374

  
	
   

  	
   

  	
   

  
	
   

  	
  Challenger Energy Corp.

  	
  Suite 3300, 400 - 3rd Avenue SW

  Calgary, Alberta T2P 4112

  
	
   

  	
   

  	
   

  
	
   

  	
  Attention:

  	
  President

  
	
   

  	
  Fax No.:

  	
  (403) 216-2374

  
				

 

8.2                                                                               Deemed Delivery

Any Notice given or made in
the manner set forth in Section 8.1 shall be deemed to have been given or
made and to have been received on the day of its delivery or transmission, as
the case may be, if such day is a Business Day and such Notice is received
prior to 2:00 p.m., Calgary time, and, if not, on the first Business Day
thereafter.

8.3                                                                               Change of Address

A Party may change its
address or telecopier number by Notice
to the other Party given in accordance with Section 8.1.

ARTICLE 9

AREA OF MUTUAL INTEREST

9.1                                                                               Creation of Area of Mutual
Interest

The Parties hereby establish
the Area of Mutual Interest. Except in accordance with the terms of this
Agreement, a Party shall not acquire any rights, directly or indirectly, in any
exploration licences, wells, or other petroleum and or natural gas interests in
the “Area of Mutual Interest” or the “AMI”) at any time for a period commencing on the Effective
Date and ending 120 days after the rig release date of the last well drilled
pursuant to the Work Programme (the “AMI Period”). For the purposes hereof each
Party shall be deemed to have acquired any AMI Interests acquired by its
Affiliates, and shall at all times be required to comply with all obligations
provided for hereunder as if those AMI Interests constituted property of that
Party.

9.2                                                                               Acquisition of lnterests within
AMI

(a)                                  If a Party (the “Acquiring Party”) acquires
an AMI Interest during the AMI Period, that Party shall, within ten (10) days
of acquiring such interest, notify in writing (the “AMI Notice”) the other
Party (the “Non-Acquiring Party”) and offer to the other Party their Working
Interest percent of the AMI Interest acquired by the Acquiring Party, on the
same terms and conditions as apply to the Acquiring Party under the applicable
licence, agreement or arrangement. The Non-Acquiring Party shall have thirty
(30) days from receipt of such AMI Notice to accept or decline to exercise its
option to acquire such interest from the Acquiring Party. To be considered a
valid AMI Notice, the AMI Notice shall contain such sufficient information and
detail of the terms and conditions of the acquisition of the AMI Interest by
the Acquiring Party such that the Non- Acquiring Party may reasonably
assess the acquisition opportunity.

(b)                                 If the consideration stipulated in the
licence, agreement or arrangement referred to in Section 9.2(a) of
this Agreement cannot be matched in kind by the other Party, or involves an
allocation

 10
 

 

 

of cash value to the
applicable AMI Interest where it forms a portion only of the assets subject to
the applicable transaction, the Acquiring Party shall, in its AMI Notice issued
to the Non-Acquiring Party, set out its bona-fide estimate of the cash
equivalent of such consideration, and acceptance of the offer and payment of
the relevant portion of that cash consideration shall constitute a valid
acceptance and satisfaction of the Non-Acquiring Party’s obligations in
acquiring the share of the relevant interest.

(c)                                  AMI
Interests which are acquired by a Party, in compliance with the terms hereof,
with or from a Third Party shall be governed by and subject to any agreement,
that may be entered into between them with respect to those AMI Interests
separate and apart from this Agreement.

ARTICLE 10

COVENANTS

10.1                                                                        Covenants

The Parties will use their reasonable commercial
efforts to proceed with the Rights Issuance contemplated pursuant to this
Agreement.

ARTICLE
11

MISCELLANEOUS

11.1                                                                        Amendments

All amendments to this Agreement shall he made in a
written instrument signed by both Parties.

11.2                                                                        Waiver in Writing

No waiver of any provision, or the breach of any
provision, of this Agreement shall be effective unless contained in a written
instrument signed by the Party granting the waiver. Such waiver shall affect
only the matter specifically identified in the instrument granting the waiver
and shall not extend to any other matter, provision or breach.

11.3                                                                        Delay
Not Waiver

The failure of a Party to give Notice to any other
Party or to take any other steps in exercising any right, or in respect of the
breach or nonfulfillment of any provision of this Agreement, shall not operate
as a waiver of that right, breach or provision nor shall any single or partial
exercise of any right preclude any other or future exercise of that right or
the exercise of any other right, whether in law or in equity or otherwise.

11.4                                                                        Acceptance
of Payment Not Waiver

Acceptance of payment by a Party after the breach or
nonfulfillment of any provision of this Agreement by another Party shall not
constitute a waiver of the provisions of this Agreement, other than any breach
cured by such payment.

 11
 

 

 

11.5                                                                        Primacy of Participation Agreement

In the event of a conflict
between the provisions of this Agreement, the Production Sharing Contract and
the Joint Operating Agreement, the provisions of this Agreement shall prevail.
In the event of a conflict between the provisions of the Production Sharing
Contract and the Joint Operating Agreement, the provisions of the Production
Sharing Contract shall prevail

11.6                                                                        Entire
Agreement

This Agreement constitutes
the entire agreement of the Parties in respect of the subject matter hereof and
supersedes all prior oral or written agreements and understandings of the
Parties.

11.7                                                                        Further Assurances

Each Party shall do all such
things and execute and deliver all such further instruments as the other
Parties may reasonably request to give effect to and implement this
Agreement.

11.8                                                                        Assignment

This Agreement may not
be assigned by either Party without the prior written consent of the other
Party, which consent shall not be unreasonably delayed or withheld.

11.9                                                                        Enurement

This Agreement is binding
upon and shall enure to the benefit of the Parties hereto and their respective
successors and permitted assigns.

11.10                                                                 Counterpart and
Facsimile Execution

This Agreement may be
executed in counterpart and all counterparts shall together constitute one
and the same Agreement. Any copies executed in counterpart may be
delivered via facsimile transmission and, if so delivered, shall be considered
to be originals for all purposes.

11.11                                                                 Delivery

A Party which has executed
this Agreement may deliver it to the other Party by facsimile transmission
at its address for such transmissions set out in Section 8, and any copy
so delivered shall be deemed an original for all purposes. A Party so
delivering this Agreement shall thereafter forthwith deliver to the other Party
an original execution page hereof with its original signature located
thereon provided, however, that any failure by a Party to so deliver such
original execution page shall not affect the validity or enforceabilitv of
this Agreement against that Party.

11.12                                                                 Severability

The invalidity or
unenforceability of any Section or provision of this Agreement shall not
affect the validity or enforceability of any other Section, provision or whole
of this Agreement.

10.13                                                                 Authority

Each of the Parties agrees
and acknowledges that it has the requisite capacity, power and authority to
enter into this Agreement and to lake such further steps as are required to
give effect to the provisions hereof.

 12
 

 

 

IN WITNESS WHEREOF the
Parties have hereby executed this Agreement as of the year and date first above
written.

	
  CHALLENGER ENERGY CORP.

  
	
   

  	
   

  
	
  Per:

  	
  /s/ Neil MacKenzie

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  CANADIAN SUPERIOR ENERGY INC.

  
	
   

  	
   

  
	
  Per:

  	
  /s/ Michael E. Coolen

  	
   

  
	
   

  	
  Michael E. Coolen, Director

  
	
   

  	
   

  
	
   

  	
  /s/ T.J. Harp Dir.

  	
   

  
	
   

  	
  T.J. Harp

  

 

 13

 

SCHEDULE
“A”

This is Schedule “A”
attached to and forming part of an Amended

and Restated Participation Agreement dated December 30, 2005

Between Canadian Superior Energy Inc. and

Challenger Energy Corp.

Production Sharing
Contract

 

PRODUCTION SHARING
CONTRACT

FOR

BLOCK 5(c)

(dated 20th day of
July, 2005)

TO

CANADIAN SUPERIOR
ENERGY INC.

Registered as No.          

IDENTIFIED as
Block 5(c) Offshore, Trinidad

TRINIDAD AND
TOBAGO

 

TABLE
OF CONTENTS

	
  

  	
   

  	
   

  	
   

  	
  Page

  
	
  ARTICLE 1

  	
   

  	
  DEFINITIONS

  	
   

  	
  3

  	
   

  
	
  ARTICLE 2

  	
   

  	
  SCOPE

  	
   

  	
  6

  	
   

  
	
  ARTICLE 3

  	
   

  	
  CONTRACT AREA

  	
   

  	
  7

  	
   

  
	
  ARTICLE 4

  	
   

  	
  CONTRACT TERM

  	
   

  	
  7

  	
   

  
	
  ARTICLE 5

  	
   

  	
  RELINQUISHMENTS

  	
   

  	
  8

  	
   

  
	
  ARTICLE 6

  	
   

  	
  RETAINED EXPLORATION AREA

  	
   

  	
  9

  	
   

  
	
  ARTICLE 7

  	
   

  	
  MINIMUM EXPLORATION WORK PROGRAMME

  	
   

  	
  10

  	
   

  
	
  ARTICLE 8

  	
   

  	
  GUARANTEES

  	
   

  	
  11

  	
   

  
	
  ARTICLE 9

  	
   

  	
  COORDINATION COMMITTEE

  	
   

  	
  12

  	
   

  
	
  ARTICLE 11

  	
   

  	
  ANCILLARY RIGHTS OF CONTRACTOR

  	
   

  	
  15

  	
   

  
	
  ARTICLE 12

  	
   

  	
  ASSISTANCE BY THE MINISTER

  	
   

  	
  15

  	
   

  
	
  ARTICLE 13

  	
   

  	
  DISCOVERY, COMMERCIALIZATION PROCEDURE

  	
   

  	
  15

  	
   

  
	
  ARTICLE 14

  	
   

  	
  EXPLORATION WORK PROGRAMME

  	
   

  	
  19

  	
   

  
	
  ARTICLE 15

  	
   

  	
  DEVELOPMENT AND PRODUCTION WORK PROGRAMMES AND
  BUDGETS

  	
   

  	
  19

  	
   

  
	
  ARTICLE 16

  	
   

  	
  NATURAL GAS

  	
   

  	
  20

  	
   

  
	
  ARTICLE 17

  	
   

  	
  BOOKS OF ACCOUNT, FINANCIAL REPORTING, AUDIT, AND
  COST VERIFICATION

  	
   

  	
  22

  	
   

  
	
  ARTICLE 18

  	
   

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

  	
   

  	
  23

  	
   

  
	
  ARTICLE 19

  	
   

  	
  MEASUREMENT OF PETROLEUM

  	
   

  	
  26

  	
   

  
	
  ARTICLE 20

  	
   

  	
  VALUATION

  	
   

  	
  27

  	
   

  
	
  ARTICLE 21

  	
   

  	
  FINANCIAL OBLIGATIONS

  	
   

  	
  28

  	
   

  
	
  ARTICLE 22

  	
   

  	
  PAYMENT AND CURRENCY

  	
   

  	
  31

  	
   

  
	
  ARTICLE 23

  	
   

  	
  MATERIALS AND EQUIPMENT IMPORT DUTIES

  	
   

  	
  31

  	
   

  
	
  ARTICLE 24

  	
   

  	
  OWNERSHIP OF ASSETS

  	
   

  	
  32

  	
   

  
	
  ARTICLE 25

  	
   

  	
  SUBCONTRACTORS, PERSONNEL AND TRAINING

  	
   

  	
  32

  	
   

  
	
  ARTICLE 26

  	
   

  	
  STATE’S RIGHT OF REQUISITION

  	
   

  	
  33

  	
   

  
	
  ARTICLE 27

  	
   

  	
  UNITIZATION

  	
   

  	
  33

  	
   

  

 

 i
 

 

 

	
  ARTICLE 28

  	
   

  	
  CONFIDENTIALITY

  	
   

  	
  34

  	
   

  
	
  ARTICLE 29

  	
   

  	
  PIPELINES

  	
   

  	
  34

  	
   

  
	
  ARTICLE 30

  	
   

  	
  INSURANCE

  	
   

  	
  34

  	
   

  
	
  ARTICLE 31

  	
   

  	
  ASSIGNMENT

  	
   

  	
  35

  	
   

  
	
  ARTICLE 32

  	
   

  	
  APPLICABLE LAW

  	
   

  	
  35

  	
   

  
	
  ARTICLE 33

  	
   

  	
  CONSULTATION, EXPERT DETERMINATION AND ARBITRATION

  	
   

  	
  36

  	
   

  
	
  ARTICLE 34

  	
   

  	
  FORCE MAJEURE

  	
   

  	
  37

  	
   

  
	
  ARTICLE 35

  	
   

  	
  NOTICES

  	
   

  	
  37

  	
   

  
	
  ARTICLE 36

  	
   

  	
  TERMINATION

  	
   

  	
  38

  	
   

  
	
  ARTICLE 37

  	
   

  	
  ABANDONMENT PROGRAMME AND BUDGET

  	
   

  	
  38

  	
   

  
	
  ARTICLE 38

  	
   

  	
  THE PETROLEUM ACT AND REGULATIONS

  	
   

  	
  39

  	
   

  
	
  ARTICLE 39

  	
   

  	
  MISCELLANEOUS

  	
   

  	
  40

  	
   

  
	
  ANNEX “A”

  	
   

  	
  GEOGRAPHICAL DESCRIPTION OF BLOCK 5(c)

  	
   

  	
  44

  	
   

  
	
  ANNEX “B”

  	
   

  	
   

  	
   

  	
  47

  	
   

  
	
  ANNEX “C”

  	
   

  	
   

  	
   

  	
  51

  	
   

  

 

 ii

 

PRODUCTION SHARING
CONTRACT

This Contract made
this 20 day of July,
2005 among the PRESIDENT OF THE REPUBLIC OF TRINIDAD TOBAGO, HIS EXCELLENCY
PROFESSOR GEORGE MAXWELL RICHARDS, Intendant of State Lands (hereinafter
referred to as “the President”) of the FIRST PART, THE MINISTER OF ENERGY AND
ENERGY INDUSTRIES, the HONOURABLE ERIC ANTHONY WILLIAMS(hereinafter referred to
as “the Minister”) of the SECOND PART and CANADIAN SUPERIOR ENERGY INC. a
company incorporated under the Laws of Alberta, Canada and registered under
section 138 of the Companies Act Chap. 81.01 with its principal office at
Ignatius Chambers, 4th Floor, 33 St. Vincent Street, Port of Spain, Trinidad,
Trinidad and Tobago (hereinafter referred to as “the Contractor”) of the THIRD
PART.

WHEREAS, pursuant
to Section 6(3) of The Petroleum Act Chapter 62:01 (“the Act”) the
Minister is authorized to enter into Production Sharing Contracts for the
carrying out of Petroleum Operations upon such terms and conditions as the
Cabinet may approve.

AND WHEREAS, the
Minister, under Regulation 4 of the Petroleum Regulations made under the Act,
issued on the 4th day of July, 2003, the Petroleum Regulations (Competitive
Bidding) Order 2003 published as Legal Notice No. 113 of 2003 and amended
by the Petroleum Regulations (Competitive Bidding) (Amendment) Order 2003
issued on the 21st day of November, 2003 and published as Legal Notice
No. 116 of 2004 by which bids were invited for certain submarine areas
described in the First Schedule therein.

AND WHEREAS, the
Contractor submitted a bid on 14th January, 2004 in accordance with and
pursuant to said Order.

AND WHEREAS, by
Cabinet Minute No. 1004 dated April 14, 2005 the Cabinet approved this
Contract.

AND WHEREAS, the
Contractor has represented to the Minister that it has the requisite technical
and financial capabilities to carry out Petroleum Operations and wishes to
assist the Government in thoroughly evaluating the Petroleum potential and
promptly and efficiently developing Petroleum resources discovered in the
Contract Area.

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

ARTICLE 1

DEFINITIONS

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

1.1                                 “Accounting
Procedure” means the Accounting Procedure set out in Annex ”C” hereto.

1.2                                 An
“Affiliated Company” or “Affiliate” means any entity directly or indirectly
effectively controlling or effectively controlled by, or under direct or indirect
effective common control with a specified entity or which is directly or
indirectly controlled by a company or corporation that also directly or
indirectly controls the Contractor.  For
the purpose of this definition “control” when used with respect to any
specified entity means the power to direct, administer and dictate policies of
such entity (it being understood and agreed that it is not necessary to own
directly or indirectly fifty percent (50%) or more of such entity’s voting
securities to have effective control over such entity, but ownership, direct or
indirect, of fifty percent (50%) or more of such entity’s voting securities
shall automatically indicate effective control), and the terms “controlling”
and “controlled” have meanings corresponding to the foregoing.

1.3                                 “Appraisal”
or “Appraisal Programme” means all works carried out by Contractor following a
Discovery of Petroleum in the Contract Area for the purpose of delineating one
or more Petroleum reservoirs to which that Discovery relates in terms of
thickness and lateral extent and in order to further define the quantity of
recoverable Petroleum therein.

 3
 

 

1.4                                 “Appraisal
Area” means that area referred to in Article 13.2(a) as approved by the
Minister from time to time.

1.5                                 “Assessment
Plan” means a plan submitted pursuant to Gas Discovery in sufficient detail to
be able to seek a market for the Natural Gas.

1.6                                 “Associated
Natural Gas” means all Natural Gas produced from any reservoir the predominant
production of which is Crude Oil and which is separated from Crude Oil in
accordance with normal oilfield practice including free gas cap, but shall
exclude any liquid hydrocarbon extracted from such gas either by normal field
separation, dehydration or in a gas plant.

1.7                                 “Available
Crude Oil” means all Crude Oil produced and saved from the Contract Area and
not used in Petroleum Operations.

1.8                                 “Available
Natural Gas” means all Natural Gas produced and saved from the Contract Area
and not used in Petroleum Operations.

1.9                                 “Available
Petroleum” means all Available Crude Oil and Available Natural Gas.

1.10                           “Barrel”
means a unit of volume equal to forty-two (42) United States gallons, liquid
measure, corrected to a temperature of sixty (60) degrees Fahrenheit and
fourteen point seven (14.7) p.s.i.a.

1.11                           “Calendar
Quarter” means a period of three (3) consecutive Months beginning on the first
day of January, April, July, or October.

1.12                           “Calendar
Year” means a period of twelve (12) consecutive Months beginning on the first
day of January and ending on the following thirty first day of December in the
same year.

1.13                           “Commercial
Discovery” means a Discovery that the Contractor proposes to develop and
produce under the terms of the Contract.

1.14                           “Commercial
Production” means regular and continuous production of Petroleum from a
Production Area pursuant to an annual production schedule approved under
Article 15.

1.15                           “Contract”
or “Production Sharing Contract” means this Contract and any subsequent
amendments.

1.16                           “Contract
Area” means the area specified in Article 3 hereof and delineated on the
map set out in Annex A, as modified and reconfigured from time to time in
accordance with the stipulations of this Contract.

1.17                           “Contractor”
means CANADIAN SUPERIOR ENERGY INC. and includes its/their respective
successors and permitted assignees.

1.18                           “Contract
Year” means a period of twelve (12) consecutive months within the term of the
Contract, beginning on the Effective Date or any anniversary thereof.

1.19                           “Coordination
Committee” means the committee composed of representatives of the Minister and
the Contractor constituted in accordance with Article 9.

1.20                           “Crude
Oil” means any hydrocarbon produced from the Contract Area which at standard
conditions of temperature and pressure (40 degrees Fahrenheit and14.7 p.s.i.a.)
is in a liquid state at the wellhead or separator, or distillate and condensate
which is extracted from gas or casing-head gas in a plant.

1.21                           “Development”
or “Development Operations” or “Development Work” shall include but not be
limited to:

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(i)                                     all
the operations and activities under the Contract with respect to the drilling
of wells other than Exploration Wells and Appraisal wells, the deepening,
plugging back, completing and equipping of such wells, together with the
design, construction and installation of such equipment, pipeline or lines,
installations, production units and all other systems relating to such wells as
may be necessary in conformity with sound oilfield and generally prevailing
environmental practices in the international

(ii)                                  all
operations and activities relative to the servicing and maintenance of
pipelines, lines, installations, production units and all related activities
for Production and management of wells.

1.22                           “Development
Plan” means the plan for development of a Commercial Discovery, as provided in
Article 13.

1.23                           “Discovery”
means any Petroleum not previously known to have existed, which is recovered at
the surface in a flow measurable by conventional Petroleum industry testing
methods.

1.24                           “Effective
Date” means the date on which this Contract has been signed by all Parties.

1.25                           “Energy
Equivalent Basis” means the equivalent of Natural Gas in Barrels of Crude Oil
with 5,800 standard cubic feet of Natural Gas being equivalent to one Barrel of
Crude Oil.

1.26.                        “Exploration”
or “Exploration Operations” means operations which include such geological,
geophysical, and other surveys and any interpretation of data relating thereto,
and the drilling of such shot holes, core holes, stratigraphic tests,
Exploration Wells for the Discovery of Petroleum, Appraisal of Discoveries and
other related operations.

1.27                           “Exploration
Period” means the period not exceeding six (6) Contract Years from the
Effective Date divided into up to three (3) phases, as provided for in Article 4.1.

1.28                           “Exploration
Well” means any well drilled with the objective of confirming a structure or
geologic trap in which Petroleum has not been previously discovered.

1.29                           “Field”
means an area within the Contract Area consisting of a Petroleum reservoir or
multiple Petroleum reservoirs all grouped on or related to the same individual
geological structural feature or stratigraphic conditions from which Petroleum
may be produced commercially.  All
reservoirs overlying or underlying a Field shall constitute part of such Field.

1.30                           “Measurement
Point” means the location specified in the approved Development Plan within or
outside of the Contract Area where the Petroleum is metered and delivered to
the Minister and the Contractor.

1.31                           “Minimum
Exploration Programme” means the Exploration work to which Contractor has
committed itself for each phase of the Exploration Period in accordance with
Article 7.

1.32                           “Minister”
means the member of Cabinet to whom responsibility for matters related to
Petroleum is assigned and his duly authorized delegates pursuant to
Section 5 of the Act.

1.33                           “Month”
or “Calendar Month” means any of the twelve months of the Calendar Year.

1.34                           “Natural
Gas” means all Petroleum which at standard conditions of temperature and
pressure (60 degrees Fahrenheit and14.7 p.s.i.a.) is in a gaseous state,
including wet gas, dry gas, and residue gas remaining after the extraction,
processing or separation of liquid Petroleum from wet gas, as well as
non-Petroleum gas or gases produced in association with liquid or gaseous
Petroleum.

1.35                           “Natural
Gas Field” means a Field from which more than fifty percent (50%) per cent of
the estimated reserves on an Energy Equivalent Basis is Natural Gas at surface
conditions.

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1.36                           “Non-associated
Natural Gas” means all gaseous hydrocarbons produced from gas reservoirs, and
includes wet gas, dry gas and residue gas remaining after the extraction of
liquid hydrocarbons from wet gas.

1.37                           “Operator”
means one of the entities comprising the Contractor and in charge of the day to
day activities of the Contractor under this Contract.  The initial Operator shall be CANADIAN
SUPERIOR ENERGY INC.  No change in the
Operator shall take effect unless it has been approved by the Minister.

1.38                           “Party”
or “Parties” means the Minister and the Contractor and does not include any
Subcontractor(s).

1.39                           “Petroleum”
means all natural organic substances composed of carbon and hydrogen; and
includes Crude Oil and Natural Gas, and all other mineral substances, products,
by-products and derivatives that are found in conjunction with such substances.

1.40                           “Petroleum
Operations” means the Exploration Operations, the Development Operations, the
Production Operations, and all other activities related thereto carried out
under this Contract, but excludes mining operations involving the extraction of
Petroleum from bituminous shales, tar sands, asphalt or other like deposits.

1.41                           “Petroleum
Regulations” means the regulations made pursuant to the Act.

1.42                           “Production
Area” means the portion of the Contract Area specified in an approved
Development Plan under Article 13.8.

1.43                           “Production”
or “Production Operations” shall include but not be limited to operations and
all activities related thereto carried out for Petroleum production after the
Minister’s approval of the Development Plan, such as extraction, injection,
stimulation, treatment, transportation, storage, lifting, and related
operations, but does not include any storage or transportation beyond the
Measurement Point.

1.44                           “Quarter”
means a period of three (3) consecutive Months.

1.45                           “State”
or “Government” means the Government of the Republic of Trinidad and Tobago and
all agencies or instrumentalities thereof.

1.44                           “Subcontractor”
means a specialized entity contracted by Contractor to carry out specific work
relative to Petroleum Operations under the supervision of and for the account
of Contractor.

1.47                           “Work
Programme” means a programme itemizing the Petroleum Operations to be conducted
with respect to the Contract Area and the time schedule for accomplishing such
operations.

ARTICLE 2

SCOPE

2.1                                 This
is a Production Sharing Contract, the object of which is the Exploration,
Appraisal, Development and Production of Petroleum in the Contract Area and the
provision of required infrastructure within and outside of the Contract Area up
to the Measurement Point, all at Contractor’s sole risk and expense.

2.2                                 Subject
to the terms and conditions of the Contract, the Minister hereby appoints
Contractor as the exclusive agent to conduct Petroleum Operations in the
Contract Area during the term of the Contract.

2.3                                 Contractor
shall be responsible to the Minister for the execution of such Petroleum
Operations in accordance with the provisions of the Contract.  Without prejudice to Contractor’s position as
an independent Contractor hereunder, the work to be done by Contractor shall be
subject to of the general supervision and review of the Minister in accordance
with the Contract.

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2.4                                 In
performing Petroleum Operations, Contractor shall provide the requisite
financial resources and employ industry standards, scientific methods,
procedures, technologies and equipment generally accepted in the international
Petroleum industry.

2.5                                 Contractor
shall receive no compensation for its services, nor any reimbursement of its
expenditures under the Contract, except for the share of Petroleum from the
Contract Area to which it may become entitled under Article 18.  If there is no Commercial Discovery in the
Contract Area or if the Contractor’s share of the production achieved from
Production Areas within the Contract Area developed by Contractor is
insufficient to reimburse Contractor, Contractor shall bear its own losses.

ARTICLE 3

CONTRACT AREA

3.1                                 The
Contract Area as of the Effective Date of the Contract comprises a total area
of approximately thirty two thousand three hundred and ninety two (32,392)
hectares, as described in Annex ”A” attached hereto and delineated in the
map which forms part thereof.

3.2                                 Except
for the rights expressly provided by the Contract, no right is granted in
favour of the Contractor to the surface area, sea-bed, sub-soil or to any “natural
resources” or aquatic resources.

ARTICLE 4

CONTRACT TERM

4.1                                 The
Exploration Period shall be for a period not exceeding six (6) Contract Years from
the Effective Date, divided into:

·                  a first phase of
three (3) years

·                  an optional
second phase of three (3) years

Contractor’s right to enter the next phase is subject
to it having fulfilled its obligations for the then current phase.

4.2.                              Contractor
shall notify the Minister of its election to enter the next phase at least
ninety (90) days prior to expiration of the then current phase.  If Contractor does not so elect to enter the
next phase, the Contract shall terminate pursuant to the terms of this Contract
under terms and conditions to be agreed by the Minister and the Contractor at
the end of the then current phase, with respect to any portion of the Contract
Area not included in:

(a)                                  a
Production Area ;

(b)                                 areas
subject to an extension pursuant to Article —4.3;

(c)                                  areas
retained for a market development phase pursuant, to Article 14.2;

(d)                                 areas
retained for Exploration pursuant to Article 4.1; and

(e)                                  any
areas then pending approval or then in dispute under Article 13.4(d) and
13.2(d).

4.3                                 Where
insufficient time is available during the Exploration Period to complete the
commercialization determination under an Appraisal Programme approved under
Articles 13.2 or 13.3, the Contractor may have the right, upon written
application to the Minister not less than ninety (90) days before the end of
the Exploration Period, to an extension of the term with respect to the
Appraisal Area until the date on which the evaluation report on such Discovery
is due under Article 13.2(d) or 13.4(d).

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4.4                                 In
the event of a Commercial Discovery, the term of the Contract shall be
twenty-five (25) years from the Effective Date with respect to the Production
Area corresponding to such Commercial Discovery; provided, however, if the
Commercial Discovery relates to a Natural Gas Field, the term of the Contract
shall be twenty-five (25) years from the Effective Date plus the period of any
market development phase granted and 
utilized in accordance with Article 14.2 and any extension granted
in accordance with Article 14.4, with respect to the Production Area
corresponding to such Natural Gas Field.

4.5                                 The
Contractor may request by notice to the Minister at least one (1) year prior to
the end of the term of the Contract to extend the duration of the Contract with
respect to any Production Area for up to an additional five (5) years on terms
and conditions to be mutually agreed between the Minister and the Contractor.

4.6                                 The
Minister may grant further five (5) year extensions in the same manner as has
been laid down in Article 4.5.

ARTICLE 5

RELINQUISHMENTS

5.1                                 Subject
to Article 5.2, the Contract Area shall be reduced by:

(a)                                  at
least [*] percent [*] of the original Contract Area, not later than the end of
the first phase of the Exploration Period;

(b)                                 all
portions of the original Contract Area not later than the end of the
Exploration Period under Article 4.1 with the exception of:

(i)                                     Production
Areas;

(ii)                                  Appraisal
Areas subject to an extension under Article 4.3;

(iii)                               Natural
Gas Discovery areas retained for a market development phase under
Article 14.2 and

(iv)                              Exploration
areas retained in accordance with Article 4.1;

(c)                                  any
Appraisal Area subject to an -extension rider Article 4.3 that is not
declared a Commercial Discovery, by the end of the extension under
Article 4.3;

(d)                                 any
Natural Gas Discovery area retained pursuant to Article 14.2 that is not
declared a Commercial Discovery, by the end of the market development phase
granted under Article 16.2;

(e)                                  any
Production Area, not in Commercial Production by the end of eight (8) years
after declaration of Commercial Discovery for such area, within thirty (30)
days after the Minister’s request for such relinquishment, and

(f)                                    any
Exploration area retained pursuant to Article 4.1 for which no approved
Exploration Work Programme for such area is committed.

5.2                                 Subject
only to Articles 5.1(e) and 5.6, the Contractor shall not be required
pursuant to Article 5.1 to relinquish any portion of the Contract Area
designated as a Production Area.

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

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5.4                                 The
area designated under Article 5.3 for relinquishment shall consist as far
as practicable of rectangular blocks bounded by lines running due north and
south and due east and west, having the longer side no more than three (3)
times the shorter side.  Unless the
Minister specifically consents, no individual block relinquished shall be less
than thirty percent (30%) of the total area being relinquished at such time.

5.5                                 Article 5.4
shall also apply where a Contractor voluntarily surrenders a part of the
Contract Area.

5.6                                 The
Contractor shall relinquish rights to conduct Petroleum Operations in a
Production Area upon request of the Minister where, for reasons other than
force majeure or scheduled maintenance under an approved Work Programme and budget,
the Contractor has ceased normal production of such Production Area for more
than one hundred and eighty (180) consecutive days.

5.7                                 No
relinquishment shall relieve Contractor of accrued, but unfulfilled obligations
under the Contract.  In the event that
Contractor desires to relinquish its rights hereunder in all of the Contract
Area without giving fulfilled all accrued Minimum Work Programme under
Article 7, Contractor or its guarantor shall pay the Minister prior to the
date of such proposed total relinquishment an amount equal to the remaining
amount of the non-discharged guarantees under Article 8 corresponding to
such accrued, but unfulfilled work obligations.

5.8                                 Prior
to relinquishment of any area, Contractor shall perform all necessary abandonment
programme activities in accordance with internationally accepted petroleum
industry standards to restore such area as nearly as possible to the condition
in which it existed on the Effective Date, including removal of such
facilities, equipment or installations as the Minister may instruct, and shall
take action necessary to prevent hazards to human life, property and the
environment which may be caused by its facilities, equipment or installations.

ARTICLE 6

RETAINED EXPLORATION AREA

6.1                                 Where
the Contractor declares a Commercial Discovery in the Contract Area during the
Exploration Period specified in Article 4.1 or any extension as provided
for under Article 4.3, the Contractor shall have the option, exercisable
by notice to the Minister at least one hundred and twenty (120) days before the
relinquishment required under Article 5.1(b), to retain up to [*] percent
[*] of the original Contract acreage or an area to be mutually agreed by the
Minister and Contractor if justified by Contractor’s Work Programme for ongoing
Exploration.  The notice to the Minister:

(a)                                  shall
specify the coordinates of the Exploration area selected for retention, which
shall be comprised of no more than two (2) separate rectangular blocks that
comply with the specifications stated in Article 5.4; and

(b)                                 shall
contain the Contractor’s proposed Exploration Work Programme and budget
corresponding to such area for the balance of the current Calendar Year and the
next Calendar Year.

Provided the Minister approves the initial Exploration
Work Programme submitted with the aforementioned notice, the Contractor shall
have the right to conduct Petroleum Operations in the retained Exploration area
for so long during the term of the Contract as it commits to and carries out a
biennial Exploration Work Programme, acceptable to the Minister, with respect
to such retained area.

6.2                                 If
the Contractor elects to retain any portion of the Exploration area selected
under Article 4.1 beyond the date for which an agreed programme is
committed, the Contractor shall propose, for the Minister’s approval, an
Exploration Work Programme and budget for the next two (2) Calendar Year
periods.  Such proposal shall be
presented to the Minister at least ninety (90) days before the end of the
period for which an Exploration Work Programme has been approved.

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6.3                                 Notwithstanding
the guarantees committed to under Article 8, the Contractor shall complete
the Work Programme as agreed to under this Article .

ARTICLE 7

MINIMUM EXPLORATION WORK PROGRAMME

7.1                                 Contractor
shall commence Exploration Operations hereunder within ninety  (90) days after the Effective Date.  Such Exploration Operations shall be
diligently and continuously carried out in accordance with sound and current
international Petroleum industry practice for the duration of the Exploration
Period.

7.2                                 During
the first phase of the Exploration Period, Contractor shall carry out at least
the following Minimum Exploration Programme.

(a)                                  Geological:

Evaluate,
integrate and map all available data related to the Contract Area including
sample examination; core analysis; geochemical analysis; and petrographic
studies of existing wells located on/or nearby the:  Contract Area.

(b)                                 Geophysical:

(i)                                     Reprocess
[*]  3D seismic available for the block.

(ii)                                  Evaluate,
integrate and map all seismic data related to the Contract Area.

(c)                                  Drilling:

Drilling of at least [*] Exploration Wells, to depths
of at least [*] metres, true vertical depth below mudline with spudding of the
first such well to be not later than [*] after the Effective Date.

7.3                                 During
the optional second phase of the Exploration Period, Contractor shall carry out
at least the following Minimum Exploration Programme.

(a)                                  Geological:

Evaluate, integrate and map all data related to the
Contract Area including but not limited to sample examination; core analysis;
geochemical analysis; and petrography studies of all additional wells during
the first Phase of the Exploration Period.

(b)                                 Geophysical:

Evaluate, integrate and map all seismic data related
to Contract Area including special processing (i.e. AVO); modification of
seismic interpretation; and modeling based on additional wells drilled in the
first Phase.

(c)                                  Drilling:

Drilling of at least [*] Exploration [*],  to a depth of at least [*] thousand [*] hundred
[*] metres, true vertical depth below mudline.

7.4.                              For
purposes of the Minimum Exploration Programme under Articles 7.2 through
Article 7.3:

(a)                                                                                  The
obligations related to the second phase or third phase of the Exploration
Period will accrue only if Contractor elects to enter such subsequent phase by
notice pursuant to Article 4.1;

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(b)                                                                                 In
the event that an Exploration Well attains the minimum depth requirement in a
prospective zone, Contractor shall be required to continue drilling to a depth
which will ensure penetration of and allow for the proper testing of the entire
prospective zone, provided such further drilling is technically feasible.

(c)                                                                                  Additional
line kilometres of seismic and additional Exploration Wells beyond the minimum
required for any phase of the Exploration Period may be carried forward to
satisfy the respective seismic and drilling obligations of a subsequent phase
of the Exploration Period.

7.5                                 Neither
Appraisal wells, seismic surveys nor any other Petroleum Operations carried out
as part of an Appraisal Programme or Assessment Plan approved under
Article 13 shall discharge the Contractor of obligations in respect of the
Minimum Exploration Programme.

ARTICLE 8

GUARANTEES

8.1                                 Within
seven (7) days after the Effective Date of the Contract, upon commencement of
each subsequent phase of the Exploration Period entered into under
Article 4 and within seven (7) days of approval being granted for an
Exploration Work Programme under Article 6 or for any additional
Exploration or Appraisal Work Programme pursuant to Article 13.6(c),
Contractor shall provide the Minister with irrevocable guarantees from a
guarantor of financial substance acceptable to the Minister for an amount equal
to:

(a)                                  the
respective amounts specified in Article 8.2, of carrying out the Work
Programmes under Articles 6, 7 and 13.6 (c) ;and

(b)                                 the
sum of [*] US dollars for the performance of any obligation under the Contract
other than those covered by the guarantees under (a) above.

Such guarantees shall be
in a form and substance acceptable to the Minister.

8.2                                 The
respective amounts of the guarantees for obligations arising out of Work
Programmes referred to in Article 8.1 shall be:

(a)                                  For
the first phase of the Exploration Period [*]

(b)                                 For
the second phase of the Exploration Period [*]

(c)                                  For
any retained Exploration area, the estimated cost of the Work Programme that
the Contractor commits itself to car out under Article 6 from time to
time.

(d)                                 For
any additional Exploration or Appraisal Work Programme, pursuant to
Article 13.6(c), the estimated cost of the Work Programme that the
Contractor commits itself to carry out under Article 13.6(c) from time to
time.

8.3                                 Upon
delivery to the issuing guarantor of a certificate from the Contractor
countersigned on behalf of the Minister by a duly authorized official that the
corresponding items of work have been completed in accordance with the Contract
and that all technical data related thereto has been delivered to the Minister
the guarantee(s) shall be reduced in accordance with the following schedule:

(a)                                  by
an amount of [*] US dollars upon completion of the first phase.

(b)                                 by
an amount of [*] US dollars upon completion of the second phase.

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(c)                                  by
an amount equal to the estimated cost of the Work Programme agreed to under
Article 6 from time to time.

(d)                                 by
an amount equal to the estimated cost of the Work Programme agreed to under
Article 13.4 (c) from time to time.

8.4                                 If,
at the end of any phase of the Exploration Period, an approved period in
respect of a retained Exploration area pursuant to Article 6, an approved
period in respect of an additional Exploration or Appraisal Work Programme
pursuant to Article 13.6(c), or upon termination of the Contract,
Contractor has failed to perform in accordance with the Contract all or any
part of accrued Work Programmes, the Contractor or its guarantor shall on
demand from the Minister immediately pay the Minister the entire remaining
amount of such outstanding guarantee or guarantees.

8.5                                 The
Contractor shall deliver to the Minister within seven (7) days after the
Effective Date of the Contract in a form acceptable to the Minister an
undertaking from the ultimate parent company that such parent company shall
provide all technical and financial resources that its subsidiary may require
to meet on a timely basis Contractor’s obligations under the Contract.

ARTICLE 9

COORDINATION COMMITTEE

9.1                                 Within
ten (10) days after the Effective Date, a Coordination Committee composed of
four (4) members, two (2) of whom shall be appointed by the Minister and two
(2) by the Contractor, shall be established. 
A Party, by at least ten (10) days’ notice to the other Party, may
replace one or more of its members on the Coordination Committee.  The Chairman of the Coordination Committee
shall be appointed by the Minister from the members appointed by him, and the
secretary shall be named by the Contractor from among its appointees.  Additional representatives of either Party
may attend meetings as observers or alternate members.

9.2                                 The
mandate of the Coordination Committee is to assist Contractor in its activities
under this Contract and to provide a forum for a continuous dialogue and flow
of information between the Contractor and the Minister regarding Contractor’s
planned activities and progress related to the Contract Area.  The Committee shall review proposals for
revisions to agreed Work Programmes and budgets and periodically, evaluate the
Contractor’s progress in respect of approved Work Programmes, budgets and other
matters related to Petroleum Operations under this Contract.

9.3                                 Ordinary
meetings of the Coordination Committee shall be held quarterly in Port of
Spain, or any other location agreed by the Parties.  Special meetings of the Coordination
Committee may be called on reasonable notice by either Party for the purpose of
considering any major development or problems in Petroleum Operations.

9.4                                 The
secretary’s minutes of a meeting shall be prepared, and circulated within
fourteen (14) days after adjournment of the meeting.  A copy of such minutes shall be delivered to
each of the Parties for information and appropriate action.

9.5                                 The
Coordination Committee may from time to time designate one or more technical
committees, composed of specialists appointed by the Parties to assist as required.

ARTICLE 10

UNDERTAKING BY CONTRACTOR

10.1                           Resident
Representative:  Within thirty (30)
days after the Effective Date Contractor shall designate a representative
residing in Trinidad and Tobago who shall have full authority to represent it
in respect of matters related to the Contract and to receive notices addressed
to Contractor.

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10.2                           Office:  Within ninety (90) days after the Effective
Date, Contractor shall establish an office in Trinidad and Tobago with
sufficient competence and capacity to conduct and perform Petroleum Operations
in accordance with the terms of this Contract.

10.3                           Conduct
of Petroleum Operations:  Contractor
shall conduct Petroleum Operations hereunder in a continuous, diligent, and
workmanlike manner, in accordance with applicable law and the Contract, and
sound and current international petroleum industry practices and environmental
standards applicable from time to time in similar circumstances, all designed
to achieve efficient and safe Exploration and Production of Petroleum and to
maximize the ultimate economic recovery of Petroleum from the Contract
Area.  In this regard, Contractor shall
ensure that all materials, equipment, technologies and facilities used in
Petroleum Operations comply with engineering and environmental standards
generally accepted in the international petroleum industry, and are kept in
good working order.

10.4                           Notification
of Work:  Contractor shall provide
the Minister with regular and complete information concerning all Petroleum
Operations and shall present to the Minister prior to execution of specific
work information relative thereto.

10.5                           Records: 
Contractor shall prepare and maintain in Trinidad and Tobago at all
times during the term of the Contract accurate and current records of its
Petroleum Operations hereunder.

10.6                           Reports: 
In accordance with Annex ”B”, the Contractor shall submit to the
Minister detailed daily drilling reports and monthly physical progress reports
covering in reasonable detail all the activities carried out hereunder, as well
as all other reports as may be required by the Minister.

10.7                           Comprehensive
Technical and Commercial Evaluation: 
Within ninety (90) days after completion of the Minimum Exploration
Programme under Articles 7.2 and 7.3 respectively, and Work Programmes
under Articles 4 and 13, Contractor shall prepare and present to the
Minister a comprehensive technical and commercial evaluation of the Petroleum
potential of those portions of the Contract Area for which Exploration
Operations and other activities have been performed or evaluated by the work
conducted.

10.8                           Data:  Contractor shall provide the Minister in
accordance with Annex ”B” any and all data, reports, samples, information,
interpretation of such data and all other information.  or work product pertaining to the Contract
Area including in particular all data for which the cost was recorded by
Contractor as a cost of Petroleum Operations. 
The Contractor may retain for use in Petroleum Operations hereunder
copies of technical data.  All original
data shall be delivered by Contractor to the Minister not later than the end of
the term of the Contract.  Subject to the
prior approval of the Minister, Contractor may:

(a)                                  export
original data;

(b)                                 retain
for use in Petroleum Operations hereunder original technical data;

(c)                                  export
for processing or laboratory examination or analysis, samples or other original
materials, provided that samples equivalent in size and quality or, where such
material is capable of reproduction, copies of equivalent quality have first
been delivered to the Minister.

10.9                           Inspection
by the Minister:

(a)                                  Contractor
shall enable at all reasonable times the duly authorized representatives of the
Minister and other agencies of the Government to inspect any part of Petroleum
Operations and all facilities, installations, offices, records, books or data
related to Petroleum Operations.

(b)                                 All
duly authorized representatives of the Minister and other agencies of the
Government agree to abide by the posted or published safety rules of the Contractor
during such inspections.

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10.10                     Use
of Facilities:  Contractor shall
provide facilities to a reasonable number of duly authorized representatives of
the Minister and other agencies of the Government to perform their duties and
obligations in relation to this Contract, including in the case of Field
operations, transportation, lodging, food and other amenities at equal
conditions as those supplied by Contractor to its own staff.

10.11.                  Loss
or Damage:  Contractor shall bear
responsibility in accordance with applicable law for any loss or damage to
third parties caused by its employees’ or Subcontractors’ wrongful or negligent
acts or omissions and indemnify the Minister and the Government against
all.  claims and liabilities in respect
thereof.

10.12                     Legal
Proceedings:  Contractor shall give
the Minister timely notice of any legal proceedings in relation to this
Contract.

10.13                     Environment,
Pollution, Safety:  While conducting
Petroleum Operations and in accordance with sound and current international
Petroleum industry practice, Contractor shall take and ensure that its
Subcontractors and agents take necessary measures for safety of life;
conservation of property, crops, fish, wildlife and navigation; protection of
the environment; prevention of pollution; and safety and health of personnel,
including but not limited to:

(a)                                  ensuring
security areas around all machinery and equipment;

(b)                                 erecting
of fences, if applicable, at a distance of not less than fifty (50) metres from
any drilling rig, generator, or other equipment of a dangerous nature;

(c)                                  providing
secure storage areas for all explosives, detonators, and similar dangerous
materials used in Petroleum Operations;

(d)                                 preventing
pollution or damage to any water-bearing formations and other natural
resources;

(e)                                  containing
any blowout, fire or other emergency situation that would result in loss of
reserves or damage to the reservoir;

(f)                                    preventing
(i) unintentional entrance of fluids into Petroleum formations and
(ii) the production of Crude Oil or Natural Gas from reservoirs at higher
rates than consistent with good Petroleum industry practice;

(g)                                 taking
all necessary -precautions to prevent pollution of or damage to the environment
including the undertaking of remedial measures within a reasonable period to
repair or offset damage to the environment in cases where the Minister
determines that any works or installations erected by the Contractor or any
operations conducted by or on behalf of the Contractor endanger third party
property or cause pollution or harm wildlife or the environment, including
where pollution occurs promptly to treat or disperse it in an environmentally
acceptable manner;

(h)                                 reporting
to the Minister within twenty-four (24) hours in cases of death or serious
injury to workers in the performance of duties connected with Petroleum
Operations;

(i)                                     arranging
an adequate supply of first-aid medicines and equipment in each area and
maintaining a healthy environment for the workers;

(j)                                     providing
safety and fire-fighting equipment and training of personnel in the use of such
equipment in each work area; and

(k)                                  participating
in the National Oil Spill Contingency Plan, as in force from time to time, and,
in addition and without prejudice to its obligations thereunder, preparing and submitting
to the

 14
 

 

 

Minister for approval prior to commencing any drilling
activities, an oil spill and fire contingency plan, which plan shall be
implemented in the event of such a catastrophe.

10.14                     Joint
Operating Agreement:  In the event
there is more than one entity comprising the Contractor, a joint operating
agreement between the entities shall be executed within ninety (90) days of the
Effective Date and submitted to the Minister for his information.  Any changes made thereafter to that agreement
shall be submitted to the Minister for his information within ten days after
the execution of such changes

ARTICLE 11

ANCILLARY RIGHTS OF CONTRACTOR

11.1                           Contractor
shall for the efficient conduct of Petroleum Operations have the right:

(a)                                  to
free access to and from the Contract Area and to and from facilities pertaining
to Petroleum Operations hereunder wherever located at all times, and to
unimpeded use of the land required; and

(b)                                 to
use in Petroleum Operations sand, gravel and water belonging to the public
domain by prior arrangement with the relevant authorities and on payment of the
generally.  prevailing charge for such
resources in the locality of use.

ARTICLE 12

ASSISTANCE BY THE MINISTER

12.1                           To
enable Contractor to implement the Contract expeditiously and efficiently, the
Minister shall when specifically requested by Contractor assist the Contractor
among other things, in:

(a)                                  obtaining
right to use land, rights of way, permits and/or easements as may be required
for the conduct of Petroleum Operations;

(b)                                 obtaining
licences or permits for transportation and communication facilities;

(c)                                  complying
with import/ export control and regulation and custom formalities and where
applicable obtaining exemptions from customs and other duties;

(d)                                 obtaining
entry and exit visas for the foreign employees of Contractor and foreign
Subcontractors who may come to Trinidad and Tobago for the implementation of
the Contract, including members of their families;

(e)                                  obtaining
relevant work permits;

(f)                                    obtaining
access to all geological, geophysical, drilling, well and production
information in the Contract Area; and

(g)                                 dealing
with Government authorities in general.

12.2                           All
reasonable expenses incurred in the assistance provided by the Minister in
accordance with this Article 12 shall be reimbursed by Contractor.”

ARTICLE 13

DISCOVERY, COMMERCIALIZATION PROCEDURE

13.1                           If
a Discovery is made in an Exploration Well, the Contractor shall:

(a)                                  immediately
notify the Minister of such Discovery;

 15
 

 

 

(b)                                 within
thirty (30) days thereafter provide the Minister with all available information
regarding the Discovery, including a preliminary classification of the
Discovery as Crude Oil or Natural Gas; and

(c)                                  within
ninety (90) days after such Discovery, also notify the Minister whether:

(i)                                     it
considers the Discovery of Crude Oil or Natural Gas to have commercial
potential; or

(ii)                                  it
days not consider the Discovery of Crude Oil or Natural Gas to have commercial
potential.

13.2                           (a)                                  If
the Contractor pursuant to Article 13.1(c)(i) notifies the Minister that a
Discovery of Crude Oil has commercial potential, it shall within thirty (30)
days after such notice present to the Minister for approval an Appraisal
Programme.  The Appraisal Programme shall
be deemed approved as submitted if the Minister does not respond in writing
within sixty (40) days of receipt thereof.

(b)                                 The
Appraisal Programme shall:

(i)                                     specify
in reasonable detail the Appraisal work including seismic, drilling of wells
and studies to be carried out, the estimated cost of these works and the time
frame within which the Contractor shall commence and complete the programme;
and

(ii)                                  identify
the Appraisal Area which shall not exceed the area encompassing the geological
structure or feature and a reasonable margin surrounding such structure or
feature to be mutually agreed by the Minister and Contractor.

(c)                                  The
Contractor shall carry out the approved Appraisal Programme under
Article 13.2(a) within the time frame specified therein.  The Contractor may amend the Appraisal
Programme subject to the Minister’s prior approval.

(d)                                 Within
ninety (90) days after completion of the Appraisal Programme the Contractor
shall submit to the Minister a comprehensive evaluation report on the Appraisal
Programme.  Such evaluation report shall
include, but not be limited to, the following information:  geological conditions, such as structural
configuration; physical properties and extent of reservoir rocks; pressure,
volume and temperature analysis of the reservoir fluid; fluid characteristics,
including gravity and composition of liquid and gaseous hydrocarbons, sulphur
percentage, sediment and water percentage, and product yield pattern;
production forecasts (per well and per Field); and estimates of recoverable
reserves, projected delivery rate and pressure, quality specifications and
other relevant technical and economic factors including economic feasibility
studies carried out by the Contractor in respect of its declaration made under
Article 13.4.

13.3                           (a)                                  If
the Contractor pursuant to Article 13.1(c) (i) notifies the Minister that
a Discovery of Natural Gas gis commercial potential, it shall within ninety
(90) days after such notice present to the Minister for approval a plan for
assessing the Discovery in sufficient detail to be able to seek a market for
the Natural Gas (“Assessment Plan”).  The
Assessment Plan shall be deemed approved as submitted if the Minister does not
respond within sixty (40) days of receipt thereof.

(b)                                 The
Assessment Plan shall:

(i)                                     specify
in reasonable detail the work that is needed to assess the discovery, including
seismic, drilling of wells and studies to be carried out, the estimated cost of
these works and the time frame within which the Contractor shall commence and
complete such works.

 16
 

 

 

(ii)                                  identify
the Assessment Plan area which shall not exceed the area encompassing the
geological structure or feature and a reasonable margin surrounding such
structure or feature to be mutually agreed by the Minister and Contractor.

(c)                                  The
Contractor shall carry out the approved Assessment Plan under
Article 13.3(a) within the time frame specified therein.  The Contractor may amend, the Assessment Plan
subject to the Minister’s prior approval.

(d)                                 Within
ninety (90) days after completion of the Assessment Plan, the Contractor shall
submit to the Minister a comprehensive evaluation report on the Assessment
Plan.  Such evaluation report shall
include all available information related to the Discovery and a preliminary
evaluation of its technical and economic factors including economic feasibility
studies relevant to the determination of a market for available Natural Gas.

(e)                                  Upon
submission of the evaluation report under Article 13.3(d) the Contractor
shall notify the Minister whether or not based on the results of its Assessment
Plan it wishes to retain the Natural Gas Discovery for a market development
phase in accordance with Article 16.2.

13.4                           (a)                                  As
a condition for declaring Commercial Discovery of a Natural Gas Field, the
Contractor shall conduct an Appraisal Programme acceptable to the
Minister.  As soon as the Contractor
develops an acceptable market for Natural Gas, but in any event within the term
of the Contract including any market development phase granted under Article 16.2,
the Contractor shall apply to the Minister for approval and upon approval being
granted forthwith carry out an Appraisal Programme of the Natural Gas
Discovery.

(b)                                 The
Appraisal Programme shall:

(i)                                     specify
in reasonable detail the Appraisal work including seismic, drilling of wells
and studies to be carried out, the estimated cost of these works and the time
frame within which the Contractor shall commence and complete the programme;
and

(ii)                                  identify
the Appraisal Area which shall not exceed the area encompassing the geological
structure or feature and a reasonable margin surrounding such structure or
feature to be mutually agreed by the Minister and Contractor.

(c)                                  The
Contractor shall carry out the approved Appraisal Programme under
Article 13.4(a) within the time frame specified therein.  The Contractor may amend the Appraisal
Programme subject to the Minister’s prior approval.

(d)                                 Within
ninety (90) days after completion of the Appraisal Programme the Contractor
shall submit to the Minister a comprehensive evaluation report on the Appraisal
Programme.  Such evaluation report shall
include, but not be limited to, the following information:  geological conditions, such as structural
configuration; physical properties and extent of reservoir rocks; pressure,
volume and temperature analysis of the reservoir fluid; fluid characteristics,
including gravity and composition of liquid and gaseous hydrocarbons, sulphur
percentage, sediment and water percentage, and product yield pattern;
production forecasts (per well and per Field); and estimates of recoverable
reserves, projected delivery rate and pressure, quality specifications and
other relevant technical and economic factors including economic feasibility
studies carried out by the Contractor in respect of its declaration made under
Article 13.4.

13.5                           If
the Contractor fails to present an Appraisal Programme under
Article 13.2(a) or Assessment Plan under Article 13.3 that is
acceptable to the Minister, the Contractor shall upon the request of the
Minister at any time thereafter relinquish an area which shall contain as a
minimum the geological structure or feature in which the Discovery was made.

 17

 

13.6         With the
submission of the evaluation reports pursuant to Article 13.2
and 13.4, the Contractor shall submit a written declaration to the
Minister indicating one of the following:

(a)           that based
on the results of its Appraisal Programme it has determined that the Discovery
is a Commercial Discovery;

(b)           that based
on the results of its Appraisal Programme it has determined that the Discovery
is not a Commercial Discovery in which event the Contractor shall be required
to relinquish the areas pursuant to Article 5;

(c)           that based
on the results of its Appraisal Programme it has determined that the Discovery
is a significant Discovery which may become a Commercial Discovery conditional
on the outcome of further work, acceptable to the Minister, that the Contractor
commits itself to carry out under a further Exploration or Appraisal Work
Programme in specified areas within or outside the Appraisal Area.

13.7         In the event
the Contractor commits itself to an approved Work Programme under
Article 13.6(c), it shall be entitled to retain the Appraisal Area pending
the completion of the further Exploration or Appraisal Programme within the
term of the Contract, at which time the provisions of Article 13.4(a) or
(b) shall be applied accordingly.

13.8         (a)           If
Contractor declares pursuant to Article 13.6(a) that a Discovery is a
Commercial Discovery, the Contractor shall submit within ninety (90) days of
such declaration:

(i)            a
proposed Development Plan;

(ii)           a proposed
designation of the Production Area; and

(iii)          a
comprehensive environmental impact study covering the proposed Development and
any related facilities or infrastructure inside or outside of the Contract
Area.

all three of which shall be subject to the Minister’s prior
approval.  The proposed Development Plan,
Production Area and environmental impact study shall be deemed approved as
submitted if the Minister does not respond within ninety (90) days of receipt.

(b)           In the
event the Minister and the Contractor are unable to reach agreement on any
objections raised or changes proposed by the Minister, the Contractor shall
have the right to request determination of the disputed issues pursuant to
Article 33, in which case the decision shall be binding on both the
Minister and the Contractor.

(c)           Upon
approval being granted, the Contractor shall proceed promptly and diligently
and in accordance with good international Petroleum industry practice to
develop the Discovery, to install all necessary facilities, to commence
Commercial Production and to produce the Field in a manner that will achieve
maximum economic recovery of the reserves. 
Production shall continue without interruption unless the Minister is
satisfied that the interruption is justified for technical or other reasons

13.9         The
Contractor’s proposed Development Plan under Article 13.8 shall detail the
Contractor’s proposals for Development and operation of the Production Area and
of any facilities and infrastructure up to the Measurement Point required
outside of the Production Area.  Such
Development Plan shall set forth Production parameters, number and spacing of
wells, the facilities and infrastructure (including proposed locations) to be
installed for Production, storage, transportation and loading of Petroleum, an
estimate of the overall cost of the Development, and estimates of the time
required to complete each phase of the Development Plan, a production forecast
and an estimate of ongoing capital and operating expenses involved to achieve
the production profile, any other factor which would affect the economic or
technical

 18
 

 

feasibility of the proposed Development, profitability estimates,
safety measures to be adopted, a description of the organisation to be
established in Trinidad and Tobago, measures to be implemented for the
employment of nationals, the proposed abandonment plan and such other
particulars as the Minister may direct.

13.10       Any
significant changes to an approved Development Plan or proposals related to
extension of a Field or for enhanced recovery projects shall be discussed among
the Parties and if agreed shall be submitted in writing to the Minister for his
prior approval.  Such changes shall be
deemed approved as submitted if the Minister does not respond within ninety
(90) days of receipt.

ARTICLE 14

EXPLORATION WORK PROGRAMME

14.1         (a)           The
Contractor shall present to the Minister for approval with respect to each
Calendar Year during the Exploration Period an annual Work Programme and budget
for the Contract Area.  The Work
Programme and budget shall be deemed approved as submitted if the Minister does
not respond within sixty (40) days of receipt. 
The first such programme and budget shall be submitted within thirty
(30) days after the Effective Date and each subsequent programme and budget at
least sixty (40) days before the beginning of the relevant Calendar Year.

(b)           Within
thirty (30) days following the end of each Quarter of the Calendar Year, the
Contractor shall provide to the Minister a status report specifying the work
carried out during that Quarter, the approximate costs incurred during such
period and any changes that the Contractor plans to make to the Work Programme
and budget as a result of operations to date in that Calendar Year.  The status report corresponding to the fourth
Quarter of each Calendar Year shall also contain an annual summary of the
quarterly reports for that Calendar year.

14.2         In respect
of the retained Exploration area approved under Article 6 and the
Appraisal Area under Article 13 the provisions of 14.1(b) shall apply.

14.3         Subject to
the Contractor’s obligations under Article 7 and the Minister’s prior
approval, the Contractor may amend the Work Programme and budget approved under
Article 14.1.

ARTICLE 15

DEVELOPMENT AND PRODUCTION WORK PROGRAMMES AND BUDGETS

15.1         Commencing
in the Calendar Year in which the Minister approves the first Development Plan
for the Contract Area, the Contractor shall prepare and submit to the Minister
for approval, in such form as the Minister may direct, an annual Development
and Production Work Programme and budget detailing by Calendar Quarter all
aspects of the proposed Petroleum Operations to be carried out in relation to
each Production Area and related facilities and infrastructure, the estimated
cost thereof, duration and location of each operation, and, where applicable,
the estimated monthly rate of production for each Production Area.  Each proposed Work Programme and budget shall
also include a forecast of yearly Development and Production activity and
expenditure for the ensuing period of four (4) Calendar Years or the period up
to the end of the term of the.  Contract,
whichever is shorter.

15.2         The first
Development and Production Work Programme and budget,- covering the balance of
the Calendar Year in which the first Development Plan is approved shall be
submitted within thirty (30) days after-the date of approval of such
Development Plan.  Thereafter, the
Contractor shall submit its proposed annual Work Programme and budget at least
ninety (90) days before the beginning of the relevant Calendar Year.

15.3         The
Contractor’s proposed Work Programme and budget shall be deemed approved as
submitted if the Minister does not respond in writing within sixty (40) days
after receipt.

 19
 

 

15.4         If the
Minister objects to.  any part of the
Contractor’s proposal, he shall notify the Contractor within the period
specified in Article 15.3.  The
Minister’s notice shall specify the modifications required by the
Minister.  If the Contractor considers
that any revision required by the Minister renders the Work Programme and budget
unacceptable to the Contractor, the Contractor shall within twenty-five (25)
days after receipt notify and substantiate to the Minister its reasons for that
decision.  Forthwith the Minister and the
Contractor shall meet with a view to resolving any differences.  If they fail to resolve their differences by
the beginning of the Calendar Year for which the Work Programme is to apply,
the Contractor shall incorporate the modifications requested by the Minister
into the proposed Work Programme and budget submitted under Article 15.2
to the extent such changes:

(a)           do not
increase or decrease any line item of such proposed Work Programme and budget
by more than ten percent (10%); and

(b)           do not
materially alter the Development Plan as approved by the Minister provided that
the Development and Production Work Programme and budget is consistent with
such Development Plan.

The Minister may direct the Contractor to modify the proposed rate of
production from any Field from which more than fifty percent (50%) of the
production on an energy equivalent basis is Crude Oil for any of the reasons
contained in Sections 43(h), 43(i) and 43(s)- of the Regulations, provided
always that such changes in production levels shall not significantly alter the
production levels agreed to between the Minister and the Contractor in the then
current Development Plan. 
Notwithstanding the above provisions the Minister reserves the right to
modify production levels for safety considerations.

15.5         The
Contractor shall deliver to the Minister within twenty-one (21) days after each
Calendar Quarter a status report on the operations conducted and costs incurred
under the approved Development and Production Work Programme and budget during
such Calendar Quarter.  The status report
shall forecast any significant changes to such approved Work Programme and
budget that the Contractor anticipates may be necessary during the balance of
the Calendar Year.  The report
corresponding to the last Quarter of each Calendar Year shall also include a
year end summary of operations and costs during such Calendar Year.

ARTICLE 16

NATURAL GAS

16.1         Within
ninety (90) days of completion of an Assessment Plan agreed with the Minister
under Article 13.3, the Contractor shall submit a comprehensive evaluation
report on the Assessment Plan in accordance with Article 13.  Upon submission of the evaluation report the
Contractor shall in accordance with the provisions of Article 13 notify
the Minister whether or not it wishes to retain the Natural Gas Discovery for a
market development phase.

16.2         If the
Contractor requests a market development phase for such Discovery, the
Contractor and the Minister shall within sixty (60) days after such election,
define by mutual agreement the portion of the Contract Area to be subject to
such market development phase.  Such
portion shall not exceed the area encompassing the geological structure or
feature in which such Discovery was made and a reasonable margin surrounding
such structure or feature to be mutually agreed by the Minister and
Contractor.  Subject to
Articles 14.2-through 16.5 the duration of such market development phase
shall not exceed five (5) years from the date of the Contractor’s notice under
Article 16.1.  The market
development phase shall end on the first to occur of:

(a)           the date
following that on which the Natural Gas Discovery is declared a Commercial
Discovery;

(b)           the date
that the Contractor voluntarily surrenders the market development area, or

(c)           five (5)
years after the date of the Contractor’s notice under Article 14.1.

 20
 

 

The Contractor shall be deemed to have relinquished all rights to the
Natural Gas Discovery if it does not declare the Discovery a Commercial
Discovery by the end of the market development phase or on earlier
relinquishment of that portion of the Contract Area.

16.3         During the
market development phase, the Contractor shall pay to the Minister at the end
of each year of the market development phase or upon earlier termination an
annual holding fee of [*] US dollars, reduced by duly verified amounts that the
Contractor has expended during such year under specific programmes approved by
the Minister on activities or projects directly attributable to the market
development area.  Expenditures for the
following types of activities will be eligible as credits against the holding
fee:

(a)           further
geochemical, geophysical or geological surveys in the market development area;

(b)           the
drilling and testing of any well in the market development area;

(c)           consulting,
feasibility and marketing studies;

(d)           market
development outside Trinidad and Tobago for projects approved by the Minister.

Amounts expended-in a particular year in excess of the holding fee may
be carried forward as a credit against the following years holding fees if
agreed by the Minister in his approval of the programme under which the
expenditure was made.  The holding fee
shall be applied on a pro rata daily basis in the event the Contractor
relinquishes the market development area or declares such Natural Gas Discovery
to be a Commercial Discovery prior to the end of such year.

16.4         The
Contractor shall notify the Minister, forthwith upon entering the market
development phase, of the availability of the Natural Gas from such Discovery
for sale and use in the internal market in Trinidad and Tobago.  With such notice the Contractor shall provide
the results of the Assessment Plan carried out under Article 13.3.  The internal market includes, without
limitation, Natural Gas sold to refineries, electricity generating facilities,
petrochemical manufacturers and other industrial, commercial and domestic
customers in Trinidad and Tobago but expressly excludes Natural Gas to be
liquified for export or to be chemically converted to gasoline for export or to
be used by Contractor in its Petroleum Operations hereunder.

16.5         The
Contractor shall have primary responsibility for developing a market for all
Available Natural Gas from the market development area and for negotiation for
the sale thereof on a joint dedicated basis at prices and terms common to both
the Minister and the Contractor.  The
marketing arrangements for such Natural Gas sales contract shall be subject to
approval by the Minister.  In applying
for such approval the Contractor shall demonstrate to the Minister that the
price of such Natural Gas at the Measurement Point represents the fair market
value for such Natural Gas, taking into consideration a fair market cost for
transporting the Natural as from the Measurement Point to the consumer.

The approval of
any export project shall be at the discretion of the Minister.

16.6         With its
application for approval of any gas sales, contract, pursuant to
Article 16.5, the Contractor may also apply to the Minister for the
granting of an additional period, to be added to the term of-the Contract, to
facilitate the sale of Natural Gas under such gas sales contract.  The Minister shall subject to the execution
of such :gas sales contract, extend the term of the Contract, with respect to
the Natural Gas Production Area, corresponding to such gas sales contract, for
a period which will allow for the supply of Natural Gas under the terms of the
gas sales contract.

16.7         The
Contractor shall apply to the Minister for such licences as may be required for
operations in Trinidad and Tobago beyond the Measurement Point.  Costs incurred in this regard shall not be
subject to cost recovery under this Contract.

 21
 

 

16.8         The
Contractor shall use with priority in Petroleum Operations, Associated Natural
Gas, including use for reinjection for pressure maintenance or recycling
operations to effect maximum economic recovery of Crude Oil.

16.9         The Minister
may at any time call upon the Contractor to deliver to the Minister at the
Field separator without compensation any quantity of Natural Gas, produced in
association with Crude Oil, not being required by the Contractor for Petroleum
Operations or for sale, which may be needed in the public interest, provided
that delivery does not unreasonably interfere with Contractor’s Petroleum
Operations.  Government shall at its own
cost provide and maintain any facilities beyond the delivery point required in
connection with gathering, transporting, processing or utilization of such
Associated Natural Gas.

16.10       The
Contractor shall minimize flaring of any remaining Associated Natural Gas by
reinjecting such Natural Gas into suitable strata or underground storage in
accordance with good Petroleum industry practice.  The Contractor shall seek the Minister’s
approval to flare any such gas which cannot be re-injected due to specific
reservoir considerations or for other reasons, that are accepted
internationally and are in line with good oilfield practice.  Before flaring, the Contractor shall take
reasonable measures to ensure the extraction of natural gasoline and other
liquids contained in the Associated Natural Gas if the.  Minister and the.  Contractor agreed that such extraction is
economically justifiable.  Notwithstanding
anything in this Article to the contrary, Associated Natural Gas may be flared
at any time if necessary for the conducting of well and production tests and
during any emergency.

ARTICLE 17

BOOKS OF ACCOUNT, FINANCIAL REPORTING, AUDIT, AND

COST VERIFICATION

17.1         Contractor
shall maintain in Trinidad and Tobago in accordance with the Accounting
Procedure in Annex ”C” and accepted accounting practices generally used in
the international petroleum industry, books of account and such other books and
records as may be necessary to show the work performed under the Contract, the
costs incurred and the quantity and value of all Petroleum produced and saved
from the Contract Area and not used in Petroleum Operations.

17.2         Contractor
shall prepare for each Calendar Year financial statements including a balance
sheet and profit and loss statement reflecting its operations under the
Contract.  Accounting methods, rules and
practices applied for determining revenue and expense shall be consistent with
sound and usual international petroleum industry practice and, the laws of
Trinidad and Tobago.  Each financial
statement shall  be certified by an
independent certified firm of chartered accountants acceptable to the Minister
and shall be submitted, along with the auditor’s report to the Minister and the
minister responsible for finance within ninety (90) days after the end of the
Calendar Year to which it pertains.

17.3         Contractor
shall also provide the Minister with the various other financial reports
required by Annex ”C”.

17.4         The Minister
shall have the right to inspect and audit Contractor’s books, accounts and
records relating to Petroleum Operations under the Contract for the purpose of
verifying Contractor’s compliance with the terms and conditions hereof.  Upon reasonable advance notice such books,
accounts and records shall be available in Trinidad and Tobago at all
reasonable times for inspection and audit by duly authorized representatives of
the     Government,
including independent auditors that may be employed by it.  Fiscal audits shall be carried out within the
period allowed under the Petroleum Taxes Act Chapter 75:04.

17.5         The Minister
and/or the minister responsible for finance may require Contractor to engage
Contractor’s parent company’s auditors to examine at Contractor’s cost and in
accordance with generally accepted auditing standards, the books and records of
an Affiliate to verify the accuracy and compliance with the terms of the
Contract insofar as a charge from the Affiliate of Contractor (or of any entity
comprising Contractor) is included directly or through Contractor as a
reimbursable cost under the Contract.  Whenever
audit of an Affiliate’s books is requested, the Minister shall specify in
writing the item or items for which it requires verification from such
independent audit.  A copy of the
independent auditor’s findings shall be

 22
 

 

delivered to the Minister and the minister responsible.  for finance within thirty (30) days after
completion of such audit.

(a)           Contractor
shall submit a statement of expenditure in accordance with the procedure
detailed in Annex ”C” to the Minister who shall verify:

(i)            that
claimed costs qualify for cost recovery under the terms of the Contract and the
Accounting Procedure; and

(ii)           that the
claimed amount of a qualifying cost is correct based on documentation made
available at the Contractor’s office in Trinidad and Tobago.

(b)           The
statement of expenditure shall be deemed approved as submitted if the Minister
does not respond within ninety (90) days of receipt.  If the Minister takes written exception
thereto, such written exception shall identify the particular cost or costs
being contested and the reason for the query.

(c)           The
Contractor shall submit to the Minister within thirty (30) days after receipt
of the Minister’s exception notice such additional information in written form
as the Minister may require or the Contractor considers appropriate to support
the correctness and/or recoverability of the contested cost or costs.  If Contractor does not make a written
submission within such time supporting the charge, the cost or costs shall be
deemed disallowed for purposes of cost recovery.

(d)           If
additional written information supporting the contested cost or costs is
submitted by Contractor within the prescribed period, the Minister shall notify
the Contractor of his decision within thirty (30) days after receipt of such
information.

(e)           If the
Minister notifies the Contractor that the exception remains, the charge shall
be deemed disallowed for purposes of cost recovery under the Contract subject
to the right of the Contractor to request within thirty (30) days after the
receipt of such notice that the final determination as to recoverability of the
disputed cost or costs be made by an expert pursuant to Article 33.8.

(f)            The
Contractor shall promptly correct its books of account to reflect any changes
resulting from the cost verification procedure.

17.7         Except as
otherwise agreed in writing between the Minister and the Contractor, all
transactions giving rise to revenues, costs or expenses which will be credited
or charged to the books, accounts, records and reports prepared, maintained or
submitted hereunder shall be conducted at arm’s length or on such a basis as
will assure that all such revenues, costs or expenses will not be higher or
lower than would result from a transaction conducted at arm’s length on a
competitive basis with third parties

ARTICLE 18

ALLOCATION OF PRODUCTION, RECOVERY OF COSTS AND EXPENSES, PRODUCTION SHARING

AND RIGHT OF EXPORT

18.1        Contractor
shall have the right to use free of charge Petroleum produced from the Contract
Area to the extent reasonably required for Petroleum Operations under the
Contract.

18.2        All
Available Petroleum shall be measured at the applicable Measurement Points and
allocated as set forth hereinafter.  Test
or experimental production, to the extent not required for Petroleum Operations
hereunder; shall be deemed Profit Petroleum and shall be allocated between the
Minister and the Contractor in accordance with Article 18.14.

18.3.       Contractor
and the Minister shall review annually Contractor’s production programme from
each Production Area having due regard to ensuring compliance with Contractor’s
obligations under Article 10.

 23
 

 

18.4        Contractor
shall prepare and provide the Minister not less than ninety (90) days prior to
the beginning of each.  Calendar Quarter
following commencement of Commercial Production a written forecast setting out
the total quantity of Petroleum that it estimates can be produced and saved
hereunder during each Month for the next four (4) Calendar Quarters in
accordance with good Petroleum industry practice and the Production programme
established in accordance with Article 18.3.  Contractor shall endeavour to produce each
Calendar Month the forecast quantity.

18.5        The
Crude Oil shall be run, if applicable, to storage tanks constructed, maintained
and operated at the Measurement Point under the Contract where it shall be
measured for purposes of the Contract and delivered to the Minister and each
entity comprising Contractor who shall each take in kind, assume risk of loss
and separately dispose of their respective entitlement of Available Crude
Oil.  All Available Natural Gas shall be
sold on a joint-dedicated basis in accordance with Article 14.5.

18.6        Prior
to commencement of Commercial Production of Crude Oil from the Contract Area,
the Minister and the Contractor shall agree on a procedure for taking volumes
of Crude Oil corresponding to their respective entitlements on a regular basis
and in a manner that is appropriate having regard to the respective
destinations and uses of the Crude Oil.

Cost Recovery

18.7        The
value of Cost Recovery Petroleum shall be determined in accordance with
Article 20 herein.  Subject to the
Accounting Procedure and the auditing provisions of the Contract, Contractor
shall recover costs and expenses duly verified in accordance with Article 17
of the Contract in respect of the Petroleum Operations hereunder to the extent
of and out of the following maximum limits per Calendar Month of all Available
Crude Oil and/or all.  Available Natural
Gas from the Contract Area, (hereinafter referred to as “Cost Recovery Crude
Oil” and/or “Cost Recovery Natural Gas”).

(a)           [*]  of all Available Crude Oil and
[*]of all Available Natural Gas from the Contract Area when cumulative
production of Petroleum in the Contract Area after the Effective Date is equal
to or less than [*] Barrels of Crude Oil;

(b)           [*] of all
Available Crude Oil and [*] of all Available Natural Gas from the Contract Area
when cumulative production of Petroleum in the Contract Area after the
Effective Date exceeds [*] Barrels but is equal to or less than [*] Barrels of
Crude Oil; and

(c)           [*] of all
Available Crude Oil and [*] of all Available Natural Gas from the Contract Area
when cumulative production of Petroleum in the Contract Area after the
Effective Date exceeds [*] Barrels of Crude Oil.

In computing the total cumulative production referred to above, Natural
Gas production shall be added to Crude Oil production after converting to
Barrels of Crude Oil on an Energy Equivalent Basis.

18.8        Subject
to Article 18.9 such costs and expenses shall be allocated to the
applicable recoverable Crude Oil cost account or recoverable Natural Gas cost
account and shall be recovered from the relevant account on a first in, first
out basis subject to the following:

(a)           costs
incurred in respect of Exploration Operations may be recovered on an expensed
basis;

(b)           capital
costs incurred in respect of Development and Production Operations may be
recovered over [*] commencing in the year in which such expenditure is incurred
with [*] recoverable in the first year and [*] recoverable in each of the next
[*] years;

(c)           annual
operating costs, may be recovered in the year in which they are incurred;

 24
 

 

(d)           annual
administrative overhead costs, up to the limits established in
Article 2(1) of the Accounting Procedure may be recovered in the year
incurred; and

(e)           any
Exploration Well or Appraisal well which is subsequently used for Development
Operations shall be classified as a Development well and all costs incurred
shall be deemed recoverable as prescribed under Article 18.8(b).  An appropriate adjustment shall be made to
the cost recovery account in the Calendar Month immediately following this
reclassification.

18.9        To
the extent that in a Calendar Year outstanding recoverable costs or expenses
related to the Contract Area exceed the value of all Cost Recovery Crude Oil or
Cost Recovery Natural Gas from the Contract Area for such Calendar Year the
excess shall be carried forward for recovery in the Year until fully recovered,
termination of the Contract.

18.10      To
the extent that the value of Cost Recovery Crude Oil or Cost Recovery Natural
Gas received by Contractor from the Contract Area during a Calendar Month is
greater or less than the amount Contractor was entitled to receive for that
Month, an appropriate adjustment shall be made in accordance with
internationally accepted accounting principles.

Profit Petroleum

18.11      The
remaining Available Petroleum including any portion of Cost Recovery Crude Oil
or Cost-Recovery Natural Gas not required to cover costs (hereinafter referred
to as “Profit Crude Oil” and/or “Profit Natural Gas” and collectively, as “Profit
Petroleum”) shall be allocated between the Minister and Contractor.

18.12      The
Contractor’s share of Profit Petroleum shall be the remaining portion after deducting
the Minister’s share in accordance with the provisions of Article 18.14.

18.13      Subject
only to Article 14.5 and 24, the Contractor may freely export any
Available Petroleum received by it under Article 18.

18.14      The
Minister’s share of Profit Crude Oil and/or Profit.  Natural Gas for a Calendar Month from the
Contract Area shall be determined separately for Crude Oil and Natural Gas by
reference to the applicable price class in the relevant table(s) detailed hereunder.  The average daily production rates referred
to in the production tiers set out in the tables hereunder shall be calculated
for each Calendar Month by dividing the respective volumes of Available Crude
Oil and Available Natural Gas produced from the Contract Area during that Month
by the number of days in such Month.

(a)           Minister’s
Share of Profit Crude Oil %

	
  Production Tier

  	
   

  	
  Crude Oil Price Class

  	
   

  
	
   

  	
   

  	
  A

  	
   

  	
  B

  	
   

  	
  C

  	
   

  	
  D

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Production up to
  [*] B/D

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Production in
  excess of [*] B/D and up to [*] B/D

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Production in
  excess of [*] B/D and up to [*] B/D

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Production in
  excess of [*] B/D and up to [*] B/D

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Production in excess of
  [*] B/D

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  

 

 25
 

 

Where:             Price
Class A refers to the Minister’s share for a Crude Oil price less than or equal
to US$[*] per Barrel.

Price Class B refers to the Minister’s share for a Crude Oil price
greater than US$[*] per Barrel but less than or equal to US [*]  per Barrel.

Price Class C refers to the Minister’s share for a Crude Oil price
greater than US$[*] per Barrel but less than or equal to US [*] per Barrel.

Price Class D refers to the Minister’s share for a Crude Oil price
greater than US$[*] per Barrel.

(b)           Minister’s
Share of Profit Natural Gas %

	
  Production Tier

  	
   

  	
  Natural Gas Price Class

  	
   

  
	
   

  	
   

  	
  A

  	
   

  	
  B

  	
   

  	
  C

  	
   

  	
  D

  	
   

  
	
  Production up to
  [*] MMcfd

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Production in
  excess [*] MMcfd and up to [*] MMcfd

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Production in
  excess of [*] MMcfd and up to [*]
  MMcfd

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Production in
  excess of [*] MMcfd and up to [*] MMcfd

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Production in excess of
  [*] MMcfd

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  	
  [*]

  	
   

  

 

Where:             Price
Class A refers to the Minister’s share for a Natural Gas price less than or
equal to US$[*] per Mcf.

Price Class B refers to the Minister’s share for a Natural Gas price
greater than US [*] per Mcf but less than or equal to US$[*] per Mcf.

Price Class C refers to the Minister’s share for a Natural Gas price
greater than US$[*] per Mcf but less than or equal to US$[*] per Mcf.

Price Class D refers to the Minister’s share for Natural Gas price
greater than US$[*] per Mcf.

ARTICLE 19

MEASUREMENT OF PETROLEUM

19.1        All
Petroleum produced, saved and not used in Petroleum Operations shall be
measured at the Measurement Points approved in the Development Plan.

19.2        The
Measurement Points shall be at the end of the facilities for which the cost is
included as a recoverable cost of Petroleum Operations under the Contract.

19.3        The
production shall be measured in accordance with standards generally accepted in
the international Petroleum industry. 
All measurement equipment shall be installed, maintained and operated by
the, Contractor.  The Minister shall have
the right to inspect the measuring equipment installed by the Contractor and
all charts and other measurement or test data at all reasonable times.  The accuracy of

 26
 

 

Contractor’s measuring equipment shall be verified by tests at regular
intervals and upon the request of the Minister, using means and methods
generally accepted in the international Petroleum industry.

19.4        Upon
discovery of a meter malfunction, Contractor shall immediately have the meter
repaired, adjusted and corrected and following such repairs, adjustment or
correction shall have it tested or calibrated to establish its accuracy.  Upon the discovery of a metering error,
Contractor shall have the meter tested immediately and shall take the necessary
steps to correct any error that may be discovered.

19.5        In
the event a measuring error is discovered, Contractor shall use its best
efforts to determine the correct production figures for the period during which
there was a measuring error and the corrected figures shall be used.  In determining the correction, Contractor
shall use, where required, the information from other measurements made inside
or outside the Production Area. 
Contractor shall submit for the Minister’s approval a report detailing
the source and nature of the measuring error and the corrections to be
applied.  If it proves impossible to
determine when the measuring error first occurred, the commencement of the
error shall be deemed to be that point in time halfway between the date of the
last previous test and the date on which the existence of the measuring error
was first discovered.

19.6        All
measurements for all purposes in this Contract shall be adjusted to standard
conditions of pressure and temperature (sixty (60) degrees Fahrenheit and 14.7
p.s.i.a.).

ARTICLE 20

VALUATION

20.1        The
value of Crude Oil from each Production Area shall be the international fair
market value of such Crude Oil at the Measurement Point.

20.2         The
international fair market value of Crude Oil, shall be the price in United
States dollars at which an independent third party buyer would be prepared to
buy at the particular time such Crude Oil, at the Measurement Point, on an arms
length basis, taking into account the quality, volume, cost of transportation,
terms of payment, and any other relevant conditions, including the then
prevailing market conditions for crude oil.

20.3        Where
different grades of Crude Oil are being produced from the Contract Area, the
value shall be determined and applied for each grade of such Crude Oil.  However, in the event that different grades
of such Crude Oil are blended together for sale then the value of such a blend
shall-prevail.

20.4                         (a)           The
Contractor shall present to the Minister, within ten (10) days after the end of
each Calendar Month during which Crude Oil is produced and measured from the
Production Area, its proposal as to the value of the particular Crude Oil for
the preceding Month.  Such proposal shall
be accompanied by information supporting the Contractor’s proposal, including
evidence of actual arms length, FOB sales prices for the particular Crude Oil
and/or comparable crude oils delivered during such preceding Calendar Month by
the Contractor or other producers from Trinidad and Tobago or other producing
countries.

(b)           The
proposals shall be deemed approved, as submitted, under Article 20.4(a) if
the Minister fails to respond within thirty (30) days of receipt.

(c)           If the
Minister takes written exception to the Contractor’s proposal, the Minister
shall include with such notice a counter-proposal for the value of the
particular Crude Oil.

(d)           If the
Contractor accepts the Minister’s counter-proposal or does not take written
exception thereto within ten (10) days after receipt, the Minister’s
counter-proposal shall be the value for the Calendar Month for which the price
is being determined.

 27
 

 

(e)           If the
Contractor takes written exception to the Minister’s counter-proposal within
the prescribed period, authorized representatives of the Minister and the
Contractor shall meet to establish the value for the Calendar Month for which
the determination is being made, in accordance with the principles outlined
under Article 20.5

20.5         For Crude
Oil sales deemed to be non-arms length, the following principles shall apply in
determining the value of Crude Oil:

(a)           a base of
widely traded reference crudes similar in quality to the crude to be valued
shall be selected and the international market prices of the crudes selected
shall be used as the base value for the crude to be valued;

(b)           an
appropriate price-setting market where substantial quantities of the reference
crudes are traded at arms length and on an ongoing basis shall be chosen;

(c)           the crude
oils to be included in the basket shall be proposed by the Contractor as part
of the Development Plan under Article 13.8 to be approved by the Minister;

(d)           in the
event that one or more of the crude oils comprising an agreed basket no longer
meets the requirements of Article 20.5(a), a replacement crude oil shall
be determined by agreement between the Minister and the Contractor;

(e)           transportation
differential shall be taken into account, that is to say, the difference
between the cost of transporting to the price-setting market, the reference
crudes and the Crude to be valued;

(f)            interest
charges on the value of the inventory in transit may be considered in
determining transportation costs;

(g)           other
relevant considerations.

20.6         The value of
Natural Gas shall be the weighted average price at the Measurement Point
determined under the marketing arrangements for Natural Gas approved by the
Minister under Article 16.5 for deliveries of Natural Gas during the
Calendar Month.

20.7         Subject to
the provisions of this Article 20, in the event of any dispute between the
Minister and the Contractor concerning the pricing of Crude Oil or Natural Gas,
such dispute may be referred by either Party for final determination in
accordance with Article 33.

ARTICLE 21

FINANCIAL OBLIGATIONS

21.1         The
Contractor’s financial obligations towards the Minister, which it shall satisfy
at its own expense, shall consist of the following payments:

(a)           Minimum
payment in respect of each hectare of the Contract Area retained by the
Contractor from time to time throughout the period of this Contract at the following
rates:  

	
  

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  US$ per hectare

  per annum

  	
   

  
	
  During

  	
   

  	
  The

  	
   

  	
  1st

  	
   

  	
  Contract

  	
   

  	
  Year

  	
   

  	
  [*]

  	
   

  
	
  “

  	
   

  	
  “

  	
   

  	
  2nd

  	
   

  	
  “

  	
   

  	
  “

  	
   

  	
  [*]

  	
   

  
	
  “

  	
   

  	
  “

  	
   

  	
  3rd

  	
   

  	
  “

  	
   

  	
  “

  	
   

  	
  [*]

  	
   

  
	
  “

  	
   

  	
  “

  	
   

  	
  4th

  	
   

  	
  “

  	
   

  	
  “

  	
   

  	
  [*]

  	
   

  
	
  “

  	
   

  	
  “

  	
   

  	
  5th

  	
   

  	
  “

  	
   

  	
  “

  	
   

  	
  [*]

  	
   

  
	
  “

  	
   

  	
  “

  	
   

  	
  6th

  	
   

  	
  “

  	
   

  	
  “

  	
   

  	
  [*]

  	
   

  

 

 28
 

 

Thereafter minimum payment shall increase annually at a rate of  [*] 
for the unexpired term of the Contract. 
Minimum payment shall be payable quarterly in advance within the first
ten (10) days of January, April, July and October.  No refund shall become due if before the end
of a quarterly period a part of the area has been surrendered.

(b)           Annual
charges payable within ten (10) days of the Effective Date of this Contract and
thereafter within the first ten (10) days, of each Contract Year in respect of
the following items:

(i)            An
administrative charge of  [*] US dollars
during the first year of this Contract increasing annually at a rate of  [*] for the unexpired term of the Contract.  No refund shall be due if the Contractor
ceases operation prior to the end of a Contract Year.

(ii)           A training
contribution of  [*] US dollars to the
University of Trinidad and Tobago for the financing of training of nationals in
appropriate fields of study associated with the energy sector for the first
year of the Contract and increasing annually at a rate of  [*] 
for the unexpired term of the Contract. 
In the event of a Commercial Discovery the amount shall increase to [*]  US dollars in the year following Commercial
Discovery increasing by  [*] per annum
for the remaining term of the Contract. 
In the event that these funds are not utilized as prescribed above
during any Contract Year, the Contractor shall pay to the Minster an amount
equivalent to funds not expended.

(iii)          A
research and development contribution of 
[*] US dollars for the financing of Petroleum related research and
development activity for the first year of the Contract and increasing annually
at a rate of  [*] for the unexpired term
of the Contract.  In the event of a
Commercial Discovery the amount shall increase to  [*] US dollars in the year following
Commercial Discovery increasing by 
[*]  per annum for the remaining
term of the Contract.

(c)           A
signature bonus of  [*]  US dollars payable within ten (10) days of
the Effective Date of this Contract.

(d)           Production
bonuses payable on first attainment of a sixty (40) consecutive day average at
or in excess of the production levels detailed hereunder:

	
  Petroleum production in Barrels

  per day (BOPD)

  	
   

  	
  Production bonus payments

  in US$

  	
   

  
	
  [*]

  	
   

  	
  $

  	
  [*]

  	
   

  
	
  [*]

  	
   

  	
  $

  	
  [*]

  	
   

  
	
  [*]

  	
   

  	
  $

  	
  [*]

  	
   

  
	
  [*]

  	
   

  	
  $

  	
  [*]

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Thereafter for every
  [*] BOPD exceeding  [*] BOPD

  	
   

  	
  $

  	
  [*]

  	
   

  

 

In computing the production levels referred to above, Natural Gas
production shall be added to Crude Oil production after converting to Barrels
of Crude Oil on an Energy Equivalent Basis.

(e)           A
technical assistance/equipment bonus of [*] US dollars payable as directed by
the Minister either:

(i)            in cash
within ten (10) days of the Effective Date of this Contract; or

 29
 

 

 

(ii)           in
technical assistance and/or equipment to a total delivered cost of  [*] US dollars.  Such technical assistance and/or equipment
shall be delivered to the Minister within three (3) months of the date that a
list of such technical assistance and/or equipment is agreed between the
Minister and the Contractor.

(f)            In
consultation with the Minister, fund the award of a minimum of  [*] scholarships annually during the
Exploration Period and a minimum of  [*]
scholarships annually for the remaining term of the Contract for the training
of nationals of Trinidad and Tobago in appropriate fields of study associated
with the Petroleum industry.  The minimum
value of each scholarship shall be [*] US dollars per annum.  In the event any of these scholarships are
not awarded and/or funded by the Contractor to at least the minimum value as
prescribed above during any Contract Year, the Contractor shall pay to the
Minister an amount equivalent to funds not expended in respect of each such
scholarship up to the prescribed minimum value indicated herein.

21.2         Contractor
shall be subject to payment of assessment or contributions, assessed on
employees by generally applicable law on labour costs.  Contractor shall also guarantee the payment
of any Trinidad and Tobago income tax due from its foreign employees.

21.3         The
Contractor and its Subcontractors and their respective personnel shall be
obliged, to pay such transfer taxes and stamp duties as may be in effect from
time to time at the rates which are generally applicable to all persons or
entities in Trinidad and Tobago.

21.4         The
Contractor shall be subject to and must observe the laws in force from time to
time in Trinidad and Tobago and nothing herein contained shall be construed as
exempting the Contractor from complying with the laws imposing taxes, duties, levies,
fees, royalties, charges or similar impositions or contributions which the
Contractor would be liable to pay or is called upon to pay under such laws by
virtue of its conduct of Petroleum Operations hereunder.  Notwithstanding the provisions of Article 21.5,
Contractor shall discharge its liability for withholding tax in accordance with
applicable law.  The Contractor shall
maintain financial books and records with respect to Petroleum Operations in
the Contract Area and shall enable authorised persons to inspect and review
such books.

21.5         The Minister
shall pay on behalf of the Contractor out of his share of production referred
to in Article 18.14 the Contractor’s liability for Petroleum Profits Tax,
Unemployment Levy or any other taxes impositions whatsoever measured upon
income profits.  Taxable income
prescribed under Article 21.6 less the deductions allowed under the income
tax laws of Trinidad and Tobago, including any losses carried forward from previous
Calendar Years.  For the purposes of calculating
taxable income herein, initial and first year capital allowances shall be
mandatory deductions in the first year. 
The Minister shall cause the tax authority of Trinidad and Tobago to
furnish the Contractor with the proper official receipts evidencing such
payments.  The value of the Petroleum to
be used in making the application to the Contractor’s said liability shall be
the same as the value used in the computation of the amount of the income
giving rise to such liability.  The
Contractor shall maintain financial books and records with respect to Petroleum
Operations in the Contract Area and shall enable authorized persons to inspect
and review such books.

21.6         For the
purpose of applying Article 21.5, the gross income of the Contractor in
respect of any year of income shall be calculated as the total of:

(a)           the sums
received by Contractor from the sale or other disposition of all Petroleum
acquired by Contractor pursuant to Article 18 and

(b)           an amount
equal to Contractor’s Gross-up Value calculated in the manner shown in
Annex C, Article 12.

21.7         Subject only
to Article 21.1 21.2, 21.3, 21.4 and 23, the Minister shall save the
Contractor harmless from all other payments to or levies by the Treasury or the
Government whether or not existing at the date of this

 30
 

 

 

Contract, including but not limited to Royalty, Petroleum Impost,
Petroleum Profits Tax, the Supplemental Petroleum Tax, the Petroleum Levy, and
the Unemployment Levy.

21.8         The Parties
agree that for the purposes of determining taxable income in Trinidad and
Tobago, profits and/or losses resulting from Petroleum Operations carried out
under this Contract shall not at any time be consolidated with profits and/or
losses resulting from any of the Contractor’s other operations in Trinidad and Tobago
outside the Contract Area.

ARTICLE 22

PAYMENT AND CURRENCY

22.1         All payments
which the Contract requires the Contractor to make to the Minister or the
Government shall be made in United States dollars at a bank designated by
recipient.  Contractor may make payment
in other currencies, if acceptable to recipient.

22.2         Conversion
of all payments made by Contractor in Trinidad and Tobago into United States
dollars or any other currency acceptable to the recipient shall be effected at
the generally prevailing rate of exchange at the time of payment.

22.3         All payments
due to Contractor from the Minister shall be made in United States dollars or
any other currency acceptable to Contractor, at a bank to be designated by
Contractor.

22.4         Contractor
shall have the right to receive, retain abroad and use without restriction the
entirety of proceeds received from its sales of its share of Petroleum from the
Contract Area subject to the Contractor satisfying completely its then accrued
financial obligations under the Contract.

22.5         Contractor
shall during the term of the Contract have the right without the imposition of
any, control, except as otherwise imposed by the terms of the Contract, to make
any payments and to maintain and operate bank accounts outside Trinidad and
Tobago in whatsoever currency. 
Contractor may also operate and maintain United States dollar or other
foreign currency bank accounts within Trinidad and Tobago subject to applicable
law.

ARTICLE 23

MATERIALS AND EQUIPMENT IMPORT DUTIES

23.1         Contractor
shall provide all equipment, machinery, tools, spare parts and any other goods
of a similar nature (“Materials”) required for Petroleum Operations under this
Contract.

23.2         Such
Materials shall be provided by Contractor in accordance with programmes and
budgets under Article s 14 and 15 and shall be acquired pursuant to
procurement procedures specified by the Contractor under Article  1.7 of
the Accounting Procedure.

23.3         Contractor
shall give, preference to the use of locally manufactured or locally available
Materials when such are comparable with the competing imported Material in
quality and availability and the price thereof does not exceed the c.i.f. price
(including import deities where applicable) of the imported.  Materials delivered to the Contract Area.

23.4         Subject to
Article  23.3, Contractor shall have the right to import any Materials
required for Petroleum Operations.  In
this regard the Contractor shall comply with generally applicable importation
formalities and pay import and excise duties to the extent not exempt therefrom
by generally applicable law.

 31
 

 

 

ARTICLE 24

OWNERSHIP OF ASSETS

24.1         Subject to
Article  24.3, ownership of any asset, whether fixed or moveable, acquired
and owned by Contractor in connection with Petroleum Operations hereunder shall
pass to the Minister without consideration when the part of the Contract Area
in which the asset is located is relinquished or at the end of the term of this
Contract, whichever first occurs, except in cases where the Minister notifies Contractor
that he does not accept the particular asset where the Minister elects not to
take a particular asset Contractor shall carry out the approved abandonment
programme under Article 37 and shall be free to dispose of the asset in,
accordance with applicable law.

24.2         Where
Production from a Production Area is possible beyond the term of the Contract,
Contractor shall hand over to the Minister without consideration such
Production Area and all facilities required for, carrying out existing
operations, in good working order, normal wear and tear excepted.  Upon the transfer of said Production Area and
related facilities, the Minister shall assume all responsibility for the
facilities and their abandonment and hold the Contractor harmless against any
liability with respect thereto accruing after the date of such transfer to the
Minister.

24.3         Subject to
Article 24.2, whenever Contractor relinquishes any part of the Contract
Area, all moveable property located within the part of the Contract Area so
relinquished, may be removed to any part of the Contract Area that has been
retained.

24.4         The
provisions of Article  24.1 and 24.2 shall not apply to materials,
facilities, or other property that are rented or leased to Contractor or which
belong to employees of Contractor, provided that the ownership of any such item
by other than Contractor is clearly documented with the Minister at the time of
entry into Trinidad and Tobago or of local acquisition.

24.5         In the event
Contractor desires to move property located on the Contract Area but no longer
used in Petroleum Operations to another location within Trinidad and Tobago for
further use prior approval of the Minister shall be required.  Upon receipt of such approval the Contractor
shall pay to the Minister either

(a)           an amount
equal to a transfer price mutually agreed upon by the Parties, or

(b)           f no price
is agreed and Contractor still desires to move the property as provided herein,
an amount equal to the percentage of the cost of such property that has been
cost recovered under this Contract as of the date such property is moved
multiplied by the depreciated value of the property determined in accordance
with applicable law.

ARTICLE 25

SUBCONTRACTORS, PERSONNEL AND TRAINING

25.1         Contractor
has the right to use qualified Subcontractors to provide specialized equipment
or services.

25.2         Contractor
shall, provide national companies genuine opportunities, in competition, with
foreign entities, to provide any services or equipment required in connection
with Petroleum Operations.  The
procurement procedures submitted pursuant to Article  1.7 of the
Accounting Procedure should contain appropriate measures to ensure Contractor’s
compliance in this regard.  Contractor
shall give preference to national Subcontractors where such are competitive
with foreign bidders in skills, availability and price and meet the technical
and financial requirements of the Contractor.

25.3         Prior to the
commencement of any contract, the Contractor shall provide the Minister all
necessary information covering each Subcontractor including, upon the Minister’s
request, an executed copy of any contract or change thereto.

25.4         Contractor
and its Subcontractors shall employ with priority local personnel in all
aspects of Petroleum Operations to the extent that nationals of Trinidad and
Tobago with the requisite qualifications and experience can be found.

 32
 

 

 

25.5         Contractor
and its Subcontractors may employ foreign nationals

(a)           to the
extent that qualified nationals cannot be found to fill the positions required;

(b)           to fill a
reasonable number of technical or managerial positions; and

(c)           to provide
short-term expertise.

25.6         Contractor
shall undertake the development and training of its national personnel
(including training for the specific purpose of taking over positions held by
expatriate personnel) for all positions including administrative, technical and
executive management positions. 
Contractor shall, together with its annual Work Programme and Budget,
prepare and submit annually to the Minister for approval programmes for such
development and training Contractor shall include a status report on these
programmes with its submission of the quarterly status report required under
Article s 14.1(b) and 15.5.

25.7         Contractor
shall at its own expense as part of Petroleum, Operations provide a reasonable
number of personnel of the Ministry with on-the-job training and where
appropriate and practicable, with overseas training based on a mutually agreed
programme.  On-the-job training shall
involve the inclusion of representatives of the Minister on project teams
responsible for various aspects of Petroleum Operations under this Contract.

25.8         Contractor
shall also submit to the Minister together with its submission of the annual
Work Programme and budget, the details of all the payments, benefits and
privileges accorded for each classified category of Contractor’s personnel
(both expatriate and local).

ARTICLE 26

STATE’S RIGHT OF REQUISITION

26.1         In case of
war or imminent expectation of war or grave national emergency (as provided for
in Section 36 of the Act), the President may requisition all or a part of
the Crude Oil production from the Contract Area and require Contractor to
increase such production to the extent required.  In such event, the price to be paid by the
President for the Crude Oil shall be the value determined in accordance with
Article  20 of the Contract and payment shall be made within thirty (30)
days after delivery in US dollars at a bank outside of Trinidad and Tobago
designated by the Contractor.

26.2         In the event
of any requisition as provided above, the President shall indemnify the
Contractor in full for the period during which the requisition is maintained
including all reasonable damages, if any, which result from such requisition.

ARTICLE 27

UNITIZATION

27.1         If a
Discovery in the Contract Area extends beyond the boundaries of the Contract
Area, the Minister may require that the Development of the Discovery and the
Production of Petroleum therefrom be carried out in collaboration with the
entity or entities that have the right to conduct Petroleum Operations in the
areas into which the Discovery extends.

27.2         In such
case, a collective proposal for common Development and Production of the
deposit of Petroleum shall be proposed by the Contractor and such other entity
or, entities for approval by the Minister. 
If such proposal is not approved, the Minister may prepare or cause to
be prepared for the account of Contractor and the other entity involved a
reasonable plane for common Development and Production.

27.3         Where one or
more of the entities object to the programme prepared by the Minister under
Article  27.2 it or they may within twenty-eight (28) days of receipt of
the programme submit the matter for arbitration in accordance with the
procedure set out in this Contract.

 33
 

 

 

ARTICLE 28

CONFIDENTIALITY

28.1         All
technical data and other information related to Petroleum Operations in the
Contract Area shall be the property of the State.  Except as provided in Article s 28.3,
28.4 and 28.5 all data shall be maintained by the Parties as strictly
confidential and shall not be divulged by either Party during the term of the
Contract without prior written consent of the other Party, except to the extent
required to comply with applicable law, unless such data become part of the
public domain.

28.2         Such
confidentiality undertaking shall continue to apply to Contractor for a period
of five (5) years after the termination of the Contract Contractor shall not
trade, sell or publish data pertaining to the Contract Area at any time without
the prior written consent of the Minister.

28.3         A Party may
disclose such information to its employees Affiliates, consultants, banks,
financial institutions, auditors, Subcontractors and prospective assignees to the
extent required for the efficient conduct of Petroleum Operations.  Prior to making any such disclosures to its
consultants, banks, financial institutions, Subcontractors or prospective
assignees, such Party shall obtain from such individuals or entities a written
confidentiality undertaking to keep the data and information strictly
confidential.  The Contractor may also,
upon written notice to the Minister, make such disclosures as may be required
by applicable law or the rules of a recognized stock exchange and/or any
regulatory authority of competent jurisdiction, over Contractor (including,
without limitation), any securities commission or taxation authority and such
notice shall include copies of the information to be disclosed.

28.4         (a)           All
data furnished under this Contract shall, subject to the exemptions in
Article 28.4(b) below, be treated as strictly confidential for the term of
this Contract or any extension or renewal hereof, except that the Minister and
the Contractor shall have the right to use such data for the purpose of any
arbitration or litigation between the Minister and the Contractor.

(b)           (i)            Data
related to Petroleum Operations in areas which have been relinquished by the
Contractor may be released by the Minister immediately on relinquishment.

(ii)           Data
related to the Petroleum Operations in areas not relinquished in accordance
with the terms of this Contract may be released by the Minister at the end of
the sixth (6th) year of the Contract or one (1) year after acquisition
whichever period is later.

28.5         The Minister
shall be entitled at any time to prepare and publish reports or studies using
information derived from any information or data related to the Contract Area.

ARTICLE 29

PIPELINES

29.1         Sections 26
and 27 of the Petroleum Regulations shall apply to any pipeline outside of the
Contract Area but which is included as a part of Petroleum Operations
hereunder.

29.2         In the event
of usage of such pipeline by third parties, the tariff collected by the
Contractor shall be credited to the cost recovery account.

ARTICLE 30

INSURANCE

30.1         Contractor
shall provide all insurance required by applicable law and such other insurance
as may be agreed with the Minister from time to time in conformity with
generally accepted practices in the international Petroleum industry.

 34
 

 

 

30.2         All such
policies of insurance with respect to the operations of the Contractor shall
name the Minister as an additional named insured or “loss payee” and shall
contain an express waiver of subrogation against the Government and the
Minister.

30.3         Contractor
shall upon request provide the Minister with copies of all policies of
insurance.

30.4         Contractor
shall actively pursue any claims against insurers.  Any amount received from insurance
settlements shall be applied and accounted for in accordance with the
Accounting Procedure.

30.5         Contractor
shall not self insure or insure through Affiliates without the specific prior
approval of the Minister.

30.6         Contractor
may utilize its normal worldwide insurance programmes and coverage to satisfy
these insurance requirements with the prior approval of the Minister.

ARTICLE 31

ASSIGNMENT

31.1         Any entity
or entities comprising the Contractor may with prior approval of the Minister
assign all or an undivided percentage interest in its rights and obligations
under the Contract to any of its Affiliates provided that

(a)           such
entity demonstrates to the Minister’s satisfaction that the Affiliated assignee
is as qualified as the assignor with respect to this technical and financial
competence;

(b)           such
entity at the time of such notice provides the Minister with an undertaking
from the ultimate parent company of the Affiliated assignee required by
Article 8.5; and

(c)           the
instrument of assignment states precisely that the assignee is bound by all
covenants contained in the Contract.

31.2         Subject to
the prior written approval of the Minister any of the entities comprising
Contractor may assign all or an undivided percentage interest in its rights and
obligations under the Contract to a nonaffiliated third party.  For consideration to be given to any such
request:

(a)           all
accrued obligations of the assignor derived from the Contract must have been
duly fulfilled as of the date such request is made, or assignor and assignee
must jointly and severally guarantee fulfillment of any unfulfilled accrued
obligations of assignor;

(b)           the
proposed assignee or assignees must produce reasonable evidence to the Minister
of its or their financial and technical competence; and

(c)           the
instruments of assignment shall be submitted to the Minister for scrutiny and
approval and shall include provisions stating precisely that the assignee is
bound by all covenants contained in the Contract.

31.3         No
assignment shall in any way absolve the assignor from the obligations
undertaken by it under the Contract except to the extent such obligations are
in fact performed by the assignee.

31.4         Each
assignee shall within thirty (30) days after the effective date of the
assignment comply with the requirements of Articles 10.1 and 10.2.

 35
 

 

 

ARTICLE 32

APPLICABLE LAW

32.1         The
validity, interpretation and implementation of the Contract shall be governed
by the laws of the Republic of Trinidad and Tobago.

ARTICLE 33

CONSULTATION, EXPERT DETERMINATION

AND ARBITRATION

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

33.2         If any
dispute referred to under this Article  has not been settled through such
consultation within ninety (90) days after the dispute arises either Party may
by notice to the other Party propose that the dispute be referred either for
determination by a sole expert or to arbitration in accordance with the
provisions of Article  33.

33.3         Following
the giving of notice under Article 33.2 the Parties may, by mutual
agreement, refer the dispute for determination by a sole expert to be appointed
by agreement between the Parties.  Such
sole expert shall be an internationally recognized specialist in the
interpretation of the subject under dispute. 
If the Parties are unable to agree on designation of the expert within
thirty (30) days following the giving of notice under Article 33.2, the
expert shall be named by an internationally recognized organisation to be
agreed to by the Parties.

33.4         As an
alternative to the procedure described in Article 33.3 and if agreed upon
by the Parties, such dispute shall be referred to arbitration by an agreed sole
arbitrator.

33.5         (a)           If
the Parties fail to refer such dispute to a sole expert under Article 33.3
or to a sole arbitrator under Article 33.4, within sixty (60) days of the
giving of notice under Article 33.2, the dispute shall be referred to
arbitration.  The arbitration shall be
conducted by three (3) arbitrators in accordance with the UNCITRAL Rules in
effect on the Effective Date of the Contract.

(b)           Where
arbitration is resorted to either by the sole arbitrator under
Article 33.4 or arbitral tribunal, the Arbitration Rules of the United
Nations Commission on International Trade Law (UNCITRAL Rules) in effect on the
Effective Date of the Contract shall be used.

33.6         The English
language shall be the language used in the expert or arbitral proceedings.  All hearing materials, statements of claim or
defence, award and the reasons supporting them shall be in English.

33.7         The place of
the expert determination or arbitration shall be in Trinidad and Tobago.

33.8         In the case
of a request by Contractor pursuant to Article 17.6(e) for final
determination by an expert of whether a disputed charge is subject to cost
recovery, such expert shall be an internationally recognized specialist in
interpretation of Petroleum contracts with experience in verifying costs of
Petroleum Operations.  If the Parties are
unable to agree on designation of the expert within thirty (30) days after
Contractor’s request under Article 17.6 (e) for the expert determination,
the expert shall be named by the International Chamber of Commerce.  The waiting period required by
Article 33.2 shall not apply to this type of expert determination

33.9         (a)           Any
decision by the expert determination, sole arbitrator or arbitral tribunal
shall be final and binding upon the Parties. 
Such decision shall be rendered within sixty (60) days after the completion
of the expert determination or arbitration proceedings.

(b)           Judgment
for execution of any award rendered by the expert determination, sole
arbitrator or arbitral tribunal may be entered by any court of competent
jurisdiction without review of the merits of such award.

 36
 

 

 

ARTICLE 34

FORCE MAJEURE

34.1         No delay,
default, failure or omission by either Party in the performance of any
obligation under this Contract shall be considered as a breach of the Contract
if such delay, default or omission is due to force majeure, as defined in,
Section 19(2) of the Act.  The Party
claiming force majeure shall notify the other in writing as soon as possible
and take all reasonable and necessary measures to resume full execution of
performance hereunder as soon as possible

34.2         Notwithstanding
anything in Article  34.1 (and without prejudice to the generality
thereof) the following events or circumstances shall not be treated as being
force majeure or caused thereby

(a)           failure by
either Party to pay money when due or fulfill any financial obligation under
this Contract;

(b)           the
insolvency of Contractor or any entity constituting Contractor

34.3         If the
Petroleum Operations are partially or totally suspended as a result of force
majeure, the duration of the period directly affected by such suspension shall
be extended by a period corresponding to the period of the suspension which in
no event shall be more than two(2) years.

34.4         The
Contractor may terminate the Contract upon a three (3) month written notice to
the other Party if the fulfillment of the obligation of either party under this
Contract is affected by Force Majeure during the Exploration Period or any
extension thereof for a continuous period exceeding two (2) years without
further obligation and liabilities of any kind.

ARTICLE 35

NOTICES

35.1         Any notice
and other communications requited or given under the Contract shall be deemed
given when delivered in writing either by hand, in person or through the
registered mail, courier service or fax transmission, appropriately addressed
as follows:

TO THE MINISTER.

By Hand or Mail:

Permanent Secretary

Ministry of Energy and Energy Industries

Level 9, Riverside Plaza

Besson Street

Port of Spain.  Trinidad & Tobago

Telefax No.  (868)6250306

TO CONTRACTOR.

Canadian Superior Energy Inc. Ignatius Chambers

4th Floor

33 St. Vincent Street

Port of Spain.  Trinidad & Tobago

35.2         Each of the
Parties may change its address or addresses or representative for purpose of
receiving notices by giving at least ten (10) days prior written notice of the
change to the other Party.

 37
 

 

 

ARTICLE 36

TERMINATION

36.1         The Minister
shall have the right to terminate the Contract and to take without
consideration all property of whatever nature belonging to the Contractor in
Trinidad and Tobago related to the Contract Area if the Contractor fails:

(a)           to fulfill
the obligations provided for in Articles 7 or 14 hereof; or,

(b)           to conform
to the provision of an arbitration award or expert determination under
Article 33 hereof.

36.2         Contractor
shall have the right to terminate this Contract by electing to relinquish the
entire Contract Area pursuant to the conditions specified in Article 5.

36.3         If either
Party to the Contract commits a material breach of Contract, the other Party
shall have the right to terminate the Contract 
using the following procedure:

(a)           The Party
claiming the right to terminate shall give notice to the other Party specifying
the particular material breach complained of, and requiring the other Party,
within ninety (90) days of such notice, to remedy the same or make reasonable
compensation to the complaining Party, as the case may be;

(b)           If the
Party receiving the notice fails to comply with said notice, the complaining
Party may, after the expiration of the ninety (90) days notice, forthwith
terminate this Contract provided that in the event the issue of whether there
has been a material breach has been referred to arbitration or expert
determination under Article 33, the complaining Party may not exercise its
power of termination until the result of arbitration or expert determination is
known.  The Party which elects to refer
the dispute to arbitration or expert determination must be diligent in pursuing
its claim in such proceedings.  Failure
to pursue such claim diligently will entitle the complaining Party to exercise
its right to terminate in spite of the referral to arbitration or expert
determination.

36.4         Contractor
shall have the right to terminate this Contract in accordance with the
provisions of Article 34.4.

36.5         This Contract
may be terminated prior to the end of the Contract term, by express agreement
of the Parties or in accordance with the provisions of Article 4.2.

36.6         Upon the
termination of this Contract by either Party all rights granted to the
Contractor and all obligations imposed on Contractor hereunder shall terminate,
subject and without prejudice to any rights which may have accrued to the
Minister or to the Contractor under this Contract.

ARTICLE 37

ABANDONMENT PROGRAMME AND BUDGET

37.1         Within sixty
(60) days after the expiration of the term of the Contract or the sooner
relinquishment of some or all of the Contract Area, the Contractor shall carry
out to the Minister’s satisfaction an abandonment programme agreed with the
Minister for all installations and pipelines provided by Contractor under this
Contract that the Minister elects not to have delivered up to him in accordance
with Article 24.1.  With respect to
the area being relinquished and/or facilities thereon, such abandonment
programme shall comply with internationally accepted standards prevailing the
time of abandonment.

37.2         Not
later than  [*] years before the earlier
of:

(a)           the
scheduled expiry of the term of the Contract; or

 38

 

(b)           the
Contractor’s anticipated termination Production of a Field or of operation of
pipeline;

the Contractor shall submit for the Minister’s
approval a proposed abandonment programme and budget covering all such
installations and pipelines provided by Contractor under this Contract.

37.3         The
Minister shall act without unreasonable delay in reaching a decision on the
Contractor’s proposal under Article 37.2 and may approve or modify or
impose conditions thereon.  Before
modifying or imposing conditions on the proposal, the Minister shall notify the
Contractor of the proposed modification or conditions and give the Contractor
the opportunity to make written representations within sixty (60) days
thereafter about the proposed modifications or conditions.  After taking into consideration such
representations the Minister and the Contractor shall make their best efforts
to mutually agree on the proposed modifications or conditions of the
abandonment programme and budget.  In the
event that the Minister and the Contractor cannot mutually agree on the
proposed abandonment programme and budget, either Party may by written notice
to the other Party propose that the dispute be referred for determination in
accordance with the provisions of Article 33.  Until such time that the determination has
been made, the Contractor shall make payments into the escrow account referred
to in Article 37.5, based on its proposed abandonment programme and
budget.  After the determination is made,
Contractor shall adjust the payments to such escrow account to reflect the
abandonment programme and budget so determined.

37.4         In
the event that the Contractor does not present a timely proposal to the
Minister under Article 37.2 the Minister, after giving thirty (30) days
notice to the Contractor of his intention to do so, may prepare an abandonment
programme and budget for the Contract Area if the Contractor does not present a
proposal by the end of the thirty (30) day period.  When the Minister has so prepared the
abandonment programme and budget, it shall have the same effect as if it had
been submitted by the Contractor and approved by the Minister.

37.5         The
approved budget for carrying out the approved abandonment programme shall be
provided for by the Contractor paying into an interest bearing account with an
escrow agent approved by the Minister a per unit of production assessment
calculated by dividing the approved abandonment budget by the estimated units
of production to be produced and saved by the Contractor between the date of
the Minister’s approval and the anticipated date of the abandonment.  All monies allocated to the abandonment
programme and budget shall be recoverable as operating costs.  If the Contractor carries out the abandonment
programme the accrued interest and any portion of the escrow account not
required for the abandonment programme shall be transferred to the
Minister.  If the escrowed amount is
insufficient to complete the approved programme, the Contractor shall pay all
such additional required costs.  In the
event the Minister elects to have the facility delivered up to him, the escrow
account shall be transferred to the Minister, who shall assume all
responsibility for the facility, its abandonment and hold the Contractor
harmless against any liability with respect thereto accruing after the date of
such transfer to the Minister.

ARTICLE 38

THE PETROLEUM ACT AND REGULATIONS

38.1         Pursuant
to Section 6(4) of the Act, the Parties have agreed that this Contract
sets out comprehensively the rights and obligations of the Parties with regard
to matters otherwise covered by the Act and the Petroleum Regulations provided
that any provisions regarding safety incorporated in the Regulations, Rules
and/or Orders as the Minister may issue from time to time shall apply to the Contractor.

38.2         So
much only of the Act and the Regulations as are not excluded by the Contract
shall apply to the Contractor, and where any provision of the Act or the
Regulations is modified by this Contract for the purposes of this Contract, the
Act and the Regulations shall be read, and construed accordingly and where
there is any conflict or variance with reference to any matter between the
provisions of this Contract and the Act or the Regulations the provisions of
this Contract shall prevail.

 39
 

 

ARTICLE 39

MISCELLANEOUS

39.1         The
Contract shall not be amended or modified in any respect except by written
agreement entered into by the Parties hereto.

39.2         The
headings of this Contract are for convenience of reference only and shall not
be taken into account in interpreting the terms of this Contract.

39.3         A
reference to the singular in this Contract includes a reference to the plural
and vice versa.

39.4         The
provisions of this Contract shall inure to the benefit of and be binding upon
the Parties and their permitted assignees and successors in interest.

39.5         No
waiver by  any Party of any one or more
obligations or defaults by any other Party in the performance of the Contract
shall operate or be construed waiver of any other obligations or defaults
whether of a like or of a different character.

39.6         This
Contract supersedes and replaces any previous agreement or understanding
between the Parties whether oral or written on the subject matter hereof, prior
to the date of this Contract.

 40
 

 

 

AS WITNESS WHEREOF Stephanie Elder-Alexander,
Commissioner of State Lands acting on behalf of His Excellency Professor George
Maxwell Richards, the President of the Republic of Trinidad and Tobago has
hereunto set her hand the 20th day of July, 2005
and the Honourable Eric Anthony Williams, the Minister of Energy and Energy
Industries has hereunto set his hand the 20th day of July,
2005.  The Corporate Seal of Canadian
Superior Energy Inc. was hereunto affixed the 20th day of July, 2005.

	
  SIGNED AND DELIVERED by

  
	
  the within-named
  STEPHANIE

  
	
  ELDER-ALEXANDER

  
	
  Commissioner of
  State Lands,

  
	
  Pursuant to the
  State Lands Act

  
	
  Chap. 57:01 as
  and for the act and

  	
  /s/ Stephanie Elder-Alexander

  	
   

  
	
  deed of the
  President of the

  
	
  Republic of
  Trinidad and Tobago in

  
	
  the presence of:

  
	
   

  
	
   

  	
  /s/ Selwyn Lashley

  	
   

  
	
  Selwyn Lashley

  
	
  Chief Technology Officer

  
	
  Ministry of Energy and

  
	
  Energy Industries

  
	
  Level 9, Riverside Plaza

  
	
  Besson Street

  
	
  Port of Spain

  
	
   

  
	
   

  
	
  And of me,

  
	
   

  
	
   

  
	
   

  	
  /s/ Joyce C. Lynch

  	
   

  
	
  Attorney-at-Law

  
							

 

 41
 

 

 

	
  SIGNED AND DELIVERED by

  
	
  the within-named
  Honourable ERIC

  
	
  ANTHONY
  WILLIAMS, Minister

  	
  /s/ Eric A. Willis

  	
   

  
	
  of Energy and
  Energy Industries as

  
	
  and for his act
  and deed in the

  
	
  presence of:

  
	
   

  
	
   

  	
  /s/ Leroy Mayers

  	
   

  
	
  Leroy Mayers

  
	
  Permanent Secretary

  
	
  Ministry of Energy and

  
	
  Energy Industries

  
	
  Level 9, Riverside Plaza

  
	
  Besson Street

  
	
  Port of Spain

  
	
   

  
	
   

  
	
  And of me,

  
	
   

  
	
   

  
	
   

  	
  /s/ Joyce C. Lynch

  	
   

  
	
  Attorney-at-Law

  
							

 42
 

 

 

	
  The Corporate Seal of
  Canadian

  
	
  Superior Energy Inc.
  was hereunto

  
	
  affixed by:

  
	
   

  
	
  Michael Coolen

  	
  /s/ Michael E. Coolen

  	
   

  
	
  in the presence of:

  
	
   

  
	
  Leigh Shirley
  Bilton

  	
  /s/ Leigh
  Shirley Bilton

  	
   

  
	
   

  
	
  duly authorized
  by resolution of the

  
	
  Board of
  Directors of the Company

  
	
  in conformity
  with the Article s of

  
	
  Incorporation
  and Bye Laws of said 

  
	
  Company as and
  for the act and

  
	
  deed of the said
  Company in the

  
	
  presence of:

  
	
   

  
	
   

  	
  /s/ Fairah
  Carrmuddeen

  	
   

  
	
  Fairah Carrmuddeen

  
	
  Attorney at Law

  
	
  Fourth Floor

  
	
  33 St. Vincent Street

  
	
  Port of Spain

  
	
   

  
	
   

  
	
  And of me,

  
	
   

  
	
   

  
	
   

  	
  /s/ Joyce C. Lynch

  	
   

  
	
  Attorney-at-Law

  
								

 43
 

 

 

ANNEX “A”

GEOGRAPHICAL
DESCRIPTION OF BLOCK 5(c)

Block 5(c)

Geographical
coordinated of origin

	
  Latitude

  	
  :

  	
  10°26’30”

  
	
  Longitude

  	
  :

  	
  61°20’00”

  

 

Rectangular
Coordinates of origin

	
  Easting

  	
  :

  	
  430 000 links

  
	
  Northing

  	
  :

  	
  325 000 Links

  

 

Geographical
positions are based on the Clark 1858 Spheroid.

Cassini
grid coordinates are in links

 44
 

 

 

BLOCK
5(c)

Block 5(c) comprising approximately 32 383 hectares
situate off the East Coast of Trinidad is bounded by the lines joining the
points listed hereunder and shown on the attached map.

	
  Name

  	
   

  	
   

  	
   

  	
  Coordinates

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  A5

  	
   

  	
  266 420.841

  lk N

  	
   

  	
  998 801.886 lk E

  
	
   

  	
   

  	
  10° 20’ 0.35”

  N. Lat

  	
   

  	
  60° 17’19.10” W.

  Long

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  B5

  	
   

  	
  266 565.0300

  lk N

  	
   

  	
  1 039 107.076 lk E

  
	
   

  	
   

  	
  10° 20’ 0.400”

  N. Lat

  	
   

  	
  60° 12’ 52.602”

  W. Long

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C5

  	
   

  	
  266 804.831

  lk N

  	
   

  	
  1 106 056.895 lk E

  
	
   

  	
   

  	
  10° 20’ 0.35”

  N. Lat

  	
   

  	
  60° 05’ 29.93

  W. Long

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  D5

  	
   

  	
  117 104.940

  lk N

  	
   

  	
  1 106 055.998 lk E

  
	
   

  	
   

  	
  100 03’ 40.38”

  	
   

  	
  60° 05’ 33.73”

  W. Long

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  E5

  	
   

  	
  144 348.419

  lk N.

  	
   

  	
  1 081 484.496 lk E

  
	
   

  	
   

  	
  10° 06’ 39.324”

  Lat

  	
   

  	
  60° 08’ 15.399”

  W. Long

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  F5

  	
   

  	
  184 155.588

  lk N

  	
   

  	
  1 045 578.113 lk E

  
	
   

  	
   

  	
  10° 11’ 0.76”

  N. Lat

  	
   

  	
  60° 12’ 11.73”

  N. Lat

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  G5

  	
   

  	
  197

  798.0561k N

  	
   

  	
  1 060 696.956 lk E

  
	
   

  	
   

  	
  100 12’

  29.72” N. Lat

  	
   

  	
  60° 10’ 31.49” W.

  Long

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  H5

  	
   

  	
  231 319.554

  1k N

  	
   

  	
  1 030 461.487 lk E

  
	
   

  	
   

  	
  10° 16’

  9.862” N. Lat

  	
   

  	
  60° 13’ 50.568” W.

  Long

  

 

 45
 

 

 46
 

 

 

ANNEX “B”

REPORTS TO BE
SUBMITTED BY CONTRACTOR

1.             Monthly,
quarterly and annual progress reports.

2.             Reports
on magnetic and gravity surveys and any other geological or geophysical surveys
performed, including where applicable but not limited to:

(a)           Flight
path maps in 150,000 and 1100,000 scales.

(b)           Magnetic
recording tapes of field data on a medium to be specified by the Minister.

(c)           Daily
records of the earth’s magnetic fields.

(d)           Specifications
of equipment used in magnetic and gravity surveys and any other geological or
geophysical survey performed.

(e)           Reports
on the interpretation of items (a), (b) and (c) together with maps showing
the intensity of magnetic and gravity readings, depth of basement and
structural maps in 150,000 and 1100,000 scales, in transparencies, paper prints
and in digital form.

(f)            Magnetic
tapes of the processed and navigation data on a medium and format specified by
the Minister.

Reports on items (a), (b), (c) and (d) shall be
submitted within thirty (30) days after completion of the magnetic and gravity
surveys, and reports on item (e) shall be submitted within ninety (90)
days following preparation.

3.             Reports
on geological surveys conducted both within and outside the Contract Area in
respect of Petroleum Operations under the Contract, to be submitted within
ninety (90) days after completion of such surveys, including but not limited to

(a)           Geological
maps in 110,000 and 1100,000 scales and maps showing the location of the
collection of samples in 125,000 scale in transparencies, paper prints and
digital form.

(b)           Analysis
of Petroleum reservoirs specifying all reservoir parameters including but not
limited to the rock types, petrology, permeability and porosity.

(c)           Petroleum
source rock analyses

(d)           Paleontology
analysis, stratigraphy and environment of deposition.

4.             Reports
on seismic data and interpretations thereof, including where applicable the
following in relation to seismic surveys

(a)           Source
and receiver pattern diagrams.

(b)           Specifications
of equipment used in seismic surveys.

(c)           Maps
showing permanent markers used in the survey in 150,000 scale.

 47
 

 

 

(d)           Seismic
shot point maps in 150,000 and 1250,000 scales, transparencies, paper prints
and in digital form.

(e)           Source
wave form characteristic analysis.

(f)            Field
and processed navigation tapes and seismic final processed tapes; and
reprocessed tapes if they have been used for reinterpretation and/or location
of well(s).  These data are to be
supplied on a medium and in a format specified by the Minister on approval of
these surveys.

(g)           2D
Seismic sections of all seismic data processing displays of every seismic
line in one (1) second per ten (10) centimetre scale including
transparencies and one paper print.  The
same requirement applies to any reprocessed lines.

(h)           Root
mean square velocity and interval velocity analysis of shot points carried out
on each line.

(i)            Seismic
interpretation of every horizon that Contractor has interpreted as well as any
thickness, facies, environment, maturity and any other interpretive maps 
prepared by the Contractor.

(j)            Structural
contour maps based on the interpretations in (h) and (i) at the scale utilized
by Contractor or a scale specified by the Minister

(k)           For
3D seismic surveys the Minister retains the right to be supplied with a copy of
the field tapes including navigation tapes and observer reports at any time in
the life of the Contract at Contractor’s cost.

(l)            3D
seismic final processed data including navigation to be supplied on a tape
medium and format specified by the Minister on approval of the survey.

(m)          3D
seismic sections at a spacing to be specified by the Minister and at a scale to
be specified by the Minister.  One (1)
paper and one (1) film of each specified seismic line.

(n)           Reports
on items (a), (b), (c), (e) (f), (g) and (h) shall be submitted within sixty
(60) days after completion of the processing of each seismic line.

(o)           Reports
on items (i) and (j) shall be submitted upon completion of each
seismic interpretation.

5.             Reports
on drilling operations including the following:

(a)           a
daily report by 1300 hours of the following day, which must contain the
following details where applicable

	
  (i)

  	
  Name of well and of Contractor.

  
	
  (ii)

  	
  Date and time of operation.

  
	
  (iii)

  	
  Name of drilling rig.

  
	
  (iv)

  	
  Days of previous operation on the particular well.

  
	
  (v)

  	
  Depth of well at time of report.

  
	
  (vi)

  	
  Diameter of well.

  
	
  (vii)

  	
  Type and size of drill bit.

  
	
  (viii)

  	
  Deviation of well.

  
	
  (ix)

  	
  Type, weight; and specification of drilling mud.

  
	
  (x)

  	
  Operations and problems during previous twenty-four
  (24) hours.

  
	
  (xi)

  	
  Lithology within previous twenty-four (24) hours.

  
	
  (xii)

  	
  Petroleum found.

  
	
  (xiii)

  	
  Type, size, weight and depth of casing.

  
	
  (xiv)

  	
  Cementing.

  

 48
 

 

 

	
  (xv)

  	
  Pressure test of Petroleum blowout preventer,
  casing, and other related equipment.

  
	
  (xvi)

  	
  Well-logging, including type and depth of logging.

  
	
  (xvii)

  	
  Core sampling.

  
	
  (xviii)

  	
  Flow tests and the depth thereof.

  
	
  (xix)

  	
  Well abandonment.

  
	
  (xx)

  	
  Drilling rig released.

  
	
  (xxi)

  	
  Conditions of weather.

  

 

(b)           Two
(2) complete sets of well logs at 1:500 and 1:200 scales spliced into
continuous logs, both paper print and digital form, to be submitted within
twenty (20) days after the completion of well logging operations (in addition
to well logs which the Contractor supplies while drilling).

(c)           Well
completion reports to be submitted within sixty (60) days after completion of
drilling.  These reports shall contain a
well completion log, a complete description of the results of the well, the
results of tests and the details of geology and Ethology.  The well completion log will be at 1:1000
scale and should include at least the following

	
  (i)

  	
  log curves;

  
	
  (ii)

  	
  lithologic plot and description;

  
	
  (iii)

  	
  formation tops;

  
	
  (iv)

  	
  velocity information;

  
	
  (v)

  	
  shows and tests;

  
	
  (vi)

  	
  casing and plugs;

  
	
  (vii)

  	
  cores;

  
	
  (viii)

  	
  paleontologic and palynologic markers;

  
	
  (ix)

  	
  environment of deposition;

  
	
  (x)

  	
  any other information which Contractor has plotted
  on its own 1:1000 scale logs which contributes to an interpretation of the
  results of the well.

  

The well completion
report shall also include where applicable:

	
  (i)

  	
  reports on analysis of any samples taken;

  
	
  (ii)

  	
  reports on any well tests conducted;

  
	
  (iii)

  	
  analysis of Petroleum and water;

  
	
  (iv)

  	
  pressure analysis.

  

6.             Reports
on production of Petroleum, including the following:

(a)           A daily
report by 1300 hours of the following day; with the following details:

	
  (i)

  	
  Quantity of Petroleum produced.

  
	
  (ii).

  	
  Quantity of Petroleum used in Petroleum Operations

  
	
  (iii)

  	
  Quantity of Petroleum measured at measurement
  point(s).

  
	
  (iv)

  	
  Quantity of Petroleum delivered.

  
	
   

  	
  (A) to
  Contractor for cost recovery;.

  
	
   

  	
  (B) to the
  Minister as production share;

  
	
   

  	
  (C) to the
  Contractor as production share.

  
	
  (v)

  	
  Quantity of Petroleum flared.

  
	
  (vi)

  	
  Tubing and casing pressure.

  
	
  (vii)

  	
  Choke size.

  
	
  (viii)

  	
  Well test.

  
	
  (ix)

  	
  Operations during the previous twenty-four (24)
  hours.

  

(b)           Reports
detailing the results obtained with respect to the following shall be submitted
immediately they become available after the relevant analyses are carried out:

 49
 

 

 

	
  (i)

  	
  Gravity and viscosity.

  
	
  (ii)

  	
  Vapour pressure.

  
	
  (iii)

  	
  Pour point.

  
	
  (iv)

  	
  Dewpoint and composition of Natural Gas.

  
	
  (v)

  	
  Impurities.

  
	
  (vi)

  	
  Water produced and results of the analysis.

  

 

(c)           Workover
report, giving reasons, length and details of workover within thirty (30) days
after the completion of the workover.

(d)           Stimulation
report, stating methods and details of materials used for the purpose within
thirty (30) days after the completion of operations.

(e)           Bottom
hole pressure test within fifteen (15) days after the completion of the test.

(f)            Production
test report including details of calculation within thirty (30) days after
completion of the test.

(g)           Structural
contour maps for all producing horizons together with well location, reserve
assessment, and detailed calculation and reservoir simulation report, if, and
when prepared within thirty (30) days prior to production, and every six (6)
months dining production in the event of change.

7.             Reports
on investigation of Petroleum reserves, Field limits and related economic
evaluations as required under Articles 10 and 13 of the Contract within
the time frames specified therein.

8.             Safety
programmes and reports on accidents.

9.             Representative
samples of all cores and fluids extracted from wells drilled in the Contract
Area.

10.           Such
other samples, data, reports, plans, designs, interpretations or information as
the Minister may request including anything for which the cost was recorded by
the Contractor in its books as a cost of Petroleum Operations.

11.           Revisions
of reports, data, analyses or processing shall be submitted to the Minister
within thirty (30) days of completion.

12.           All
reports are required to be submitted, if possible; in digital format along with
any of the hard copies requested herein

 50
 

 

 

ANNEX “C”

ARTICLE 1

GENERAL PROVISIONS

1.1           Definitions

The definitions contained in Article 1 of the
Production Sharing Contract to which this is annexed shall apply to this
Accounting Procedure and have the same meaning except that references herein to
Article s refer to Article s hereof unless otherwise indicated.

1.2           Precedence
of Documents

In the event of any inconsistency or conflict between
the provisions of this Accounting Procedure and the provisions of the Contract,
the provisions of the Contract shall prevail.

1.3           Statements

Within sixty (60) days from the end of each Calendar
Quarter Contractor shall supply the Minister with the following statements

(a)           a
statement of expenditure classified in accordance with Article s 2, 3 and
5 hereof containing the information required by Article  10;

(b)           a
statement of receipts in accordance with Article  5;

(c)           an
inventory statement containing the information required by Article  7;

(d)           a
cost recovery statement in accordance with Article  9;

(e)           a
production statement in accordance with Article  8;

(f)            a
control statement containing the information required by Article 11, and a
statement of Local Content in accordance with Article 13.

Consolidated annual summaries of each of these statements
shall also be provided to the Minister within sixty (60) days after the end of
the relevant Calendar Year.

1.4           Books
of Account

Contractor’s books for Petroleum Operations shall be
kept on the accrual basis in United States dollars Such books of account shall
be kept in Trinidad and Tobago, in the English language and in accordance with
internationally accepted accounting principles consistent with accepted
Petroleum industry practices and procedures and the provisions of the Contract
and this Accounting Procedure.  All U.S.
dollar expenditures shall be charged in the amount expended.  All expenditures in Trinidad and Tobago
currency shall be translated into U.S. dollars in conformity with
Article 22.2 of the Contract, and all other non-U.S. dollar expenditures
shall be translated into U.S. dollars at the documented cost of purchase.  Contractor shall maintain a record and
documentation of the exchange rates used in translating Trinidad and Tobago
currency or other non-U.S. dollar expenditures to U.S. dollars.

1.5           Revision
of Accounting Procedure

This Accounting Procedure may be revised from time to
time by written agreement between the Minister and Contractor.

 51
 

 

 

1.6           Detailed
Outline of Accounting System

Within ninety (90) days after the Effective Date,
Contractor shall present to the Minister an outline of charts of accounts,
detailed classifications of costs, detailed nature of cost centres (as
specified in Article 3 hereof) to be used and operating records and
reports to be established in accordance with the Contract and this Accounting
Procedure.  Following agreement on such
drafts with the Minister, Contractor shall promptly prepare and provide the
Minister with its (a) comprehensive charts of accounts, (b) detailed
organization chart showing recording and reporting functions, and
(c) manuals to be used in implementing this Accounting Procedure.

1.7           Procurement
Procedure

Within ninety (90) days after the Effective Date
Contractor shall furnish to the Minister the procurement procedures to be followed
by Contractor for obtaining materials, equipment and services under the
Contract.

 52
 

 

 

ARTICLE 2

COSTS AND
EXPENDITURES

2.1           Classification
of Costs and Expenditures

The detailed chart of accounts will be submitted to
the Minister pursuant to Article 1.6 hereof.  However, as a minimum, costs and expenditures
subject to cost recovery shall be accounted for in accordance with the
following classifications:

(a)           Surface
Use Rights

All direct costs attributable to the acquisition
renewal or relinquishment of surface use rights for areas required by
Contractor for installations and operations forming part of Petroleum
Operations.

(b)           Labour

(i)            Actual
salaries and wages of Contractor’s employees directly engaged in Trinidad and
Tobago in the various activities under the Contract, including salaries and
wages paid to geologists, engineers and other employees temporarily assigned to
and employed in such activities.

(ii)           Actual
salaries and wages of employees of Contractor’s Affiliates, whose services are
not covered by paragraph (f)(ii) or (I) hereof attributable to time
worked within or outside of Trinidad and Tobago on Petroleum Operations under
the Contract and documented by time sheets.

(iii)          Cost
of overseas service premiums, living and housing allowances, and other
customary allowances applicable to salaries and wages of expatriate employees
chargeable under paragraph (b)(i) hereof.

(iv)          Paid
bonuses, overtime and other customary allowances applicable to salaries and
wages of national employees chargeable under paragraph (b)(i) hereof.

(v)           Expenditures
or contributions if any made pursuant to law or assessments imposed by
Government which are applicable to labour costs chargeable under
paragraph (b)(i) hereof.

(c)           Employee
Benefits

(i)            Cost
of Contractor’s established plans and policies for employee group life
insurance, social security, hospitalization, pension, retirement, stock
purchase, thrift, expatriate tax equalization, dependent education and other
benefits of a like nature attributable to salaries and wages chargeable under
paragraphs (b)(i) or (b)(ii) hereof.

(ii)           Severance
pay to national employees charged at a fixed rate applied to the national
payroll, which will equal an amount equivalent to the maximum liability for
such severance payments under applicable Trinidad and Tobago law.

 53
 

 

(d)           Materials,
Equipment and Supplied

(i)            Material
equipment and supplies purchased or furnished by Contractor valued in
accordance with the provisions of Article  4 hereof

(ii)           Material
and equipment rented, charged at actual cost.

(e)           Transportation

(i)            Transportation
of equipment, Materials and supplies necessary for the conduct of Contractor’s
activities under the Contract.

(ii)           Business
travel and transportation expenses to the’ extent covered by established
policies of Contractor, as incurred and paid by, or for expatriate and national
employees in the conduct of Contractor’s business.

(iii)          Employee
relocation costs for expatriate and national employees to the extent covered by
established policy of Contractor; for expatriates, this will include all travel
and relocation costs of such employees and their families to and from the
employee’s point of origin at the time of employment, at time of separation and
for vacations, and travelling expenses for employees and their families
incurred as a result of a transfer from one location to another within Trinidad
and Tobago.  Transportation costs
chargeable for employees and their families incurred as a result of a transfer
from Trinidad and Tobago to a location other than the point of origin shall not
be charged as a cost under the Contract.

(f)            Services

(i)            Outside
Services

The cost of consultants, contract services and
utilities procured from third parties.

(ii)           Affiliated
Services

Cost of services, including laboratory analysis,
drafting, geophysical processing and interpretation, geological interpretation,
engineering and data processing which are performed by Contractor’s Affiliates
in facilities inside or outside Trinidad and Tobago that are not covered by
paragraph (b)(ii) or (k) hereof. 
Use of Affiliate’s wholly owned equipment shall be charged a rental rate
commensurate with the cost of ownership and operation, but not in excess of
competitive rates prevailing in the Caribbean-Venezuelan region at the time of
usage Other services performed by an Affiliate shall be charged at a negotiated
contract rate not exceeding the then prevailing rate for similar services
performed in arm’s length transactions on a competitive basis with third
parties.

(g)           Damages
and Losses

All costs or expenses necessary to replace or repair
damage or losses incurred by fire, flood, storm, theft, accident or any other
cause not controllable by Contractor through the exercise of reasonable
diligence and not resulting through Contractor’s failure to file timely claims
and to diligently pursue such against the insurers.  Contractor, shall furnish the Minister
written notice of damage or losses incurred in excess of twenty-five thousand
(25,000) US dollars per occurrence, as soon as practicable after report of the
same has been received by Contractor.

 54
 

 

(h)           Insurance
and Claims

The cost of insurance, including public liability,
property, damage and other insurances including the coverage against
liabilities of Contractor to its employees and/or outsiders as may be carried
by Contractor, or required by the laws, rules and regulations of Trinidad and
Tobago or as the Minister and Contractor may agree upon.  The proceeds of any such insurance or claim
collected shall be credited against the appropriate expenditure account and
reduce recoverable costs.  If no
insurance is carried for a particular risk, all related actual expenditures
incurred and paid by Contractor in settlement of any and all losses, claims,
damages, judgments and any other expenses, including legal services, shall be
charged to the appropriate expenditure account, provided such loss, claim or
damage did not result from Contractor’s failure to operate in accordance with
the standards required by the Contract.

(i)            Field
Offices, Camps, Warehouses, Miscellaneous Facilities

Cost of establishing and operating field offices,
camps, and other facilities such as shore bases, warehouses, water systems, and
road or other transportation systems necessary for the conduct of Contractor’s
activities under the Contract.

(j)            Legal
Expenses

ll costs and expenses of litigation, or legal services
otherwise necessary or expedient for the protection of the Contract Area and
facilities or infrastructure provided under the Contract; Petroleum Operations
and facilities against third party claims, including outside attorney’s fees
and expenses, together with all judgments obtained against the Parties or any
of them on account of the operations under the Contract; and actual expenses
incurred by a Party in securing evidence for the purpose of defending against
any action or claim prosecuted or urged in connection with the operations or
the subject matter of the Contract.  In
the event actions or claims affecting the interests hereunder shall be handled
by the legal staff of Contractor or its Affiliates the cost of such personnel
shall be chargeable under paragraph (b)(i) or (ii) hereof.

(k)           General
Expenses

Cost of staffing and maintaining Contractor’s office
or offices in Trinidad and Tobago (except offices covered by paragraph (i)),
excepting salaries of employees of Contractor or an Affiliate who are assigned
to the various activities under the Contract which will be charged as provided
in Article 2.1(b) hereof.

(l)            Administrative
Overhead

(i)            Contractor’s
administrative overhead outside Trinidad and Tobago applicable to the Petroleum
Operations under the Contract prior to the date of the first Declaration of
Commercial Discovery in the Contract Area shall be charged in accordance with
the following rates with respect to all expenditures allowable for Cost
Recovery other than administrative overheads

[*] of the first 
[*] US dollars of such expenditures paid during the Calendar Year;

[*] of the next 
[*] US dollars of such expenditures paid during the Calendar Year; and

[*] of amounts exceeding  [*] US dollars of such expenditures paid
during the Calendar Year.

 55
 

 

 

(ii)           Contractor’s
administrative overhead outside Trinidad and Tobago applicable to Petroleum
Operations under the Contract after the date of the first Declaration of
Commercial Discovery in the Contract Area shall be charged in accordance with
the following rates with respect to all expenditures allowable for Cost
Recovery other than administrative overhead

[*] of the first [*] US dollars of such expenditures
paid during the Calendar Year;

[*] of amounts exceeding [*] US dollars but not
greater than  [*]  US dollars of such expenditures paid during
the Calendar Year; and

[*] of amounts exceeding [*] US dollars of such
expenditures paid during the Calendar Year.

(iii)          Contractor
shall make provisional quarterly charges to the accounts based on the above
rates.

(iv)          Such
overhead charges shall be considered full compensation to Contractor’s
Affiliates wherever located for the following types of assistance provided

(A)          Executive
- Time of executive officers above the rank of regional exploration manager.

(B)           Treasury
- Financial and exchange problems and payment of invoices.

(C)           Purchasing
- Procuring and forwarding materials, equipment supplies

(D)          Exploration
and Production - Directing, advising and controlling the entire project.

(E)           Services
- All direct services of Contractor’s Affiliates not chargeable as direct
charges under Article s 2.1(b) or 2.1(f) hereof provided by other
departments such as legal, engineering, employee relations and

(m)          Import
Duties and Taxes

All taxes, duties, levies or any other imposts, if
any, paid in Trinidad and Tobago by Contractor under Article 23 of the
Contract.

(n)           Bank
Charges

Bank charges, bond fees and charges for any guarantees
required under Article 8 of the Contract and routine bank charges for
transfers of funds and currency exchange.

(o)           Other
Expenses

Any justified costs, expenses or expenditures, other
than those which are covered, dealt with or excluded by Article 2 or Article 6,
incurred by Contractor for the proper conduct of the Petroleum Operations under
approved Work Programmes and budgets personnel recruiting, administrative,
accounting and audit which contribute time, knowledge and experience to the
operation.

 56
 

 

 

ARTICLE 3

COST CENTRES

3.1           In
order to provide for efficient control of the recoverable costs under the
Contract, all costs must be presented for the Minister’s review on the basis of
cost centres and subdivisions of these cost centres.  The detailed division shall be presented to
the Minister pursuant to Article 1.6 hereof.  However, as a minimum the following divisions
shall be established:

(a)           The
costs shall be allocated per area in the following manner:

(i)            each
Exploration area;

(ii)           each
individual Production area; and

(iii)          costs
that cannot be related to a certain area.

(b)           The costs
shall be allocated per Petroleum Operation in the following manner:

(i)            Exploration
Operations, subdivided further into:

(A)          geological,
geochemical, palaeontological, topographical and other surveys;

(B)           each
individual geophysical survey;

(C)           each
individual Exploration or Appraisal well;

(D)          infrastructure
(roads, airstrips, etc.);

(E)           support
facilities (warehouses, etc.), including an allocation of common service costs
(costs related to various Petroleum Operations);

(F)           an
allocation of the administrative overhead and general expenses; and

(G)           other
costs.

(ii)           Development
Operations, subdivided further into:

(A)          geological,
geochemical, geophysical, and other surveys;

(B)           each
individual Development Well;

(C)           gathering
facilities;

(D)          field
facilities;

(E)           tank
farms and other storage facilities for Petroleum;

(F)           infrastructure

- within Contract Area

- outside Contract Area;

 57
 

 

 

(G)           support
facilities, including an allocation of common service costs (cost related to
various Petroleum Operations);

(H)          an
allocation of the administrative overhead and general expenses; and

(I)            other
costs.

(iii)          Other
Costs, Costs described in Article  2 but not included under 3.1(b)(i)
and (ii) above.

(c)           Costs
shall be allocated to Crude Oil and to Natural Gas, where both are being
produced and saved.  The allocation shall
be in accordance with the following principles:

(i)            where
costs are exclusively related to either Crude Oil or Natural Gas, such costs
shall be allocated completely to the respective hydrocarbon;

(ii)           where
costs can be attributed to both Crude Oil and Natural Gas, the costs shall be
allocated on a basis agreed between the Parties in accordance with good
practices in the international Petroleum industry.

 58

 

ARTICLE 4

VALUATION OF
MATERIALS

4.1                                 Materials
either charged to the accounts pursuant to Article  3 hereof or credited
to the accounts pursuant to Article  5 hereof shall be valued in
accordance with the principles of this Article .

4.2           Purchases

Material, equipment and supplies shall be purchased by
Contractor directly from the supplier whenever practicable and in such event
shall be charged at the price paid by Contractor after deduction of all
discounts actually received.

4.3           Material Furnished by Contractor

Materials provided by Contractor from Contractor’s
Affiliate’s stocks outside Trinidad and Tobago at prices specified in (a)
and (b) below’

(a)                                  New
Material (Condition “A”)

New material transferred from Contractor’s Affiliate’s
warehouses or other properties shall be priced at net cost provided that the
cost of material supplied is no higher than prices in the Caribbean-Venezuelan
region fore material of similar quality, supplied on similar terms prevailing
at the time such material was supplied.

(b)                                 Used
Material (Conditions “B” and “C”)

(i)                                     Material
which is in sound and serviceable condition and is suitable for reuse without
reconditioning shall be classified as Condition “B” and priced at seventy-five
percent (75%) of allowable value of new material as defined in (a) above.

(ii)                                  Material
which cannot be classified as Condition “B” but which

(A)                              after
reconditioning will be further serviceable for original function; or

(B)                                is
serviceable for original function but substantially not suitable for reconditioning
shall be ‘classified as Condition “C” and priced at fifty percent (50%) of the
allowable price of new material as defined in (a) above.

The cost of reconditioning shall be charged to the
reconditioned material provided that the value of Condition “C” material plus
the cost of reconditioning do not exceed the value of condition “B” material.

(c)                                  Material
which cannot be classified as Condition ”B” or “C” shall be priced at a
value commensurate with its use.

(d)                                 Tanks,
buildings and other equipment involving erection costs shall be charged at
applicable, percentage of knocked down allowable new price.

(e)                                  Sale
or Export of Materials

In case Contractor sells; exports or transfers any
material to Affiliates or other entities or persons, the value of such
transfers shall be credited to the accounts, the costs of which were previously
charged to the accounts.

 59
 

 

 

ARTICLE 5

RECEIPTS

5.1                                 Credits
in favour of the Contractor as a result of the Petroleum Operations or
incidental thereto shall be credited to the respective accounts and be included
as credits in the statement of expenditures. 
Such credits shall include the following transactions

(a)                                  Claims
Recovery

The proceeds of any insurance or claim in connection
with the Petroleum Operations or any assets charged to the accounts.

(b)                                 Third
Party Revenues

Revenues received from third parties for the use of
property, assets, forth delivery of any services by the Contractor, or for any
information or data.

(c)                                  Adjustments

Any discounts or adjustments received by the
Contractor from the supplier/manufacturers or their agents in connection with
goods purchased or defective equipment or materials, the costs of which were
previously charged to the accounts.

(d)                                 Refunds

Rentals, refunds or other credits received by the Contractor,
which apply to any charge which has been made to the accounts.

(e)                                  Sale
or Export of Materials

In case Contractor sells
or exports or transfers any material to Affiliates or other entities or
persons, the value of such transfers shall be credited to the accounts, the
costs of which were previously charged to the accounts

 60
 

 

 

ARTICLE 6

NON-RECOVERABLE
COSTS

6.1                                 The
following costs shall be non-recoverable for purpose of cost recovery under
Article 18 of the Contract

(a)                                  interest
on financing charges on investment in the Contract Area;

(b)                                 costs
that are not reasonably justified with appropriate records which have been
incorrectly accounted for (to the extent not corrected);

(c)                                  costs
incurred before the Effective Date of the Contract;

(d)                                 costs
of goods and services in excess of the international market price for goods or
services of similar quality supplied on similar terms prevailing in the
Caribbean-Venezuelan region at the time such goods or services were contracted
by Contractor,

(e)                                  charges
for goods in excess of the amount allowed by Article 4 hereof and/or which
the condition of the material does not tally with their prices;

(f)                                    costs
incurred beyond the Measurement Point;

(g)                                 taxes
or impositions of whatever nature except for any applicable;

(i)            customs
duties and other import charges paid in Trinidad and Tobago on Materials and
equipment required for Petroleum Operations; and

(ii)           employer
taxes or contributions permitted as part of labour costs under
Article 2.1(b)(v) paid in or outside of Trinidad and Tobago;

(h)                                 amounts
paid as a holding fee under Article 16.3 of the Contract;

(i)                                     payments
made in accordance with Article 21 of the Contract;

(j)                                     costs
of expert determination or arbitration pursuant to Article  33 of the
Contract;

(k)                                  fines
and penalties imposed by any authority;

(l)                                     donations
or contributions, unless previously approved by the Minister; and

(m)                               payments
on claims arising out of losses covered by any insurance.

 61
 

 

 

ARTICLE 7

INVENTORIES AND
INVENTORY STATEMENT

7.1                                 Periodic
Inventories, Notice and Representation

(a)                                  At
reasonable intervals as agreed between the Minister and Contractor, but in any
event at least once during each Calendar Year and on termination of the
Contract, inventories shall be taken by Contractor of all Materials and
physical assets required for Petroleum Operations under this Contract.

(b)                                 Written
notice of intention to take an inventory shall be given by Contractor to the
Minister at least thirty (30) days before any inventory is to begin so that the
Minster may be represented when any inventory is taken.

(c)                                  Failure
of the Minister to be represented at an inventory shall bind the Minister to
accept the inventory taken by Contractor who shall in that event, promptly
furnish the Minister with a copy of all inventory documents.

7.2                                 Reconciliation
and Adjustment of Inventories

Reconciliation of inventory shall be made by
Contractor and the Minister, with a list of shortages and overages being
jointly determined, and the inventory shall he accordingly adjusted by Contractor.

7.3                                 Inventory
Statement

(a)                                  Contractor
shall maintain detailed records of property acquired for Petroleum Operations.

(b)                                 On
a Quarterly basis, Contractor shall provide the Minister with an Inventory
Statement containing:

(i)                                     description
and codes of all controllable assets and Materials;

(ii)                                  amount
charged to the accounts for each asset;.

(iii)                               date
on which each asset was charged to the account; and

(iv)                              whether
the costs of such asset has been recovered pursuant to Article 18 of the
Contract.

7.4                                 Identification

To the extent
practicable, all assets shall be identified for easy inspection with the
respective codes specified in the manuals prepared by Contractor under
Article 1.6 hereof.

 62
 

 

 

ARTICLE 8

PRODUCTION
STATEMENT

8.1                                 Contractor’s
Production Statement shall contain the following information and shall be
prepared in accordance with the following principles

(a)                                  The
production sharing shall be determined on the basis of all Petroleum produced
and saved from the Contract Area and measured at the Measurement Point or
Points during the respective Month in accordance with Article 18 of the
Contract.  The average daily production
of Crude Oil and Natural Gas by Fields for the purpose of applying the provision
of Article 18 of the Contract shall be determined by dividing the
respective total measurements of Available Crude Oil and Available Natural Gas
attributable to each Field for the Month by the number of days on which Crude
Oil and/or Natural Gas was produced in such Month.  Where different grades of Crude Oil and/or
Natural Gas are being delivered at the Measurement Point(s), the volumes, of
each grade shall be determined separately. 
However, in the event that different grades of such Crude Oil or Natural
Gas are blended together for sale then the volume of such a blend shall
prevail.

(b)                                 The
volumes of such, grades of Crude Oil and Natural Gas will be determined
separately at the Measurement Point.

(c)                                  The
volumes of Crude Oil shall be corrected for water and sediments, and shall be
determined on the basis of standard temperatures and pressures (sixty (60)
degrees Fahrenheit and 14.7 p.s.i.a.). 
The gravity, sulphur content, and other quality indicators of the Crude
Oil shall be determined and registered regularly.

(d)                                 The
volumes of Natural Gas shall be determined on the basis of standard
temperatures and pressures (sixty (60) degrees Fahrenheit and 14.7
p.s.i.a.).  The energy content, sulphur
content and other quality indicatory of the Natural Gas shall be determined and
registered regularly.

 63
 

 

 

ARTICLE 9

COST RECOVERY
STATEMENT

9.1                                 Contractor
shall establish cost recovery accounts for Crude Oil and/or Natural.  Gas and shall, pursuant to Article 1.3
hereof, render to the Minister not later than sixty (60) days after each
Calendar Quarter a cost recovery statement containing the following
information:

(a)                                  recoverable
costs carried forward from the previous Calendar Quarter, if any;

(b)                                 recoverable
costs incurred during the Calendar Quarter, total recoverable costs for the
Calendar Quarter;

(c)                                  quantity
and value of Cost Recovery Crude Oil and/or Cost Recovery Natural Gas available
to the Contractor during the Calendar Quarter,

(d)                                 amount
of costs recovered from the applicable Cost Recovery Crude Oil and/or Cost
Recovery Natural Gas account for the Calendar Quarter;

(e)                                  amount
of recoverable costs carried into succeeding Calendar Quarter, if any; and

(f)                                    quantities
of Crude Oil and/or Natural Gas allocated to Contractor and the Minister,
respectively, during the Calendar Quarter as Cost Recovery Crude Oil, Cost
Recovery Natural Gas, Profit Crude Oil and/or Profit Natural Gas.

 64
 

 

 

ARTICLE 10

STATEMENT OF
EXPENDITURE

10.1                           Contractor
shall maintain accounts of expenditures incurred in respect of Petroleum
Operations under the Contact and shall, pursuant to Article 1.3 hereof,
prepare and render to the Minister not later than sixty (60) days after each
Calendar Quarter a statement of expenditure. 
This statement shall show the following:

(a)                                  the
expenditure contemplated for the budget year (Contract Year prior to Commercial
Discovery and Calendar Year subsequent to Commercial Discovery), on the basis
of the cost classification and cost centres as provided for in this Accounting
Procedure;

(b)                                 the
expenditure (less credits) accrued during the Quarter in question;

(c)                                  the
cumulative expenditure (less credits) to date for the budget year under
consideration;

(d)                                 modifications
to the budget;

(e)                                  the
latest forecast of cumulative expenditure for year end; and

(f)                                    variations
between budget forecast (as amended, by subparagraph (d) hereof, where
applicable) and latest forecast and reasonable explanations thereof.

 65
 

 

 

ARTICLE 11

CONTROL STATEMENTS AND OTHER ACCOUNTS

11.1                           Control
Statements

Contractor shall prepare each Quarter a control
statement showing the accumulated accounts of costs and revenues verified by
the Minister in accordance with Article  17 of the Contract.  The statement shall include information in
respect of the following:

(a)                                  the
total amount of recoverable costs;

(b)                                 the
amount of costs recovered;

(c)                                  the
amount of costs remaining to be recovered.

(d)                                 the
total quantity and value of Cost Recovery Crude Oil and/or Cost Recovery
Natural Gas allocated to the Contractor; and

(e)                                  the
total quantity and value of Profit Crude Oil and/or Profit Natural Gas allocated
to the Minister and the Contractor respectively under the Contract.

 66
 

 

 

ARTICLE 12

TAX COMPUTATION

Any Trinidad and
Tobago income tax paid by the Minister on Contractor’s behalf shall constitute
additional income to Contractor.  This
additional income is included in “Contractor’s Taxable Income” subject to
Trinidad and Tobago income tax.

“Contractor’s
Taxable Income,” as determined in Article 21 of the Contract, less the
amount equal to Contractor’s Trinidad and Tobago income tax, shall be “Contractor’s
Provisional Income.” The “Gross-up Value” is an amount added to “Contractor’s
Provisional Income” to give “Contractor’s Taxable Income” and is equal to the
Contractor’s Trinidad and Tobago income taxes.

Therefore,

Contractor’s
Taxable Income = Contractor’s Provisional Income (C.P.I.) plus Gross-up Value
and

Gross-up
Value = Contractor’s Trinidad and Tobago income tax on taxable income.  Gross-up Value = Trinidad and Tobago
Income=Tax Rate x Contractor’s Taxable Income.

Gross-up
Value = C.P.I x Trinidad and Tobago
Income Tax Rate

1 - Trinidad and Tobago
Income Tax Rate

where the Tax Rate
is expressed as a decimal.

The above
computations are illustrated by the following numerical example.  Assuming that the “Contractor’s Provisional
Income” is 1000 and the Trinidad and Tobago Income Tax rate, including
unemployment levy is 55 percent, then the Gross-up Value is equal to

	
  1000 x.55

  	
   

  
	
   

  	
  = 1222.22

  
	
  1 - 55

  	
   

  

 

Therefore

	
  Contractor’s Provisional
  Income =

  	
   

  	
  1000.00

  
	
  Gross-up Value

  	
   

  	
   

  	
  = 1222.22

  
	
   

  	
   

  	
   

  
	
  Contractor’s
  Taxable Income

  	
   

  	
   

  	
  2222.22

  
	
  Trinidad and
  Tobago Income Tax =

  	
   

  	
  1222.22

  	
   

  
	
  Contractor’s
  Income after Tax

  	
   

  	
  1000.00

  
					

 

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ARTICLE 13

STATEMENT OF LOCAL
CONTENT

13.1         The
Contractor shall comply with the Government of Trinidad and Tobago’s Local
Content and Local Participation Policy in force and as modified from time to
time.  A Copy of the existing policy is
appended hereto.

13.2         The
Contractor shall maximize to the satisfaction of the Minister the level of
usage of Local goods and services, businesses, financing and the employment of
nationals of Trinidad and Tobago.  In
this regard, the Contractor shall ensure that subcontracts are sized, as far as
it is economically feasible and practical to match the capability (time,
finance and manpower) of local suppliers and shall manage the risk to allow
their participation.

13.3         The
Contractor shall provide the Minister at the beginning of each calendar year
with a list of all projects to be undertaken as well as all goods and services
that are required.  The Minister and
Contractor shall agree on a list of those projects and goods and services that
is to be published in at least two local newspapers and on the Ministry’s
website.

13.4         All
contracts are to be advertised and awarded in Trinidad and Tobago.  The Contractor shall apply to Minister for
prior approval where the circumstances warrant that any part of the tender
process be conducted abroad.

13.5         The
Contractor shall give preferential treatment to local suppliers by ensuring
access to all tender invitations and by including high weighting on local value
added in the tender valuation criteria

13.6         The
Contractor shall give preference and assurance to local suppliers in respect of
prompt payment for goods and services actually provided to the Contractor and
its subcontractors both foreign and local.

13.7         The
Contractor shall ensure the development of people by imparting to nationals
technology and business expertise in all areas of energy sector activity
including but not limited to:

(a)                                  Fabrication

(b)                                 Information
Technology support, including seismic data acquisition, processing and
interpretation support

(c)                                  Operations
and maintenance support

(d)                                 Maritime
services

(e)                                  Business
support services, including accounting, human resource services, consulting,
marketing and contract negotiations

(f)                                    Financing

(g)                                 Trading

13.8         The
Contractor shall ensure that nationals are selected and trained consistent with
Contractor’s performance standards in relation activities referred at
Article  132.

13.9         In
addition to the requirements in Article  13.7 the Contractor shall ensure
that the development of people in key areas allow nationals to take more
value-added, analytical and decision making roles in areas

(a)                                  of
a technical or professional nature including general management, design
engineering, project management, seismic data processing, human resource
development, legal and

(b)                                 business
strategic skills including leadership, business development, commercial,
analytical, negotiating, strategy development and trading know how and acumen.

 68
 

 

 

13.10       The
Contractor shall, pursuant to Article  13 hereof; prepare and submit to
the Minister not later than sixty (60) days after each Calendar Quarter, a Quarterly
and Year to Date Statement of Local Content.

13.11       The
Statement of Local Content shall include but not be limited to the following
categories:

1.             Payments
made to

(a)                                  Local
contractors who supply Local Goods and Local Services.

(b)                                 Local
Suppliers other than contractors who supply Local Goods.

(c)                                  Local
Subcontractors and local Suppliers who supply foreign goods.

(d)                                 Foreign
contractors and suppliers who supply Local Goods.

(e)                                  Foreign
contractors and suppliers who provide foreign goods and services.

2.

(a)                                  Payment
of salaries, wages, profits, dividends on shares and other tangibles to persons
who are nationals of Trinidad and Tobago.

(b)                                 Statement
on the development of people outlining the level of promotion of nationals in
the key areas identified in Article s 13.7, 13.8 and 13.9 respectively.

(c)                                  The
CIF of all foreign goods to be listed in the statement of local content.

13.12       The
Contractor shall maintain records to facilitate the determination of the Local
Content of expenditure incurred in respect of Petroleum Operations.  These records shall include supporting
documentation certifying the cost of local materials, labour and services used
and shall be subject to audit by the Minister.

13.13       For
the purpose of measurement, Local Content shall be comprised of all costs
incurred as direct materials, direct subcontracts, indirect materials, indirect
subcontracts, construction management and other costs.  Local Content shall not include any taxes or
other statutory payments to Government including payment made under this
Contract.

 69
 

 

 

THE
REPUBLIC OF TRINIDAD AND TOBAGO

PERMANENT LOCAL CONTENT COMMITTEE

 

 

LOCAL CONTENT

&

LOCAL PARTICIPATION

IN THE ENERGY SECTOR

 

POLICY

&

FRAMEWORK

 

 

October 07, 2004

 70
 

 

 

TRINIDAD
& TOBAGO ENERGY SECTOR

LOCAL
CONTENT & LOCAL PARTICIPATION

POLICY
FRAMEWORK

CONTEXT

Trinidad and
Tobago, blessed as we are with abundant resources of oil and gas, recognise
that our country’s development is enabled by a wasting asset which belongs to
all our citizens and which, once removed, is not replenished.  The government, as caretaker and manager of
these assets, has an obligation to ensure that the exploitation of these
resources is conducted in a manner that generates maximum benefit to all the
people of Trinidad and Tobago.

In generating value
from the resource, the government has at its disposal a mixture of fiscal and
non-fiscal measures that it can apply to the activities involved in
exploration, production, conversion and disposal of the resource.

This policy
addresses measures related to the activities conducted by individuals and
enterprises engaged in the sector and operating within and outside of Trinidad
and Tobago.

The energy
business is characterised as requiring high levels, know-how, technology and
capital.  Trinidad and Tobago, with our
limited human and capital resources, will continue to engage foreign
individuals, international businesses and organisations which have these
capabilities, to explore for, exploit and commercialize our natural resources.

In seeking to
achieve developed nation status, Trinidad and Tobago has to move to a position
of increased GNP vs. GDP and of producing higher value-added goods and services
for export.  The energy sector provides
excellent opportunities, so to do, but there are only achieved through
increased local participation in the value chain.  Current levels of local value capture are in
the 10% range and increasing this will have a significant impact on the
national economy.

The issues of
local content and participation have recently gained prominence internationally
and are a major feature of policy initiatives in both developed and developing
countries and the huge value they can bring to an oil and gas producing
community provides compelling reasons for the development and enactment of a local
content and participation policy in Trinidad and Tobago.

INTENT

Is it the
intention of the government and people of Trinidad and Tobago that T&T will
maximize the level of participation of its national people, enterprises,
technology and capital through the development and increasing use of locally
owned businesses, local financing and human capabilities in the conduct of all
activities connected with the energy sector, along its entire value chain,
within and outside of T&T.

As T&T is
rapidly growing its businesses to help the international community meet their
energy needs, we shall use this opportunity to leverage the capabilities of
international companies in our midst to build our own businesses, people,
technology and capital markets. 
Recognising the fact that in growing and depleting our natural resources
we are simultaneously removing our opportunities to capture future wealth, it
is incumbent on us to ensure that we make the most of this opportunity to
create the capability to generate wealth in the future.

This policy
framework seeks to identify the guiding principles that will determine:

·                  the major
mechanisms for local content, participation and capability development;

·                  where, how and
by whom these will be delivered;

·                  the performance
measurement, assurance and reporting processes to be used; and

 71
 

 

 

·                  some
key areas for priority focus.

VISION
& POLICY FRAMEWORK

To achieve the
goal of maximising value for the country from its assets, the government and
people of Trinidad and Tobago shall participate in the business of oil and gas
and engage external participants in a manner that captures value on two fronts:

1.             Fiscal measures
– through the use of

i.      taxation and
royalty policies and

ii.     government
expenditure

to capture value from the sector and to extend it by
building local capabilities that support the sector’s growth.

2.             Non-Fiscal measures
– through

i.      Local
Participation – maximising the depth and breadth of local ownership, control
and financing, in order to increase local value-capture from all parts of the
value chain created from the resource, including those activities in which
T&T people, businesses and capital are not currently engaged, both within
and outside of T&T;

ii.     Local Content –
maximising the level of usage of local goods and services, people, businesses
and financing.

iii.    Local Capability
Development – maximising the impact of the ongoing sector activities, through
the transfer of technology and know-how to

a)              enhance,
deepen and broaden the capability and international competitiveness of T&T’s
people and businesses within the sector;

b)             create
and enhance capabilities that are transferable to other sectors within T&T;
and

c)              create
and support cluster developments with other industries that have a natural
synergy with the energy sector and which may have the capacity to diversify
and/or sustain the economy after the resource is depleted.

“Local Content and
Participation” – collectively referred to as “local value-added” – will be
defined in terms of ownership, control and financing by citizens of Trinidad
and Tobago.

While, typically,
the themes of “local content and participation” have focussed primarily on the
aspects of in-country activity, Trinidad and Tobago recognises that the energy
sector has tremendous potential to develop local capabilities that are
essential for the capture of further opportunities outside of the country and
which potential is not achieved unless there are specific strategies to do so.

This policy
framework addresses local content and local participation in a manner that:

·                  will maximise
utilisation and development of T&T nationals, businesses owned by nationals
and the T&T capital market in every aspect of the activities conducted in
the sector.

·                  recognises the
impact of other mechanisms for maximising local value-added in the short-term,
while building capability for increased value capture now and in the future.

·                  seeks to ensure
that T&T does not overlook opportunities provided by activities in and in
support of the sector, so that

·                  supporting energy
sector policies and strategies on human and enterprise development will be
consistent with this policy framework.

·                  all Government
and State-agencies, regulations, strategies and contracts are aligned with
these policies; and

·                  all policies
will be vigorously applied to ongoing, proposed and future individual projects,
operations and suppliers of goods and services in the energy sector.

 72
 

 

 

LOCAL CONTENT AND PARTICIPATION POLICY STATEMENT

 

In managing the
energy resources of T&T, the Government will take every opportunity to
maximise the local value-added and value retention from the activities that
will be conducted in all parts of the sector, where our resources are involved,
whether those activities occur with T&T or not.

The Government
shall consistently define Local Content in terms of the level of ownership,
control and financing by citizens of Trinidad and Tobago, in conformity with
internationally accepted norms and the key tenets of international conventions,
such as GATS.

In order to
achieve the goal of maximum local content and participation, the government
shall ensure that all participants in the energy sector are selected, engaged
and managed in a manner that:

1.                                       Identifies
WHERE to enable local value-added opportunity capture from the sector by:

·                                          Selecting,
from time to time, specific goods or services for focusing the local content,
participation and supply capability development efforts;

2.                                       Determines
HOW to enable delivery of maximum local value-added by:

·                                          managing
the program of activities in the sector as a portfolio, so that project pace
and scheduling enable the maximum opportunity for development of local
capabilities and their sustainable utilisation;

·                                          targeting
local capability development by increasing the amount, depth and breadth of
in-country activities, so as to enable fuller participation of nationals and
enterprises in the value chain;

·                                          giving
preference, firstly, to locally owned, controlled and financed enterprises,
then to those that demonstrate a clear culture, commitment and capacity for
maximising local value-added, participation and capability development,
consistent with the country’s aspirations and vision;

·                                          focusing
on improving local skills, business know-how, technology, financing, capital
market development, and wealth capture and distribution;

3.                                       Ensures
DELIVERY of maximum local value-added by:

·                                          Aggressively
promoting and rigorously applying this policy wherever State controlled
resources are involved

·                                          Facilitating
the development of local capability to enable local value-added;

·                                          Removing
barriers for local participation;

·                                          setting
targets of local content and participation that will be assigned to individual
projects, operations and/or operators and supporting these targets with
appropriate contract terms;

·                                          measuring and
reporting on the performance of operators in the sector;

·                                          periodically
comparing the local content and participation performance amongst operators,
between projects and operations and with other countries, to establish
benchmarks, targets and opportunities for improvement and for the transfer of
best practices;

The Permanent Local Content Committee will be responsible for:

·                                          updating
these local content and participation policies, as required;

·                                          developing
specific subsidiary policies and strategies, to ensure the transfer of
technology and know-how to improve local skills, businesses and the capital
market;

·                                          ensuring
compliance with these policies; and

·                                          reporting
to the Minister of Energy and Energy Industries and the Cabinet, as appropriate.

LOCAL CONTENT POLICY
IMPLEMENTATION

The traditional approach
of “giving preference to local suppliers if the cost, quality and timeliness of
delivery of their goods and/or service are of equal quality to the
international competitor” has not helped us build local capability, as only
those who are already globally competitive will succeed.  There is no opportunity to become competitive
if the local is not given a chance to do, learn and improve.  For this reason “local capability development”
will be an important part of the implementation strategy.

 73
 

 

 

Recognizing that
not all projects, activities, goods or services can be addressed immediately
nor can they all be delivered or sustained locally, the Permanent Local Content
Committee will initially direct efforts to maximise local content and
participation in the following way and in the following key areas:

1)                                      Defining
Local Content and Participation in terms of the level of:

·                                          Local
ownership, control and decision-making;

·                                          Local
financing (preferential access to local finance — not just equal access)

2)                                      Requiring
preferential treatment of local suppliers by:

·                                          ensuring
that these are given preference and assurances from the principal operator,
which is not deferred to primary or other contractors; these assurances to
include, access, treatment and reimbursement for goods and services actually
provided;

·                                          addressing
barriers that currently prevent this from happening, such as those aspects of
the 1994 “Treaty Between the Government of the Republic of Trinidad and Tobago
and the Government of the United States of America Concerning the Encouragement
and Reciprocal Protection of Investment.”

3)                                      People
development in key areas that allow locals to take more value-added, analytical
and decision making roles and to ensure that existing regulations and
processes, like the work permits, are aligned to ensure compliance with the
policies and strategies:

·                                          High
value-added skills

·                  Technical

·                  General management;

·                  Design engineering;

·                  Project management;

·                  Seismic processing;

·                  Human resource development.

·                  Business strategic skills

·                  Leadership;

·                  Business development;

·                  Commercial;

·                  Analytical;

·                  Negotiating;

·                  Strategy development;

·                  Trading.

4)                                      Technology
and business know-how that have high value, consistent and sustained demand and
which might be transferable to other sectors of the economy.  Areas for immediate focus will include:

·                  Fabrication;

·                  IT support, including seismic data
management and processing support;

·                  Operations and maintenance support;

·                  Maritime services;

·                  Business support services, including
accounting, HR services and consulting;

·                  Financing;

·                  Trading.

5)                                      Creating
and maintaining databases of:

·                  Projects and operations work
programs, including their needs for the provision of goods and services and
their scheduling;

·                  Local suppliers of goods and
services;

·                                          People
development programs and initiatives of the operators and their international
contractors,

·                                          Including
work permits awarded and the related commitments;

·                                          Business
development programs and initiatives;

 74
 

 

 

·                                          The status of
activities of in-country operators, State-owned companies and agencies and
their contractors, including their:

·                                          Local content
and participation policies, strategies and initiatives;

·                                          Targets,
benchmarks and performance metrics

·                                          Appropriate
legislation, regulations and contracts.

Recognising the
importance of local value-added to national development and in order to ensure
that the Permanent Local Content Committee (PLCC) is able to properly deliver
on its mandate, the necessary resources (human, financial and technology) will
be made available to the PLCC.

 75

 

 

Schedule “B”

This is Schedule “B” attached to and made part of an Amended and
Restated Participation Agreement dated December 30, 2005 between Challenger
Energy Corp. and Canadian Superior Energy, Inc.

2002

MODEL
INTERNATIONAL OPERATING AGREEMENT

OPERATING
AGREEMENT COVERING:

BLOCK
5(C), OFFSHORE TRINIDAD

 76

 

 

TABLE OF CONTENTS

	
  ARTICLE 1 DEFINITIONS

  	
  1

  
	
  ARTICLE 2 EFFECTIVE DATE AND TERM

  	
  5

  
	
  ARTICLE 3 SCOPE

  	
  6

  
	
  3.1

  	
  Scope

  	
  6

  
	
  3.2

  	
  Participating Interest

  	
  6

  
	
  3.3

  	
  Ownership, Obligations and Liabilities

  	
  6

  
	
  3.4

  	
  Government Participation

  	
  7

  
	
  ARTICLE 4 OPERATOR

  	
  7

  
	
  4.1

  	
  Designation of Operator

  	
  7

  
	
  4.2

  	
  Rights and Duties of Operator

  	
  7

  
	
  4.3

  	
  Operator Personnel

  	
  9

  
	
  4.4

  	
  Information Supplied by Operator

  	
  12

  
	
  4.5

  	
  Settlement of Claims and Lawsuits

  	
  13

  
	
  4.6

  	
  Limitation on Liability of Operator

  	
  13

  
	
  4.7

  	
  Insurance Obtained by Operator

  	
  14

  
	
  4.8

  	
  Commingling of Funds

  	
  16

  
	
  4.9

  	
  Resignation of Operator

  	
  17

  
	
  4.10

  	
  Removal of Operator

  	
  17

  
	
  4.11

  	
  Appointment of Successor

  	
  18

  
	
  4.12

  	
  Health, Safety and Environment (HSE)

  	
  19

  
	
  ARTICLE 5 OPERATING COMMITTEE

  	
  20

  
	
  5.1

  	
  Establishment of Operating Committee

  	
  20

  
	
  5.2

  	
  Powers and Duties of Operating Committee

  	
  20

  
	
  5.3

  	
  Authority to Vote

  	
  20

  
	
  5.4

  	
  Subcommittees

  	
  21

  
	
  5.5

  	
  Notice of Meeting

  	
  21

  
	
  5.6

  	
  Contents of Meeting Notice

  	
  21

  
	
  5.7

  	
  Location of Meetings

  	
  21

  
	
  5.8

  	
  Operator’s Duties for Meetings

  	
  21

  
	
  5.9

  	
  Voting Procedure

  	
  22

  
	
  5.10

  	
  Record of Votes

  	
  23

  
	
  5.11

  	
  Minutes

  	
  23

  
	
  5.12

  	
  Voting by Notice

  	
  23

  
	
  5.13

  	
  Effect of Vote

  	
  24

  
	
  ARTICLE 6 WORK PROGRAMS AND BUDGETS

  	
  26

  
	
  6.1

  	
  Exploration and Appraisal

  	
  26

  
	
  6.2

  	
  Development

  	
  27

  
	
  6.3

  	
  Production

  	
  28

  
	
  6.4

  	
  Itemization of Expenditures

  	
  28

  
	
  6.5

  	
  Multi-Year Work Program and Budget

  	
  29

  
	
  6.6

  	
  Contract Awards

  	
  29

  
	
  6.7

  	
  Authorization for Expenditure (AFE) Procedure

  	
  31

  
	
  6.8

  	
  Overexpenditures of Work Programs and Budgets

  	
  32

  

 

 i
 

 

 

	
  ARTICLE
  7 OPERATIONS BY LESS THAN ALL PARTIES

  	
  33

  
	
  7.1

  	
  Limitation on Applicability

  	
  33

  
	
  7.2

  	
  Procedure to Propose Exclusive Operations

  	
  34

  
	
  7.3

  	
  Responsibility for Exclusive Operations

  	
  36

  
	
  7.4

  	
  Consequences of Exclusive Operations

  	
  36

  
	
  7.5

  	
  Premium to Participate in Exclusive Operations

  	
  39

  
	
  7.6

  	
  Order of Preference of Operations

  	
  40

  
	
  7.7

  	
  Stand-By Costs

  	
  41

  
	
  7.8

  	
  Special Considerations Regarding Deepening and
  Sidetracking

  	
  42

  
	
  7.9

  	
  Use of Property

  	
  42

  
	
  7.10

  	
  Lost Production

  	
  44

  
	
  7.11

  	
  Production Bonuses

  	
  44

  
	
  7.12

  	
  Conduct of Exclusive Operations

  	
  45

  
	
  ARTICLE 8 DEFAULT

  	
  46

  
	
  8.1

  	
  Default and Notice

  	
  46

  
	
  8.2

  	
  Operating Committee Meetings and Data

  	
  46

  
	
  8.3

  	
  Allocation of Defaulted Accounts

  	
  47

  
	
  8.4

  	
  Remedies

  	
  48

  
	
  8.5

  	
  Survival

  	
  52

  
	
  8.6

  	
  No Right of Set Off

  	
  53

  
	
  ARTICLE 9 DISPOSITION OF PRODUCTION

  	
  53

  
	
  9.1

  	
  Right and Obligation to Take in Kind

  	
  53

  
	
  9.2

  	
  Disposition of Crude Oil

  	
  53

  
	
  9.3

  	
  Disposition of Natural Gas

  	
  55

  
	
  9.4

  	
  Principles of Natural Gas Agreement(s) with
  Government

  	
  57

  
	
  ARTICLE 10 ABANDONMENT

  	
  57

  
	
  10.1

  	
  Abandonment of Wells Drilled as Joint Operations

  	
  57

  
	
  10.2

  	
  Abandonment of Exclusive Operations

  	
  59

  
	
  10.3

  	
  Abandonment Security

  	
  59

  
	
  ARTICLE 11 SURRENDER, EXTENSIONS AND RENEWALS

  	
  59

  
	
  11.1

  	
  Surrender

  	
  59

  
	
  11.2

  	
  Extension of the Term

  	
  60

  
	
  ARTICLE 12 TRANSFER OF INTEREST OR RIGHTS AND
  CHANGES IN CONTROL

  	
  60

  
	
  12.1

  	
  Obligations

  	
  60

  
	
  12.2.

  	
  Transfer

  	
  61

  
	
  12.3

  	
  Change in Control

  	
  66

  
	
  ARTICLE 13 WITHDRAWAL FROM AGREEMENT

  	
  69

  
	
  13.1

  	
  Right of Withdrawal

  	
  69

  
	
  13.2

  	
  Partial or Complete Withdrawal

  	
  69

  
	
  13.3

  	
  Rights of a Withdrawing Party

  	
  70

  
	
  13.4

  	
  Obligations and Liabilities of a Withdrawing Party

  	
  70

  
	
  13.5

  	
  Emergency

  	
  71

  
	
  13.6

  	
  Assignment

  	
  71

  
	
  13.7

  	
  Approvals

  	
  71

  
	
  13.8

  	
  Security

  	
  71

  
	
  13.9

  	
  Withdrawal or Abandonment by all Parties

  	
  72

  

 

 ii
 

 

 

	
  ARTICLE 14 RELATIONSHIP OF PARTIES AND TAX

  	
  72

  
	
  14.1

  	
  Relationship of Parties

  	
  72

  
	
  14.2

  	
  Tax

  	
  72

  
	
  14.3

  	
  United States Tax Election

  	
  72

  
	
  ARTICLE 15 VENTURE INFORMATION - CONFIDENTIALITY -
  INTELLECTUAL PROPERTY

  	
  73

  
	
  15.1

  	
  Venture Information

  	
  73

  
	
  15.2

  	
  Confidentiality

  	
  74

  
	
  15.3

  	
  Intellectual Property

  	
  75

  
	
  15.4

  	
  Continuing Obligations

  	
  76

  
	
  15.5

  	
  Trades

  	
  76

  
	
  ARTICLE 16 FORCE MAJEURE

  	
  76

  
	
  16.1

  	
  Obligations

  	
  76

  
	
  16.2

  	
  Definition of Force Majeure

  	
  77

  
	
  ARTICLE 17 NOTICES

  	
  77

  
	
  ARTICLE 18 APPLICABLE LAW - DISPUTE RESOLUTION -
  WAIVER OF SOVEREIGN IMMUNITY

  	
  78

  
	
  18.1

  	
  Applicable Law

  	
  78

  
	
  18.2

  	
  Dispute Resolution

  	
  78

  
	
  18.3

  	
  Expert Determination

  	
  83

  
	
  18.4

  	
  Waiver of Sovereign Immunity

  	
  83

  
	
  ARTICLE 19 ALLOCATION OF COST & PROFIT
  HYDROCARBONS

  	
  84

  
	
  19.1

  	
  Allocation of Total Production

  	
  84

  
	
  19.2

  	
  Allocation of Hydrocarbons to Parties

  	
  84

  
	
  19.3

  	
  Use of Estimates

  	
  85

  
	
  19.4

  	
  Principles

  	
  85

  
	
  ARTICLE 20 GENERAL PROVISIONS

  	
  85

  
	
  20.1

  	
  Conduct of the Parties

  	
  85

  
	
  20.2

  	
  Conflicts of Interest

  	
  86

  
	
  20.3

  	
  Public Announcements

  	
  86

  
	
  20.4

  	
  Successors and Assigns

  	
  86

  
	
  20.5

  	
  Waiver

  	
  87

  
	
  20.6

  	
  No Third Party Beneficiaries

  	
  87

  
	
  20.7

  	
  Joint Preparation

  	
  87

  
	
  20.8

  	
  Severance of Invalid Provisions

  	
  87

  
	
  20.9

  	
  Modifications

  	
  87

  
	
  20.10

  	
  Interpretation

  	
  87

  
	
  20.11

  	
  Counterpart Execution

  	
  87

  
	
  20.12

  	
  Entirety

  	
  88

  

 

	
  Exhibit A

  	
  -

  	
  Accounting Procedure

  
	
  Exhibit B

  	
  -

  	
  Contract Area

  
	
  [Exhibit C

  	
  -

  	
  Insurance]

  
	
  [Exhibit D

  	
  -

  	
  Lifting Procedure [NOTE: A model Lifting
  Procedure may be acquired from the AIPN]]

  

 

 iii

 

 

OPERATING AGREEMENT

THIS AGREEMENT is made as of the 17th day of November, 2004 (the “Effective Date”) among Challenger
Energy Corp., a company existing under the laws of Alberta, Canada (hereinafter
referred to as CNE); and Canadian Superior Energy Inc., a company existing
under the laws of Canada (hereinafter referred to as Canadian Superior).  The companies named above, and their
respective successors and assignees (if any), may sometimes individually be
referred to as “Party” and collectively as the “Parties”.

WITNESSETH:

WHEREAS, the Parties have entered into a Participation
Agreement dated November 17, 2004 
(hereinafter referred to as the “Option”), with, inter alia, the
intention to jointly own interests in a Production Sharing Contract
(hereinafter referred to as the “Contract”);
and

WHEREAS, the Parties desire to define their respective
rights and obligations with respect to their operations under the Contract;

NOW, THEREFORE, in consideration of the premises and
the mutual covenants and agreements and obligations set out below and to be
performed, the Parties agree as follows:

ARTICLE 1

DEFINITIONS

As used in this Agreement, the following words and
terms shall have the meaning ascribed to them below:

1.1                               Accounting Procedure means the
rules, provisions and conditions contained in Exhibit A.

1.2                               AFE means an authorization for
expenditure pursuant to Article 6.7.

1.3                               Affiliate means a legal entity which
Controls, or is Controlled by, or which is Controlled by an entity which
Controls, a Party.

1.4                               Agreed Interest Rate means interest
compounded on a monthly basis, at the rate per annum equal to the one (1) month
term, London Interbank Offered Rate (LIBOR rate) for U.S. dollar deposits, as
published in London by the Financial Times or if not published, then by The
Wall Street Journal, plus two percent (2%) percentage points, applicable on
the first Business Day prior to the due date of payment and thereafter on the
first Business Day of each succeeding calendar month.  If the aforesaid rate is contrary to any
applicable usury law, the rate of interest to be charged shall be the maximum
rate permitted by such applicable law.

1.5                               Agreement means this agreement,
together with the Exhibits attached to this agreement, and any extension,
renewal or amendment hereof agreed to in writing by the Parties.

1.6                               Appraisal Well means any well (other
than an Exploration Well or a Development Well) whose purpose at the time of
commencement of drilling such well is to appraise the extent or the volume of
Hydrocarbon reserves contained in an existing Discovery.

1.7                               Business Day means a Day on which
the banks in Calgary, Alberta, Canada are customarily open for business.

1.8                               Calendar Quarter means a period of
three (3) months commencing with January 1 and ending on the following
March 31, a period of three (3) months commencing with April 1 and ending on
the following June 30, a period of three (3) months commencing with July 1
and ending on the following September 30,

 1
 

 

 

or a period of three (3)
months commencing with October 1 and ending on the following December 31, all
in accordance with the Gregorian Calendar.

1.9                               Calendar Year means a period of
twelve (12) months commencing with January 1 and ending on the following
December 31 according to the Gregorian Calendar.

1.10                        Commercial Discovery means any
Discovery that is sufficient to entitle the Parties to apply for authorization
from the Government to commence exploitation.

1.11                        Completion means an operation
intended to complete a well through the Christmas tree as a producer of
Hydrocarbons in one or more Zones, including the setting of production casing,
perforating, stimulating the well and production Testing conducted in such
operation.  “Complete”
and other derivatives shall be construed accordingly.

1.12                        Consenting Party means a Party who
agrees to participate in and pay its share of the cost of an Exclusive
Operation.

1.13                        Consequential Loss means any loss,
damages, costs, expenses or liabilities caused (directly or indirectly) by any
of the following arising out of, relating to, or connected with this Agreement
or the operations carried out under this Agreement: (i) reservoir or formation
damage; (ii) inability to produce, use or dispose of Hydrocarbons; (iii) loss
or deferment of income; (iv) punitive damages; or (v) other indirect damages or
losses whether or not similar to the foregoing.

1.14                        Contract means the instrument
identified in the recitals to this Agreement and any extension, renewal or
amendment thereto.

1.15                        Contract Area means as of the
Effective Date the area that is described in Exhibit B.  The perimeter or perimeters of the Contract
Area shall correspond to that area covered by the Contract, as such area may
vary from time to time during the term of validity of the Contract.

1.16                        Control means the ownership directly
or indirectly of

Check one Alternative.

x                                  ALTERNATIVE NO. 1

more than fifty
(50) percent

o                                    ALTERNATIVE NO.
2

fifty (50) percent
or more

of the voting rights in a legal entity.  “Controls”,
“Controlled by” and other
derivatives shall be construed accordingly.

1.17                        Cost Hydrocarbons means that portion
of the total production of Hydrocarbons which is allocated to the Parties under
the Contract and this Agreement for the recovery of the costs
and expenses incurred by the Parties and allowed to be recovered pursuant to
the Contract.

1.18                        Crude Oil means all crude oils,
condensates, and natural gas liquids at atmospheric pressure which are subject
to and covered by the Contract.

1.19                        Day means a calendar day unless
otherwise specifically provided.

1.20                        Deepening means an operation whereby
a well is drilled to an objective Zone below the deepest Zone in which the well
was previously drilled, or below the deepest Zone proposed in the associated
AFE (if required), whichever is the deeper. 
“Deepen” and other
derivatives shall be construed accordingly.

 2
 

 

1.21                        Development Plan means a plan for
the development of Hydrocarbons from an Exploitation Area.

1.22                        Development Well means any well
drilled for the production of Hydrocarbons pursuant to a Development Plan.

1.23                        Discovery means the discovery of an
accumulation of Hydrocarbons whose existence until that moment was unproven by
drilling.

1.24                        Dispute means any dispute,
controversy or claim (of any and every kind or type, whether based on contract,
tort, statute, regulation, or otherwise) arising out of, relating to, or
connected with this Agreement or the operations carried out under this
Agreement, including any dispute as to the construction, validity,
interpretation, enforceability or breach of this Agreement.

1.25                        Entitlement means that quantity of
Hydrocarbons (excluding all quantities used or lost in Joint Operations) of
which a Party has the right and obligation to take delivery pursuant to the
terms of this Agreement and the Contract, as such rights and obligations may be
adjusted by the terms of any lifting, balancing and other disposition
agreements entered into pursuant to Article 9.

1.26                        Environmental Loss means any loss,
damages, costs, expenses or liabilities (other than Consequential Loss) caused
by a discharge of Hydrocarbons, pollutants or other contaminants into or onto
any medium (such as land, surface water, ground water and/or air) arising out
of, relating to, or connected with this Agreement or the operations carried out
under this Agreement, including any of the following: (i) injury or damage to,
or destruction of, natural resources or real or personal property; (ii) cost of
pollution control, cleanup and removal; (iii) cost of restoration of natural
resources; and (iv) fines, penalties or other assessments.

1.27                        Exclusive Operation means those
operations and activities carried out pursuant to this Agreement, the costs of
which are chargeable to the account of less than all the Parties.

1.28                        Exclusive Well means a well drilled
pursuant to an Exclusive Operation.

1.29                        Exploitation Area means that part of
the Contract Area which is established for development of a Commercial
Discovery pursuant to the Contract or, if the Contract does not establish an
exploitation area, then that part of the Contract Area which is delineated as
the exploitation area in a Development Plan approved as a Joint Operation or as
an Exclusive Operation.

1.30                        Exploitation Period means any and
all periods of exploitation during which the production and removal of
Hydrocarbons is permitted under the Contract.

1.31                        Exploration Period means any and all
periods of exploration set out in the Contract.

1.32                        Exploration Well means any well the
purpose of which at the time of the commencement of drilling is to explore for
an accumulation of Hydrocarbons, which accumulation was at that time unproven
by drilling.

1.33                        G & G Data means only
geological, geophysical and geochemical data and other similar information that
is not obtained through a well bore.

1.34                        Government means the government of
                             
and any political subdivision, agency or instrumentality thereof, including the
Government Oil & Gas Company.

1.35                        Government Oil & Gas Company
means
                                      .

1.36                        Gross Negligence / Willful Misconduct
means any act or failure to act (whether sole, joint or concurrent) by any
person or entity which was intended to cause, or which was in reckless
disregard of or wanton indifference to, harmful consequences such person or
entity knew, or should have known, such act or

 3
 

 

 

failure would have
on the safety or property of another person or entity.

1.37                        Hydrocarbons means all substances
which are subject to and covered by the Contract, including Crude Oil and
Natural Gas.

1.38                        Joint Account means the accounts
maintained by Operator in accordance with the provisions of this Agreement,
including the Accounting Procedure.

1.39                        Joint Operations means those
operations and activities carried out by Operator pursuant to this Agreement,
the costs of which are chargeable to all Parties.

1.40                        Joint Property means, at any point
in time, all wells, facilities, equipment, materials, information, funds and property
(other than Hydrocarbons) held for use in Joint Operations. [NOTE: This definition should be reviewed in light of the Alternative
chosen in Article 15 with regard to Venture Information.]

1.41                        Laws / Regulations means those laws,
statutes, rules and regulations governing activities under the Contract.

1.42                        Minimum Work Obligations means those
work and/or expenditure obligations specified in the Contract that must be
performed in order to satisfy the obligations of the Contract.

1.43                        Natural Gas means all gaseous
hydrocarbons (including wet gas, dry gas and residue gas) which are subject to
and covered by the Contract, but excluding Crude Oil.

1.44                        Non-Consenting Party means each
Party who elects not to participate in an Exclusive Operation.

1.45                        Non-Operator means each Party to
this Agreement other than Operator.

1.46                        Operating Committee means the
committee constituted in accordance with Article 5.

1.47                        Operator means a Party to this
Agreement designated as such in accordance with Articles 4 or 7.12(F).

1.48                        Participating Interest means as to
any Party, the undivided interest of such Party (expressed as a percentage of
the total interests of all Parties) in the rights and obligations derived from
the Parties’ interest in the Contract and this Agreement.

1.49                        Plugging Back means a single
operation whereby a deeper Zone is abandoned in order to attempt a Completion
in a shallower Zone.  “Plug Back” and other derivatives
shall be construed accordingly.

1.50                        Profit Hydrocarbons means that
portion of the total production of Hydrocarbons, in excess of Cost
Hydrocarbons, which is allocated to the Parties under the terms of the
Contract.

1.51                        Recompletion means an operation
whereby a Completion in one Zone is abandoned in order to attempt a Completion
in a different Zone within the existing wellbore.  “Recomplete”
and other derivatives shall be construed accordingly.

1.52                        Reworking
means an operation conducted in the wellbore of a well after it is Completed to
secure, restore, or improve production in a Zone which is currently open to
production in the wellbore.  Such
operations include well stimulation operations, but exclude any routine repair
or maintenance work, or drilling, Sidetracking, Deepening, Completing,
Recompleting, or Plugging Back of a well. 
“Rework” and other
derivatives shall be construed accordingly.

1.53                        Security means (i) a guarantee or
standby letter of credit issued by a bank; (ii) an on-demand bond issued by a
surety corporation; (iii) a corporate guarantee; (iv) any financial security
required by the Contract or this Agreement; and (v) any financial security
agreed from time to time by the Parties; provided, however,

 4
 

 

that the bank, surety or
corporation issuing the guarantee, standby letter of credit, bond or other
security (as applicable) has a credit rating indicating it has a sufficient
worth to pay its obligations in all reasonably foreseeable circumstances.

1.54                        Senior Supervisory Personnel means,
with respect to a Party, any individual who functions as:

Check one Alternative.

o                                    ALTERNATIVE NO.
1 -  Field Supervisor Tier

its designated manager or supervisor who is
responsible for or in charge of onsite drilling, construction or production and
related operations, or any other field operations;

x                                  ALTERNATIVE NO. 2
-  Facility Manager Tier

its designated manager or supervisor of an onshore or
offshore installation or facility used for operations and activities of such
Party, but excluding all managers or supervisors who are responsible for or in
charge of onsite drilling, construction or production and related operations or
any other field operations;

o                                    ALTERNATIVE NO.
3 -  Resident Manager and Direct
Managerial Report Tier

its senior resident manager who directs all operations
and activities of such Party in the country or region in which he is resident,
and any manager who directly reports to such senior resident manager in such
country or region, but excluding all managers or supervisors who are
responsible for or in charge of installations or facilities, onsite drilling,
construction or production and related operations, or any other field
operations;

o                                    ALTERNATIVE NO.
4 -  Resident Manager Tier

its senior resident manager who directs all operations
and activities of such Party in the country or region in which he is resident,
but excluding all managers or supervisors who are responsible for or in charge
of installations or facilities, onsite drilling, construction or production and
related operations, or any other field operations;

and, in any of the above alternatives, any individual
who functions for such Party or one of its Affiliates at a management level
equivalent to or superior to the tier selected, or any officer or director of
such Party or one of its Affiliates.

1.55                        Sidetracking means the directional
control and intentional deviation of a well from vertical so as to change the
bottom hole location unless done to straighten the hole or to drill around junk
in the hole or to overcome other mechanical difficulties.  “Sidetrack”
and other derivatives shall be construed accordingly.

1.56                        Testing means an operation intended
to evaluate the capacity of a Zone to produce Hydrocarbons.  “Test” and
other derivatives shall be construed accordingly.

1.57                        Urgent Operational Matters has the
meaning ascribed to it in Article 5.12(A)(1).

1.58                        Work Program and Budget means a work
program for Joint Operations and budget therefor as described and approved in
accordance with Article 6.

1.59                        Zone means a stratum of earth
containing or thought to contain an accumulation of Hydrocarbons separately
producible from any other accumulation of Hydrocarbons.

ARTICLE 2

EFFECTIVE DATE AND TERM

This Agreement shall have
effect from the Effective Date (as defined in the preamble to this Agreement)
and shall continue in effect until the following occur in accordance with the
terms of this Agreement: the Contract

 5
 

 

terminates; all
materials, equipment and personal property used in connection with Joint
Operations or Exclusive Operations have been disposed of or removed; and final
settlement (including settlement in relation to any financial audit carried out
pursuant to the Accounting Procedure) has been made.  Notwithstanding the preceding sentence:
(i) Article 10 shall remain in effect until all abandonment obligations
under the Contract have been satisfied; and (ii) Article 4.5, Article 8, Article 15.2, Article 18 and the indemnity obligation
under Article 20.1 (A) shall remain in effect until all obligations have been
extinguished and all Disputes have been resolved.  Termination of this Agreement shall be
without prejudice to any rights and obligations arising out of or in connection
with this Agreement which have vested, matured or accrued prior to such
termination.

ARTICLE 3

SCOPE

3.1          Scope

(A)                              The
purpose of this Agreement is to establish the respective rights and obligations
of the Parties with regard to operations under the Contract, including the
joint exploration, appraisal, development, production and disposition of
Hydrocarbons from the Contract Area.

(B)                                For
greater certainty, the Parties confirm that, except to the extent expressly
included in the Contract, the following activities are outside of the scope of
this Agreement and are not addressed herein:

(1)                                  construction,
operation, ownership, maintenance, repair and removal of facilities downstream
from the delivery point (as determined under Article 9) of the Parties’
Entitlements;

(2)                                  transportation
of the Parties’ Entitlements downstream from the delivery point (as determined
under Article 9);

(3)                                  marketing
and sales of Hydrocarbons, except as expressly provided in
Article 7.12(E), Article 8.4 and Article 9;

(4)                                  acquisition
of rights to explore for, appraise, develop or produce Hydrocarbons outside of
the Contract Area (other than as a consequence of unitization with an adjoining
contract area under the terms of the Contract); and

(5)                                  exploration,
appraisal, development or production of minerals other than Hydrocarbons,
whether inside or outside of the Contract Area.

3.2                               Participating
Interest

(A)                              The
Participating Interests of the Parties as of the Effective Date are:

	
  CNE

  	
   

  	
  25

  	
  %

  
	
  Canadian Superior

  	
   

  	
  75

  	
  %

  

 

(B)                                If
a Party transfers all or part of its Participating Interest pursuant to the
provisions of this Agreement and the Contract, the Participating Interests of the
Parties shall be revised accordingly.

3.3                               Ownership,
Obligations and Liabilities

(A)                              Unless
otherwise provided in this Agreement, all the rights and interests in and under
the Contract, all Joint Property, and any Hydrocarbons produced from the
Contract Area shall, subject to the terms of the Contract, be owned by the
Parties in accordance with their respective Participating Interests.

 6
 

 

(B)                                Unless
otherwise provided in this Agreement, the obligations of the Parties under the
Contract and all liabilities and expenses incurred by Operator in connection
with Joint Operations shall be charged to the Joint Account and all credits to
the Joint Account shall be shared by the Parties, in accordance with their
respective Participating Interests.

(C)                                Each
Party shall pay when due, in accordance with the Accounting Procedure, its
Participating Interest share of Joint Account expenses, including cash advances
and interest, accrued pursuant to this Agreement.  A Party’s payment of any charge under this
Agreement shall be without prejudice to its right to later contest the charge.

Check Article 3.4, if desired.

o            OPTIONAL PROVISION

3.4                               Government
Participation

If Government Oil
& Gas Company elects to participate in the rights and obligations of
Parties pursuant to Section     of the Contract, the Parties
shall contribute, in proportion to their respective Participating Interests, to
the interest to be acquired by Government Oil & Gas Company.

Check one alternative.

o                                    ALTERNATIVE
NO. 1        

The Parties shall execute such documents as may be necessary to effect such
transfer of interests and the joinder of Government Oil & Gas Company as a
Party to this Agreement.  All payments
received for the transfer of such interests shall be credited to the Parties in
proportion to their Participating Interests.

o                                    ALTERNATIVE
NO. 2        

The Parties shall execute such documents as may be necessary to effect such
transfer of interests.  The rights and
obligations of the Parties with respect to each other shall remain unchanged;
however, they shall enter into a separate operating agreement with Government
Oil & Gas Company with respect to the rights and obligations of Government
Oil & Gas Company, on the one hand, and the Parties on the other.  All payments received for the transfer of
such interests shall be credited to the Parties in proportion to their
Participating Interests.

ARTICLE 4

OPERATOR

4.1                               Designation
of Operator

Canadian Superior
is designated as Operator and agrees to act as such in accordance with this
Agreement.

4.2                               Rights
and Duties of Operator

(A)                              Subject
to the terms and conditions of this Agreement, Operator shall have all of the
rights, functions and duties of Operator under the Contract and shall have
exclusive charge of and shall conduct all Joint Operations.  Operator may employ independent contractors
and agents (which independent contractors and agents may include an Affiliate
of Operator, a Non-Operator, or an Affiliate of a Non-Operator) in such Joint
Operations.

(B)                                In
the conduct of Joint Operations Operator shall:

 7
 

 

(1)                                  perform
Joint Operations in accordance with the provisions of the Contract, the Laws /
Regulations, this Agreement, and the decisions of the Operating Committee not
in conflict with this Agreement;

(2)                                  conduct
all Joint Operations in a diligent, safe and efficient manner in accordance
with such good and prudent petroleum industry practices and field conservation
principles as are generally followed by the international petroleum industry
under similar circumstances;

(3)                                  exercise
due care with respect to the receipt, payment and accounting of funds in
accordance with good and prudent practices as are generally followed by the
international petroleum industry under similar circumstances;

(4)                                  subject
to Article 4.6 and the Accounting Procedure, neither gain a profit nor suffer a
loss as a result of being the Operator in its conduct of Joint Operations,
provided that Operator may rely upon Operating Committee approval of specific
accounting practices not in conflict with the Accounting Procedure;

(5)                                  perform
the duties for the Operating Committee set out in Article 5, and prepare and
submit to the Operating Committee proposed Work Programs and Budgets and (if
required) AFEs, as provided in Article 6;

(6)                                  acquire
all permits, consents, approvals, and surface or other rights that may be
required for or in connection with the conduct of Joint Operations;

(7)                                  upon
receipt of reasonable advance notice, permit the representatives of any of the
Parties to have at all reasonable times during normal business hours and at their
own risk and expense reasonable access to the Joint Operations with the right
to observe all Joint Operations and to inspect all Joint Property and to
conduct financial audits as provided in the Accounting Procedure;

(8)                                  undertake
to maintain the Contract in full force and effect in accordance with such good
and prudent petroleum industry practices as are generally followed by the
international petroleum industry under similar circumstances.  Operator shall timely pay and discharge all
liabilities and expenses incurred in connection with Joint Operations and use
its reasonable endeavors to keep and maintain the Joint Property free from all
liens, charges and encumbrances arising out of Joint Operations;

(9)                                  pay
to the Government for the Joint Account, within the periods and in the manner
prescribed by the Contract and the Laws / Regulations, all periodic payments,
royalties, taxes, fees and other payments pertaining to Joint Operations but
excluding any taxes measured by the incomes of the Parties;

(10)                            carry
out the obligations of Operator pursuant to the Contract, including preparing
and furnishing such reports, records and information as may be required
pursuant to the Contract;

(11)                            have,
in accordance with any decisions of the Operating Committee, the exclusive
right and obligation to represent the Parties in all dealings with the
Government with respect to matters arising under the Contract and Joint
Operations.  Operator shall notify the
other Parties as soon as possible of such meetings.  Subject to the Contract and any necessary
Government approvals, Non-Operators shall have the right to attend any meetings
with the Government with respect to such matters, but only in the capacity of
observers.  Nothing contained in this
Agreement shall restrict any Party from holding discussions with the Government
with respect to any issue peculiar to its particular business interests

 8
 

 

arising under the
Contract or this Agreement, but in such event such Party shall promptly advise
the Parties, if possible, before and in any event promptly after such
discussions, provided that such Party shall not be required to divulge to the
Parties any matters discussed to the extent the same involve proprietary
information or matters not affecting the Parties;

(12)                            in
accordance with Article 9.3 and any decisions of the Operating Committee,
assess (to the extent lawful) alternatives for the disposition of Natural Gas
from a Discovery;

(13)                            in
case of an emergency (including a significant fire, explosion, Natural Gas
release, Crude Oil release, or sabotage; incident involving loss of life,
serious injury to an employee, contractor, or third party, or serious property
damage; strikes and riots; or evacuations of Operator personnel): (i) take all
necessary and proper measures for the protection of life, health, the
environment and property; and (ii) as soon as reasonably practicable, report to
Non-Operators the details of such event and any measures Operator has taken or
plans to take in response thereto;

(14)                            establish
and implement pursuant to Article 4.12 an HSE plan to govern Joint Operations
which is designed to ensure compliance with applicable HSE laws, rules and
regulations and this Agreement;

(15)                            include,
to the extent practical, in its contracts with independent contractors and to
the extent lawful, provisions which:

(a)                                  establish
that such contractors can only enforce their contracts against Operator;

(b)                                 permit
Operator, on behalf of itself and Non-Operators, to enforce contractual
indemnities against, and recover losses and damages suffered by them (insofar
as recovered under their contracts) from, such contractors; and

(c)                                  require
such contractors to take insurance required by Article 4.7(H).

4.3                               Operator
Personnel

Check one
Alternative

o                                    ALTERNATIVE NO. 1

Operator shall engage or retain only such employees, contractors, consultants
and agents as are reasonably necessary to conduct Joint Operations.  Subject to the Contract and this Agreement,
Operator shall determine the number of employees, contractors, consultants and
agents, the selection of such persons, their hours of work, and the
compensation to be paid to all such persons in connection with Joint
Operations.

o                                    ALTERNATIVE NO. 2

Operator shall engage or
retain only such employees, secondees, contractors, consultants and agents as
are reasonably necessary to conduct Joint Operations.  Subject to the Contract and this Agreement,
Operator shall determine the number of employees, secondees, contractors,
consultants and other persons, the selection of such persons, their hours of
work, and (except for secondees) the compensation to be paid to all such
persons in connection with Joint Operations.

x                                  ALTERNATIVE NO. 3
- (from Paragraph (A) to (F))

(A)                              Operator
shall engage or retain only such employees, Secondees, contractors, consultants
and agents as are reasonably necessary to conduct Joint Operations.  For the purposes of this Article 4.3, “Secondee” means an employee of a
Non-Operator (or its Affiliate) who

 9
 

 

is seconded to Operator
to provide services under a secondment agreement to be negotiated and entered
into between Operator and such Non-Operator; and “Secondment”
means placement within Operator’s organization in accordance with this Article
4.3 of one or more persons who are employed by a Non-Operator or an Affiliate.

(B)                                Subject
to the Contract and this Agreement, Operator shall determine the number of
employees, Secondees, contractors, consultants and agents, the selection of
such persons, their hours of work, and (except for Secondees) the compensation
to be paid to all such persons in connection with Joint Operations.

(C)                                No
Secondment may be implemented except (i) in situations requiring particular
expertise or involving projects of a technical, operational or economically
challenging nature; and (ii) in the manner set out in paragraphs (1) to (7)
below.

(1)                                  Any
Party may propose Secondment for a designated purpose related to Joint
Operations.  Any proposal for Secondment
must include the:

(a)                                  designated
purpose and scope of Secondment, including duties, responsibilities, and
deliverables;

(b)                                 duration
of the Secondment;

(c)                                  number
of Secondees and minimum expertise, qualifications and experience required;

(d)                                 work
location and position within Operator’s organization of each Secondee; and

(e)                                  estimated
costs of the Secondment.

(2)                                  In
relation to a proposed Secondment meeting the requirements of
Article 4.3(C)(1), Operator shall as soon as reasonably practicable:

Check one Alternative.

o                                    ALTERNATIVE NO. 1

approve or reject any Secondment proposed by a Non-Operator, in Operator’s sole
discretion.

x                                  ALTERNATIVE NO. 2

approve (such approval to not be unreasonably withheld) or reject any
Secondment proposed by a Non-Operator. Without prejudice to Operator’s right to
conduct Joint Operations in accordance with this Agreement and the Contract,
Operator shall consider such Secondment proposal in light of the: (i) expertise
and experience required for the relevant Joint Operations; (ii) expertise
and experience of Operator’s personnel; and (iii) potential benefits of such
Secondment to the conduct of Joint Operations.

(3)                                  Any
proposal for one or more Secondment positions approved by Operator is subject
to: (i) the Operating Committee’s authorization of an appropriate budget for
such Secondment positions; and (ii) Non-Operators continuing to make available
to Operator Secondees qualified to fulfill the designated purpose and scope of
such Secondment.

 10
 

 

(4)                                  As
to each approved and authorized Secondment position, Operator shall request
Non-Operators to nominate, by a specified date, qualified personnel to be the
Secondee for such position.  Each
Non-Operator has the right (but not the obligation) to nominate for each
Secondment position one or more proposed Secondees who such Non-Operator
considers reasonably qualified to fulfill the designated purpose and scope of
such Secondment.

(5)                                  Following
the deadline for submitting nominations, Operator shall consider the expertise
and experience of each such nominee in light of the expertise and experience
required for the approved and authorized Secondment position, and shall:

Check one Alternative.

o                                    ALTERNATIVE NO. 1

select or reject any nominee in Operator’s sole discretion.

o                                    ALTERNATIVE NO. 2

select from the nominees the best qualified person, unless Operator reasonably
demonstrates that no nominee is qualified to fulfill the designated purpose and
scope of such Secondment.

(6)                                  Operator
shall have the right to terminate the Secondment for cause in accordance with
the secondment agreement provided for under Article 4.3(D).

(7)                                  Although
each Secondee shall report to and be directed by Operator, each Secondee shall
remain at all times the employee of the Party (or its Affiliate) nominating
such Secondee.

(D)                               Any
Secondment under this Agreement shall be in accordance with a separate
secondment agreement to be negotiated and entered into between Operator and the
employer of the Secondee, which agreement shall be consistent with this Article
4.3.  [NOTE: A model Secondment
Agreement may be acquired through the AIPN]

(E)                                 All
costs related to Secondment and Secondees that are within the Work Program and
Budget related to such Secondment position shall be charged to the Joint
Account.

(F)                                 If
any Secondee acting as the Senior Supervisory Personnel of Operator or its
Affiliates engages in Gross Negligence / Willful Misconduct which proximately
causes the Parties to incur damage, loss, cost, expense or liability for
claims, demands or causes of action referred to in Articles 4.6(A) or 4.6(B),
then all such damages, losses, costs, expenses and liabilities shall be
allocated to:

Check one Alternative.

o                                    ALTERNATIVE NO. 1

the Joint Account notwithstanding the provisions of Article 4.6.

x                                  ALTERNATIVE NO. 2

Operator, in accordance with Article 4.6.

o                                    ALTERNATIVE NO. 3

the Non-Operator who nominated such Secondee, in an equivalent manner and

 11
 

 

to the same extent
liability for Gross Negligence / Willful Misconduct is allocated to Operator
pursuant to Article 4.6.

4.4                               Information
Supplied by Operator

(A)                              Operator
shall provide Non-Operators with the following data and reports (to the extent
to be charged to the Joint Account) as they are currently produced or compiled
from Joint Operations:

(1)                                  copies
of all logs or surveys, including in digitally recorded format if such exists;

(2)                                  daily
drilling reports;

(3)                                  copies
of all Tests and core data and analysis reports;

(4)                                  final
well recap report;

(5)                                  copies
of plugging reports;

(6)                                  copies
of final geological and geophysical maps, seismic sections and shot point
location maps;

(7)                                  engineering
studies, development schedules and [quarterly/annual] progress reports on
development projects;

(8)                                  field
and well performance reports, including reservoir studies and reserve
estimates;

(9)                                  as
requested by a Non-Operator, (i) copies of all material reports relating to
Joint Operations or the Contract Area furnished by Operator to the Government;
and (ii) other material studies and reports relating to Joint Operations;

(10)                            gas
balancing reports under agreements provided for in Article 9.3;

(11)                            such
additional information as a Non-Operator may reasonably request, provided that
the requesting Party or Parties pay the costs of preparation of such
information and that the preparation of such information will not unduly burden
Operator’s administrative and technical personnel.  Only Non-Operators who pay such costs will
receive such additional information; and

(12)                            other
reports as directed by the Operating Committee.

(B)                                Operator
shall give Non-Operators access at all reasonable times during normal business
hours to all data and reports (other than data and reports provided to
Non-Operators in accordance with Article 4.4(A)) acquired in the conduct
of Joint Operations, which a Non-Operator may reasonably request.  Any Non-Operator may make copies of such
other data at its sole expense.

 12
 

 

4.5                               Settlement
of Claims and Lawsuits

(A)                              Operator
shall promptly notify the Parties of any and all material claims or suits that
relate in any way to Joint Operations. 
Operator shall represent the Parties and defend or oppose the claim or
suit.  Operator may in its sole
discretion compromise or settle any such claim or suit or any related series of
claims or suits for an amount not to exceed the equivalent of
[           U.S. dollars]
exclusive of legal fees.  Operator shall
obtain the approval and direction of the Operating Committee on amounts in
excess of the above-stated amount. 
Without prejudice to the foregoing, each Non-Operator shall have the
right to be represented by its own counsel at its own expense in the settlement,
compromise or defense of such claims or suits.

(B)                                Any
Non-Operator shall promptly notify the other Parties of any claim made against
such Non-Operator by a third party that arises out of or may affect the Joint
Operations, and such Non-Operator shall defend or settle the same in accordance
with any directions given by the Operating Committee.  Those costs, expenses and damages incurred
pursuant to such defense or settlement which are attributable to Joint
Operations shall be for the Joint Account.

(C)                                Notwithstanding
Article 4.5(A) and Article 4.5(B), each Party shall have the right to
participate in any such suit, prosecution, defense or settlement conducted in
accordance with Article 4.5(A) and Article 4.5(B), at its sole cost and
expense; provided always that no Party may settle its Participating Interest
share of any claim without first satisfying the Operating Committee that it can
do so without prejudicing the interests of the Joint Operations.

4.6                               Limitation
on Liability of Operator

(A)                              [Except
as set out in Article 4.6(C)], neither Operator nor any other Indemnitee (as
defined below) shall bear (except as a Party to the extent of its Participating
Interest share) any damage, loss, cost, expense or liability resulting from
performing (or failing to perform) the duties and functions of Operator, and
the Indemnitees are hereby released from liability to Non-Operators for any and
all damages, losses, costs, expenses and liabilities arising out of, incident
to or resulting from such performance or failure to perform, even though caused
in whole or in part by a pre-existing defect, or the negligence (whether sole,
joint or concurrent), gross negligence, willful misconduct, strict liability or
other legal fault of Operator (or any such Indemnitee).

(B)                                [Except
as set out in Article 4.6(C)], the Parties shall (in proportion to their
Participating Interests) defend and indemnify Operator and its Affiliates, and
their respective directors, officers, and employees (collectively, the “Indemnitees”), from any and all
damages, losses, costs, expenses (including reasonable legal costs, expenses
and attorneys’ fees) and liabilities incident to claims, demands or causes of
action brought by or on behalf of any person or entity, which claims, demands
or causes of action arise out of, are incident to or result from Joint
Operations, even though caused in whole or in part by a pre-existing defect, or
the negligence (whether sole, joint or concurrent), gross negligence, willful
misconduct, strict liability or other legal fault of Operator (or any such Indemnitee).

x                                  OPTIONAL
PROVISION

(C)                                Notwithstanding
Articles 4.6(A) or 4.6(B), if any Senior Supervisory Personnel of Operator or
its Affiliates engage in Gross Negligence / Willful Misconduct which
proximately causes the Parties to incur damage, loss, cost, expense or
liability for claims, demands or causes of action referred to in Articles
4.6(A) or 4.6(B), then, in addition to its Participating Interest share:

 13
 

 

Check one
Alternative.

x                                  ALTERNATIVE NO. 1
- No Limitation             

Operator shall bear all such damages, losses, costs, expenses and liabilities.

o                                    ALTERNATIVE NO.
2 - Joint Property Limitation

Operator
shall bear only the actual damage, loss, cost, expense and liability to repair,
replace and/or remove Joint Property so damaged or lost, if any.

o                                    ALTERNATIVE
NO. 3 — Financial Limitation               

Operator shall bear only the first
[           U.S. dollars] of
such damages, losses, costs, expenses and liabilities.

Notwithstanding the
foregoing, under no circumstances shall Operator (except as a Party to the
extent of its Participating Interest) or any other Indemnitee bear any
Consequential Loss or Environmental Loss.

(D)                               Nothing
in this Article 4.6 shall be deemed to relieve Operator from its Participating
Interest share of any damage, loss, cost, expense or liability arising out of,
incident to, or resulting from Joint Operations.

4.7                               Insurance
Obtained by Operator

(A)                              Operator
shall procure and maintain for the Joint Account all insurance in the types and
amounts required by the Contract or the Laws / Regulations [or as provided in
Exhibit C].

(B)                                Operator
shall procure and maintain any further insurance, at reasonable rates, as the
Operating Committee may from time to time require.  In the event that such further insurance is,
in Operator’s reasonable opinion, unavailable or available only at an
unreasonable cost, Operator shall promptly notify the Non-Operators in order to
allow the Operating Committee to reconsider such further insurance.

(C)                                Each
Party will be provided the opportunity to underwrite any or all of the
insurance to be obtained by Operator under Articles 4.7(A) and 4.7(B), through
such Party’s Affiliate insurance company or, if such direct insurance is not so
permitted, through reinsurance policies to such Party’s Affiliate insurance
company; provided that the security and creditworthiness of such insurance
arrangements are satisfactory to Operator, and that such arrangements will not
result in any part of the premiums for such insurance not being recoverable
under the Contract, or being significantly higher than the market rate.

(D)                               Subject
to the Contract and the Laws / Regulations, any Party may elect not to
participate in the insurance to be procured under:

Check one
Alternative.

o                                    ALTERNATIVE
NO. 1        

Articles 4.7(A) and 4.7(B) provided such Party:

x                                  ALTERNATIVE
NO. 2        

Article 4.7(B) provided such Party:

(1)                                  gives
prompt written notice to that effect to Operator;

(2)                                  does
nothing which may interfere with Operator’s negotiations for such insurance for
the other Parties;

 

 14

 

 

(3)           obtains
insurance prior to or concurrent with the commencement of relevant operations
and maintains such insurance (in respect of which a current certificate of
adequate coverage, provided at least once a year, shall be sufficient evidence)
or other evidence of financial responsibility which fully covers its
Participating Interest share of the risks that would be covered by the
insurance to be procured under Article 4.7(A) and/or Article 4.7(B), as
applicable, and which the Operating Committee determines to be acceptable.  No such determination of acceptability shall
in any way absolve a non-participating Party from its obligation to meet each
cash call (except, in accordance with Article 4.7(F), as regards the costs of
the insurance policy in which such Party has elected not to participate)
including any cash call with respect to damages and losses and/or the costs of
remedying the same in accordance with the terms of this Agreement, the Contract
and the Laws / Regulations.  If such
Party obtains other insurance, such insurance shall (a) contain a waiver of
subrogation in favor of all the other Parties, the Operator and their insurers
but only with respect to their interests under this Agreement; (b) provide that
thirty (30) days written notice be given to Operator prior to any material
change in, or cancellation of, such insurance policy; (c) be primary to, and
receive no contribution from, any other insurance maintained by or on behalf
of, or benefiting Operator or the other Parties; and (d) contain adequate
territorial extensions and coverage in the location of the Joint Operations;
and

(4)           is
responsible for all deductibles, coinsurance payments, self-insured exposures,
uninsured or underinsured exposures relating to its interests under this
Agreement.

Check Paragraph (E), if desired.
Renumber following paragraphs if Paragraph (E) is not selected.

x                                  OPTIONAL
PROVISION

(E)           In
the event Operator elects, to the extent permitted by the Contract and Laws /
Regulations, to self-insure all or part of the coverage to be procured under
Articles 4.7(A) and/or 4.7(B), Operator shall so notify the Operating Committee
and provide a qualified self-insurance letter stating what coverages Operator
is self-insuring.  Any risk to be covered
by insurance to be procured in accordance with Articles 4.7(A) and 4.7(B), that
is not identified in the self-insurance letter shall be covered by insurance
and supported by a current certificate of adequate coverage.  If requested by the Operating Committee from
time to time, Operator shall provide evidence of financial responsibility,
acceptable to the Operating Committee, which fully covers the risks that would
be covered by the insurance to be procured under Articles 4.7(A) and 4.7(B).

(F)           The
cost of insurance in which all the Parties are participating shall be for the
Joint Account and the cost of insurance in which less than all the Parties are
participating shall be charged to the Parties participating in proportion to
their respective Participating Interests. 
Subject to the preceding sentence, the cost of insurance with respect to
an Exclusive Operation shall be charged to the Consenting Parties.

(G)           Operator
shall, with respect to all insurance obtained under this Article 4.7:

(1)           use
reasonable endeavors to procure or cause to be procured such insurance prior to
or concurrent with, the commencement of relevant operations and maintain or
cause to be maintained such insurance during the term of the relevant
operations or any longer term required under the Contract or the Laws / Regulations;

(2)           promptly
inform the participating Parties when such insurance is obtained and supply
them with certificates of insurance or copies of the relevant policies when the
same are issued;

 15
 

 

 

(3)           arrange
for the participating Parties, according to their respective Participating
Interests, to be named as co-insureds on the relevant policies with waivers of
subrogation in favor of all the Parties but only with respect to their
interests under this Agreement;

(4)           use
reasonable endeavors to ensure that each policy shall survive the default or
bankruptcy of the insured for claims arising out of an event before such
default or bankruptcy and that all rights of the insured shall revert to the
Parties not in default or bankruptcy; and

(5)           duly
file all claims and take all necessary and proper steps to collect any proceeds
and credit any proceeds to the participating Parties in proportion to their
respective Participating Interests.

(H)          Operator
shall use its reasonable endeavors to require all contractors performing work
with respect to Joint Operations to:

(1)           obtain
and maintain any and all insurance in the types and amounts required by the
Contract, the Laws / Regulations or any decision of the Operating Committee;

(2)           name
the Parties as additional insureds on the contractor’s insurance policies and
obtain from their insurers waivers of all rights of recourse against Operator,
Non-Operators and their insurers; and

(3)           provide
Operator with certificates reflecting such insurance prior to the commencement
of their services.

4.8                               Commingling
of Funds

Check one Alternative.

x                                  ALTERNATIVE
NO. 1

Operator may not commingle with Operator’s own funds the monies which Operator
receives from or for the Joint Account pursuant to this Agreement.  However, Operator reserves the right to make
future proposals to the Operating Committee with respect to the commingling of
funds to achieve financial efficiency.

o                                    ALTERNATIVE
NO. 2

Operator may commingle with its own funds the monies which it receives from or
for the Joint Account pursuant to this Agreement.  Notwithstanding that monies of a Non-Operator
have been commingled with Operator’s funds, Operator shall account to the
Non-Operators for the monies of a Non-Operator advanced or paid to Operator,
whether for the conduct of Joint Operations or as proceeds from the sale of
Hydrocarbons or Joint Property under this Agreement.  Such monies shall be applied only to their
intended use and shall in no way be deemed to be funds belonging to Operator.

Check if desired, in relation to
Alternative No. 2

o                                    OPTIONAL
PROVISION

Notwithstanding the foregoing, the Operating Committee shall have the right to
require Operator to segregate from Operator’s own funds the monies which
Operator receives:

Check one alternative.

o                                    ALTERNATIVE
NO. 2-1

from or for the Joint Account pursuant to this Agreement.

 16
 

 

 

o                                    ALTERNATIVE
NO. 2-2

from the Parties in connection with operations on each Exploitation Area.

Check if
desired.

o                                    OPTIONAL
PROVISION - Interest Bearing Account

The Operating Committee may decide that monies Operator receives for the Joint
Account shall be deposited in an interest-bearing account

Check one alternative.

o                                    ALTERNATIVE
NO. 1

at any time.

o                                    ALTERNATIVE
NO. 2

after the approval of the Development Plan.

Interest earned shall be allocated among the Parties
on an equitable basis taking into account the date of the funding by each Party
and its share of the Joint Account monies. 
Operator shall apply such earned interest to the next succeeding cash call
or, if directed by the Operating Committee, pay it to the Parties.

4.9                               Resignation
of Operator

Subject to Article 4.11, Operator may resign as
Operator at any time by so notifying the other Parties at least one hundred and
twenty (120) Days prior to the effective date of such resignation.

4.10                        Removal
of Operator

(A)          Subject
to Article 4.11, Operator shall be removed upon receipt of notice from any
Non-Operator if:

(1)           Operator
becomes insolvent or bankrupt, or makes an assignment for the benefit of
creditors;

(2)           an order
is made by a court or an effective resolution is passed for the reorganization
under any bankruptcy law, dissolution, liquidation, or winding up of Operator;

(3)           a receiver
is appointed for a substantial part of Operator’s assets; or

(4)           Operator
dissolves, liquidates, is wound up, or otherwise terminates its existence.

(B)           Subject to
Article 4.11, Operator may be removed by the decision of the Non-Operators if
Operator has committed a material breach of this Agreement and has either
failed to commence to cure that breach within thirty (30) Days of receipt of a
notice from Non-Operators detailing the alleged breach or failed to diligently
pursue the cure to completion.  Any
decision of Non-Operators to give notice of breach to Operator or to remove
Operator under this Article 4.10(B) shall be made by an affirmative vote of a
majority of at least twenty five percent (25%). 
However, if Operator disputes such alleged commission of or failure to
cure a material breach and dispute resolution proceedings are initiated
pursuant to Article 18.2 in relation to such breach, then Operator shall remain
appointed and no successor Operator may be appointed pending the conclusion or
abandonment of such proceedings, subject to the terms of Article 8.3 with
respect to Operator’s breach of its payment obligations.

 17
 

 

 

Check
Paragraph (C), if desired. Renumber following paragraphs if Paragraph (C) is
not selected.

x                                  OPTIONAL
PROVISION

(C)           If
Operator together with any Affiliates of Operator is or becomes the holder of a
Participating Interest of less than thirty percent (30%), then Operator shall
be required to promptly notify the other Parties.  The Operating Committee shall then vote
within thirty (30) Days of such notification on whether or not a successor Operator
should be named pursuant to Article 4.11.

Check
Paragraph (D), if desired. Renumber following paragraph if Paragraph (D) is not
selected.

o                                    OPTIONAL
PROVISION

(D)          If
there is a direct or indirect change in Control of Operator (other than a
transfer of Control to an Affiliate of Operator), Operator shall be required to
promptly notify the other Parties.  The
Operating Committee shall vote within
         
(        ) Days of such notification on
whether or not a successor Operator should be named pursuant to Article 4.11.

Check
Paragraph (E), if desired.

o                                    OPTIONAL
PROVISION

(E)           Subject
to Article 4.11, Operator may be removed at any time without cause by the
affirmative vote of a majority of Non-Operators holding a combined
Participating Interest of at least seventy percent (70%).

4.11                        Appointment
of Successor

When a change of Operator occurs pursuant to Article
4.9 or Article 4.10:

(A)          The
Operating Committee shall meet as soon as possible to appoint a successor
Operator pursuant to the voting procedure of Article 5.9.  No Party may be appointed successor Operator
against its will.

(B)           If
Operator is removed, [other than in the case of Article 4.10(C) or Article
4.10(D)], neither Operator nor any Affiliate of Operator shall have the right
to be considered as a candidate for the successor Operator.

(C)           The
resigning or removed Operator shall be compensated out of the Joint Account for
its reasonable expenses directly related to its resignation or removal, except
in the case of Article 4.10(B).

(D)          The
resigning or removed Operator and the successor Operator shall arrange for the
taking of an inventory of all Joint Property and Hydrocarbons, and an audit of
the books and records of the removed Operator. 
Such inventory and audit shall be completed, if possible, no later than
the effective date of the change of Operator and shall be subject to the
approval of the Operating Committee.  The
liabilities and expenses of such inventory and audit shall be charged to the
Joint Account.

(E)           The
resignation or removal of Operator and its replacement by the successor
Operator shall not become effective prior to receipt of any necessary
Government approvals.

(F)           Upon the
effective date of the resignation or removal, the successor Operator shall
succeed to all

 18
 

 

 

duties, rights and authority prescribed for Operator.  The former Operator shall transfer to the
successor Operator custody of all Joint Property, books of account, records and
other documents maintained by Operator pertaining to the Contract Area and to
Joint Operations.  Upon delivery of the
above-described property and data, the former Operator shall be released and
discharged from all obligations and liabilities as Operator accruing after such
date.

4.12                        Health,
Safety and Environment (“HSE”)

(A)          With
the goal of achieving safe and reliable operations in compliance with
applicable HSE laws, rules and regulations (including avoiding significant and
unintended impact on the safety or health of people, on property, or on the
environment), Operator shall in the conduct of Joint Operations:

(1)           establish
and implement an HSE plan in a manner consistent with standards and procedures
generally followed in the international petroleum industry under similar
circumstances;

(2)           design and
operate Joint Property consistent with the HSE plan; and

(3)           conform
with locally applicable HSE laws, rules and regulations and other HSE-related
statutory requirements that may apply.

(B)           The
Operating Committee shall:

Check one Alternative.

o                                    ALTERNATIVE
NO. 1

from time to time review details of Operator’s HSE plan and Operator’s
implementation thereof.

x                                  ALTERNATIVE
NO. 2

be provided by Operator, on an annual basis, with an HSE letter of
assurance providing adequate evidence that an HSE plan is in place and that any
major HSE issues have been brought to the attention of the Operating Committee
and are being properly managed.

(C)           In
the conduct of Joint Operations, Operator shall:

Check one
Alternative.

x                                  ALTERNATIVE
NO. 1

establish and implement a program for regular HSE assessments.  The purpose of such assessments is to periodically
review HSE systems and procedures, including actual practice and performance,
to verify that the HSE plan is being implemented in accordance with the
policies and standards of the HSE plan. 
Operator shall, at a minimum, conduct such an assessment before entering
into significant new Joint Operations and before undertaking any major changes
to existing Joint Operations.  Upon
reasonable notice given to Operator, Non-Operators shall have the right to
participate in such HSE assessments.

o                                    ALTERNATIVE
NO. 2

establish an annual audit program whereby independent auditors review and
verify the effectiveness of the HSE plan.

(D)          Operator
shall require its contractors, consultants and agents undertaking activities
for the Joint Account to manage HSE risks in a manner consistent with the
requirements of this Article 4.12.

 19
 

 

 

(E)           Operator
shall establish and enforce rules consistent with those generally followed in
the international petroleum industry under similar circumstances that, at a
minimum, prohibit within the Contract Area the following:

(1)           possession,
use, distribution or sale of firearms, explosives, or other weapons without the
prior written approval of senior management of Operator;

(2)           possession,
use, distribution or sale of alcoholic beverages without the prior written
approval of senior management of Operator; and

(3)           possession,
use, distribution or sale of illicit or non-prescribed controlled substances
and the misuse of prescribed drugs.

Check if desired.

x                                  OPTIONAL
PROVISION

(F)           Without
prejudice to a Party’s rights under Article 4.2(B)(7), with reasonable advance
notice, Operator shall permit each Non-Operator to have at all reasonable times
during normal business hours (and at its own risk and expense) the right to
conduct its own HSE audit.

ARTICLE 5

OPERATING COMMITTEE

5.1                               Establishment
of Operating Committee

To provide for the overall supervision and direction
of Joint Operations, there is established an Operating Committee composed of
representatives of each Party holding a Participating Interest.  Each Party shall appoint one (1)
representative and one (1) alternate representative to serve on the Operating
Committee.  Each Party shall as soon as
possible after the date of this Agreement give notice in writing to the other
Parties of the name and address of its representative and alternate
representative to serve on the Operating Committee.  Each Party shall have the right to change its
representative and alternate at any time by giving notice of such change to the
other Parties.

5.2                               Powers
and Duties of Operating Committee

The Operating Committee shall have power and duty to
authorize and supervise Joint Operations that are necessary or desirable to
fulfill the Contract and properly explore and exploit the Contract Area in
accordance with this Agreement and in a manner appropriate in the
circumstances.

5.3                               Authority
to Vote

The representative of a Party, or in his absence his
alternate representative, shall be authorized to represent and bind such Party
with respect to any matter which is within the powers of the Operating
Committee and is properly brought before the Operating Committee.  Each such representative shall have a vote
equal to the Participating Interest of the Party such person represents.  Each alternate representative shall be entitled
to attend all Operating Committee meetings but shall have no vote at such
meetings except in the absence of the representative for whom he is the
alternate.  In addition to the
representative and alternate representative, each Party may also bring to any
Operating Committee meetings such technical and other advisors as it may deem
appropriate.

 20
 

 

 

5.4                               Subcommittees

The Operating Committee
may establish such subcommittees, including technical subcommittees, as the
Operating Committee may deem appropriate. 
The functions of such subcommittees shall be in an advisory capacity or
as otherwise determined unanimously by the Parties.  Each Party shall have the right to appoint a
representative to each subcommittee.

5.5                               Notice
of Meeting

(A)          Operator
may call a meeting of the Operating Committee by giving notice to the Parties
at least fifteen (15) Days in advance of such meeting.

(B)           Any
Non-Operator may request a meeting of the Operating Committee by giving notice
to all the other Parties.  Upon receiving
such request, Operator shall call such meeting for a date not less than fifteen
(15) Days nor more than twenty (20) Days after receipt of the request.

(C)           The notice
periods above may only be waived with the unanimous consent of all the Parties.

5.6                               Contents
of Meeting Notice

(A)          Each notice
of a meeting of the Operating Committee as provided by Operator shall contain:

(1)           the date,
time and location of the meeting;

(2)           an agenda
of the matters and proposals to be considered and/or voted upon; and

(3)           copies of
all proposals to be considered at the meeting (including all appropriate
supporting information not previously distributed to the Parties).

(B)           A Party,
by notice to the other Parties given not less than seven (7) Days prior to a
meeting, may add additional matters to the agenda for a meeting.

(C)           On the
request of a Party, and with the unanimous consent of all Parties, the
Operating Committee may consider at a meeting a proposal not contained in such
meeting agenda.

5.7                               Location
of Meetings

All meetings of the Operating Committee shall be held
in Calgary, Alberta, Canada, or elsewhere as the Operating Committee may
decide.

5.8                               Operator’s
Duties for Meetings

(A)          With
respect to meetings of the Operating Committee and any subcommittee, Operator’s
duties shall include:

(1)           timely
preparation and distribution of the agenda;

(2)           organization
and conduct of the meeting; and

(3)           preparation
of a written record or minutes of each meeting.

 21
 

 

 

(B)           Operator
shall have the right to appoint the chairman of the Operating Committee and all
subcommittees.

5.9                               Voting
Procedure

Check one Alternative.

x                                  ALTERNATIVE
NO. 1

Except as otherwise expressly provided in this Agreement, all decisions,
approvals and other actions of the Operating Committee on all proposals coming
before it shall be decided by the affirmative vote of two (2) or more Parties
which are not Affiliates then having collectively at least eighty five percent
(85%) of the Participating Interests.

o                                    ALTERNATIVE
NO. 2 (From Paragraph (A) to (C))

Except as otherwise expressly provided in this Agreement, decisions,
approvals and other actions of the Operating Committee on all proposals coming
before it shall be decided as follows.

(A)          All
decisions, approvals and other actions for which column (A) below is checked shall
require the affirmative vote of
                  
(       ) or more Parties which are not
Affiliates then having collectively at least
              
percent (    %) of the Participating Interests.

(B)           All
decisions, approvals and other actions for which column (B) below is checked
shall require the affirmative vote of
                 
(        ) or more Parties which are
not Affiliates then having collectively at least
          percent
(    %) of the Participating Interests.

(C)           All
decisions, approvals and other actions for which column (C) below is checked
shall require the affirmative vote of
               
(         ) or more Parties which
are not Affiliates then having collectively at least
          percent
(    %) of the Participating Interests.

	
  Matter

  	
   

  	
  (A)

  	
   

  	
  (B)

  	
   

  	
  (C)

  
	
  (1)

  	
  Minimum Work Programs.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (2)

  	
  Drilling, Deepening, Testing,
  Sidetracking, Plugging Back, Recompleting or Reworking Exploration Wells.
  [NOTE: This list may be split in order to allow different levels of approval]

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (3)

  	
  Drilling, Deepening, Testing,
  Sidetracking, Plugging Back, Recompleting or Reworking Appraisal Wells.
  [NOTE: This list may be split in order to allow different levels of approval]

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (4)

  	
  Development Plans.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (5)

  	
  Production programs.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (6)

  	
  Completion of a well.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (7)

  	
  Plugging and abandoning
  a well.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (8)

  	
  Acquisition of G &
  G Data.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 22
 

 

 

	
  (9)

  	
  Construction of processing, treatment, compression,
  gathering, transportation and other downstream facilities.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (10)

  	
  Contract awards (if
  approval is required).

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (11)

  	
  Determination that a
  Discovery is a Commercial Discovery.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (12)

  	
  Unitization under the
  terms of the Contract with an adjoining contract area.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (13)

  	
  Establishment of an
  interest bearing account for Joint Account monies.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (14)

  	
  Acquisition and
  development of Venture Information under terms other than as specified in
  Article 15.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (15)

  	
                                                                                                                                  .

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (16)

  	
  All other matters
  within the Operating Committee’s authority.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

 

 

5.10                        Record
of Votes

The chairman of the Operating Committee shall appoint
a secretary who shall make a record of each proposal voted on and the results
of such voting at each Operating Committee meeting.  Each representative shall sign and be
provided a copy of such record at the end of such meeting, and it shall be considered
the final record of the decisions of the Operating Committee.

5.11                        Minutes

The secretary shall provide each Party with a copy of
the minutes of the Operating Committee meeting within fifteen (15) Business
Days after the end of the meeting.  Each
Party shall have fifteen (15) Days after receipt of such minutes to give notice
to the secretary of its objections to the minutes.  A failure to give notice specifying objection
to such minutes within said fifteen (15) Day period shall be deemed to be
approval of such minutes.  In any event,
the votes recorded under Article 5.10 shall take precedence over the minutes
described above.

5.12                        Voting
by Notice

(A)          In
lieu of a meeting, any Party may submit any proposal to the Operating Committee
for a vote by notice.  The proposing
Party or Parties shall notify Operator who shall give each Party’s
representative notice describing the proposal so submitted and whether Operator
considers such operational matter to require urgent determination.  Operator shall include with such notice
adequate documentation in connection with such proposal to enable the Parties
to make a decision.  Each Party shall
communicate its vote by notice to Operator and the other Parties within one of
the following appropriate time periods after receipt of Operator’s notice:

(1)           forty
eight (48) hours in the case of operations which involve the use of a drilling
rig that is standing by in the Contract Area and such other operational matters
reasonably considered by Operator to require by their nature urgent
determination (such operations and matters being referred to as “Urgent Operational Matters”); and

(2)           thirty
(30) Days in the case of all other proposals.

(B)           Except in
the case of Article 5.12(A)(1), any Party may, by notice delivered to all
Parties within ten (10) Days of receipt of Operator’s notice, request that the
proposal be decided at a meeting

 23
 

 

 

rather than by notice. 
In such an event, that proposal shall be decided at a meeting duly
called for that purpose.

(C)           Except as
provided in Article 10, any Party failing to communicate its vote in a timely
manner shall be deemed to have voted against such proposal.

(D)          If a
meeting is not requested, then at the expiration of the appropriate time
period, Operator shall give each Party a confirmation notice stating the
tabulation and results of the vote.

5.13                        Effect
of Vote

All decisions taken by the Operating Committee
pursuant to this Article 5 shall be conclusive and binding on all the Parties,
except in the following cases.

(A)          If pursuant
to this Article 5, a Joint Operation has been properly proposed to the
Operating Committee and the Operating Committee has not approved such proposal
in a timely manner, then any Party that voted in favor of such proposal shall
have the right for the appropriate period specified below to propose, in
accordance with Article 7, an Exclusive Operation involving operations
essentially the same as those proposed for such Joint Operation.

(1)           For
proposals related to Urgent Operational Matters, such right shall be
exercisable for twenty-four (24) hours after the time specified in Article
5.12(A)(1) has expired or after receipt of Operator’s notice given to the
Parties pursuant to Article [5.13(D)], as applicable.

(2)           For
proposals to develop a Discovery, such right shall be exercisable for ten (10)
Days after the date the Operating Committee was required to consider such
proposal pursuant to Article 5.6 or Article 5.12.

(3)           For all
other proposals, such right shall be exercisable for five (5) Days after the
date the Operating Committee was required to consider such proposal pursuant to
Article 5.6 or Article 5.12.

Check Paragraph (B) if desired.
Renumber following paragraphs if Paragraph (B) is not selected.

x                                  OPTIONAL
PROVISION (Paragraph (B))

(B)           If
a Party voted against any proposal which was approved by the Operating
Committee and which could be conducted as an Exclusive Operation pursuant to
Article 7, then such Party shall have the right not to participate in the
operation contemplated by such approval. 
Any such Party wishing to exercise its right of non-consent must give
notice of non-consent to all other Parties within five (5) Days (or twenty-four
(24) hours for Urgent Operational Matters) following Operating Committee
approval of such proposal.  If a Party exercises
its right of non-consent, the Parties who were not entitled to give or did not
give notice of non-consent shall be Consenting Parties as to the operation
contemplated by the Operating Committee approval, and shall conduct such
operation as an Exclusive Operation under Article 7; provided, however, that
any such Party who was not entitled to give or did not give notice of
non-consent may, by notice provided to the other Parties within five (5) Days
(or twenty-four (24) hours for Urgent Operational Matters) following the notice
of non-consent given by any non-consenting Party, require that the Operating
Committee vote again on the proposal in question. Only the Parties which were
not entitled to or have not exercised their right of non-consent with respect
to the contemplated operation shall participate in such second vote of the
Operating Committee, with voting rights proportional to their respective
Participating Interest.  If the Operating
Committee approves again the contemplated operation, any Party which

 24
 

 

 

voted against the contemplated operation in such
second vote may elect to be a Non-Consenting Party with respect to such
operation, by notice of non-consent provided to all other Parties within five
(5) Days (or twenty-four (24) hours for Urgent Operational Matters) following
the Operating Committee’s second approval of such contemplated operation.

(C)           If the
Consenting Parties to an Exclusive Operation under Article 5.13(A) [or
Article 5.13(B)] concur, then the Operating Committee may, at any time,
pursuant to this Article 5, reconsider and approve, decide or take action on
any proposal that the Operating Committee declined to approve earlier, or
modify or revoke an earlier approval, decision or action.

(D)          Once a
Joint Operation for the drilling, Deepening, Testing, Sidetracking, Plugging
Back, Completing, Recompleting, Reworking, or plugging of a well has been
approved and commenced, such operation shall not be discontinued without the
consent of the Operating Committee; provided, however, that such operation may
be discontinued if:

(1)           an
impenetrable substance or other condition in the hole is encountered which in
the reasonable judgment of Operator causes the continuation of such operation
to be impractical; or

(2)           other
circumstances occur which in the reasonable judgment of Operator cause the
continuation of such operation to be unwarranted and the Operating Committee,
within the period required under Article 5.12(A)(1) after receipt of Operator’s
notice, approves discontinuing such operation.

On the occurrence of either of the above, Operator
shall promptly notify the Parties that such operation is being discontinued
pursuant to the foregoing, and any Party shall have the right to propose in
accordance with Article 7 an Exclusive Operation to continue such operation.

 25
 

 

 

ARTICLE 6

WORK PROGRAMS AND BUDGETS

6.1                               Exploration
and Appraisal

(A)          Within
       
(        ) Days after the Effective
Date, Operator shall deliver to the Parties a proposed Work Program and Budget
detailing the Joint Operations to be performed for the remainder of the current
Calendar Year and, if appropriate, for the following Calendar Year.  Within
        
(        ) Days of such delivery, the Operating
Committee shall meet to consider and to endeavor to agree on a Work Program and
Budget.

(B)           On or
before the 30th Day of September of each Calendar Year,
Operator shall deliver to the Parties a proposed Work Program and Budget
detailing the Joint Operations to be performed for the following Calendar Year.  Within forty five (45) Days of such delivery,
the Operating Committee shall meet to consider and to endeavor to agree on a
Work Program and Budget.

(C)           If a
Discovery is made, Operator shall deliver any notice of Discovery required
under the Contract and shall as soon as possible submit to the Parties a report
containing available details concerning the Discovery and Operator’s
recommendation as to whether the Discovery merits appraisal.  If the Operating Committee determines that
the Discovery merits appraisal, Operator within forty five (45) Days shall
deliver to the Parties a proposed Work Program and Budget for the appraisal of
the Discovery.  Within forty five (45)
Days of such delivery, or earlier if necessary to meet any applicable deadline
under the Contract, the Operating Committee shall meet to consider, modify and
then either approve or reject the appraisal Work Program and Budget.  If the appraisal Work Program and Budget is
approved by the Operating Committee, Operator shall take such steps as may be
required under the Contract to secure approval of the appraisal Work Program
and Budget by the Government.  In the
event the Government requires changes in the appraisal Work Program and Budget,
the matter shall be resubmitted to the Operating Committee for further consideration.

(D)          The Work
Program and Budget agreed pursuant to this Article shall include at least that
part of the Minimum Work Obligations required to be carried out during the
Calendar Year in question under the terms of the Contract.  If within the time periods prescribed in this
Article 6.1 the Operating Committee is unable to agree on such a Work Program
and Budget, then the proposal capable of satisfying the Minimum Work
Obligations for the Calendar Year in question that receives the largest
Participating Interest vote (even if less than the applicable percentage under
Article 5.9) shall be deemed adopted as part of the annual Work Program and
Budget.  If competing proposals receive
equal votes, then Operator shall choose between those competing proposals.  Any portion of a Work Program and Budget
adopted pursuant to this Article 6.1(D) instead of Article 5.9 shall contain
only such operations for the Joint Account as are necessary to maintain the
Contract in full force and effect, including such operations as are necessary
to fulfill the Minimum Work Obligations required for the given Calendar Year.

(E)           Any
approved Work Program and Budget may be revised by the Operating Committee from
time to time.  To the extent such
revisions are approved by the Operating Committee, the Work Program and Budget
shall be amended accordingly.  Operator
shall prepare and submit a corresponding work program and budget amendment to
the Government if required by the Contract.

(F)           Subject to
Article 6.8, approval of any such Work Program and Budget which includes:

(1)           an
Exploration Well, whether by drilling, Deepening or Sidetracking, shall include
approval for:

Check one Alternative.

 26
 

 

 

x           ALTERNATIVE
NO. 1 - No Casing Point Election

all expenditures necessary for drilling, Deepening or Sidetracking, as
applicable, and Testing and Completing an Exploration Well.

o            ALTERNATIVE
NO. 2 - Casing Point Election - (This alternative shall not
apply where Minimum Work Obligations require Testing or Completing of a well.)

only expenditures
necessary for the drilling, Deepening or Sidetracking of such Exploration Well,
as applicable.  When an Exploration Well
has reached its authorized depth, all logs, cores and other approved Tests have
been conducted and the results furnished to the Parties, Operator shall submit
to the Parties in accordance with Article 5.12(A)(1) an election to participate
in an attempt to Complete such Exploration Well.  Operator shall include in such submission
Operator’s recommendation on such Completion attempt and an AFE for such
Completion costs.

(2)           an
Appraisal Well, whether by drilling, Deepening or Sidetracking, shall include
approval for:

Check one
Alternative.

x                                  ALTERNATIVE
NO. 1 - No Casing Point Election

all expenditures necessary for drilling, Deepening or Sidetracking, as
applicable, and Testing and Completing such Appraisal Well.

o                                    ALTERNATIVE
NO. 2 - Casing Point Election - (This alternative shall not
apply where Minimum Work Obligations require Testing or Completing of an
Appraisal Well.)

only
expenditures necessary for the drilling, Deepening or Sidetracking of such
Appraisal Well, as applicable.  When an
Appraisal Well has reached its authorized depth, all logs, cores and other
approved Tests have been conducted and the results furnished to the Parties,
Operator shall submit to the Parties in accordance with Article 5.12(A)(1) an
election to participate in an attempt to Complete such Appraisal Well.  Operator shall include in such submission
Operator’s recommendation on such Completion attempt and an AFE for such
Completion costs.

(G)           Any Party
desiring to propose a Completion attempt, or an alternative Completion attempt,
must do so within the time period provided in Article 5.12(A)(1) by notifying
all other Parties.  Any such proposal
shall include an AFE for such Completion costs.

6.2                               Development

(A)          If
the Operating Committee determines that a Discovery may be a Commercial
Discovery, Operator shall, as soon as practicable, deliver to the Parties a
Development Plan together with the first annual Work Program and Budget (or a
multi-year Work Program and Budget pursuant to Article 6.5) and provisional
Work Programs and Budgets for the remainder of the development of the
Discovery, which shall contain, inter alia:

(1)           details of
the proposed work to be undertaken, personnel required and expenditures to be
incurred, including the timing of same, on a Calendar Year basis;

(2)           an
estimated date for the commencement of production;

(3)           a
delineation of the proposed Exploitation Area; and

 27
 

 

 

(4)           any other
information requested by the Operating Committee.

(B)           After
receipt of the Development Plan and prior to any applicable deadline under the
Contract, the Operating Committee shall meet to consider, modify and then
either approve or reject the Development Plan and the first annual Work Program
and Budget for the development of a Discovery, as submitted by Operator.  If the Operating Committee determines that
the Discovery is a Commercial Discovery and approves the corresponding
Development Plan, Operator shall, as soon as possible, deliver any notice of Commercial
Discovery required under the Contract and take such other steps as may be
required under the Contract to secure approval of the Development Plan by the
Government.  In the event the Government
requires changes in the Development Plan, the matter shall be resubmitted to
the Operating Committee for further consideration.

(C)           If the
Development Plan is approved, such work shall be incorporated into and form
part of annual Work Programs and Budgets, and Operator shall, on or before the
30th Day of September of each Calendar Year submit
a Work Program and Budget for the Exploitation Area, for the following Calendar
Year.  Subject to Article 6.5, within
forty five (45) Days after such submittal, the Operating Committee shall
endeavor to agree to such Work Program and Budget, including any necessary or
appropriate revisions to the Work Program and Budget for the approved
Development Plan.

6.3                               Production

On or before the 30th Day of September of each Calendar Year,
Operator shall deliver to the Parties a proposed production Work Program and
Budget detailing the Joint Operations to be performed in the Exploitation Area
and the projected production schedule for the following Calendar Year.  Within forty five (45) Days of such delivery,
the Operating Committee shall agree upon a production Work Program and Budget,
failing which the provisions of Article 6.1(D) shall be applied mutatis mutandis.

6.4                               Itemization
of Expenditures

(A)          During the
preparation of the proposed Work Programs and Budgets and Development Plans
contemplated in this Article 6, Operator shall consult with the Operating
Committee or the appropriate subcommittees regarding the contents of such Work
Programs and Budgets and Development Plans.

(B)           Each Work
Program and Budget and Development Plan submitted by Operator shall contain an
itemized estimate of the costs of Joint Operations and all other expenditures
to be made for the Joint Account during the Calendar Year in question and
shall, inter alia:

(1)           identify
each work category in sufficient detail to afford the ready identification of
the nature, scope and duration of the activity in question;

(2)           include
such reasonable information regarding Operator’s allocation procedures and
estimated manpower costs as the Operating Committee may determine;

(3)           comply
with the requirements of the Contract;

Check
(4), if desired. Renumber following paragraph if (4) is not selected.

x                                  OPTIONAL
PROVISION

(4)           contain
an estimate of funds to be expended by Calendar Quarter; and

Check (5), if desired.

 28
 

 

 

x                                  OPTIONAL
PROVISION

(5)           during
the Exploration Period, provide a forecast of annual expenditures and
activities through the end of the Exploration Period.

(C)           The Work
Program and Budget shall designate the portion or portions of the Contract Area
in which Joint Operations itemized in such Work Program and Budget are to be
conducted and shall specify the kind and extent of such operations in such
detail as the Operating Committee may deem suitable.

6.5                               Multi-Year
Work Program and Budget

Any work that cannot be efficiently completed within a
single Calendar Year may be proposed in a multi-year Work Program and
Budget.  Upon approval by the Operating
Committee, such multi-year Work Program and Budget shall, subject only to
revisions approved by the Operating Committee thereafter: (i) remain in effect
as between the Parties (and the associated cost estimate shall be a binding
pro-rata obligation of each Party) through the completion of the work; and
(ii) be reflected in each annual Work Program and Budget.  If the Contract requires that Work Programs
and Budgets be submitted to the Government for approval, such multi-year Work
Program and Budget shall be submitted to the Government either in a single
request for a multi-year approval or as part of the annual approval process,
according to the terms of the Contract.

6.6                               Contract
Awards

Check one
Alternative.

o                                    ALTERNATIVE
NO. 1

Subject to the Contract, Operator shall award the contract to the best
qualified contractor as determined by cost and ability to perform the contract
without the obligation to tender and without informing or seeking the approval
of the Operating Committee, except that before entering into contracts with
Affiliates of Operator exceeding
[           U.S. dollars],
Operator shall obtain the approval of the Operating Committee.

o                                    ALTERNATIVE
NO. 2 (From Paragraph (A) to (C))

Subject to the Contract, Operator shall award each contract for Joint
Operations on the following basis (the amounts stated are in thousands of U.S.
dollars):

	
  

  	
   

  	
  Procedure A

  	
   

  	
  Procedure B

  	
   

  	
  Procedure C

  	
   

  
	
  Exploration and Appraisal Operations

  	
   

  	
  0 to 250

  	
   

  	
  250 to 500

  	
   

  	
  >500

  	
   

  
	
  Development
  Operations

  	
   

  	
  0 to 500

  	
   

  	
  500 to 1,500

  	
   

  	
  >1,500

  	
   

  
	
  Production Operations

  	
   

  	
  0 to 500

  	
   

  	
  500 to 1,500

  	
   

  	
  >1,500

  	
   

  

 

Procedure A

(A)          Operator
shall award the contract to the best qualified contractor as determined by cost
and ability to perform the contract without the obligation to tender and
without informing or seeking the approval of the Operating Committee, except
that before entering into contracts with Affiliates of Operator exceeding one
hundred thousand U.S. dollars, Operator shall obtain the approval of the
Operating Committee.

 29
 

 

Procedure B

 

(B)           Operator
shall:

(1)           provide
the Parties with a list of the entities whom Operator proposes to invite to
tender for the said contract;

(2)           add
to such list any entity whom a Party reasonably requests to be added within
fourteen (14) Days of receipt of such list;

(3)           complete
the tendering process within a reasonable period of time;

(4)           inform
the Parties of the entities to whom the contract has been awarded, provided
that before awarding contracts to Affiliates of Operator which exceed one
hundred thousand U.S. dollars, Operator shall obtain the approval of the
Operating Committee;

(5)           circulate
to the Parties a competitive bid analysis stating the reasons for the choice
made; and

(6)           upon
the request of a Party, provide such Party with a copy of the final version of
the contract.

Procedure C

(C)           Operator
shall:

(1)           provide
the Parties with a list of the entities whom Operator proposes to invite to
tender for the said contract;

(2)           add
to such list any entity whom a Party reasonably requests to be added within
fourteen (14) Days of receipt of such list;

(3)           prepare
and dispatch the tender documents to the entities on the list as aforesaid and
to Non-Operators;

(4)           after
the expiration of the period allowed for tendering, consider and analyze the
details of all bids received;

(5)           prepare
and circulate to the Parties a competitive bid analysis, stating Operator’s
recommendation as to the entity to whom the contract should be awarded, the
reasons therefor, and the technical, commercial and contractual terms to be
agreed upon;

(6)           obtain
the approval of the Operating Committee to the recommended bid; and

(7)           upon
the request of a Party, provide such Party with a copy of the final version of
the contract.

 30
 

 

 

Check Article 6.7, if desired.
Renumber following article if Article 6.7 is not selected.

x                                  OPTIONAL
PROVISION

[NOTE: If
Article 6.7 is not checked, the definition of an AFE in Article 1.2 and all
references to AFEs in Articles 1.20, 4.2(B)(5), 6.1(F), 6.1(G), 6.8(B), 7.4(C),
and 13.4(A) are to be removed.]

6.7                               Authorization
for Expenditure (“AFE”) Procedure

(A)          Prior
to incurring any commitment or expenditure for the Joint Account, which is
estimated to be:

(1)           in
excess of fifty thousand U.S. dollars in an exploration or appraisal Work
Program and Budget;

(2)           in
excess of two hundred thousand U.S. dollars in a development Work Program and
Budget; and

(3)           in
excess of two hundred thousand U.S. dollars in a production Work Program and
Budget,

Operator shall send to
each Non-Operator an AFE as described in Article 6.7(C).  Notwithstanding the above, Operator shall not
be obliged to furnish an AFE to the Parties with respect to any Minimum Work
Obligations, workovers of wells and general and administrative costs that are
listed as separate line items in an approved Work Program and Budget.

Check one
Alternative for Paragraph (B).

o                                    ALTERNATIVE
NO. 1

(B)           Notwithstanding
any other provision of this Agreement, all AFEs shall be for informational
purposes only.  Approval of an operation
in the current Work Program and Budget shall authorize Operator to conduct the
operation (subject to Article 6.8) without further authorization from the
Operating Committee.

o                                    ALTERNATIVE
NO. 2

(B)           Prior
to making any expenditures or incurring any commitments for work subject to the
AFE procedure in Article 6.7(A), Operator shall obtain the approval of the
Operating Committee.  If the Operating
Committee approves an AFE for the operation within the applicable time period
under Article 5.12(A), Operator shall be authorized to conduct the operation
under the terms of this Agreement.  If
the Operating Committee fails to approve an AFE for the operation within the
applicable time period, the operation shall be deemed rejected.  Operator shall promptly notify the Parties if
the operation has been rejected, and, subject to Article 7, any Party may
thereafter propose to conduct the operation as an Exclusive Operation under
Article 7.  When an operation is rejected
under this Article 6.7(B) or an operation is approved for differing amounts
than those provided for in the applicable line items of the approved Work Program
and Budget, the Work Program and Budget shall be deemed to be revised
accordingly.

 31
 

 

 

x                                  ALTERNATIVE
NO. 3

(B)           Prior
to making any expenditures or incurring any commitments for work subject to the
AFE procedure in Article 6.7(A), Operator shall obtain the approval of the
Operating Committee to an AFE for cost and technical control purposes.  A Party may vote to disapprove an AFE issued
in furtherance of an approved Work Program and Budget only if (i) some or all
of the costs described in the AFE exceed the line items in the approved Work
Program and Budget by more than is permitted under Article 6.8; (ii) the
proposed terms of any third party contract described in the AFE do not
approximate fair market terms; or (iii) in such Party’s good faith opinion, any
material technical specifications contained in the AFE that are not in the
approved Work Program and Budget are imprudent or are not supported by the
known data about the formations being drilled. 
A Party’s vote shall be considered a vote to approve the AFE unless the
Party specifically describes one or more of the three reasons listed above as
the basis for its vote of disapproval. 
If the Operating Committee approves an AFE for the operation within the
applicable time period under Article 5.12(A), Operator shall be authorized to
conduct the operation under the terms of this Agreement.  If the Operating Committee fails to approve
an AFE for the operation within the applicable time period, the operation shall
be deemed rejected.  Operator shall
promptly notify the Parties if the operation has been rejected, and, subject to
Article 7, any Party may thereafter propose to conduct the operation as an
Exclusive Operation under Article 7. 
When an operation is rejected under this Article 6.7(B) or an operation
is approved for differing amounts than those provided for in the applicable
line items of the approved Work Program and Budget, the Work Program and Budget
shall be deemed to be revised accordingly.

(C)           Each
AFE proposed by Operator shall:

(1)           identify
the operation by specific reference to the applicable line items in the Work
Program and Budget;

(2)           describe
the work in detail;

(3)           contain
Operator’s best estimate of the total funds required to carry out such work;

(4)           outline
the proposed work schedule;

(5)           provide
a timetable of expenditures, if known; and

(6)           be
accompanied by such other supporting information as is necessary for an
informed decision.

6.8                               Overexpenditures
of Work Programs and Budgets

(A)          For
expenditures on any line item of an approved Work Program and Budget, Operator
shall be entitled to incur without further approval of the Operating Committee
an overexpenditure for such line item up to ten percent (10%) of the authorized
amount for such line item; provided that the cumulative total of all
overexpenditures for a Calendar Year shall not exceed five percent (5%) of the
total annual Work Program and Budget in question.

(B)           At such
time Operator reasonably anticipates the limits of Article 6.8(A) will be
exceeded, Operator shall furnish to the Operating Committee:

 32

 

Check one Alternative.

o                                    ALTERNATIVE
NO. 1 – Informational AFE System

a reasonably detailed estimate for the Operating Committee’s
approval.  The Work Program and Budget
shall be revised accordingly and the overexpenditures permitted in Article
6.8(A) shall be based on the revised Work Program and Budget.  Operator shall promptly give notice of the
amounts of overexpenditures when actually incurred.

x                                  ALTERNATIVE
NO. 2 - Operational AFE System

a supplemental AFE for
the estimated expenditures for the Operating Committee’s approval, and Operator
shall provide reasonable details of such overexpenditures.  The Work Program and Budget shall be revised
accordingly and the overexpenditures permitted in Article 6.8(A) shall be based
on the revised Work Program and Budget. 
Operator shall promptly give notice of the amounts of overexpenditures
when actually incurred.

(C)           The
restrictions contained in this Article 6 shall be without prejudice to Operator’s
rights to make expenditures for Urgent Operational Matters and measures set out
in Article 13.5 without the Operating Committee’s approval.

ARTICLE 7

OPERATIONS BY LESS THAN ALL PARTIES

7.1                               Limitation
on Applicability

(A)          No
operations may be conducted in furtherance of the Contract except as Joint
Operations under Article 5 or as Exclusive Operations under this Article
7.  No Exclusive Operation shall be
conducted (other than the tie-in of Exclusive Operation facilities with
existing production facilities pursuant to Article 7.10) which conflicts with a
previously approved Joint Operation or with a previously approved Exclusive
Operation.

(B)           Operations
which are required to fulfill the Minimum Work Obligations must be proposed and
conducted as Joint Operations under Article 5, and may not be proposed or
conducted as Exclusive Operations under this Article 7.

Check if desired.

o                                    OPTIONAL
PROVISION

Except for Exclusive
Operations relating to Deepening, Testing, Completing, Sidetracking, Plugging
Back, Recompletions or Reworking of a well originally drilled to fulfill the
Minimum Work Obligations, no Exclusive Operations may be proposed or conducted
until the Minimum Work Obligations are fulfilled.

(C)           No Party
may propose or conduct an Exclusive Operation under this Article 7 unless and
until such Party has properly exercised its right to propose an Exclusive
Operation pursuant to Article 5.13, or is entitled to conduct an Exclusive
Operation pursuant to Article 10.

Check one Alternative for
Paragraph (D).

o                                    ALTERNATIVE
NO. 1

(D)          Any
operation that may be proposed and conducted as a Joint Operation, other than
operations pursuant to an approved Development Plan, may be proposed and
conducted as an Exclusive Operation, subject to the terms of this Article 7.

 33
 

 

 

x                                  ALTERNATIVE
NO. 2

(D)          The
following operations may be proposed and conducted as Exclusive Operations,
subject to the terms of this Article 7:

(1)           drilling
and/or Testing of Exploration Wells and Appraisal Wells;

(2)           Completion
of Exploration Wells and Appraisal Wells not then Completed as productive of
Hydrocarbons;

(3)           Deepening,
Sidetracking, Plugging Back and/or Recompletion of Exploration Wells and
Appraisal Wells;

(4)           development
of a Commercial Discovery;

(5)           acquisition
of G & G Data;

(6)           any
operations specifically authorized to be undertaken as an Exclusive Operation
under Article 10; and

(7)           any
operation that has unanimous approval from the Parties.

No other type of
operation may be proposed or conducted as an Exclusive Operation.

7.2                               Procedure
to Propose Exclusive Operations

(A)          Subject
to Article 7.1, if any Party proposes to conduct an Exclusive Operation, such
Party shall give notice of the proposed operation to all Parties, other than
Non-Consenting Parties who have relinquished their rights to participate in
such operation pursuant to Article 7.4(B) or Article 7.4(F) and have no option
to reinstate such rights under Article 7.4(C). 
Such notice shall specify that such operation is proposed as an
Exclusive Operation and include the work to be performed, the location, the
objectives, and estimated cost of such operation.

(B)           Any Party
entitled to receive such notice shall have the right to participate in the
proposed operation.

(1)           For
proposals to Deepen, Test, Complete, Sidetrack, Plug Back, Recomplete or Rework
related to Urgent Operational Matters, any such Party wishing to exercise such
right must so notify the proposing Party and Operator within twenty-four (24)
hours after receipt of the notice proposing the Exclusive Operation.

(2)           For
proposals to develop a Discovery, any Party wishing to exercise such right must
so notify Operator and the Party proposing to develop within sixty (60) Days
after receipt of the notice proposing the Exclusive Operation.

(3)           For all
other proposals, any such Party wishing to exercise such right must so notify
the proposing Party and Operator within ten (10) Days after receipt of the
notice proposing the Exclusive Operation.

(C)           Failure of
a Party to whom a proposal notice is delivered to properly reply within the
period specified above shall constitute an election by that Party not to
participate in the proposed operation.

(D)          If all
Parties properly exercise their rights to participate, then the proposed
operation shall be conducted as a Joint Operation.  Operator shall commence such Joint Operation
as promptly as

 34
 

 

 

practicable and conduct
it with due diligence.

(E)           If less
than all Parties entitled to receive such proposal notice properly exercise
their rights to participate, then:

Check one
Alternative.

o                                    ALTERNATIVE
NO. 1 (From Paragraph (1) to (3))

(1)           The
Party proposing the Exclusive Operation, together with any other Consenting
Parties, shall have the right exercisable for the applicable notice period set
out in Article 7.2(B), to instruct Operator (subject to Article 7.12(F)) to
conduct the Exclusive Operation.

(2)           If
the Exclusive Operation is conducted, the Consenting Parties shall bear a
Participating Interest in such Exclusive Operation, the numerator of which is
such Consenting Party’s Participating Interest as stated in Article 3.2(A) and
the denominator of which is the aggregate of the Participating Interests of the
Consenting Parties as stated in Article 3.2(A), or as the Consenting
Parties may otherwise agree.

(3)           If
such Exclusive Operation has not been commenced within
            
(        ) Days (excluding any
extension specifically agreed by all Parties or allowed by the force majeure
provisions of Article 16) after the date of the instruction given to Operator
under Article 7.2(E)(1), the right to conduct such Exclusive Operation shall
terminate.  If any Party still desires to
conduct such Exclusive Operation, notice proposing such operation must be
resubmitted to the Parties in accordance with Article 5, as if no proposal to
conduct an Exclusive Operation had been previously made.

x                                  ALTERNATIVE
NO. 2 (From Paragraph (1) to (8))

(1)           Immediately
after the expiration of the applicable notice period set out in
Article 7.2(B), Operator shall notify all Parties of the names of the
Consenting Parties and the recommendation of the proposing Party as to whether
the Consenting Parties should proceed with the Exclusive Operation.

(2)           Concurrently,
Operator shall request the Consenting Parties to specify the Participating
Interest each Consenting Party is willing to bear in the Exclusive Operation.

(3)           Within
twenty-four (24) hours after receipt of such notice, each Consenting Party
shall respond to Operator stating that it is willing to bear a Participating
Interest in such Exclusive Operation equal to:

(a)           only
its Participating Interest as stated in Article 3.2(A);

(b)           a
fraction, the numerator of which is such Consenting Party’s Participating
Interest as stated in Article 3.2(A) and the denominator of which is the
aggregate of the Participating Interests of the Consenting Parties as stated in
Article 3.2(A); or

(c)           the
Participating Interest as contemplated by Article 7.2(E)(3)(b) plus all or any
part of the difference between one hundred percent (100%) and the total of the
Participating Interests subscribed by the other 

 35
 

 

 

Consenting Parties. Any portion of such difference claimed by more than
one Party shall be distributed to each claimant on a pro-rata basis.

(4)           Any
Consenting Party failing to advise Operator within the response period set out
above shall be deemed to have elected to bear the Participating Interest set
out in Article 7.2(E)(3)(b) as to the Exclusive Operation.

(5)           If,
within the response period set out above, the Consenting Parties subscribe less
than one hundred percent (100%) of the Participating Interest in the Exclusive
Operation, the Party proposing such Exclusive Operation shall be deemed to have
withdrawn its proposal for the Exclusive Operation, unless within twenty-four
(24) hours of the expiry of the response period set out in Article 7.2(E)(3),
the proposing Party notifies the other Consenting Parties that the proposing
Party shall bear the unsubscribed Participating Interest.

(6)           If
one hundred percent (100%) subscription to the proposed Exclusive Operation is
obtained, Operator shall promptly notify the Consenting Parties of their Participating
Interests in the Exclusive Operation.

(7)           As
soon as any Exclusive Operation is fully subscribed pursuant to
Article 7.2(E)(6), Operator, subject to Article 7.12(F), shall commence
such Exclusive Operation as promptly as practicable and conduct it with due
diligence in accordance with this Agreement.

(8)           If
such Exclusive Operation has not been commenced within ninety (90) Days
(excluding any extension specifically agreed by all Parties or allowed by the
force majeure provisions of Article 16) after the date of the notice given by
Operator under Article 7.2(E)(6), the right to conduct such Exclusive Operation
shall terminate.  If any Party still
desires to conduct such Exclusive Operation, notice proposing such operation
must be resubmitted to the Parties in accordance with Article 5, as if no
proposal to conduct an Exclusive Operation had been previously made.

7.3                               Responsibility
for Exclusive Operations

(A)          The
Consenting Parties shall bear in accordance with the Participating Interests
agreed under Article 7.2(E) the entire cost and liability of conducting an
Exclusive Operation and shall indemnify the Non-Consenting Parties from any and
all costs and liabilities incurred incident to such Exclusive Operation
(including Consequential Loss and Environmental Loss) and shall keep the
Contract Area free and clear of all liens and encumbrances of every kind
created by or arising from such Exclusive Operation.

(B)           Notwithstanding
Article 7.3(A), each Party shall continue to bear its Participating Interest share
of the cost and liability incident to the operations in which it participated,
including plugging and abandoning and restoring the surface location, but only
to the extent those costs were not increased by the Exclusive Operation.

7.4                               Consequences
of Exclusive Operations

(A)          With
regard to any Exclusive Operation, for so long as a Non-Consenting Party has
the option under Article 7.4(C) to reinstate the rights it relinquished under
Article 7.4(B), such Non-Consenting Party shall be entitled to have access
concurrently with the Consenting Parties to all data and other information
relating to such Exclusive Operation, other than data obtained in an Exclusive
Operation for the purpose of acquiring G & G Data.  If a Non-Consenting Party desires to receive
and acquire the right to use such G & G Data, then such Non-Consenting
Party shall

 36
 

 

 

have the right to
do so by paying to the Consenting Parties its Participating Interest share as
set out in Article 3.2(A) of the cost incurred in obtaining such G & G
Data.

(B)           Subject to
Article 7.4(C) [and Articles 7.6(E) and 7.8, if selected], each Non-Consenting
Party shall be deemed to have relinquished to the Consenting Parties, and the
Consenting Parties shall be deemed to own, in proportion to their respective
Participating Interests in any Exclusive Operation:

(1)           all of
each such Non-Consenting Party’s right to participate in further operations in
the well or Deepened or Sidetracked portion of a well in which the Exclusive
Operation was conducted and on any Discovery made or appraised in the course of
such Exclusive Operation; and

(2)           all of
each such Non-Consenting Party’s right pursuant to the Contract to take and
dispose of Hydrocarbons produced and saved:

(a)           from the
well or Deepened or Sidetracked portion of a well in which such Exclusive
Operation was conducted; and

(b)           from any
wells drilled to appraise or develop a Discovery made or appraised in the
course of such Exclusive Operation.

(C)           A
Non-Consenting Party shall have only the following options to reinstate the
rights it relinquished pursuant to Article 7.4(B):

(1)           If the
Consenting Parties decide to appraise a Discovery made in the course of an
Exclusive Operation, the Consenting Parties shall submit to each Non-Consenting
Party the approved appraisal program. 
For thirty (30) Days (or forty-eight (48) hours for Urgent Operational
Matters) from receipt of such appraisal program, each Non-Consenting Party
shall have the option to reinstate the rights it relinquished pursuant to
Article 7.4(B) and to participate in such appraisal program.  The Non-Consenting Party may exercise such
option by notifying Operator within the period specified above that such
Non-Consenting Party agrees to bear its Participating Interest share of the
expense and liability of such appraisal program, and to pay such amounts as set
out in Articles 7.5(A) and 7.5(B).

(2)           If the
Consenting Parties decide to develop a Discovery made or appraised in the
course of an Exclusive Operation, the Consenting Parties shall submit to the
Non-Consenting Parties a Development Plan substantially in the form intended to
be submitted to the Government under the Contract.  For sixty (60) Days from receipt of such
Development Plan or such lesser period of time prescribed by the Contract, each
Non-Consenting Party shall have the option to reinstate the rights it
relinquished pursuant to Article 7.4(B) and to participate in such Development
Plan.  The Non-Consenting Party may
exercise such option by notifying Operator within the period specified above
that such Non-Consenting Party agrees to bear its Participating Interest share
of the liability and expense of such Development Plan and such future operating
and producing costs, and to pay the amounts as set out in Articles 7.5(A)
and 7.5(B).

(3)           If the
Consenting Parties decide to Deepen, Complete, Sidetrack, Plug Back or
Recomplete an Exclusive Well and such further operation was not included in the
original proposal for such Exclusive Well, the Consenting Parties shall submit
to the Non-Consenting Parties the approved AFE for such further operation.  For thirty (30) Days (or forty-eight (48)
hours for Urgent Operational Matters) from receipt of such AFE, each
Non-Consenting Party shall have the option to reinstate the rights it
relinquished pursuant to Article 7.4(B) and to participate in such
operation.  The Non-

 37
 

 

 

Consenting Party may
exercise such option by notifying Operator within the period specified above
that such Non-Consenting Party agrees to bear its Participating Interest share
of the liability and expense of such further operation, and to pay the amounts
as set out in Articles 7.5(A) and 7.5(B).

A Non-Consenting Party shall not be entitled to
reinstate its rights in any other type of operation.

(D)          If a
Non-Consenting Party does not properly and in a timely manner exercise its
option under Article 7.4(C), including paying all amounts due in accordance
with Articles 7.5(A) and 7.5(B), such Non-Consenting Party shall have
forfeited the options as set out in Article 7.4(C) and the right to participate
in the proposed program, unless such program, plan or operation is materially
modified or expanded (in which case a new notice and option shall be given to
such Non-Consenting Party under Article 7.4(C)).

(E)           A
Non-Consenting Party exercising its option under Article 7.4(C) shall notify
the other Parties that it agrees to bear its share of the liability and expense
of such further operation and to reimburse the amounts set out in Articles
7.5(A) and 7.5(B) that such Non-Consenting Party had not previously paid.  Such Non-Consenting Party shall in no way be
deemed to be entitled to any amounts paid pursuant to Articles 7.5(A) and
7.5(B) incident to such Exclusive Operations. 
The Participating Interest of such Non-Consenting Party in such
Exclusive Operation shall be its Participating Interest set out in Article
3.2(A).  The Consenting Parties shall
contribute to the Participating Interest of the Non-Consenting Party in
proportion to the excess Participating Interest that each received under
Article 7.2(E). If all Parties participate in the proposed operation, then
such operation shall be conducted as a Joint Operation pursuant to Article 5.

(F)           If after
the expiry of the period in which a Non-Consenting Party may exercise its
option to participate in a Development Plan the Consenting Parties desire to
proceed, Operator shall give notice to the Government under the appropriate
provision of the Contract requesting a meeting to advise the Government that
the Consenting Parties consider the Discovery to be a Commercial
Discovery.  Following such meeting such
Operator for such development shall apply for an Exploitation Area (if
applicable in the Contract).  Unless the
Development Plan is materially modified or expanded prior to the commencement
of operations under such plan (in which case a new notice and option shall be
given to the Non-Consenting Parties under Article 7.4(C)), each Non-Consenting
Party to such Development Plan shall:

(1)           if
the Contract so allows, elect not to apply for an Exploitation Area covering such
development and forfeit all interest in such Exploitation Area, or

(2)           if the
Contract does not so allow, be deemed to have:

(a)           elected
not to apply for an Exploitation Area covering such development;

(b)           forfeited
all economic interest in such Exploitation Area; and

(c)           assumed a
fiduciary duty to exercise its legal interest in such Exploitation Area for the
benefit of the Consenting Parties.

In either case such Non-Consenting Party shall be
deemed to have withdrawn from this Agreement to the extent it relates to such
Exploitation Area, even if the Development Plan is modified or expanded
subsequent to the commencement of operations under such Development Plan and
shall be further deemed to have forfeited any right to participate in the
construction and ownership of facilities outside such Exploitation Area
designed solely for the use of such Exploitation Area.

 38
 

 

 

7.5                               Premium
to Participate in Exclusive Operations

(A)          Each
such Non-Consenting Party shall:

Check one Alternative.

x                                  ALTERNATIVE
NO. 1

within thirty (30) Days
of the exercise of its option under Article 7.4(C), pay in immediately
available funds to the Consenting Parties in proportion to their respective
Participating Interests in such Exclusive Operations a lump sum amount payable
in the currency designated by such Consenting Parties.  Such lump sum amount shall be equal to such
Non-Consenting Party’s Participating Interest share of all liabilities and
expenses that were incurred in every Exclusive Operation relating to the
Discovery (or Exclusive Well, as the case may be) in which the Non-Consenting
Party desires to reinstate the rights it relinquished pursuant to Article
7.4(B), and that were not previously paid by such Non-Consenting Party.

o                                    ALTERNATIVE
NO. 2

immediately
upon the exercise of its option under Article 7.4(C), begin to bear one hundred
percent (100%) of the cash calls made on each Consenting Party in respect of
both Joint Operations and Exclusive Operations until such Non-Consenting Party
has reimbursed the original Consenting Parties (in proportion to their
respective Participating Interest in the Exclusive Operations in which such
Non-Consenting Party is reinstating its rights) an amount equal to such
Non-Consenting Party’s Participating Interest share of all liabilities and expenses
that were incurred in every Exclusive Operation relating to the Discovery (or
Exclusive Well, as the case may be) in which the Non-Consenting Party desires
to reinstate the rights it relinquished pursuant to Article 7.4(B) and that
were not previously paid by such Non-Consenting Party.

(B)           In
addition to the payment required under Article 7.5(A), immediately following
the exercise of its option under Article 7.4(C) each such Non-Consenting Party
shall be liable to reimburse the Consenting Parties who took the risk of such
Exclusive Operations (in proportion to their respective Participating
Interests) an amount equal to the total of:

(1)           fifty
percent (50%) of such Non-Consenting Party’s Participating Interest share of
all liabilities and expenses that were incurred in any Exclusive Operation
relating to the obtaining of the portion of the G & G Data which pertains
to the Discovery, and that were not previously paid by such Non-Consenting
Party; plus

(2)           one
hundred percent (100%) of such Non-Consenting Party’s Participating Interest
share of all liabilities and expenses that were incurred in any Exclusive
Operation relating to the drilling, Deepening, Testing, Completing,
Sidetracking, Plugging Back, Recompleting and Reworking of the Exploration Well
which made the Discovery in which the Non-Consenting Party desires to reinstate
the rights it relinquished pursuant to Article 7.4(B), and that were not
previously paid by such Non-Consenting Party; plus

(3)           one
hundred percent (100%) of the Non-Consenting Party’s Participating Interest
share of all liabilities and expenses that were incurred in any Exclusive
Operation relating to the drilling, Deepening, Testing, Completing,
Sidetracking, Plugging Back, Recompleting and Reworking of the Appraisal
Well(s) which delineated the Discovery in which the Non-Consenting Party
desires to reinstate the rights it relinquished pursuant to Article 7.4(B), and
that were not previously paid by such Non-Consenting Party.

(C)           Each such
Non-Consenting Party who is liable for the amounts set out in Article 7.5(B)
shall:

 39
 

 

 

Check one Alternative.

x                                  ALTERNATIVE
NO. 1

within thirty (30) Days of the exercise of its option under Article 7.4(C), pay
in immediately available funds the full amount due from it under Article 7.5(B)
to such Consenting Parties, in the currency designated by such Consenting
Parties.

o                                    ALTERNATIVE
NO. 2

bear one hundred percent (100%) of the cash calls made on each Consenting Party
in respect of both Joint Operations and Exclusive Operations until each Non-Consenting
Party has reimbursed the full amount due from it under Article 7.5(B).  Unless otherwise agreed, any balance
remaining unreimbursed at the end of, or upon a Party’s withdrawal from, the
subject Exploration Period will be reimbursed by cash payment in the currency
designated by the Consenting Parties who took the risk of such Exclusive
Operations.  The due date for any such
payment shall be fifteen (15) Days after notice from Operator of the balance
remaining unreimbursed.  Unpaid amounts
shall accrue interest at the Agreed Interest Rate from the due date until
timely paid in full.  With respect to
Parties who are participants in an on-going Exploitation Period, any balance
remaining unreimbursed after twenty-four (24) months from the date of the notice
under Article 7.4(C) shall be settled through allocation from the
Non-Consenting Parties to the Consenting Parties of an additional share of
Profit Hydrocarbons, such allocation timed to enable the reimbursement to be
completed in not more than thirty (30) months from the date of the notice under
Article 7.4(C).

(D)          The
Non-Consenting Party exercising its option under Article 7.4(C) shall, in
accordance with Article 19, be entitled to all Cost Hydrocarbons derived from
reimbursements made under Article 7.5(A). 
Such Non-Consenting Party shall not be entitled to Cost Hydrocarbons
associated with payments made under Article 7.5(B), unless the Contract or
any Laws / Regulations require otherwise. 
Each Consenting Party shall have the right to refuse to accept all or
any portion of its share of amounts paid under Articles 7.5(A) and
7.5(B).  In such case the refused amount
shall be distributed to each non-refusing Consenting Party on a pro-rata basis.

7.6                               Order
of Preference of Operations

(A)          Except as
otherwise specifically provided in this Agreement, if any Party desires to
propose the conduct of an operation that will conflict with an existing
proposal for an Exclusive Operation, such Party shall have the right
exercisable for five (5) Days (or twenty-four (24) hours for Urgent Operational
Matters) from receipt of the proposal for the Exclusive Operation, to deliver
such Party’s alternative proposal to all Parties entitled to participate in the
proposed operation.  Such alternative
proposal shall contain the information required under Article 7.2(A).

(B)           Each Party
receiving such proposals shall elect by delivery of notice to Operator and to
the proposing Parties within the appropriate response period set out in Article
7.2(B) to participate in one of the competing proposals.  Any Party not notifying Operator and the
proposing Parties within the response period shall be deemed to have voted
against the proposals.

(C)           The
proposal receiving the largest aggregate Participating Interest vote shall have
priority over all other competing proposals. 
In the case of a tie vote, Operator shall choose among the proposals
receiving the largest aggregate Participating Interest vote.  Operator shall deliver notice of such result
to all Parties entitled to participate in the operation within five (5) Days
(or twenty-four (24) hours for Urgent Operational Matters).

(D)          Each Party
shall then have two (2) Days (or twenty-four (24) hours for Urgent Operational
Matters) from receipt of such notice to elect by delivery of notice to Operator
and the proposing Parties whether such Party will participate in such Exclusive
Operation, or will relinquish its interest pursuant to Article 7.4(B).  Failure by a Party to deliver such notice
within such period 

 40
 

 

 

shall be deemed an election not to participate in the
prevailing proposal.

Check Paragraph (E), if desired.

x                                  OPTIONAL
PROVISION

(E)           Notwithstanding
the provisions of Article 7.4(B), if for reasons other than the encountering of
granite or other practically impenetrable substance or any other condition in
the hole rendering further operations impracticable, a well drilled as an
Exclusive Operation fails to reach the deepest objective Zone described in the
notice proposing such well, Operator shall give notice of such failure to each Non-Consenting
Party who submitted or voted for an alternative proposal under this Article 7.6
to drill such well to a shallower Zone than the deepest objective Zone proposed
in the notice under which such well was drilled.  Each such Non-Consenting Party shall have the
option exercisable for forty-eight (48) hours from receipt of such notice to
participate for its Participating Interest share in the initial proposed
Completion of such well.  Each such
Non-Consenting Party may exercise such option by notifying Operator that it
wishes to participate in such Completion and by paying its Participating
Interest share of the cost of drilling such well to its deepest depth drilled
in the Zone in which it is Completed. 
All liabilities and expenses for drilling and Testing the Exclusive Well
below that depth shall be for the sole account of the Consenting Parties.  If any such Non-Consenting Party does not
properly elect to participate in the first Completion proposed for such well,
the relinquishment provisions of Article 7.4(B) shall continue to apply to such
Non-Consenting Party’s interest.

7.7                               Stand-By
Costs

(A)          When an
operation has been performed, all tests have been conducted and the results of
such tests furnished to the Parties, stand by costs incurred pending response
to any Party’s notice proposing an Exclusive Operation for Deepening, Testing,
Sidetracking, Completing, Plugging Back, Recompleting, Reworking or other
further operation in such well (including the period required under Article 7.6
to resolve competing proposals) shall be charged and borne as part of the
operation just completed.  Stand by costs
incurred subsequent to all Parties responding, or expiration of the response
time permitted, whichever first occurs, shall be charged to and borne by the
Parties proposing the Exclusive Operation in proportion to their Participating
Interests, regardless of whether such Exclusive Operation is actually
conducted.

(B)           If a
further operation related to Urgent Operational Matters is proposed while the
drilling rig to be utilized is on location, any Party may request and receive
up to five (5) additional Days after expiration of the applicable response
period specified in Article 7.2(B)(1) within which to respond by notifying
Operator that such Party agrees to bear all stand by costs and other costs
incurred during such extended response period. 
Operator may require such Party to pay the estimated stand by costs in
advance as a condition to extending the response period.  If more than one Party requests such additional
time to respond to the notice, stand by costs shall be allocated between such
Parties on a Day-to-Day basis in proportion to their Participating Interests.

 41
 

 

 

Check Article 7.8, if desired.
Renumber following articles if Article 7.8 is not selected.

x                                  OPTIONAL
PROVISION

7.8                               Special
Considerations Regarding Deepening and Sidetracking

(A)          An
Exclusive Well shall not be Deepened or Sidetracked without first affording the
Non-Consenting Parties in accordance with this Article 7.8 the opportunity to
participate in such operation.

(B)           In
the event any Consenting Party desires to Deepen or Sidetrack an Exclusive
Well, such Party shall initiate the procedure contemplated by Article 7.2.  If a Deepening or Sidetracking operation is
approved pursuant to such provisions, and if any Non-Consenting Party to the
Exclusive Well elects to participate in such Deepening or Sidetracking
operation, such Non-Consenting Party shall not owe amounts pursuant to Article
7.5(B), and such Non-Consenting Party’s payment pursuant to Article 7.5(A)
shall be such Non-Consenting Party’s Participating Interest share of the
liabilities and expenses incurred in connection with drilling the Exclusive
Well from the surface to the depth previously drilled which such Non-Consenting
Party would have paid had such Non-Consenting Party agreed to participate in
such Exclusive Well; provided, however, all liabilities and expenses for
Testing and Completing or attempting Completion of the well incurred by
Consenting Parties prior to the commencement of actual operations to Deepen or
Sidetrack beyond the depth previously drilled shall be for the sole account of
the Consenting Parties.

7.9                               Use
of Property

(A)          The Parties
participating in any Deepening, Testing, Completing, Sidetracking, Plugging
Back, Recompleting or Reworking of any well drilled under this Agreement shall
be permitted to use (free of cost) all casing, tubing and other equipment in
the well that is not needed for operations by the owners of the wellbore, but
the ownership of all such equipment shall remain unchanged.  On abandonment of a well in which operations
with differing participation have been conducted, the Parties abandoning the
well shall account for all equipment in the well to the Parties owning such
equipment by tendering to them their respective Participating Interest shares
of the value of such equipment less the cost of salvage.

Check Paragraph (B), if desired.
Renumber following paragraphs if Paragraph (B) is not selected.

x                                  OPTIONAL
PROVISION

(B)           Any
Party (whether owning interests in the platform or not) shall be permitted to
use spare slots in a platform constructed pursuant to this Agreement for
purposes of drilling Exploration Wells and/or Appraisal Wells and running tests
in the Contract Area.  No Party except an
owner of a platform may drill Development Wells or run production from a well
(except production resulting from initial well tests) from the platform without
the prior written consent of all platform owners.  If all owners of the platform participate in
the drilling of a well, then no fee shall be payable under this Article
7.9(B).  Otherwise, each time a well is
drilled from a platform, the Consenting Parties in the well shall pay to the
owners of the platform until all wells drilled by such Parties have been
plugged and abandoned a monthly fee equal to (1) that portion of the total cost
of the platform (including costs of material, fabrication, transportation and
installation), divided by the number of months of useful life established for
the platform under the tax law of the host country, that one well slot bears to
the total number of slots on the platform plus (2) that proportionate part of
the monthly cost of operating, maintaining and financing the platform that the
well drilled under this Article 7.9(B) bears to the total number of wells

 42
 

 

 

served by such
platform.  Consenting Parties who have
paid to drill a well from a platform under this Article 7.9(B) shall be
entitled to Deepen or Sidetrack that well for no additional charge if done
prior to moving the drilling rig off of location.

Check Paragraph (C), if desired.
Renumber following paragraphs if Paragraph (C) is not selected.

x                                  OPTIONAL
PROVISION

(C)           Spare
capacity in equipment that is constructed pursuant to this Agreement and used
for processing or transporting Crude Oil and Natural Gas after it has passed
through primary separators and dehydrators (including treatment facilities, gas
processing plants and pipelines) shall be available for use by any Party for
Hydrocarbon production from the Contract Area on the terms set forth
below.  All Parties desiring to use such
equipment shall nominate capacity in such equipment on a monthly basis by
notice to Operator at least ten (10) Days prior to the beginning of each
month.  Operator may nominate capacity
for the owners of the equipment if they so elect.  If at any time the capacity nominated exceeds
the total capacity of the equipment, the capacity of the equipment shall be
allocated in the following priority:  (1)
first, to the owners of the equipment up to their respective Participating
Interest shares of total capacity, (2) second, to owners of the equipment
desiring to use capacity in excess of their Participating Interest shares, in
proportion to the Participating Interest of each such Party and (3) third, to
Parties not owning interests in the equipment, in proportion to their
Participating Interests in the Agreement. 
Owners of the equipment shall be entitled to use up to their
Participating Interest share of total capacity without payment of a fee under
this Article 7.9(C). Otherwise, each Party using equipment pursuant to this
Article 7.9(C) shall pay to the owners of the equipment monthly throughout the
period of use an arm’s-length fee based upon third party charges for similar
services in the vicinity of the Contract Area. 
If no arm’s-length rates for such services are available, then the Party
desiring to use equipment pursuant to this Article 7.9(C) shall pay to the
owners of the equipment a monthly fee equal to (1) that portion of the total cost
of the equipment, divided by the number of months of useful life established
for such equipment under the tax law of the host country, that the capacity
made available to such Party on a fee basis under this Article 7.9(C) bears to
the total capacity of the equipment plus (2) that portion of the monthly cost
of maintaining, operating and financing the equipment that the capacity made
available to such Party on a fee basis under this Article 7.9(C) bears to the
total capacity of the equipment.

Check, if desired, Paragraph (D)
in conjunction with Paragraph (B) or (C). Renumber following paragraph if
Paragraph (D) is not selected.

x                                  OPTIONAL
PROVISION

(D)          Payment
for the use of a platform under Article 7.9(B) or the use of equipment under
Article 7.9(C) shall not result in an acquisition of any additional interest in
the equipment or platform by the paying Parties.  However, such payments shall be included in
the costs which the paying Parties are entitled to recoup under Article 7.5.

Check, if desired, Paragraph (E)
in conjunction with Paragraph (C) or (D).

x                                  OPTIONAL
PROVISION

(E)           Parties
electing to use spare capacity on platforms or in equipment pursuant to
Article 7.9(B) or Article 7.9(C) shall indemnify the owners of the
equipment or platform against any and all costs and liabilities incurred as a
result of such use (including any Consequential Loss and Environmental Loss)
but excluding costs and liabilities for which

 43
 

 

 

Operator is solely
responsible under Article 4.6.

7.10                        Lost
Production During Tie-In of Exclusive Operation Facilities

If, during the tie-in of Exclusive Operation
facilities with the existing production facilities of another operation, the
production of Hydrocarbons from such other pre-existing operations is
temporarily lessened as a result, then the Consenting Parties shall compensate
the parties to such existing operation for such loss of production in the
following manner.  Operator shall
determine the amount by which each Day’s production during the tie-in of
Exclusive Operation facilities falls below the previous month’s average daily
production from the existing production facilities of such operation.  The so-determined amount of lost production
shall be recovered by all Parties who experienced such loss in proportion to
their respective Participating Interest. 
Upon completion of the tie-in, such lost production shall be recovered
in full by Operator deducting up to one hundred percent (100%) of the
production from the Exclusive Operation, prior to the Consenting Parties being
entitled to receive any such production.

Check Article 7.11, if desired.
Renumber following article if Article 7.11 is not selected.

x                                  OPTIONAL
PROVISION:

7.11                        Production
Bonuses

The bonus payable by the
Parties under the Contract (“Production Bonus”)
shall be charged to the Joint Account if there is no Hydrocarbon production
from an Exclusive Operation at the time they are incurred.  If there is Hydrocarbon production from one
or more Exclusive Operations, then any Production Bonus which becomes payable
under the Contract shall be borne

Check one
Alternative.

o                                    ALTERNATIVE
NO. 1

totally by the Exploitation Area(s) in which the average daily commercial
production of Hydrocarbons during the      Day period
preceding the date on which liability for the Production Bonus is incurred
exceeded their average daily production of Hydrocarbons during the immediately
preceding      Day period, in proportion to the amount of
the increase for each such Exploitation Area.

o                                    ALTERNATIVE
NO. 2

by each Exploitation Area, in the proportion that its average daily production
of Hydrocarbons bears to the total average daily production of Hydrocarbons
from the Contract Area during the      Day period preceding
the date on which liability for the Production Bonus is incurred.

x                                  ALTERNATIVE
NO. 3

by each Exploitation Area that produced Hydrocarbons during the thirty Day
period preceding the date on which liability for the Production Bonus is
incurred, in the proportion that its cumulative production of Hydrocarbons
through that date bears to the total cumulative production of Hydrocarbons
through that date from all Exploitation Areas liable for the Production Bonus.

o                                    ALTERNATIVE
NO. 4

by the Parties in accordance with their Participating Interests.

The Parties in an
Exploitation Area shall bear the Production Bonus allocated to that
Exploitation Area in accordance with their Participating Interests in that
Exploitation Area as of the date on which liability for the Production Bonus
was incurred.  Only types, grades and
qualities of 

 44
 

 

 

Hydrocarbons used for the
determination of the Production Bonus under the Contract shall be utilized in
the calculations in this Article 7.11.

7.12                        Conduct
of Exclusive Operations

(A)          Each
Exclusive Operation shall be carried out by the Consenting Parties acting as
the Operating Committee, subject to the provisions of this Agreement applied mutatis mutandis to such Exclusive Operation and subject to
the terms and conditions of the Contract.

(B)           The
computation of liabilities and expenses incurred in Exclusive Operations,
including the liabilities and expenses of Operator for conducting such
operations, shall be made in accordance with the principles set out in the
Accounting Procedure.

(C)           Operator
shall maintain separate books, financial records and accounts for Exclusive
Operations which shall be subject to the same rights of audit and examination
as the Joint Account and related records, all as provided in the Accounting
Procedure.  Said rights of audit and
examination shall extend to each of the Consenting Parties and each of the
Non-Consenting Parties so long as the latter are, or may be, entitled to elect
to participate in such Exclusive Operations.

(D)          Operator,
if it is conducting an Exclusive Operation for the Consenting Parties,
regardless of whether it is participating in that Exclusive Operation, shall be
entitled to request cash advances and shall not be required to use its own
funds to pay any cost and expense and shall not be obliged to commence or
continue Exclusive Operations until cash advances requested have been made, and
the Accounting Procedure shall apply to Operator in respect of any Exclusive
Operations conducted by it.

(E)           Should the
submission of a Development Plan be approved in accordance with Article 6.2, or
should any Party propose (but not yet have the right to commence) a development
in accordance with this Article 7 where neither the Development Plan nor
the development proposal call for the conduct of additional appraisal drilling,
and should any Party wish to drill an additional Appraisal Well prior to
development, then the Party proposing the Appraisal Well as an Exclusive
Operation shall be entitled to proceed first, but without the right (subject to
the following sentence) to future reimbursement pursuant to Article 7.5.  If such an Appraisal Well is produced, any
Consenting Party shall own and have the right to take in kind and separately
dispose of all of the Non-Consenting Party’s Entitlement from such Appraisal
Well until the value received in sales to purchasers in arm-length transactions
equals one hundred percent (100%) of such Non-Consenting Party’s Participating
Interest shares of all liabilities and expenses that were incurred in any
Exclusive Operations relating to the Appraisal Well.  Following the completion of drilling such
Appraisal Well as an Exclusive Operation, the Parties may proceed with the
Development Plan approved pursuant to Article 5.9, or (if applicable) the
Parties may complete the procedures to propose an Exclusive Operation to
develop a Discovery.  If, as the result
of drilling such Appraisal Well as an Exclusive Operation, the Party or Parties
proposing to develop the Discovery decide(s) not to do so, then each
Non-Consenting Party who voted in favor of such Development Plan prior to the
drilling of such Appraisal Well shall pay to the Consenting Party the amount
such Non-Consenting Party would have paid had such Appraisal Well been drilled
as a Joint Operation.

(F)           If
Operator is a Non-Consenting Party to an Exclusive Operation to develop a
Discovery, then Operator

Check one
Alternative.

o                                    ALTERNATIVE
NO. 1

may resign, but in any event shall resign on the unanimous request of the
Consenting Parties, as Operator for the Exploitation Area for such Discovery,
and the Consenting Parties shall select a Consenting Party to serve as Operator
for such Exclusive Operation

 45
 

 

 

only.

x                                  ALTERNATIVE
NO. 2

shall resign as Operator for the Exploitation Area for such Discovery.  If Operator so resigns, the Consenting
Parties shall select a Consenting Party to serve as Operator for such Exclusive
Operation only.

Any such
resignation of Operator and appointment of a Consenting Party to serve as
Operator for such Exclusive Operation shall be subject to the Parties having
first obtained any necessary Government approvals.

ARTICLE 8

DEFAULT

8.1                               Default
and Notice

(A)          Any Party
that fails to:

(1)           pay
when due its share of Joint Account expenses (including cash advances and
interest); or

(2)           obtain
and maintain any Security required of such Party under the Contract or this
Agreement;

shall be in default under
this Agreement (a “Defaulting Party”).
Operator, or any non-defaulting Party in case Operator is the Defaulting Party,
shall promptly give notice of such default (the “Default
Notice”) to the Defaulting Party and each of the non-defaulting
Parties.

(B)           For
the purposes of this Article 8, “Default Period”
means the period beginning five (5) Business Days from the date that the
Default Notice is issued in accordance with this Article 8.1 and ending when
all the Defaulting Party’s defaults pursuant to this Article 8.1 have been
remedied in full.

8.2                               Operating
Committee Meetings and Data

(A)          Notwithstanding
any other provision of this Agreement, the Defaulting Party shall have no
right, during the Default Period, to:

(1)           call or
attend Operating Committee or subcommittee meetings;

(2)           vote on
any matter coming before the Operating Committee or any subcommittee;

(3)           access any
data or information relating to any operations under this Agreement;

(4)           consent to
or reject data trades between the Parties and third parties, nor access any
data received in such data trades;

(5)           Transfer
(as defined in Article 12.1) all or part of its Participating Interest, except
to non-defaulting Parties in accordance with this Article 8;

(6)           consent to
or reject any Transfer (as defined in Article 12.1) or otherwise exercise any
other rights in respect of Transfers under this Article 8 or under Article 12;

(7)           receive
its Entitlement in accordance with Article 8.4;

(8)           withdraw
from this Agreement under Article 13; or

 46
 

 

 

(9)           take
assignment of any portion of another Party’s Participating Interest in the
event such other Party is either in default or withdrawing from this Agreement
and the Contract.

(B)           Notwithstanding
any other provisions in this Agreement, during the Default Period:

(1)           unless
agreed otherwise by the non-defaulting Parties, the voting interest of each
non-defaulting Party shall be equal to the ratio such non-defaulting Party’s
Participating Interest bears to the total Participating Interests of the
non-defaulting Parties;

(2)           any
matters requiring a unanimous vote or approval of the Parties shall not require
the vote or approval of the Defaulting Party;

(3)           the
Defaulting Party shall be deemed to have elected not to participate in any
operations that are voted upon during the Default Period, to the extent such an
election would be permitted by Article 5.13 and Article 7; and

(4)           the
Defaulting Party shall be deemed to have approved, and shall join with the
non-defaulting Parties in taking, any other actions voted on during the Default
Period.

8.3                               Allocation
of Defaulted Accounts

(A)          The
Party providing the Default Notice pursuant to Article 8.1 shall include in the
Default Notice to each non-defaulting Party a statement of: (i) the sum of
money that the non-defaulting Party shall pay as its portion of the Amount in
Default; and (ii) if the Defaulting Party has failed to obtain or maintain any
Security required of such Party in order to maintain the Contract in full force
and effect, the type and amount of the Security the non-defaulting Parties
shall post or the funds they shall pay in order to allow Operator, or (if
Operator is in default) the notifying Party, to post and maintain such
Security.  Unless otherwise agreed, the
obligations for which the Defaulting Party is in default shall be satisfied by
the non-defaulting Parties in proportion to the ratio that each non-defaulting
Party’s Participating Interest bears to the Participating Interests of all
non-defaulting Parties.  For the purposes
of this Article 8:

“Amount in Default”
means the Defaulting Party’s share of Joint Account expenses which the
Defaulting Party has failed to pay when due pursuant to the terms of this
Agreement (but excluding any interest owed on such amount); and

“Total
Amount in Default” means the following amounts: (i) the
Amount in Default; (ii) third-party costs of obtaining and maintaining any
Security incurred by the non-defaulting Parties or the funds paid by such
Parties in order to allow Operator to obtain or maintain Security, in
accordance with Article 8.3(A)(ii); plus (iii) any interest at the Agreed
Interest Rate accrued on the amount under (i) from the date this amount is due
by the Defaulting Party until paid in full by the Defaulting Party and on the
amount under (ii) from the date this amount is incurred by the non-defaulting
Parties until paid in full by the Defaulting Party.

(B)           If
the Defaulting Party remedies its default in full before the Default Period
commences, the notifying Party shall promptly notify each non-defaulting Party
by facsimile or telephone and by email, and the non-defaulting Parties shall be
relieved of their obligations under Article 8.3(A).  Otherwise, each non-defaulting Party shall
satisfy its obligations under Article 8.3(A)(i) before the Default Period
commences and its obligations under Article 8.3(A)(ii) within ten (10) Days
following the Default Notice.  If any
non-defaulting Party fails to timely satisfy such obligations, such Party shall
thereupon be a Defaulting Party subject to the provisions of this Article
8.  The non-defaulting Parties shall be
entitled to receive their respective shares of the Total Amount in Default
payable by such Defaulting Party pursuant to this Article 8.

(C)           If
Operator is a Defaulting Party, then all payments otherwise payable to Operator
for Joint

 47
 

 

 

Account costs pursuant to this Agreement shall be made
to the notifying Party instead until the default is cured or a successor
Operator appointed.  The notifying Party
shall maintain such funds in a segregated account separate from its own funds
and shall apply such funds to third party claims due and payable from the Joint
Account of which it has notice, to the extent Operator would be authorized to
make such payments under the terms of this Agreement.  The notifying Party shall be entitled to bill
or cash call the other Parties in accordance with the Accounting Procedure for
proper third party charges that become due and payable during such period to
the extent sufficient funds are not available. 
When Operator has cured its default or a successor Operator is
appointed, the notifying Party shall turn over all remaining funds in the
account to Operator and shall provide Operator and the other Parties with a
detailed accounting of the funds received and expended during this period.  The notifying Party shall not be liable for
damages, losses, costs, expenses or liabilities arising as a result of its
actions under this Article 8.3(C), except to the extent Operator would be
liable under Article 4.6.

8.4                               Remedies

(A)          During the
Default Period, the Defaulting Party shall not have a right to its Entitlement,
which shall vest in and be the property of the non-defaulting Parties.  Operator (or the notifying Party if Operator
is a Defaulting Party) shall be authorized to sell such Entitlement in an arm’s-length
sale on terms that are commercially reasonable under the circumstances and,
after deducting all costs, charges and expenses incurred in connection with
such sale, pay the net proceeds to the non-defaulting Parties in proportion to
the amounts they are owed by the Defaulting Party as a part of the Total Amount
in Default (in payment of first the interest and then the principal) and apply
such net proceeds toward the establishment of the Reserve Fund (as defined in Article
8.4(C)), if applicable, until all such Total Amount in Default is recovered and
such Reserve Fund is established.  Any
surplus remaining shall be paid to the Defaulting Party, and any deficiency
shall remain a debt due from the Defaulting Party to the non-defaulting
Parties.  When making sales under this
Article 8.4(A), the non-defaulting Parties shall have no obligation to share
any existing market or obtain a price equal to the price at which their own
production is sold.

(B)           If
Operator disposes of any Joint Property or if any other credit or adjustment is
made to the Joint Account during the Default Period, Operator (or the notifying
Party if Operator is a Defaulting Party) shall be entitled to apply the
Defaulting Party’s Participating Interest share of the proceeds of such
disposal, credit or adjustment against the Total Amount in Default (against
first the interest and then the principal) and toward the establishment of the
Reserve Fund (as defined in Article 8.4(C)), if applicable.  Any surplus remaining shall be paid to the
Defaulting Party, and any deficiency shall remain a debt due from the
Defaulting Party to the non-defaulting Parties.

(C)           The
non-defaulting Parties shall be entitled to apply the net proceeds received
under Articles 8.4(A) and 8.4(B) toward the creation of a reserve fund
(the “Reserve Fund”) in an amount equal
to the Defaulting Party’s Participating Interest share of: (i) the estimated
cost to abandon any wells and other property in which the Defaulting Party
participated; (ii) the estimated cost of severance benefits for local
employees upon cessation of operations; and (iii) any other identifiable costs
that the non-defaulting Parties anticipate will be incurred in connection with
the cessation of operations. Upon the conclusion of the Default Period, all
amounts held in the Reserve Fund shall be returned to the Party previously in
Default.

Check one Alternative for
Paragraph (D).

o                                    ALTERNATIVE
1 – Forfeiture

(D) (1)              If
a Defaulting Party fails to fully remedy all its defaults by the thirtieth
(30th) Day following the date of the Default Notice, then, without prejudice to
any other rights available to each non-defaulting Party to recover its portion
of the Total Amount in Default,

 48

 

 

Check one Alternative.

o                                    ALTERNATIVE
1-1

each non-defaulting Party

x                                  ALTERNATIVE
NO. 1-2

a majority in interest of the non-defaulting Parties (after excluding
Affiliates of the Defaulting Party)

shall have the option,
exercisable at anytime thereafter during the Default Period, to require that
the Defaulting Party completely withdraw from this Agreement and the
Contract.  Such option shall be exercised
by notice to the Defaulting Party and each non-defaulting Party.  If such option is exercised, the Defaulting
Party shall be deemed to have transferred, pursuant to Article 13.6,
effective on the date of the non-defaulting Party’s or Parties’ notice, its
Participating Interest to the non-defaulting Parties.  Notwithstanding the terms of Article 13, in
the absence of an agreement among the non-defaulting Parties to the contrary,
any transfer to the non-defaulting Parties following a withdrawal pursuant to
this Article 8.4(D)(1) shall be in proportion to the Participating
Interests of the non-defaulting Parties.

Check if desired in conjunction
with Alternative 1.

o                                    OPTIONAL
PROVISION – Expedited Forfeiture for Subsequent Default

(2)           A
Party which is held in default under this Agreement (and subsequently cures
such default) shall be subject to the provisions of this Article 8.4(D)(2) for
a period of      Days following the last Day of the Default
Period associated with such initial occurrence of default.  If such Party fails to remedy a subsequent
default by the fifteenth (15th) Day following the date of the Default Notice
associated with such subsequent occasion of default (a “Repeat
Defaulting Party”), then, without prejudice to any other rights
available to each non-defaulting Party to recover its portion of the Total
Amount in Default,

Check one Alternative.

o                                    ALTERNATIVE
NO. 1

each non-defaulting Party

o                                    ALTERNATIVE
NO. 2

a majority in interest of the non-defaulting Parties (after excluding
Affiliates of the Repeat Defaulting Party)

shall have the option,
exercisable at any time thereafter until the Repeat Defaulting Party has
completely cured its defaults, to require that the Repeat Defaulting Party
completely withdraw from this Agreement and the Contract.  Such option shall be exercised by notice to
the Repeat Defaulting Party and each non-defaulting Party.  If such option is exercised, the Repeat
Defaulting Party shall be deemed to have transferred, pursuant to
Article 13.6, effective on the date of the non-defaulting Party’s or
Parties’ notice, its Participating Interest to the non-defaulting Parties.  Notwithstanding the terms of Article 13, in
the absence of an agreement among the non-defaulting Parties to the contrary,
any transfer to the non-defaulting Parties following a

 49
 

 

 

withdrawal pursuant to
this Article 8.4(D)(2) shall be in proportion to the Participating
Interests of the non-defaulting Parties

o                                    ALTERNATIVE
NO. 2 – Buy-Out of Defaulting Party’s Participating Interest

(D)          Each
Party grants to each of the other Parties the right and option to acquire (the “Buy-Out Option”) all of its
Participating Interest for a value (the “Appraised Value”)
as determined in this Article 8.4(D) in the event that such Party becomes
a Defaulting Party and fails to fully remedy all its defaults by the thirtieth
(30th) Day following the date of the Default Notice.  If a Defaulting Party fails to remedy its
default by the thirtieth (30th) Day following the date of the Default Notice,
then, without prejudice to any other rights available to each non-defaulting
Party to recover its portion of the Total Amount in Default,

Check one
Alternative.

o                                    ALTERNATIVE
NO. 2-1

each
non-defaulting Party may, but shall not be obligated to, exercise such Buy-Out
Option by notice to the Defaulting Party and each non-defaulting Party (the “Option Notice”). The Defaulting
Party shall be obligated to transfer, pursuant to Article 13.6, effective on
the date of the Option Notice, its Participating Interest to the non-defaulting
Parties having exercised the Buy-Out Option (each, an “Acquiring
Party”). If, within thirty (30) Days after the Buy-Out Option is
first exercised by an Acquiring Party, other non-defaulting Parties become an
Acquiring Party, each Acquiring Party shall acquire a proportion of the
Participating Interest of the Defaulting Party equal to the ratio of its own
Participating Interest to the total Participating Interests of all Acquiring
Parties and pay such proportion of the Appraised Value (as defined below),
unless they otherwise agree.  Each
Acquiring Party shall specify in its Option Notice a value for the Defaulting
Party’s Participating Interest.  Within
five (5) Days of the Option Notice, the Defaulting Party shall (i) notify
the Acquiring Parties that it accepts, with respect to each Acquiring Party,
the value specified by such Acquiring Party in its Option Notice (in which case
this value is, with respect to such Acquiring Party, the “Appraised
Value”); or (ii) refer the Dispute to an independent expert
pursuant to Article 18.3 for determination of the value of its Participating
Interest (in which case the value determined by such expert shall be deemed the
“Appraised Value”).  If the Defaulting Party fails to so notify
the Acquiring Parties, then the Defaulting Party shall be deemed to have
accepted, with respect to each Acquiring Party, such Acquiring Party’s proposed
value as the Appraised Value.

o                                    ALTERNATIVE
NO. 2-2

a
majority in interest of the non-defaulting Parties (after excluding Affiliates
of the Defaulting Party) may, but shall not be obligated to, exercise such
Buy-Out Option by notice to the Defaulting Party and each non-defaulting Party
(the “Option Notice”).  If more than one non-defaulting Party elects
to exercise the Buy-Out Option, each electing non-defaulting Party
(collectively, the “Acquiring Parties”) shall
acquire a proportion of the Participating Interest of the Defaulting Party
equal to the ratio of its own Participating Interest to the total Participating
Interests of all Acquiring Parties and pay such proportion of the Appraised
Value (as defined below), unless they otherwise agree.  The Defaulting Party shall be obligated to
transfer, pursuant to Article 13.6, effective on the date of the Option Notice,
its Participating Interest to the Acquiring Parties in consideration of the
payment to the Defaulting Party of the Appraised Value.  In the Option Notice the Acquiring Parties
shall specify a value for the Defaulting Party’s Participating Interest.  Within five (5) Days of the Option

 50
 

 

 

Notice,
the Defaulting Party shall (i) notify the Acquiring Parties that it accepts the
value specified in the Option Notice (in which case such value is the “Appraised Value”); or (ii) refer the
Dispute to an independent expert pursuant to Article 18.3 for determination of
the value of its Participating Interest (in which case the value determined by
such expert shall be deemed the “Appraised Value”).  If the Defaulting Party fails to so notify
the Acquiring Parties, the Defaulting Party shall be deemed to have accepted
the Acquiring Parties’ value as the Appraised Value.

If the valuation of the
Defaulting Party’s Participating Interest is referred to an expert, such expert
shall determine the Appraised Value which shall be equal to the fair market
value of the Defaulting Party’s Participating Interest, less the following: (i)
the Total Amount in Default; (ii) all costs, including the costs of the expert,
to obtain such valuation; and (iii)     percent (  %)
of the fair market value of the Defaulting Party’s Participating Interest.

The Appraised Value shall
be paid to the Defaulting Party in four (4) installments, each equal to 25% of
the Appraised Value as follows:

(1)           the
first installment shall be due and payable to the Defaulting Party within
[15 Days] after the date on which the Defaulting Party’s Participating
Interest is effectively transferred to the Acquiring Parties (the “Transfer Date”);

(2)           the
second installment shall be due and payable to the Defaulting Party within [180
Days] after the Transfer Date;

(3)           the
third installment shall be due and payable to the Defaulting Party within [365
Days] after the Transfer Date; and

(4)           the
fourth installment shall be due and payable to the Defaulting Party within [545
Days] after the Transfer Date.

Check
Paragraph (E), if desired. Renumber following paragraphs if Paragraph (E) is
not selected.

o                                    OPTIONAL
PROVISION- Security Interest

(E)           In
addition to the other remedies available to the non-defaulting Parties under
this Article 8 and any other rights available to each non-defaulting Party
to recover its portion of the Total Amount in Default, in the event a
Defaulting Party fails to remedy its default within thirty (30) Days of the
Default Notice, the non-Defaulting Parties may elect to enforce a mortgage and
security interest on the Defaulting Party’s Participating Interest as set forth
below, subject to the Contract and the Laws / Regulations.

(1)           Each
Party grants to each of the other Parties, in pro rata shares based on their
relative Participating Interests, a mortgage and security interest on its
Participating Interest, whether now owned or hereafter acquired, together with all
products and proceeds derived from that Participating Interest (collectively,
the “Collateral”) as security for (i)
the payment of all amounts owing by such Party (including interest and costs of
collection) under this Agreement; and (ii) any Security which such Party
is required to provide under the Contract.

(2)           Should a
Defaulting Party fail to remedy its default by the thirtieth (30th) Day
following the date of the Default Notice, then, each non-defaulting Party shall
have the option, exercisable at any time thereafter during the Default Period,
to foreclose its mortgage and security interest against its prorata share of
the

 51
 

 

 

Collateral by any means permitted under the Contract
and the Laws / Regulations and to sell all or any part of that Collateral in
public or private sale after providing the Defaulting Party and other creditors
with any notice required by the Contract or the Laws / Regulations, and subject
to the provisions of Article 12.  
Except as may be prohibited by the Contract or the Laws / Regulations,
the non-defaulting Party that forecloses its mortgage and security interest
shall be entitled to become the purchaser of the Collateral sold and shall have
the right to credit toward the purchase price the amount to which it is
entitled under Article 8.4.   Any
deficiency in the amounts received by the foreclosing party shall remain a debt
due by the Defaulting Party.  The
foreclosure of mortgages and security interests by one non-defaulting Party
shall neither affect the amounts owed by the Defaulting Party to the other
non-defaulting Parties nor in any way limit the rights or remedies available to
them.  Each Party agrees that, should it
become a Defaulting Party, it waives the benefit of any appraisal, valuation,
stay, extension or redemption law and any other debtor protection law that
otherwise could be invoked to prevent or hinder the enforcement of the mortgage
and security interest granted above.

(3)           Each
Party agrees to execute such memoranda, financing statements and other
documents, and make such filings and registrations, as may be reasonably
necessary to perfect, validate and provide notice of the mortgages and security
interests granted by this Article 8.4(E).

(F)           For
purposes of [Articles 8.4(D) and 8.4(E), as elected], the Defaulting Party
shall, without delay following any request from the non-defaulting Parties, do
any act required to be done by the Laws / Regulations and any other applicable
laws in order to render the transfer of its Participating Interest legally
valid, including obtaining all governmental consents and approvals, and shall
execute any document and take such other actions as may be necessary in order
to effect a prompt and valid transfer. 
The Defaulting Party shall be obligated to promptly remove any liens and
encumbrances which may exist on its assigned Participating Interests.  In the event all Government approvals are not
timely obtained, the Defaulting Party shall hold the assigned Participating
Interest in trust for the non-defaulting Parties who are entitled to receive
it.  Each Party constitutes and appoints
each other Party its true and lawful attorney to execute such instruments and
make such filings and applications as may be necessary to make such transfer
legally effective and to obtain any necessary consents of the Government.  Actions under this power of attorney may be
taken by any Party individually without the joinder of the others.  This power of attorney is irrevocable for the
term of this Agreement and is coupled with an interest.  If requested, each Party shall execute a form
prescribed by the Operating Committee setting forth this power of attorney in
more detail.

(G)           The
non-defaulting Parties shall be entitled to recover from the Defaulting Party
all reasonable attorneys’ fees and all other reasonable costs sustained in the
collection of amounts owing by the Defaulting Party.

(H)          The rights
and remedies granted to the non-defaulting Parties in this Article 8 shall be
cumulative, not exclusive, and shall be in addition to any other rights and
remedies that may be available to the non-defaulting Parties, whether at law,
in equity or otherwise.  Each right and
remedy available to the non-defaulting Parties may be exercised from time to
time and so often and in such order as may be considered expedient by the
non-defaulting Parties in their sole discretion.

8.5                               Survival

The obligations of
the Defaulting Party and the rights of the non-defaulting Parties shall survive
the surrender of the Contract, abandonment of Joint Operations and termination
of this Agreement.

 52
 

 

 

8.6                               No
Right of Set Off

Each Party acknowledges
and accepts that a fundamental principle of this Agreement is that each Party
pays its Participating Interest share of all amounts due under this Agreement
as and when required.  Accordingly, any
Party which becomes a Defaulting Party undertakes that, in respect of either
any exercise by the non-defaulting Parties of any rights under or the
application of any of the provisions of this Article 8, such Party hereby
waives any right to raise by way of set off or invoke as a defense, whether in
law or equity, any failure by any other Party to pay amounts due and owing
under this Agreement or any alleged claim that such Party may have against
Operator or any Non-Operator, whether such claim arises under this Agreement or
otherwise.  Each Party further agrees
that the nature and the amount of the remedies granted to the non-defaulting
Parties hereunder are reasonable and appropriate in the circumstances.

ARTICLE 9

DISPOSITION OF PRODUCTION

9.1                               Right
and Obligation to Take in Kind

Except as otherwise provided in this Article 9 or in
Article 8, each Party shall have the right and obligation to own, take in kind
and separately dispose of its Entitlement.

9.2                               Disposition
of Crude Oil

Check one Alternative.

o                                    ALTERNATIVE
NO. 1

Crude Oil to be produced from an Exploitation Area shall be taken and disposed
of in accordance with the rules and procedures set forth in Exhibit D.

o                                    ALTERNATIVE
NO. 2

If Crude Oil is to
be produced from an Exploitation Area, the Parties shall in good faith, and not
less than three (3) months prior to the anticipated first delivery of Crude
Oil, as promptly notified by Operator, negotiate and conclude the terms of a
lifting agreement to cover the offtake of Crude Oil produced under the
Contract.  The lifting procedure shall be
based on the AIPN Model Form Lifting Procedure and shall contain all such terms
as may be negotiated and agreed by the Parties, consistent with the Development
Plan and subject to the terms of the Contract. 
The Government Oil & Gas Company may, if necessary and practicable,
also be party to the lifting agreement; if the Government Oil & Gas Company
is a party to the lifting agreement, then the Parties shall endeavor to obtain
its agreement to the principles set forth in this Article 9.2.  If a lifting agreement has not been entered
into by the date of first delivery of Crude Oil, the Parties shall nonetheless
be obligated to take and separately dispose of such Crude Oil as provided in
Article 9.1 and in addition shall be bound by the terms set forth in the AIPN
Model Form Lifting Procedure until a lifting agreement is executed by the
Parties.

o                                    ALTERNATIVE
NO. 3

If Crude Oil is to be produced from an Exploitation Area, the Parties shall in
good faith, and not less than three (3) months prior to the anticipated first
delivery of Crude Oil, as promptly notified by Operator, negotiate and conclude
the terms of a lifting agreement to cover the offtake of Crude Oil produced
under the Contract.  The Government Oil
& Gas Company may, if necessary and practicable, also be party to the
lifting agreement; if the Government Oil & Gas Company is party to the
lifting agreement, then the Parties shall endeavor to obtain its agreement to
the principles set forth in this Article 9.2.  The lifting agreement shall, to the extent
consistent with the Development Plan and subject to the terms of the Contract,
make provision for:

(a)           the
delivery point at which title and risk of loss of each Party’s Entitlement of
Crude Oil

 53
 

 

 

shall pass to such Party;

(b)           Operator’s
regular periodic advice to the Parties of estimates of total available
production for succeeding periods, quantities of each type and/or grade of
Crude Oil and each Party’s Entitlement for as far ahead as is necessary for
Operator and the Parties to plan lifting arrangements.  Such advice shall also cover, for each type
and/or grade of Crude Oil, the total available production and deliveries for
the preceding period, and overlifts and underlifts;

(c)           nomination
by the Parties to Operator of acceptance of their shares of total available
production for the succeeding period. 
Such nominations shall in any one period be for each Party’s entire
Entitlement of available production during that period, subject to operational
tolerances and agreed minimum economic cargo sizes or as the Parties may
otherwise agree;

(d)           timely
mitigation of the effects of overlifts and underlifts and any related
re-allocation of Cost Hydrocarbons and Profit Hydrocarbons;

(e)           if
offshore loading or a shore terminal for vessel loading is involved, risks
regarding acceptability of tankers, demurrage and (if applicable) availability
of berths;

(f)            distribution
to the Parties of available grades, gravities and qualities of Crude Oil to
ensure, to the extent Parties take delivery of their Entitlements as they
accrue, that each Party shall receive in each period Entitlements of grades,
gravities and qualities of Crude Oil from each Exploitation Area in which it
participates similar to the grades, gravities and qualities of Crude Oil
received by each other Party from that Exploitation Area in that period;

(g)           to
the extent that distribution of Entitlements on such basis is impracticable due
to availability of facilities and minimum cargo sizes, a method of making periodic
adjustments; and

(h)           the
right of the other Parties to sell an Entitlement which a Party fails to
nominate for acceptance pursuant to (c) above or of which a Party fails to take
delivery, in accordance with applicable agreed procedures, provided that such
failure either constitutes a breach of Operator’s or such Party’s obligations
under the terms of the Contract, or is likely to result in the curtailment or
shut-in of production.  Such sales shall
be made only to the limited extent necessary to avoid disruption in Joint
Operations.  Operator shall give all
Parties as much notice as is practicable of such situation and that a right of
sale option has arisen.  Any sale shall be
of the unnominated or undelivered Entitlement (as the case may be) and for reasonable
periods of time (in no event to exceed twelve (12) months).  Payment terms for production sold under this
option shall be established in the lifting agreement.

If a lifting agreement has not been entered into by
the date of first delivery of Crude Oil, the Parties shall nonetheless be
obligated to take and separately dispose of such Crude Oil as provided in
Article 9.1 and in addition shall be bound by the principles set forth in this
Article 9.2 until a lifting agreement is executed by the Parties.

x                                  ALTERNATIVE
NO. 4

The Parties shall in good faith, and not less than three (3) months prior to
the anticipated first delivery of Crude Oil, as promptly notified by Operator,
negotiate and endeavor to conclude the terms of a lifting agreement to cover the
offtake of Crude Oil produced under the Contract.

 54
 

 

 

9.3                               Disposition
of Natural Gas

Check one
Alternative.

o                                    ALTERNATIVE
NO. 1 (From Paragraph (A) to (B))

(A)          Natural
Gas to be produced from an Exploitation Area shall be taken and disposed of in
accordance with the rules and procedures set forth in this Article 9.3.  The Parties recognize that, in the event of
individual disposition of Natural Gas, imbalances may arise with the result
being that a Party will temporarily have disposed of more than its Participating
Interest share of production of Natural Gas. 
Accordingly, if Natural Gas is to be produced from an Exploitation Area,
the Parties shall, in good faith and no later than the date on which the
Development Plan for Natural Gas production is approved by the Operating
Committee, negotiate and conclude the terms of a balancing agreement to cover
the disposition of Natural Gas produced under the Contract, regardless of
whether all of the Parties have entered into a sales arrangement or sales
contract for their respective Entitlement of Natural Gas.  The Natural Gas balancing agreement shall,
subject to the terms of the Contract, make provision for:

(1)           the
right of a Party not in default to take delivery of Natural Gas (and to thereby
use all relevant facilities) in excess of its Participating Interest share of
production, subject to the right of an under-taking Party to take later
delivery of make-up Natural Gas; provided that, such make-up Natural Gas shall
in no month exceed          percent of
total Natural Gas production produced monthly from the Exploitation Area, and
further provided the such under-taking Party shall lose its right to such
make-up Natural Gas if it has not taken delivery of the make-up Natural Gas
within           
[months/years] after the excess Natural Gas was originally taken;

Check if desired.

o                                    OPTIONAL
PROVISION

and further provided that in the event any Party takes delivery of Natural
Gas in excess of its Participating Interest share of production, such
overproduction shall in no month exceed       
percent of such Party’s Participating Interest share of production;

(2)           balancing
of overproduction and underproduction on a gross calorific value basis,
determined by comparison of the Natural Gas taken by a Party with that Party’s
Participating Interest share of production for the period of time;

(3)           Natural
Gas taken by a Party being regarded as Natural Gas taken and owned exclusively
for its own account with title thereto being in such Party, regardless of
whether such Natural Gas is (i) attributable to such Party’s Participating
Interest share of production; (ii) taken as overproduction; or (iii) taken as
make-up for past underproduction;

(4)           unless
otherwise agreed, no agency relationship or other relationship of trust and
confidence being created between the Parties in regard to disposition of
Natural Gas;

(5)           unless
otherwise agreed, the delivery point (at which title and risk of loss of
Entitlements of Natural Gas shall pass to the Party taking delivery of such
Natural Gas) being the point where fiscal calculations are made consistent with
the Contract;

 55
 

 

 

(6)           each
Party’s provision to Operator of such information respecting such Party’s
arrangements for the disposition of its Entitlement of Natural Gas production
as Operator may reasonably require in order to conduct Joint Operations in
accordance with Article 4.2;

(7)           each
Party’s regular periodic nominations to Operator of the amount of such Party’s
Entitlement of total available Natural Gas production which it wishes to accept
during a defined future period, along with Operator’s regular periodic advice
to the Parties of estimates of total Natural Gas production (as reasonably in
advance as practicable in order to assist the Parties to plan Natural Gas
disposition arrangements); provided, however, that the Parties recognize that
Operator’s estimates may vary from the actual Natural Gas volumes produced and
that the Parties may rely upon any such information at their own risk; and

(8)           the
allocation of Cost Hydrocarbons and Profit Hydrocarbons in relation to such
individual Natural Gas disposition.

If such balancing
agreement has not been entered into by the date of first delivery of Natural
Gas, the Parties shall nonetheless be bound by the principles set forth in this
Article 9.3(A) until a Natural Gas balancing agreement has been entered into
between the Parties in accordance with this Agreement.

(B)           Unless
prohibited by the Laws / Regulations, the Parties may, by unanimous execution
of a multiparty Natural Gas disposition agreement, agree to dispose of Natural
Gas produced under the Contract on a multiparty basis to a common purchaser or
purchasers.  The multiparty Natural Gas
disposition agreement shall, subject to the Contract, make provision for:

(1)           the
terms of sale or disposition of Natural Gas on a multiparty basis;

(2)           the
Parties’ rights and obligations with respect to the disposition of Natural Gas
on a multiparty basis, including the extent to which Operator is designated as
the Parties’ authorized representative for the purpose of conducting marketing
studies, designing and constructing necessary facilities, investigating
financing opportunities, and negotiating sales agreements;

(3)           the
managerial structure for making decisions governing the multiparty disposal
venture;

(4)           the
scope and duration of the multiparty disposal venture;

(5)           the
extent, if any, to which the costs of the multiparty disposal venture are
chargeable to the Joint Account;

(6)           the
obligation of the Parties to participate in all Natural Gas infrastructure
necessary for such multiparty Natural Gas disposal, and the multiparty
disposition venture governing only such Natural Gas infrastructure as is
necessary to deliver Natural Gas to the point where fiscal calculations are
made for the purposes of the Contract;

(7)           the
extent to which a Party shall have, or shall be permitted to hold itself out as
having, the authority to create any obligation on behalf of the multiparty
disposal venture;

(8)           confirmation
that the relationship among the Parties shall be contractual only

 56
 

 

 

and shall not be
construed as creating a partnership or other recognized association;

(9)           confirmation
that formation of the multiparty disposal venture shall not create any rights
in any persons not a party thereto; and

(10)         the
allocation of Cost Hydrocarbons and Profit Hydrocarbons in relation to the
multiparty Natural Gas disposal.

x                                  ALTERNATIVE
NO. 2

The Parties recognize that if Natural Gas is discovered it may be necessary
for the Parties to enter into special arrangements for the disposal of the
Natural Gas, which are consistent with the Development Plan and subject to the
terms of the Contract.

9.4                               Principles
of Natural Gas Agreement(s) with the Government

(A)          The
Government Oil & Gas Company may, if necessary and practicable, also be
party to the balancing agreement under Article 9.3(A) and/or the multiparty
disposition venture under Article 9.3(B). 
If the Government Oil & Gas Company is party to the balancing
agreement, then the Parties shall endeavor to obtain its agreement to the
principles set forth in Article 9.3(A). 
Furthermore, if the Government Oil & Gas Company is party to the
multiparty disposition venture, then the Parties shall endeavor to obtain its
agreement to the principles set forth in Article 9.3(B).

(B)           In addition,
the Parties shall endeavor to include in the Contract, and in any other
agreement with the Government Oil & Gas Company in relation to the
disposition of Natural Gas, the following principles:

(1)           assured
access to a fair share of the available Natural Gas market, including suitable
assurances for Government controlled sales;

(2)           the right
to market Natural Gas, including purchase of the Government’s share, to the
highest value outlets (domestic or export) and the right to export the Parties’
Entitlements of Natural Gas;

(3)           a minimum
contractual term which provides a reasonable period to develop a Natural Gas
market and enables Natural Gas reserves to be produced for their full economic
life; and

(4)           assured
access to infrastructure for the purposes of processing and/or transporting
Natural Gas at a competitive tariff.

ARTICLE 10

ABANDONMENT

10.1                        Abandonment
of Wells Drilled as Joint Operations

(A)          A decision
to plug and abandon any well which has been drilled as a Joint Operation shall
require the approval of the Operating Committee.

(B)           Should any
Party fail to reply within the period prescribed in Article 5.12(A)(1) or
Article 5.12(A)(2), whichever is applicable, after delivery of notice of
Operator’s proposal to plug and abandon such well, such Party shall be deemed
to have consented to the proposed abandonment.

(C)           If the
Operating Committee approves a decision to plug and abandon an Exploration Well
or Appraisal Well, subject to the Laws / Regulations, any Party voting against
such decision may

 57
 

 

 

propose (within the time periods allowed by
Article 5.13(A)) to conduct an alternate Exclusive Operation in the
wellbore.  If no Exclusive Operation is
timely proposed, or if an Exclusive Operation is timely proposed but is not
commenced within the applicable time periods under Article 7.2, such well shall
be plugged and abandoned.

(D)          Any well
plugged and abandoned under this Agreement shall be plugged and abandoned in
accordance with the Laws / Regulations and at the cost, risk and expense of the
Parties who participated in the cost of drilling such well.

Check Paragraph (E), if desired.

x                                  OPTIONAL
PROVISION

(E)           Notwithstanding
anything to the contrary in this Article 10.1:

(1)           If
the Operating Committee approves a decision to plug and abandon a well from
which Hydrocarbons have been produced and sold, subject to the Laws /
Regulations, any Party voting against the decision may propose (within five (5)
Days after the time specified in Article 5.6, Article 5.12(A)(1) or Article
5.12(A)(2), whichever is applicable, has expired) to take over the entire well
as an Exclusive Operation.  Any Party
originally participating in the well shall be entitled to participate in the
operation of the well as an Exclusive Operation by response notice within ten
(10) Days after receipt of the notice proposing the Exclusive Operation.

Check one
Alternative.

o                                    ALTERNATIVE
NO. 1

In such event, the Consenting Parties shall be entitled to continue
producing only from the Zone open to production at the time they assumed
responsibility for the well and shall not be entitled to drill a substitute
well in the event that the well taken over becomes impaired or fails.

x                                  ALTERNATIVE
NO. 2

In such event, the Consenting Parties shall be entitled to conduct an
Exclusive Operation in the well; provided that the proposed operation may not
be in the same Zone from which production was previously obtained nor be in a
Zone which is produced by any other Joint Operation wells.

(2)           Each
Non-Consenting Party shall be deemed to have relinquished free of cost to the
Consenting Parties in proportion to their Participating Interests all of its
interest in the wellbore of a produced well and related equipment in accordance
with Article 7.4(B).  The Consenting
Parties shall thereafter bear all cost and liability of plugging and abandoning
such well in accordance with the Laws / Regulations, to the extent the Parties
are or become obligated to contribute to such costs and liabilities, and shall
indemnify the Non-Consenting Parties against all such costs and liabilities.

(3)           Subject
to Article 7.12(F), Operator shall continue to operate a produced well for the
account of the Consenting Parties at the rates and charges contemplated by this
Agreement, plus any additional cost and charges which may arise as the result
of the separate allocation of interest in such well.

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10.2                        Abandonment
of Exclusive Operations

This Article 10 shall apply mutatis
mutandis to the abandonment of an Exclusive Well or any well in
which an Exclusive Operation has been conducted (in which event all Parties
having the right to conduct further operations in such well shall be notified
and have the opportunity to conduct Exclusive Operations in the well in
accordance with the provisions of this Article 10).

Check Article 10.3, if desired.

o                                    OPTIONAL
PROVISION

10.3                        Abandonment
Security

If under the Contract or
the Laws / Regulations, the Parties are or become obliged to pay or contribute
to the cost of ceasing operations, then during preparation of a Development
Plan, the Parties shall negotiate a security agreement, which shall be
completed and executed by all Parties participating in such Development Plan
prior to application for an Exploitation Area. 
The security agreement shall incorporate the following principles:

(A)          a
Security shall be provided by each such Party for each Calendar Year commencing
with the Calendar Year in which the Discounted Net Value
equals     percent (    %) of the
Discounted Net Cost; and

(B)           the
amount of the Security required to be provided by each such Party in any
Calendar Year (including any security previously provided which will still be
current throughout such Calendar Year) shall be equal to the amount by which
     percent (    %) of the Discounted
Net Cost exceeds the Discounted Net Value.

“Discounted
Net Cost” means that portion of each Party’s anticipated
before tax cost of ceasing operations in accordance with the Laws / Regulations
which remains after deduction of salvage value. 
Such portion should be calculated at the anticipated time of ceasing operations
and discounted at the Discount Rate to December 31 of the Calendar Year in
question.

“Discounted
Net Value” means the value of each Party’s estimated
Entitlement which remains after payment of estimated liabilities and expenses
required to win, save and transport such production to the delivery point and
after deduction of estimated applicable taxes, royalties, imposts and levies on
such production.  Such Entitlement shall
be calculated using estimated market prices and including taxes on income, discounted
at the Discount Rate to December 31 of the Calendar Year in question.  No account shall be taken of tax allowances
expected to be available in respect of the costs of ceasing operations.

“Discount
Rate” means the rate per annum equal to the one (1) month
term, London Interbank Offered Rate (LIBOR rate) for U.S. dollar deposits
applicable to the date falling thirty (30) Business Days prior to the start of
a Calendar Year as published in London by the Financial Times or if not
published then by The Wall Street Journal.

ARTICLE
11

SURRENDER, EXTENSIONS AND RENEWALS

11.1                        Surrender

(A)          If
the Contract requires the Parties to surrender any portion of the Contract
Area, Operator shall advise the Operating Committee of such requirement at
least one hundred and twenty (120) Days in advance of the earlier of the date
for filing irrevocable notice of such surrender or the date of such
surrender.  Prior to the end of such
period, the Operating Committee shall determine pursuant

 59
 

 

 

to Article 5 the
size and shape of the surrendered area, consistent with the requirements of the
Contract.  If a sufficient vote of the
Operating Committee cannot be attained, then the proposal supported by a simple
majority of the Participating Interests shall be adopted.  If no proposal attains the support of a
simple majority of the Participating Interests, then the proposal receiving the
largest aggregate Participating Interest vote shall be adopted.  In the event of a tie, Operator shall choose
among the proposals receiving the largest aggregate Participating Interest
vote.  The Parties shall execute any and
all documents and take such other actions as may be necessary to effect the
surrender.  Each Party renounces all
claims and causes of action against Operator and any other Parties on account
of any area surrendered in accordance with the foregoing but against its
recommendation if Hydrocarbons are subsequently discovered under the
surrendered area.

(B)           A
surrender of all or any part of the Contract Area which is not required by the
Contract shall require the unanimous consent of the Parties.

11.2                        Extension
of the Term

(A)          A proposal
by any Party to enter into or extend the term of any Exploration or
Exploitation Period or any phase of the Contract, or a proposal to extend the
term of the Contract, shall be brought before the Operating Committee pursuant
to Article 5.

(B)           Any Party
shall have the right to enter into or extend the term of any Exploration or
Exploitation Period or any phase of the Contract or to extend the term of the Contract,
regardless of the level of support in the Operating Committee.  If any Party takes such action, any Party not
wishing to extend shall have a right to withdraw, subject to the requirements
of Article 13.

ARTICLE
12

TRANSFER OF INTEREST OR RIGHTS AND CHANGES IN CONTROL

12.1                        Obligations

(A)          Subject
to the requirements of the Contract,

(i)            any
Transfer (except Transfers pursuant to Article 7, Article 8 or Article 13)
shall be effective only if it satisfies the terms and conditions of Article
12.2; and

(ii)           a
Party subject to a Change in Control must satisfy the terms and conditions of
Article 12.3.

Should a Transfer subject
to this Article or a Change in Control occur without satisfaction (in all
material respects) by the transferor or the Party subject to the Change in
Control, as applicable, of the requirements hereof, then:

Check one
Alternative.

x                                  ALTERNATIVE
NO. 1

each other Party shall be
entitled to enforce specific performance of the terms of this Article, in
addition to any other remedies (including damages) to which it may be
entitled.  Each Party agrees that
monetary damages alone would not be an adequate remedy for the breach of any
Party’s obligations under this Article.

o                                    ALTERNATIVE
NO. 2

the
transferor or Party subject to the Change in Control shall pay to the other
Parties in proportion to their Participating Interests, as their exclusive
remedy, liquidated damages in an amount equal to      
percent (   %) of the Cash Value of the Participating Interest
that is the subject of the Transfer or Change in Control.  The Parties agree that it

 60
 

 

 

would
be difficult if not impossible to determine accurately the actual amount of
damages suffered by the other Parties as a result of the failure to comply with
the terms of this Article 12 and that these liquidated damages constitute a
reasonable approximation of the damages that would be suffered by such other
Parties.

(B)           For
purposes of this Agreement:

“Cash
Transfer” means any Transfer where the sole consideration
(other than the assumption of obligations relating to the transferred
Participating Interest) takes the form of cash, cash equivalents, promissory
notes or retained interests (such as production payments) in the Participating
Interest being transferred; and

“Cash
Value” means

Check one Alternative.

x                                  ALTERNATIVE
NO. 1

the portion of the total monetary value (expressed in U.S. dollars) of the
consideration being offered by the proposed transferee (including any cash,
other assets, and tax savings to the transferor from a non-cash deal) that reasonably
should be allocated to the Participating Interest subject to the proposed
Transfer or Change in Control.

o                                    ALTERNATIVE
NO. 2

the market value (expressed in U.S. dollars) of the Participating Interest
subject to the proposed Transfer or Change in Control, based upon the amount in
cash a willing buyer would pay a willing seller in an arm’s length transaction.

“Change
in Control” means any direct or indirect change in
Control of a Party (whether through merger, sale of shares or other equity
interests, or otherwise) through a single transaction or series of related
transactions, from one or more transferors to one or more transferees, in which
the market value of the Party’s Participating Interest represents more than
sixty five percent (65%) of the aggregate market value of the assets of such
Party and its Affiliates that are subject to the change in Control.   For the purposes of this definition, market
value shall be determined based upon the amount in cash a willing buyer would
pay a willing seller in an arm’s length transaction.

“Encumbrance”
means a mortgage, lien, pledge, charge or other encumbrance.  “Encumber” and
other derivatives shall be construed accordingly.

“Transfer”
means any sale, assignment, Encumbrance or other disposition by a Party of any
rights or obligations derived from the Contract or this Agreement (including
its Participating Interest), other than its Entitlement and its rights to any
credits, refunds or payments under this Agreement, and excluding any direct or
indirect change in Control of a Party.

12.2.                     Transfer

(A)          Except in
the case of a Party transferring all of its Participating Interest, no Transfer
shall be made by any Party which results in the transferor or the transferee
holding a Participating Interest of less than five percent (5%) or any interest
other than a Participating Interest in the Contract and this Agreement.

(B)           Subject to
the terms of Articles 4.9 and 4.10, the Party serving as Operator shall
remain Operator following Transfer of a portion of its Participating
Interest.  In the event of a Transfer of
all of its Participating Interest, except to an Affiliate, the Party serving as
Operator shall be deemed to have resigned as Operator, effective on the date
the Transfer becomes effective under this Article 12, in

 61
 

 

 

which event a successor Operator shall be appointed in
accordance with Article 4.11.  If
Operator transfers all of its Participating Interest to an Affiliate, that
Affiliate shall automatically become the successor Operator, provided that the
transferring Operator shall remain liable for its Affiliate’s performance of
its obligations.

(C)           Both the
transferee, and, notwithstanding the Transfer, the transferring Party, shall be
liable to the other Parties for the transferring Party’s Participating Interest
share of any obligations (financial or otherwise) which have vested, matured or
accrued under the provisions of the Contract or this Agreement prior to such
Transfer.  Such obligations, shall
include any proposed expenditure approved by the Operating Committee prior to
the transferring Party notifying the other Parties of its proposed Transfer

Check one alternative

o                                    ALTERNATIVE
NO. 1

and shall also include

x                                  ALTERNATIVE
NO. 2

but shall not include

costs of plugging and abandoning wells or portions of wells
and decommissioning facilities in which the transferring Party participated (or
with respect to which it was required to bear a share of the costs pursuant to
this sentence) to the extent such costs are payable by the Parties under the
Contract.

(D)          A
transferee shall have no rights in the Contract or this Agreement (except any
notice and cure rights or similar rights that may be provided to a Lien Holder
(as defined in Article 12.2(E)) by separate instrument signed by all Parties)
unless and until:

(1)           it
expressly undertakes in an instrument reasonably satisfactory to the other
Parties to perform the obligations of the transferor under the Contract and
this Agreement in respect of the Participating Interest being transferred and
obtains any necessary Government approval for the Transfer and furnishes any
guarantees required by the Government or the Contract on or before the
applicable deadlines; and

(2)           except
in the case of a Transfer to an Affiliate, each Party has consented in writing
to such Transfer, which consent shall not be unreasonably denied.

No consent shall be
required under this Article 12.2(D)(2) for a Transfer to an Affiliate if the
transferring Party agrees in an instrument reasonably satisfactory to the other
Parties to remain liable for its Affiliate’s performance of its obligations.

(E)           Nothing
contained in this Article 12 shall prevent a Party from Encumbering all or any
undivided share of its Participating Interest to a third party (a “Lien  Holder”)
for the purpose of security relating to finance, provided that:

(1)           such
Party shall remain liable for all obligations relating to such interest;

(2)           the
Encumbrance shall be subject to any necessary approval of the Government and be
expressly subordinated to the rights of the other Parties under this Agreement;

(3)           such
Party shall ensure that any Encumbrance shall be expressed to be without
prejudice to the provisions of this Agreement; [and]

Check paragraph (4), if desired.

 62
 

 

 

o                                    OPTIONAL
PROVISION

(4)           the
Lien Holder shall first enter into and deliver a subordination agreement in
favor of the other Parties, substantially in the form attached to this
Agreement as Exhibit    . [NOTE: If possible, the
Parties should agree in advance to the form of such subordination agreement and
attach such form as an Exhibit to this Agreement ]

Check one Optional Alternative
for Paragraph (F), if desired.

o                                    OPTIONAL
ALTERNATIVE NO. 1 - Preemptive Rights

(F)           Any
Transfer of all or a portion of a Party’s Participating Interest, other than a
Transfer to an Affiliate or the granting of an Encumbrance as provided in
Article 12.2(E), shall be subject to the following procedure.

(1)           Once
the final terms and conditions of a Transfer have been fully negotiated, the
transferor shall disclose all such final terms and conditions as are relevant
to the acquisition of the Participating Interest (and, if applicable, the
determination of the Cash Value of the Participating Interest) in a notice to
the other Parties, which notice shall be accompanied by a copy of all instruments
or relevant portions of instruments establishing such terms and
conditions.  Each other Party shall have
the right to acquire the Participating Interest subject to the proposed
Transfer from the transferor on the terms and conditions described in Article 12.2(F)(3)
if, within thirty (30) Days of the transferor’s notice, such Party delivers to
all other Parties a counter-notification that it accepts such terms and
conditions without reservations or conditions (subject to Articles 12.2(F)(3)
and 12.2(F)(4), where applicable).  If no
Party delivers such counter-notification, the Transfer to the proposed
transferee may be made, subject to the other provisions of this
Article 12, under terms and conditions no more favorable to the transferee
than those set forth in the notice to the Parties, provided that the Transfer
shall be concluded within one hundred eighty (180) Days from the date of the
notice plus such additional period as may be required to secure governmental
approvals.  No Party shall have a right under
this Article 12.2(F) to acquire any asset other than a Participating
Interest, nor may any Party be required to acquire any asset other than a
Participating Interest, regardless of whether other properties are included in
the Transfer.

(2)           If
more than one Party counter-notifies that it intends to acquire the
Participating Interest subject to the proposed Transfer, then each such Party
shall acquire a proportion of the Participating Interest to be transferred
equal to the ratio of its own Participating Interest to the total Participating
Interests of all the counter-notifying Parties, unless the counter-notifying
Parties otherwise agree.

(3)           In
the event of a Cash Transfer that does not involve other properties as part of
a wider transaction, each other Party shall have a right to acquire the
Participating Interest subject to the proposed Transfer on the same final terms
and conditions as were negotiated with the proposed transferee.  In the event of a Transfer that is not a Cash
Transfer or involves other properties included in a wider transaction (package
deal), the transferor shall include in its notification to the other Parties a
statement of the Cash Value of the Participating Interest subject to the
proposed Transfer, and each other Party shall have a right to acquire such
Participating Interest on the same final terms and conditions as were
negotiated with the proposed transferee except that it shall pay the Cash Value
in immediately available funds at the closing of the Transfer in lieu of the consideration
payable in the third party offer, and the terms and conditions of the
applicable instruments shall be modified as necessary to reflect the

 63
 

 

 

acquisition of a
Participating Interest for cash.  In the
case of a package sale, no Party may acquire the Participating Interest subject
to the proposed package sale unless and until the completion of the wider
transaction (as modified by the exclusion of properties subject to preemptive
rights or excluded for other reasons) with the package sale transferee.  If for any reason the package sale terminates
without completion, the other Parties’ rights to acquire the Participating
Interest subject to the proposed package sale shall also terminate.

(4)           For
purposes of Article 12.2(F)(3), the Cash Value proposed by the transferor
in its notice shall be conclusively deemed correct unless any Party (each a “Disagreeing Party”) gives notice to
the transferor with a copy to the other Parties within ten (10) Days of receipt
of the transferor’s notice stating that it does not agree with the transferor’s
statement of the Cash Value, stating the Cash Value it believes is correct, and
providing any supporting information that it believes is helpful.  In such event, the transferor and the
Disagreeing Parties shall have fifteen (15) Days in which to attempt to
negotiate an agreement on the applicable Cash Value.  If no agreement has been reached by the end
of such fifteen (15) Day period, either the transferor or any Disagreeing Party
shall be entitled to refer the matter to an independent expert as provided in
Article 18.3 for determination of the Cash Value.

(5)           If
the determination of the Cash Value is referred to an independent expert and
the value submitted by the transferor is no more than five percent (5%) above
the Cash Value determined by the independent expert, the transferor’s value
shall be used for the Cash Value and the Disagreeing Parties shall pay all
costs of the expert.  If the value
submitted by the transferor is more than five percent (5%) above the Cash Value
determined by the independent expert, the independent expert’s value shall be
used for the Cash Value and the transferor shall pay all costs of the
expert.  Subject to the independent
expert’s value being final and binding in accordance with Article 18.3, the
Cash Value determined by the procedure shall be final and binding on all
Parties.

(6)           Once
the Cash Value is determined under Article 12.2(F)(5), Operator shall
provide notice of such Cash Value to all Parties and

Check one Alternative.

o                                    ALTERNATIVE
NO. 1

the transferor shall be obligated to sell and the Parties which provided notice
of their intention to purchase the transferor’s Participating Interest pursuant
to Article 12.2(F)(1) shall be obligated to buy the Participating Interest at
said value.

o                                    ALTERNATIVE
NO. 2

if the Cash Value that was submitted to the independent expert by the
transferor is more than five percent (5%) above the Cash Value determined by
the independent expert, the transferor may elect to terminate its proposed
Transfer by notice to all other Parties within five (5) Days after notice to
the Parties of the final Cash Value. 
Similarly, if the Cash Value that was determined by the independent
expert is more than five percent (5%) above the Cash Value submitted to the
independent expert by a Disagreeing Party (or, in the case of a Party

 64
 

 

 

that
is not a Disagreeing Party, is more than five percent (5%) above the Cash Value
originally proposed by the transferor), such Party may elect to revoke its
notice of intention to purchase the transferor’s Participating Interest
pursuant to Article 12.2(F)(1).  If the
transferor does not properly terminate the proposed Transfer and one or more
Parties which provided notices of their intention to purchase the transferor’s
Participating Interest pursuant to Article 12.2(F)(1) have not properly revoked
their notices of such intention, then the transferor shall be obligated to sell
and such Parties shall be obligated to buy the Participating Interest at the
Cash Value as determined in accordance with Article 12.2(F)(5).  If all Parties which provided notice of their
intention to purchase the transferor’s Participating Interest pursuant to
Article 12.2(F)(1) properly revoke their notices of such intention, the
transferor shall be free to sell the interest to the third party at the
determined Cash Value or a higher value and under conditions not more favorable
to the transferee than those set forth in the notice of Transfer sent by the
transferor to the other Parties, provided that the Transfer shall be concluded
within one hundred eighty (180) Days from the date of the determination plus
such additional period as may be required to secure governmental approvals.

o                                    OPTIONAL
ALTERNATIVE NO. 2 - Right of First Negotiation

(F)           Any
Transfer (other than a Transfer to an Affiliate and the granting of an
Encumbrance as provided in Article 12.2(E)) shall be subject to the following
procedure.

(1)           In
the event that a Party wishes to transfer any part or all of its Participating
Interest, prior to the transferor entering into a written agreement providing
for such a Transfer (whether or not such agreement is binding) the transferor
shall send the other Parties notice of its intention and invite them to submit
offers for the Participating Interest subject to the Transfer.  The other Parties shall have thirty (30) Days
from the date of such notification to deliver a counter-notification with a
binding offer in accordance with Article 12.2(F)(3).  If the transferor notifies the offering Party
or Parties that the binding offer presents an acceptable basis for negotiating
a Transfer agreement, the transferor and that offering Party or Parties shall
have the next sixty (60) Days in which to negotiate in good faith and execute
the terms and conditions of a mutually acceptable Transfer agreement.  If the transferor does not find that any
Party’s offer presents an acceptable basis for negotiating a Transfer
agreement, or if the above sixty (60) Days elapse and the transferor in its
sole discretion believes that a fully negotiated agreement based on the offer
deemed acceptable by the transferor with all offering Parties is not imminent,
the transferor shall be entitled for a period of one hundred eighty (180) Days
from the expiration of the thirty (30) Day offer period or the sixty (60) Day
negotiation period, respectively, plus such additional period as may be
necessary to secure governmental approvals, to Transfer all or such portion of
its Participating Interest to a third party, subject to the obligations set
forth in this Article 12,

Check if
desired.

o                                    OPTIONAL
PROVISION

provided that the
terms and conditions of any such Transfer must be more favorable to the
transferor than the best terms and conditions offered by any Party.

(2)           If
more than one Party counter-notifies the transferor that it intends to acquire

 65
 

 

 

the Participating
Interest subject to the proposed Transfer, then each such Party shall acquire a
proportion of the Participating Interest to be transferred equal to the ratio
of its own Participating Interest to the total Participating Interests of all
the counter-notifying Parties, unless the counter-notifying Parties otherwise
agree.

(3)           All
Parties desiring to give such a counter-notice shall meet to formulate a joint
offer.  Each such Party shall make known
to the other Parties the highest price or value that it is willing to offer to
the transferor.  The proposal with the
highest price or value shall be offered to the transferor as the joint proposal
of the Parties still willing to participate in such offer under the provisions
of Article 12.2(F)(1) above.

Check
Paragraph (G), if desired, in conjunction with Paragraph (F).

o                                    OPTIONAL
PROVISION

(G)           Notwithstanding
anything to the contrary contained therein, the terms of Article 12.2(F)
shall only apply to Cash Transfers and shall not apply to Transfers that are
not Cash Transfers.

12.3                        Change
in Control

(A)          A Party
subject to a Change in Control shall obtain any necessary Government approval
with respect to the Change in Control and furnish any replacement Security required
by the Government or the Contract on or before the applicable deadlines.

Check
Paragraph (B), if desired. Renumber following paragraphs if Paragraph (B) is
not selected.

o                                    OPTIONAL
PROVISION

(B)           A
Party subject to a Change in Control shall provide evidence reasonably
satisfactory to the other Parties that following the Change in Control such
Party shall continue to have the financial capability to satisfy its payment
obligations under the Contract and this Agreement.  Should the Party that is subject to the
Change in Control fail to provide such evidence, any other Party, by notice to
such Party, may require such Party to provide Security satisfactory to the
other Parties with respect to its Participating Interest share of any
obligations or liabilities which the Parties may reasonably be expected to
incur under the Contract and this Agreement during the then-current Exploration
or Exploitation Period or phase of the Contract.

Check one Optional Alternative
for Paragraph (C), if desired.

o                                    OPTIONAL
ALTERNATIVE NO. 1 - Preemptive Rights

(C)           Any
Change in Control of a Party, other than one which results in ongoing Control
by an Affiliate, shall be subject to the following procedure.  For purposes of this Article 12.3, the term “acquired Party” shall refer
to the Party that is subject to a Change in Control and the term “acquiror” shall refer to the
Party or third party proposing to acquire Control in a Change in Control.

(1)           Once
the final terms and conditions of a Change in Control have been fully negotiated,
the acquired Party shall disclose all such final terms and conditions as are
relevant to the acquisition of such Party’s Participating Interest and the
determination of the Cash Value of that Participating Interest in a notice to
the other Parties, which notice shall be accompanied by a copy of all
instruments or

 66
 

 

 

relevant
portions of instruments establishing such terms and conditions.  Each other Party shall have the right to
acquire the acquired Party’s Participating Interest on the terms and conditions
described in Article 12.3(C)(3) if, within thirty (30) Days of the
acquired Party’s notice, such Party delivers to all other Parties a
counter-notification that it accepts such terms and conditions without
reservations or conditions (subject to Articles 12.3(C)(3) and 12.3(C)(4),
where applicable).  If no Party delivers
such counter-notification, the Change in Control may proceed without further
notice, subject to the other provisions of this Article 12, under terms
and conditions no more favorable to the acquiror than those set forth in the
notice to the Parties, provided that the Change in Control shall be concluded
within one hundred eighty (180) Days from the date of the notice plus such
additional period as may be required to secure governmental approvals.  No Party shall have a right under this
Article 12.3(C) to acquire any asset other than a Participating Interest,
nor may any Party be required to acquire any asset other than a Participating
Interest, regardless of whether other properties are subject to the Change in
Control.

(2)           If
more than one Party counter-notifies that it intends to acquire the
Participating Interest subject to the proposed Change in Control, then each
such Party shall acquire a proportion of that Participating Interest equal to
the ratio of its own Participating Interest to the total Participating
Interests of all the counter-notifying Parties, unless the counter-notifying
Parties otherwise agree.

(3)           The
acquired Party shall include in its notification to the other Parties a
statement of the Cash Value of the Participating Interest subject to the
proposed Change in Control, and each other Party shall have a right to acquire
such Participating Interest for the Cash Value, on the final terms and
conditions negotiated with the proposed acquiror that are relevant to the
acquisition of a Participating Interest for cash.  No Party may acquire the acquired Party’s
Participating Interest pursuant to this Article 12.3(C) unless and until
completion of the Change in Control.  If
for any reason the Change in Control agreement terminates without completion,
the other Parties’ rights to acquire the Participating Interest subject to the
proposed Change in Control shall also terminate.

(4)           For
purposes of Article 12.3(C)(3), the Cash Value proposed by the acquired
Party in its notice shall be conclusively deemed correct unless any Party (each
a “Disagreeing Party”)
gives notice to the acquired Party with a copy to the other Parties within ten
(10) Days of receipt of the acquired Party’s notice stating that it does not
agree with the acquired Party’s statement of the Cash Value, stating the Cash
Value it believes is correct, and providing any supporting information that it
believes is helpful.  In such event, the
acquired Party and the Disagreeing Parties shall have fifteen (15) Days in
which to attempt to negotiate an agreement on the applicable Cash Value.  If no agreement has been reached by the end
of such fifteen (15) Day period, either the acquired Party or any Disagreeing
Party shall be entitled to refer the matter to an independent expert as
provided in Article 18.3 for determination of the Cash Value.

(5)           If
the determination of Cash Value is referred to an independent expert, and the
value submitted by the acquired Party is no more than five percent (5%) above
the Cash Value determined by the independent expert, the acquired Party’s value
shall be used for the Cash Value and the Disagreeing Parties shall pay all
costs of the expert.  If the value
submitted by the acquired Party is more than five percent (5%) above the Cash
Value determined by the independent expert, the independent expert’s value shall
be used for the Cash Value and the acquired Party shall pay all costs of the
expert.  Subject to the independent
expert’s value

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being
final and binding in accordance with Article 18.3, the Cash Value determined by
the procedure shall be final and binding on all Parties.

(6)           Once
the Cash Value is determined under Article 12.3(C)(4), Operator shall
provide notice of such Cash Value to all Parties and

Check one Alternative.

o                                    ALTERNATIVE
NO. 1

the acquired Party shall be obligated to sell and the Parties which provided
notice of their intention to purchase the acquired Party’s Participating
Interest pursuant to Article 12.3(C)(1) shall be obligated to buy the
Participating Interest at said value.

o                                    ALTERNATIVE
NO. 2

if the Cash Value that was submitted by the acquired Party to the independent
expert is more than five percent (5%) above the Cash Value determined by the
independent expert, the acquired Party and its Affiliates may elect to
terminate the proposed Change in Control by notice to all other Parties within
five (5) Days after notice to the Parties of the final Cash Value. Similarly,
if the Cash Value that was determined by the independent expert is more than
five percent (5%) above the Cash Value submitted to the independent expert by a
Disagreeing Party (or, in the case of a Party that is not a Disagreeing Party,
is more than five percent (5%) above the Cash Value originally proposed by the
acquiror), such Party may elect to revoke its notice of intention to purchase
the acquired Party’s Participating Interest pursuant to Article
12.3(C)(1).  If the acquired Party and
its Affiliates do not properly terminate the proposed Change in Control and one
or more Parties which provided notices of their intention to purchase the
acquired Party’s Participating Interest pursuant to Article 12.3(C)(1) have not
properly revoked their notices of such intention, then the acquired Party shall
be obligated to sell and such Parties shall be obligated to buy the
Participating Interest at the Cash Value as determined in accordance with
Article 12.3(C)(5).  If all Parties which
provided notice of their intention to purchase the acquired Party’s
Participating Interest pursuant to Article 12.3(C)(1) properly revoke their
notices of such intention, the Change in Control may proceed without further
notice, under terms and conditions no more favorable to the acquiror than those
in effect at the time of the determination, provided that the Change in Control
shall be concluded within one hundred eighty (180) Days from the date of the
determination plus such additional period as may be required to secure
governmental approvals.

o                                    OPTIONAL
ALTERNATIVE NO. 2 - Right of First Negotiation

(C)           Any
Change in Control of a Party, other than to an Affiliate, shall be subject to
the following procedure.  For purposes of
this 12.3, the term “acquired
Party” shall refer to the Party that is subject to the
Change in Control.

(1)           In
the event that the Affiliates of a Party wish to enter into a transaction that
will result in a Change in Control of the Party, prior to such Affiliates
entering into a written agreement (whether or not such agreement is binding)
the acquired Party shall send the other Parties notice of its Affiliates’
intention and invite them to submit offers for the Participating Interest
subject to the Change in Control.  The
other Parties shall have thirty (30) Days from the date of such notification to

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deliver
a counter-notification with a binding offer in accordance with
Article 12.3(C)(3).  If the acquired
Party notifies an offering Party or Parties that their binding offer presents
an acceptable basis for negotiating a transfer agreement, the acquired Party
and the offering Party or Parties shall have the next sixty (60) Days in which
to negotiate in good faith and execute the terms and conditions of a mutually
acceptable transfer agreement.  If the
acquired Party does not find that any Party’s offer presents an acceptable
basis for negotiating a transfer agreement, or if the above sixty (60) Days
elapse and the acquired Party in its sole discretion believes that a fully
negotiated agreement with an offering Party or Parties is not imminent, the
Change in Control may proceed without further notice, subject to the
obligations set forth in this Article 12, provided that the Change in Control
shall be concluded within one hundred eighty (180) Days from the expiration of
the thirty (30) Day offer period or the sixty (60) Day negotiation period,
respectively, plus such additional period as may be necessary to secure
governmental approvals.

(2)           If
more than one Party counter-notifies the acquired Party that it intends to
acquire the Participating Interest subject to the proposed Change in Control,
then each such Party shall acquire a proportion of the Participating Interest
equal to the ratio of its own Participating Interest to the total Participating
Interests of all the counter-notifying Parties, unless the counter-notifying
Parties otherwise agree.

(3)           All
Parties desiring to give such a counter-notice shall meet to formulate a joint
offer.  Each such Party shall make known
to the other Parties the highest price or value which it is willing to offer to
the acquired Party.  The proposal with
the highest price or value shall be offered to the acquired Party as the joint
proposal of the Parties still willing to participate in such offer under the
provisions of Article 12.3(C)(1) above.

ARTICLE
13

WITHDRAWAL FROM AGREEMENT

13.1                        Right
of Withdrawal

(A)          Subject to
the provisions of this Article 13 and the Contract, any Party not in default
may at its option withdraw from this Agreement and the Contract by giving
notice to all other Parties stating its decision to withdraw.  Such notice shall be unconditional and
irrevocable when given, except as may be provided in Article 13.7.

(B)           The
effective date of withdrawal for a withdrawing Party shall be the end of the
calendar month following the calendar month in which the notice of withdrawal
is given, provided that if all Parties elect to withdraw, the effective date of
withdrawal for each Party shall be the date determined by Article 13.9.

13.2                        Partial
or Complete Withdrawal

(A)          Within
thirty (30) Days of receipt of each withdrawing Party’s notification, each of
the other Parties may also give notice that it desires to withdraw from this
Agreement and the Contract.  Should all
Parties give notice of withdrawal, the Parties shall proceed to abandon the
Contract Area and terminate the Contract and this Agreement.  If less than all of the Parties give such
notice of withdrawal, then the withdrawing Parties shall take all steps to
withdraw from the Contract and this Agreement on the earliest possible date and
execute and deliver all necessary instruments and documents to assign their
Participating Interest to the Parties which are not withdrawing, without any
compensation whatsoever, in accordance with the provisions of Article 13.6.

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(B)                                Any
Party withdrawing under Article 11.2 or under this Article 13 shall

Check one
Alternative

o                                    ALTERNATIVE NO.
1        

withdraw from the entirety of the Contract Area, including all Exploitation
Areas and all Discoveries made prior to such withdrawal, and thus abandon to
the other Parties not joining in its withdrawal all its rights to Cost
Hydrocarbons and Profit Hydrocarbons generated by operations after the
effective date of such withdrawal and all rights in associated Joint Property.

x                                  ALTERNATIVE
NO. 2        

at its option, (1) withdraw from the entirety of the Contract Area, or (2)
withdraw only from all exploration activities under the Contract, but not from
any Exploitation Area, Commercial Discovery, or Discovery (whether appraised or
not) made prior to such withdrawal.  Such
withdrawing Party shall retain its rights in Joint Property, but only insofar
as they relate to any such Exploitation Area, Commercial Discovery or
Discovery, and shall abandon all other rights in Joint Property.

13.3                        Rights of
a Withdrawing Party

A withdrawing Party shall have the right to receive
its Entitlement produced through the effective date of its withdrawal.  The withdrawing Party shall be entitled to
receive all information to which such Party is otherwise entitled under this
Agreement until the effective date of its withdrawal.  After giving its notification of withdrawal,
a Party shall not be entitled to vote on any matters coming before the
Operating Committee, other than matters for which such Party has financial
responsibility.

13.4                        Obligations
and Liabilities of a Withdrawing Party

(A)                              A
withdrawing Party shall, following its notification of withdrawal, remain
liable only for its share of the following:

(1)                                  costs
of Joint Operations, and Exclusive Operations in which it has agreed to
participate, that were approved by the Operating Committee or Consenting
Parties as part of a Work Program and Budget (including a multi-year Work
Program and Budget under Article 6.5) or AFE prior to such Party’s notification
of withdrawal, regardless of when they are incurred;

(2)                                  any
Minimum Work Obligations for the current period or phase of the Contract, and
for any subsequent period or phase which has been approved pursuant to Article
11.2 and with respect to which such Party has failed to timely withdraw under
Article 13.4(B);

(3)                                  expenditures
described in Articles 4.2(B)(13) and 13.5 related to an emergency occurring
prior to the effective date of a Party’s withdrawal, regardless of when such
expenditures are incurred;

(4)                                  all
other obligations and liabilities of the Parties or Consenting Parties, as
applicable, with respect to acts or omissions under this Agreement prior to the
effective date of such Party’s withdrawal for which such Party would have been
liable, had it not withdrawn from this Agreement; and

(5)                                  in
the case of a partially withdrawing Party, any costs and liabilities with
respect to Exploitation Areas, Commercial Discoveries and Discoveries from
which it has not withdrawn.

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The obligations and liabilities for which a withdrawing
Party remains liable shall specifically include its share of any costs of
plugging and abandoning wells or portions of wells in which it participated (or
was required to bear a share of the costs pursuant to Article 13.4(A)(1)) to
the extent such costs of plugging and abandoning are payable by the Parties
under the Contract.  Any mortgages,
liens, pledges, charges or other encumbrances which were placed on the
withdrawing Party’s Participating Interest prior to such Party’s withdrawal
shall be fully satisfied or released, at the withdrawing Party’s expense, prior
to its withdrawal.  A Party’s withdrawal
shall not relieve it from liability to the non-withdrawing Parties with respect
to any obligations or liabilities attributable to the withdrawing Party under
this Article 13 merely because they are not identified or identifiable at the
time of withdrawal.

(B)                                Notwithstanding
the foregoing, a Party shall not be liable for any operations or expenditures
it voted against (other than operations and expenditures described in
Article 13.4(A)(2) or Article 13.4(A)(3)) if it sends notification of
its withdrawal within five (5) Days (or within twenty-four (24) hours for
Urgent Operational Matters) of the Operating Committee vote approving such operation
or expenditure.  Likewise, a Party voting
against voluntarily entering into or extending of an Exploration Period or
Exploitation Period or any phase of the Contract or voluntarily extending the
Contract shall not be liable for the Minimum Work Obligations associated
therewith provided that it sends notification of its withdrawal within thirty
(30) Days of such vote pursuant to Article 11.2.

13.5                        Emergency

If a well goes out of control or a fire, blow out,
sabotage or other emergency occurs prior to the effective date of a Party’s
withdrawal, the withdrawing Party shall remain liable for its Participating
Interest share of the costs of such emergency, regardless of when they are
incurred.

13.6                        Assignment

A withdrawing Party shall assign its Participating
Interest free of cost to each of the non-withdrawing Parties in the proportion
which each of their Participating Interests (prior to the withdrawal) bears to
the total Participating Interests of all the non-withdrawing Parties (prior to
the withdrawal), unless the non-withdrawing Parties agree otherwise.  The expenses associated with the withdrawal
and assignments shall be borne by the withdrawing Party.

13.7                        Approvals

A withdrawing Party shall
promptly join in such actions as may be necessary or desirable to obtain any
Government approvals required in connection with the withdrawal and
assignments.  The non-withdrawing Parties
shall use reasonable endeavors to assist the withdrawing Party in obtaining
such approvals.  Any penalties or
expenses incurred by the Parties in connection with such withdrawal shall be
borne by the withdrawing Party.  If the
Government does not approve a Party’s withdrawal and assignment to the other
Parties, then the withdrawing Party shall at its option either (1) retract its
notice of withdrawal by notice to the other Parties and remain a Party as if
such notice of withdrawal had never been sent, or (2) hold its Participating
Interest in trust for the sole and exclusive benefit of the non-withdrawing
Parties with the right to be reimbursed by the non-withdrawing Parties for any
subsequent costs and liabilities incurred by it for which it would not have
been liable, had it successfully withdrawn.

13.8                        Security

A Party
withdrawing from this Agreement and the Contract pursuant to this Article 13
shall provide Security satisfactory to the other Parties to satisfy any
obligations or liabilities for which the withdrawing Party remains liable in
accordance with Article 13.4, but which become due after its withdrawal,
including Security to cover the costs of an abandonment, if applicable.

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13.9                        Withdrawal
or Abandonment by All Parties

In the event all Parties decide to withdraw, the
Parties agree that they shall be bound by the terms and conditions of this
Agreement for so long as may be necessary to wind up the affairs of the Parties
with the Government, to satisfy any requirements of the Laws / Regulations and
to facilitate the sale, disposition or abandonment of property or interests
held by the Joint Account, all in accordance with Article 2.

ARTICLE 14

RELATIONSHIP OF PARTIES AND TAX

14.1                        Relationship
of Parties

The rights, duties,
obligations and liabilities of the Parties under this Agreement shall be
individual, not joint or collective.  It
is not the intention of the Parties to create, nor shall this Agreement be
deemed or construed to create, a mining or other partnership, joint venture or
association or (except as explicitly provided in this Agreement) a trust.  This Agreement shall not be deemed or construed
to authorize any Party to act as an agent, servant or employee for any other
Party for any purpose whatsoever except as explicitly set forth in this
Agreement.  In their relations with each
other under this Agreement, the Parties shall not be considered fiduciaries
except as expressly provided in this Agreement.

14.2                        Tax

Each Party shall be responsible for reporting and
discharging its own tax measured by the profit or income of the Party and the
satisfaction of such Party’s share of all contract obligations under the
Contract and under this Agreement.  Each
Party shall protect, defend and indemnify each other Party from any and all
loss, cost or liability arising from the indemnifying Party’s failure to report
and discharge such taxes or satisfy such obligations.  The Parties intend that all income and all
tax benefits (including deductions, depreciation, credits and capitalization)
with respect to the expenditures made by the Parties hereunder will be
allocated by the Government tax authorities to the Parties based on the share
of each tax item actually received or borne by each Party.  If such allocation is not accomplished due to
the application of the Laws / Regulations or other Government action, the
Parties shall attempt to adopt mutually agreeable arrangements that will allow
the Parties to achieve the financial results intended.  Operator shall provide each Party, in a
timely manner and at such Party’s sole expense, with such information with
respect to Joint Operations as such Party may reasonably request for
preparation of its tax returns or responding to any audit or other tax
proceeding.

Check Article 14.3, if desired.

o            OPTIONAL
PROVISION

14.3                        United
States Tax Election

(A)                              If,
for United States federal income tax purposes, this Agreement and the
operations under this Agreement are regarded as a partnership and if the
Parties have not agreed to form a tax partnership, each U.S. Party elects to be
excluded from the application of all of the provisions of Subchapter “K”,
Chapter 1, Subtitle “A” of the United States Internal Revenue Code of 1986, as
amended (the “Code”), to the extent permitted
and authorized by Section 761(a) of the Code and the regulations promulgated
under the Code.  Operator, if it is a
U.S. Party, is authorized and directed to execute and file for each U.S. Party such
evidence of this election as may be required by the Internal Revenue Service,
including all of the returns, statements, and data required by United States
Treasury Regulations Sections 1.761-2 and 1.6031(a)-1(b)(5) and shall
provide a copy thereof to each U.S. Party. 
However, if Operator is not a U.S. Party, the Party who holds the
greatest Participating Interest among the U.S. Parties shall fulfill the
obligations of Operator under this Article 14.3.  Should there be any requirement that any U.S.
Party

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give
further evidence of this election, each U.S. Party shall execute such documents
and furnish such other evidence as may be required by the Internal Revenue
Service or as may be necessary to evidence this election.

(B)                                No
Party shall give any notice or take any other action inconsistent with the
foregoing election.  If any income tax
laws of any state or other political subdivision of the United States or any
future income tax laws of the United States or any such political subdivision
contain provisions similar to those in Subchapter “K”, Chapter 1, Subtitle “A”
of the Code, under which an election similar to that provided by Section 761(a)
of the Code is permitted, each U.S. Party shall make such election as may be
permitted or required by such laws.  In
making the foregoing election or elections, each U.S. Party states that the
income derived by it from operations under this Agreement can be adequately
determined without the computation of partnership taxable income.

(C)                                Unless
approved by every Non-U.S. Party, no activity shall be conducted under this
Agreement that would cause any Non-U.S. Party to be deemed to be engaged in a
trade or business within the United States under United States income tax laws
and regulations.

(D)                               A
Non-U.S. Party shall not be required to do any act or execute any instrument
which might subject it to the taxation jurisdiction of the United States.

(E)                                 For
the purposes of this Article 14.3, “U.S. Party”
shall mean any Party that is subject to the income tax law of the United States
in respect with operations under this Agreement.  “Non-U.S. Party”
shall mean any Party that is not subject to such income tax law.

ARTICLE
15

VENTURE INFORMATION - CONFIDENTIALITY - INTELLECTUAL PROPERTY

15.1                        Venture
Information

Check one
Alternative for Paragraph (A).

o                                    ALTERNATIVE
NO. 1

(A)                              Except
as otherwise provided in this Article 15 or in Articles 4.4 and 8.4(A), each
Party will be entitled to receive all Venture Information related to operations
in which such party is a participant.  “Venture Information” means
any information and results developed or acquired as a result of Joint
Operations and shall be Joint Property, unless provided otherwise in accordance
with this Agreement and the Contract. 
Each Party shall have the right to use all Venture Information it
receives without accounting to any other Party, subject to any applicable
patents and any limitations set forth in this Agreement and the Contract. For
purposes of this Article 15, such right to use shall include, the rights to copy,
prepare derivative works, disclose, license, distribute, and sell.

x                                  ALTERNATIVE
NO. 2

(A)                              Each
Party may use all information it receives under Article 4.4(A) (the “Venture Information”) without
the approval of any other Party, subject to any applicable restrictions and
limitations set forth in this Article 15, the Agreement and the Contract. For
purposes of this Article 15, the right to use shall entail the right to copy
and prepare derivative works.

(B)                                Each
Party may, subject to any applicable restrictions and limitations set forth in
the Contract, extend the right to use Venture Information to each of its
Affiliates which are obligated to terms not less restrictive that this Article
15.

 73
 

 

 

Check if
desired.

o            OPTIONAL
PROVISION

Except as
otherwise provided in the Contract, each Party may extend the right to use
Venture Information to members of joint ventures or production sharing
arrangements in which such Party or its Affiliates have an ownership or equity
interest, provided that each such member agrees in writing to keep the Venture
Information in confidence at least to the same extent as required in Article
15.2 and to use the Venture Information only for the benefit of that joint
venture or production sharing arrangement.

(C)                                The
acquisition or development of Venture Information under terms other than as
specified in this Article 15 shall require the approval of the Operating
Committee.  The request for approval
submitted by a Party shall be accompanied by a description of, and summary of
the use and disclosure restrictions which would be applicable to, the Venture
Information, and any such Party will be obligated to use all reasonable efforts
to arrange for rights to use which are not less restrictive than specified in
this Article 15.

(D)                               All
Venture Information received by a Party under this Agreement is received on an “as
is” basis without warranties, express or implied, of any kind. Any use of such
Venture Information by a Party shall be at such Party’s sole risk.

15.2                        Confidentiality

(A)                              Subject
to the provisions of the Contract and this Article 15, the Parties agree that
all information in relation with Joint Operations or Exclusive Operations shall
be considered confidential and shall be kept confidential and not be disclosed
during the term of the Contract and for a period of one (1) year thereafter to
any person or entity not a Party to this Agreement, except:

(1)                                  to
an Affiliate pursuant to Article 15.1(B);

(2)                                  to
a governmental agency or other entity when required by the Contract;

(3)                                  to
the extent such information is required to be furnished in compliance with the
applicable law or regulations, or pursuant to any legal proceedings or because
of any order of any court binding upon a Party;

(4)                                  to
prospective or actual attorneys engaged by any Party where disclosure of such
information is essential to such attorney’s work for such Party;

(5)                                  to
prospective or actual contractors and consultants engaged by any Party where
disclosure of such information is essential to such contractor’s or consultant’s
work for such Party;

(6)                                  to
a bona fide prospective transferee of a Party’s Participating Interest to the
extent appropriate in order to allow the assessment of such Participating
Interest (including an entity with whom a Party and/or its Affiliates are
conducting bona fide negotiations directed toward a merger, consolidation or
the sale of a majority of its or an Affiliate’s shares);

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

(8)                                  to
the extent such information must be disclosed pursuant to any rules or
requirements of any government or stock exchange having jurisdiction over such
Party, or its Affiliates; provided that if any Party desires to disclose
information in an annual or periodic report to its or its Affiliates’
shareholders and to the public and such disclosure is not required

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pursuant to any rules or requirements of any
government or stock exchange, then such Party shall comply with Article 20.3;

(9)                                  to
its respective employees for the purposes of Joint Operations or Exclusive
Operations as the case may be, subject to each Party taking customary
precautions to ensure such information is kept confidential; and

(10)                            any
information which, through no fault of a Party, becomes a part of the public
domain.

(B)                                Disclosure
as pursuant to Articles 15.2(A)(5), (6), and (7) shall not be made unless prior
to such disclosure the disclosing Party has obtained a written undertaking from
the recipient party to keep the information strictly confidential for at least
one (1) year and to use the information for the sole purpose described in
Articles 15.2(A)(5), (6), and (7), whichever is applicable, with respect to the
disclosing Party.

15.3                        Intellectual
Property

Check one
Alternative for Paragraph (A).

x                          ALTERNATIVE NO. 1

(A)                     Subject to
Articles 15.3(C) and 15.5 and unless provided otherwise in the Contract, all
intellectual property rights in the Venture Information shall be Joint
Property.  Each Party and its Affiliates
have the right to use all such intellectual property rights in their own
operations (including joint operations or a production sharing arrangement in
which the Party or its Affiliates has an ownership or equity interest) without
the approval of any other Party. 
Decisions regarding obtaining, maintaining and licensing such
intellectual property rights shall be made by the Operating Committee, and the
costs thereof shall be for the Joint Account. 
Upon unanimous consent of the Operating Committee as to ownership,
licensing rights, and income distribution, the ownership of intellectual
property rights in the Venture Information may be assigned to the Operator or
to a Party.

o                             ALTERNATIVE
NO. 2

(A)                      Subject to
Articles 15.3(C) and 15.5, all intellectual property rights in the Venture
Information shall be owned by Operator unless provided otherwise in the
Contract.  Each Party and its Affiliates
shall have a perpetual, royalty-free, irrevocable license to use, all such
intellectual property rights in their own operations (including joint venture
operations or a production sharing arrangement in which such Party has an
ownership or equity interest) without the approval of any other Party.  If any Venture Information amounts to a
patentable invention, Operator shall be entitled to seek patent protection for
such invention. If Operator does not intend to seek patent protection, Operator
shall offer its rights to such invention for assignment to the other Parties
and shall assign such rights to any requesting Party or Parties.  In case of the granting of a license under
such rights to a third party other than Affiliates of a Party, the license
income shall be shared among the Parties in proportion to their respective
Participating Interest.  The Party
granting any such license shall (i) be entitled to deduct its reasonable costs
incurred in registering and maintaining the rights licensed prior to the
aforementioned sharing among the Parties; (ii) keep records of any license
income received for any such license; and (iii) if requested, provide each Party
with a statement, certified by its statutory auditor to be correct and in
accordance with this Article 15.3, regarding such income received.

(B)                        Nothing in
this Agreement shall be deemed to require a Party to (i) divulge proprietary
technology to any of the other Parties; or (ii) grant a license or other rights
under any intellectual property rights owned or controlled by such Party or its
Affiliates to any of the other Parties.

 75
 

 

 

Check one
Alternative for Paragraph (C).

x                           ALTERNATIVE
NO. 1

(C)                        If a Party
or an Affiliate of a Party has proprietary technology applicable to activities
carried out under this Agreement which the Party or its Affiliate desires to
make available on terms and conditions other than as specified in Article
15.3(A), the Party or Affiliate may, with the prior approval of the Operating
Committee, make the proprietary technology available on terms to be
agreed.  If the proprietary technology is
so made available, then any inventions, discoveries, or improvements which
relate to such proprietary technology and which result from Joint Account
expenditures shall belong to such Party or Affiliate.  In such case, each other Party shall have a
perpetual, royalty-free, irrevocable license to practice such inventions,
discoveries, or improvements, but only in connection with the Joint Operations.

o                             ALTERNATIVE
NO. 2

(C)                        If in the
course of carrying out activities charged to the Joint Account, a Party or an
Affiliate of a Party makes or conceives any inventions, discoveries, or
improvements which primarily relate to or are primarily based on the
proprietary technology of such Party or its Affiliates, then all intellectual
property rights to such inventions, discoveries, or improvements shall vest
exclusively in such Party and each other Party shall have a perpetual,
royalty-free, irrevocable license to use such inventions, discoveries, or
improvements, but only in connection with the Joint Operations.

(D)                       Subject to
Article 4.6(B), all costs and expenses of defending, settling or otherwise
handling any claim which is based on the actual or alleged infringement of any
intellectual property right shall be for the account of the operation from
which the claim arose, whether Joint Operations or Exclusive Operations.

15.4                        Continuing
Obligations

Any Party ceasing to own
a Participating Interest during the term of this Agreement shall nonetheless
remain bound by the obligations of confidentiality in Article 15.2, and any
disputes in relation thereto shall be resolved in accordance with Article 18.2.

15.5                        Trades

Operator may, with approval of the Operating
Committee, make well trades and data trades for the benefit of the Parties,
with any data so obtained to be furnished to all Parties who participated in
the cost of the data that was traded. 
Operator shall cause any third party to such trade to enter into an
undertaking to keep the traded data confidential.

ARTICLE 16

FORCE MAJEURE

16.1                        Obligations

If as a result of
Force Majeure any Party is rendered unable, wholly or in part, to carry out its
obligations under this Agreement, other than the obligation to pay any amounts
due or to furnish Security, then the obligations of the Party giving such
notice, so far as and to the extent that the obligations are affected by such
Force Majeure, shall be suspended during the continuance of any inability so
caused and for such reasonable period thereafter as may be necessary for the
Party to put itself in the same position that it occupied prior to the Force
Majeure, but for no longer period.  The
Party claiming Force Majeure shall notify the other Parties of the Force
Majeure within a reasonable time after the occurrence of the facts

 76
 

 

 

relied on and shall keep all Parties informed of all
significant developments.  Such notice
shall give reasonably full particulars of the Force Majeure and also estimate
the period of time which the Party will probably require to remedy the Force
Majeure.  The affected Party shall use
all reasonable diligence to remove or overcome the Force Majeure situation as
quickly as possible in an economic manner but shall not be obligated to settle
any labor dispute except on terms acceptable to it, and all such disputes shall
be handled within the sole discretion of the affected Party.

16.2                        Definition
of Force Majeure

Check one
Alternative.

o                                    ALTERNATIVE
NO. 1        

For the purposes of this Agreement, “Force Majeure”
shall have the same meaning as is set out in the Contract.

x                                  ALTERNATIVE
NO. 2        

For the purposes of this Agreement, “Force Majeure”
shall mean circumstances which were beyond the reasonable control of the Party
concerned and shall include strikes, lockouts and other industrial disturbances
even if they were not “beyond the reasonable control” of the Party.

ARTICLE 17

NOTICES

Except as
otherwise specifically provided, all notices authorized or required between the
Parties by any of the provisions of this Agreement shall be in writing (in
English) and delivered in person or by courier service or by any electronic
means of transmitting written communications which provides written
confirmation of complete transmission, and addressed to such Parties.  Oral communication does not constitute notice
for purposes of this Agreement, and e-mail addresses and telephone numbers for
the Parties are listed below as a matter of convenience only.  A notice given under any provision of this
Agreement shall be deemed delivered only when received by the Party to whom
such notice is directed, and the time for such Party to deliver any notice in
response to such originating notice shall run from the date the originating
notice is received.  “Received”
for purposes of this Article 17 shall mean actual delivery of the notice to the
address of the Party specified hereunder or to be thereafter notified in
accordance with this Article 17.  Each
Party shall have the right to change its address at any time and/or designate
that copies of all such notices be directed to another person at another
address, by giving written notice thereof to all other Parties.

 

 

	
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ARTICLE
18

APPLICABLE LAW - DISPUTE RESOLUTION - WAIVER OF SOVEREIGN IMMUNITY

18.1                        Applicable
Law

[NOTE: The provisions of this Agreement must be
analyzed taking into consideration the law chosen in this Article 18.1 and any
other applicable law.]

Check one Alternative.

x                                  ALTERNATIVE
NO. 1        

The substantive laws of Alberta, Canada, exclusive of any conflicts of laws
principles that could require the application of any other law, shall govern
this Agreement for all purposes, including the resolution of all Disputes
between or among Parties.

o                                    ALTERNATIVE
NO. 2        

The laws of
              ,
to the extent consistent with international law, shall govern this Agreement
for all purposes, including the resolution of all Disputes between or among Parties.
To the extent the laws of
              
are not consistent with international law, then international law shall
prevail.

18.2                        Dispute
Resolution

Check Paragraph (A) if Paragraphs
18.2 (B) or (C) are selected. Renumber following paragraphs if Paragraph (A) is
not selected.

x                                  OPTIONAL
PROVISION - Notification

(A)                              Notification.  A Party who desires to submit a Dispute for
resolution shall commence the dispute resolution process by providing the other
parties to the Dispute written notice of the Dispute (“Notice
of Dispute”).  The Notice
of Dispute shall identify the parties to the Dispute and contain a brief
statement of the nature of the Dispute and the relief requested. The submission
of a Notice of Dispute shall toll any applicable statutes of limitation related
to the Dispute, pending the conclusion or abandonment of dispute resolution
proceedings under this Article 18.

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Check
Paragraph (B), if desired. Renumber following paragraphs if Paragraph (B) is
not selected.

x                                  OPTIONAL
PROVISION - Senior Executive Negotiations

(B)                                Negotiations.  The parties to the Dispute shall seek to
resolve any Dispute by negotiation between Senior Executives.  A “Senior Executive”
means any individual who has authority to negotiate the settlement of the
Dispute for a Party.  Within thirty (30)
Days after the date of the receipt by each party to the Dispute of the Notice
of Dispute (which notice shall request negotiations among Senior Executives),
the Senior Executives representing the parties to the Dispute shall meet at a
mutually acceptable time and place to exchange relevant information in an
attempt to resolve the Dispute.  If a
Senior Executive intends to be accompanied at the meeting by an attorney, each
other party’s Senior Executive shall be given written notice of such intention
at least three (3) Days in advance and may also be accompanied at the meeting
by an attorney.  Notwithstanding the
above, any Party may initiate arbitration proceedings pursuant to Article 18.2
(D) [NOTE: Alternative, if paragraph (C) is selected: mediation
proceedings pursuant to Article 18.2 (C)] concerning such Dispute within thirty
(30) Days after the date of receipt of the Notice of Dispute.

Check
Paragraph (C), if desired. Renumber following paragraphs if Paragraph (C) is
not selected.

x                                  OPTIONAL
PROVISION - Mediation

(C)                                Mediation.  Subject to the requirements of negotiation
between Senior Executives pursuant to Article 18(B), the parties to the Dispute
shall seek to resolve the Dispute by mediation. Within thirty (30) Days after
the date of the first negotiation meeting among Senior Executives pursuant to
Article 18(B), any party to the Dispute may initiate such mediation pursuant by
sending all other parties to the Dispute a written request that the Dispute be
mediated.  The Parties receiving such
written request will promptly respond to the requesting Party so that all
parties to the Dispute may jointly select a neutral mediator and schedule the
mediation session.  The mediator shall
meet with the parties to the Dispute to mediate the Dispute within thirty (30)
Days after the date of receipt of the written request for mediation.
Notwithstanding the above, any Party may initiate arbitration proceedings
pursuant to Article 18.2 (D) concerning such Dispute within sixty (60) Days
after the date of receipt of the Notice of Dispute.

 (D)                            Arbitration.  Any Dispute [not finally resolved by
alternative dispute resolution procedures set forth in Articles 18.2(B) and
18.2(C)] shall be exclusively and definitively resolved through final and
binding arbitration, it being the intention of the Parties that this is a broad
form arbitration agreement designed to encompass all possible disputes.

(1)                                  Rules.  The arbitration shall be conducted in
accordance with the following arbitration rules (as then in effect) (the “Rules”):

Check one
Alternative.

o                                    ALTERNATIVE NO.
1        

Rules of Arbitration of the International Chamber of Commerce (ICC).

x                                  ALTERNATIVE
NO. 2        

Arbitration Rules of the London Court of International Arbitration (LCIA).

o                                    ALTERNATIVE
NO. 3        

International Arbitration Rules of the American Arbitration Association (AAA).

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o                                    ALTERNATIVE
NO. 4        

Arbitration Rules of the Singapore International Arbitration Centre (SIAC).

o                                    ALTERNATIVE
NO. 5        

Arbitration Rules of the Institute of the Stockholm Chamber of Commerce (SCC
Institute).

o                                    ALTERNATIVE
NO. 6        

United Nations Commission of International Trade Law (UNCITRAL) Arbitration
Rules. The appointing authority shall be
[            
Arbitral Institution].

(2)                                  Number
of Arbitrators.  The arbitration
shall be conducted by three arbitrators, unless all parties to the Dispute
agree to a sole arbitrator within thirty (30) Days after the filing of the
arbitration. For greater certainty, for purposes of this Article 18.2(D), the
filing of the arbitration means the date on which the claimant’s request for
arbitration is received by the other parties to the Dispute.

(3)                                  Method
of Appointment of the Arbitrators. 
If the arbitration is to be conducted by a sole arbitrator, then the
arbitrator will be jointly selected by the parties to the Dispute.  If the parties to the Dispute fail to agree
on the arbitrator within thirty (30) Days after the filing of the arbitration,
then the London Court of International Arbitration shall appoint the
arbitrator.

If the arbitration is to be conducted by three
arbitrators and there are only two parties to the Dispute, then each party to
the Dispute shall appoint one arbitrator within thirty (30) Days of the filing
of the arbitration, and the two arbitrators so appointed shall select the
presiding arbitrator within thirty (30) Days after the latter of the two arbitrators
has been appointed by the parties to the Dispute.  If a party to the Dispute fails to appoint
its party-appointed arbitrator or if the two party-appointed arbitrators cannot
reach an agreement on the presiding arbitrator within the applicable time
period, then the London Court of Arbitral Institution shall appoint the
remainder of the three arbitrators not yet appointed.

If the arbitration
is to be conducted by three arbitrators and there are more than two parties to
the Dispute, then within thirty (30) Days of the filing of the arbitration, all
claimants shall jointly appoint one arbitrator and all respondents shall
jointly appoint one arbitrator, and the two arbitrators so appointed shall
select the presiding arbitrator within thirty (30) Days after the latter of the
two arbitrators has been appointed by the parties to the Dispute.  If either all claimants or all respondents
fail to make a joint appointment of an arbitrator or if the party-appointed
arbitrators cannot reach an agreement on the presiding arbitrator within the
applicable time period, then London Court Arbitral Institution shall appoint

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Check one
Alternative.

o                                    ALTERNATIVE
NO. 1        

all three arbitrators.

x                                  ALTERNATIVE
NO. 2        

the remainder of the three arbitrators not yet appointed.

[NOTE: If
the laws of France (and possibly other jurisdictions that have not yet
addressed the “Dutco”  problem) are
applicable to the arbitration, Alternative 2 may result in an unenforceable
arbitral award.]

Check
Paragraph (4), if desired. Renumber following paragraphs if Paragraph (4) is
not selected.

x                                  OPTIONAL
PROVISION (Paragraph (4))

(4)                                  Consolidation.  If the Parties initiate multiple arbitration
proceedings, the subject matters of which are related by common questions of
law or fact and which could result in conflicting awards or obligations, then
all such proceedings may be consolidated into a single arbitral proceeding.

(5)                                  Place
of Arbitration.  Unless otherwise
agreed by all parties to the Dispute, the place of arbitration shall be
Calgary, Alberta, Canada.

(6)                                  Language.  The arbitration proceedings shall be
conducted in the English language and the arbitrator(s) shall be fluent in the
English language.

(7)                                  Entry
of Judgment.  The award of the
arbitral tribunal shall be final and binding. 
Judgment on the award of the arbitral tribunal may be entered and
enforced by any court of competent jurisdiction.

(8)                                  Notice.  All notices required for any arbitration
proceeding shall be deemed properly given if sent in accordance with Article
17.

(9)                                  Qualifications
and Conduct of the Arbitrators.  All
arbitrators shall be and remain at all times wholly impartial, and, once
appointed, no arbitrator shall have any ex parte communications
with any of the parties to the Dispute concerning the arbitration or the underlying
Dispute other than communications directly concerning the selection of the
presiding arbitrator, where applicable.

Check if
desired.

o                                    OPTIONAL
PROVISION

Whenever the parties to
the Dispute are of more than one nationality, the single arbitrator or the
presiding arbitrator (as the case may be) shall not be of the same nationality
as any of the parties or their ultimate parent entities, unless the parties to
the Dispute otherwise agree.

(10)                            Interim
Measures.  [Notwithstanding any
requirements for alternative dispute resolution procedures as set forth in
Articles 18(B) and (C)], [a]ny party to the Dispute may apply to a court for
interim measures (i) prior to the constitution of the arbitral tribunal (and
thereafter as necessary to enforce the arbitral tribunal’s rulings); or (ii) in
the absence of the jurisdiction of the arbitral tribunal to rule on interim
measures in a given jurisdiction.  The
Parties agree that seeking and obtaining such interim measures shall not waive
the right to arbitration.  The
arbitrators (or in an emergency the presiding arbitrator acting alone in the
event one or more of the other arbitrators is unable to be involved in a timely

 81
 

 

fashion) may grant
interim measures including injunctions, attachments and conservation orders in
appropriate circumstances, which measures may be immediately enforced by court
order.  Hearings on requests for interim
measures may be held in person, by telephone, by video conference or by other
means that permit the parties to the Dispute to present evidence and arguments.

Check if
desired.

o                                    OPTIONAL
PROVISION

Without limiting the generality of the foregoing, any
party to the Dispute may have recourse to and shall be bound by the
Pre-arbitral Referee Procedure of the International Chamber of Commerce in
accordance with its rules then in effect.

(11)                            Costs
and Attorneys’ Fees.  The arbitral
tribunal is authorized to award costs and attorneys’ fees and to allocate them
between the parties to the Dispute.  The
costs of the arbitration proceedings, including attorneys’ fees, shall be borne
in the manner determined by the arbitral tribunal.

(12)                            Interest.  The award shall include interest, as
determined by the arbitral award, from the date of any default or other breach
of this Agreement until the arbitral award is paid in full.  Interest shall be awarded at the Agreed
Interest Rate.

(14)                            Currency
of Award.  The arbitral award shall
be made and payable in United States dollars, free of any tax or other
deduction.

(15)                            Exemplary
Damages.  The Parties waive their
rights to claim or recover, and the arbitral tribunal shall not award, any
punitive, multiple, or other exemplary damages (whether statutory or common
law) except to the extent such damages have been awarded to a third party and
are subject to allocation between or among the parties to the Dispute.

(16)                            Waiver
of Challenge to Decision or Award. 
To the extent permitted by law, any right to appeal or challenge any
arbitral decision or award, or to oppose enforcement of any such decision or
award before a court or any governmental authority, is hereby waived by the
Parties except with respect to the limited grounds for modification or
non-enforcement provided by any applicable arbitration statute or treaty.

Check
Paragraph (E), if desired.

x                                  OPTIONAL
PROVISION

(E)                                 Confidentiality.  All negotiations, mediation, arbitration, and
expert determinations relating to a Dispute (including a settlement resulting
from negotiation or mediation, an arbitral award, documents exchanged or
produced during a mediation or arbitration proceeding, and memorials, briefs or
other documents prepared for the arbitration) are confidential and may not be
disclosed by the Parties, their employees, officers, directors, counsel,
consultants, and expert witnesses, except (in accordance with Article 15.2) to the extent necessary to enforce this Article 18 or any
arbitration award, to enforce other rights of a Party, or as required by law;
provided, however, that breach of this confidentiality provision shall not void
any settlement, expert determination or award.

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Check Article 18.3, if any of
Article 8.4 - Alternative No. 2, Article 12.2(F) - Alternative No. 2, or
Article 12.3(C) - Alternative No. 2 is selected. Renumber following article if
Article 18.3 is not selected.

x                                  OPTIONAL
PROVISION (Article 18.3)

18.3                        Expert
Determination

For
any decision referred to an expert under Articles [8.4, 12.2 or 12.3], the
Parties hereby agree that such decision shall be conducted expeditiously by an
expert selected unanimously by the parties to the Dispute.  The expert is not an arbitrator of the
Dispute and shall not be deemed to be acting in an arbitral capacity. The Party
desiring an expert determination shall give the other parties to the Dispute
written notice of the request for such determination.  If the parties to the Dispute are unable to
agree upon an expert within ten (10) Days after receipt of the notice of
request for an expert determination, then, upon the request of any of the
parties to the Dispute, the International Centre for Expertise of the
International Chamber of Commerce (ICC) shall appoint such expert and shall
administer such expert determination through the ICC’s Rules for
Expertise.  The expert, once appointed,
shall have no ex parte communications with any
of the parties to the Dispute concerning the expert determination or the
underlying Dispute.  All Parties agree to
cooperate fully in the expeditious conduct of such expert determination and to
provide the expert with access to all facilities, books, records, documents, information
and personnel necessary to make a fully informed decision in an expeditious
manner.  Before issuing his final
decision, the expert shall issue a draft report and allow the parties to the
Dispute to comment on it.  The expert
shall endeavor to resolve the Dispute within thirty (30) Days (but no later
than sixty (60) Days) after his appointment, taking into account the
circumstances requiring an expeditious resolution of the matter in
dispute.  The expert’s decision shall be
final and binding on the parties to the Dispute unless challenged in an
arbitration pursuant to Article 18.2(D) within sixty (60) Days of the date the
expert’s final decision is received by the parties to the Dispute and until
replaced by such subsequent arbitral award. In such arbitration (i) the expert
determination on the specific matter under Articles [8.4, 12.2 or 12.3] shall
be entitled to a rebuttable presumption of correctness; and (ii) the expert
shall not (without the written consent of the parties to the Dispute) be appointed
to act as an arbitrator or as adviser to the parties to the Dispute.

18.4                        Waiver of
Sovereign Immunity

Any Party that now
or hereafter has a right to claim sovereign immunity for itself or any of its
assets hereby waives any such immunity to the fullest extent permitted by the
laws of any applicable jurisdiction. 
This waiver includes immunity from (i) any expert determination,
mediation, or arbitration proceeding commenced pursuant to this Agreement; (ii) any
judicial, administrative or other proceedings to aid the expert determination,
mediation, or arbitration commenced pursuant to this Agreement; and (iii) any
effort to confirm, enforce, or execute any decision, settlement, award,
judgment, service of process, execution order or attachment (including
pre-judgment attachment) that results from an expert determination, mediation,
arbitration or any judicial or administrative proceedings commenced pursuant to
this Agreement.  Each Party acknowledges
that its rights and obligations hereunder are of a commercial and not a
governmental nature.

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ARTICLE
19

ALLOCATION OF COST & PROFIT HYDROCARBONS

Check one Alternative for
Articles 19.1 and 19.2.

o            ALTERNATIVE
NO. 1 (Article 19.1 and Article 19.2) - Allocation by Exploitation Area

19.1                        Allocation
of Total Production

(A)                              The
total quantity of Hydrocarbons produced and measured at the delivery point (as
determined in accordance with Article 9) from each Exploitation Area and to
which the Parties are collectively entitled under the Contract shall be
composed of Cost Hydrocarbons and Profit Hydrocarbons in accordance with the
provisions of the Contract.

(B)                                Operator
shall develop and the Operating Committee shall approve procedures for
allocating such Cost Hydrocarbons and Profit Hydrocarbons during each Calendar
Quarter among the individual Exploitation Areas based upon the following
principles.

(1)                                  Cost
Hydrocarbons and Profit Hydrocarbons shall first be allocated to Exploitation
Areas based on the principle that an earlier established operation shall not be
enhanced or impaired in any way through the subsequent establishment of any
Exploitation Area, whether the subsequently established Exploitation Areas are
Exclusive Operations or Joint Operations.

(2)                                  All
allocations made pursuant to this Article 19 shall incorporate adjustments to
reflect differences in value if different qualities of Hydrocarbons are
produced.

19.2                        Allocation
of Hydrocarbons to Parties

(A)                              Cost
Hydrocarbons and Profit Hydrocarbons allocated to Exploitation Areas pursuant
to Article 19.1 shall be allocated to the Parties in proportion to their
Participating Interests in each such Exploitation Area.

(B)                                Notwithstanding
anything to the contrary contained in this Article 19, and to the extent
allowed under the Contract, Cost Hydrocarbons which are not specifically
attributable to an Exploitation Area, if any, shall be allocated to the Parties
in proportion to their respective participation in the operations which
underlie any such Cost Hydrocarbons, provided, however, that the rights of a
Party to Cost Hydrocarbons or Profit Hydrocarbons from an Exploitation Area to
which it is a participant shall not be impaired by the rights of any other
Party to recover Cost Hydrocarbons which are not specifically attributable to
such Exploitation Area.

x           ALTERNATIVE
NO. 2 (Article 19.1 and Article 19.2) - Allocation by Type of Operation

19.1                        Allocation
of Total Production

(A)                              The
total quantity of Hydrocarbons produced and measured at the delivery point (as
determined in accordance with Article 9) from each Exploitation Area and to
which the Parties are collectively entitled under the Contract shall be
composed of Cost Hydrocarbons and Profit Hydrocarbons in accordance with the
provisions of the Contract.

(B)                                Operator
shall develop and the Operating Committee shall approve procedures for
allocating such Cost Hydrocarbons and Profit Hydrocarbons during each Calendar
Quarter among the individual operations based upon the following principles.

(1)                                  Cost
Hydrocarbons and Profit Hydrocarbons shall first be allocated to Joint
Operations based on the principle that Joint Operations shall not be enhanced
or impaired in any way by the execution of any Exclusive Operations.  Any remaining Cost Hydrocarbons and Profit
Hydrocarbons shall be allocated to

 84
 

 

 

Exclusive Operations based
on the principle that an earlier executed Exclusive Operation shall not be
enhanced or impaired in any way by the subsequent execution of another
Exclusive Operation.

(2)                                  All
allocations made pursuant to this Article 19 shall incorporate adjustments to
reflect differences in value if different qualities of Hydrocarbons are
produced.

19.2                        Allocation
of Hydrocarbons to Parties

(A)                              Cost
Hydrocarbons and Profit Hydrocarbons allocated to Joint Operations or Exclusive
Operations pursuant to Article 19.1 shall be allocated to the Parties in
proportion to their respective Participating Interests in such operations.

(B)                                Notwithstanding
anything to the contrary contained in this Article 19, and to the extent
allowed under the Contract, Cost Hydrocarbons which are not specifically
attributable to an operation, if any, shall be allocated to the Parties in
proportion to their respective participation in the operations which underlie
any such Cost Hydrocarbons, provided, however, that the rights of a Party to
Cost Hydrocarbons or Profit Hydrocarbons from an operation to which it is a
participant shall not be impaired by the rights of any other Party to recover
Cost Hydrocarbons which are not specifically attributable to an operation.

19.3                        Use of
Estimates

Initial distribution
of Hydrocarbons pursuant to this Article 19 shall be based upon estimates
furnished by Operator pursuant to Article 9, with adjustments for actual
figures to be made in kind within forty-five (45) Days after the end of the
Calendar Quarter and at any later date when adjustments must be made with the
Government under the Contract.

19.4                        Principles

If no allocation procedure is approved by the
Operating Committee in accordance with Article 19.1, the Parties shall
nonetheless be bound by the principles set forth in this Article 19 with regard
to the allocation of Cost Hydrocarbons and Profit Hydrocarbons.

ARTICLE 20

GENERAL PROVISIONS

20.1                        Conduct of
the Parties

(A)                              Each
Party warrants that it and its Affiliates have not made, offered, or authorized
and will not make, offer, or authorize with respect to the matters which are
the subject of this Agreement, any payment, gift, promise or other advantage,
whether directly or through any other person or entity, to or for the use or
benefit of any public official (i.e., any
person holding a legislative, administrative or judicial office, including any
person employed by or acting on behalf of a public agency, a public enterprise
or a public international organization) or any political party or political
party official or candidate for office, where such payment, gift, promise or
advantage would violate (i) the applicable laws of Republic of Trinidad and
Tobago; (ii) the laws of the country of incorporation of such Party or such
Party’s ultimate parent company and of the principal place of business of such
ultimate parent company; or (iii) the principles described in the Convention on
Combating Bribery of Foreign Public Officials in International Business
Transactions, signed in Paris on December 17, 1997, which entered into force on
February 15, 1999, and the Convention’s Commentaries.  Each Party shall defend, indemnify and hold
the other Parties harmless from and against any and all claims, damages,
losses, penalties, costs and expenses arising from or related to, any breach by
such first Party of such warranty.  Such
indemnity obligation shall survive termination or expiration of this Agreement.

 85
 

 

 

(B)                                Each
Party agrees to (i) maintain adequate internal controls; (ii) properly record
and report all transactions; and (iii) comply with the laws applicable to
it.  Each Party must rely on the other
Parties’ system of internal controls, and on the adequacy of full disclosure of
the facts, and of financial and other data regarding the Joint Operations
undertaken under this Agreement.  No
Party is in any way authorized to take any action on behalf of another Party
that would result in an inadequate or inaccurate recording and reporting of
assets, liabilities or any other transaction, or which would put such Party in
violation of its obligations under the laws applicable to the operations under
this Agreement.

20.2                        Conflicts
of Interest

(A)                              Operator
undertakes that it shall avoid any conflict of interest between its own
interests (including the interests of Affiliates) and the interests of the
other Parties in dealing with suppliers, customers and all other organizations
or individuals doing or seeking to do business with the Parties in connection
with activities contemplated under this Agreement.

(B)                                The
provisions of the preceding paragraph shall not apply to:  (1) Operator’s performance which is in
accordance with the local preference laws or policies of the Government; or (2)
Operator’s acquisition of products or services from an Affiliate, or the sale
thereof to an Affiliate, made in accordance with the terms of this Agreement.

(C)                                Unless
otherwise agreed, the Parties and their Affiliates are free to engage or invest
(directly or indirectly) in an unlimited number of activities or businesses,
any one or more of which may be related to or in competition with the business
activities contemplated under this Agreement, without having or incurring any
obligation to offer any interest in such business activities to any Party.

20.3                        Public
Announcements

(A)                              Operator
shall be responsible for the preparation and release of all public
announcements and statements regarding this Agreement or the Joint Operations;
provided that no public announcement or statement shall be issued or made
unless, prior to its release, all the Parties have been furnished with a copy
of such statement or announcement and the approval of at least two (2) Parties
which are not Affiliates of Operator holding fifty percent (50%) or more of the
Participating Interests not held by Operator or its Affiliates has been
obtained.  Where a public announcement or
statement becomes necessary or desirable because of danger to or loss of life,
damage to property or pollution as a result of activities arising under this
Agreement, Operator is authorized to issue and make such announcement or
statement without prior approval of the Parties, but shall promptly furnish all
the Parties with a copy of such announcement or statement.

(B)                                If
a Party wishes to issue or make any public announcement or statement regarding
this Agreement or the Joint Operations, it shall not do so unless, prior to the
release of the public announcement or statement, such Party furnishes all the
Parties with a copy of such announcement or statement, and obtains the approval
of at least two (2) Parties which are not Affiliates holding fifty percent
(50%) or more of the Participating Interests not held by such announcing Party
or its Affiliates; provided that, notwithstanding any failure to obtain such
approval, no Party shall be prohibited from issuing or making any such public
announcement or statement if it is necessary to do so in order to comply with
the applicable laws, rules or regulations of any government, legal proceedings
or stock exchange having jurisdiction over such Party or its Affiliates as set
forth in Article 15.2.

20.4                        Successors
and Assigns

Subject to the
limitations on Transfer contained in Article 12, this Agreement shall inure to
the benefit of and be binding upon the successors and assigns of the Parties.

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20.5                        Waiver

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

20.6                        No Third Party
Beneficiaries

Except as provided under Article 4.6 (B), the
interpretation of this Agreement shall exclude any rights under legislative
provisions conferring rights under a contract to persons not a party to that
contract.

20.7                        Joint
Preparation

Each provision of this Agreement shall be construed as
though all Parties participated equally in the drafting of the same.  Consequently, the Parties acknowledge and
agree that any rule of construction that a document is to be construed against
the drafting party shall not be applicable to this Agreement.

20.8        Severance of Invalid Provisions

If and for so long
as any provision of this Agreement shall be deemed to be judged invalid for any
reason whatsoever, such invalidity shall not affect the validity or operation
of any other provision of this Agreement except only so far as shall be
necessary to give effect to the construction of such invalidity, and any such
invalid provision shall be deemed severed from this Agreement without affecting
the validity of the balance of this Agreement.

20.9                        Modifications

Except as is
provided in Articles 11.2(B) and 20.8, there shall be no modification of this
Agreement or the Contract except by written consent of all Parties.

20.10                 Interpretation

(A)                              Headings.  The topical headings used in this Agreement
are for convenience only and shall not be construed as having any substantive
significance or as indicating that all of the provisions of this Agreement
relating to any topic are to be found in any particular Article.

(B)                                Singular
and Plural.  Reference to the
singular includes a reference to the plural and vice versa.

(C)                                Gender.  Reference to any gender includes a reference
to all other genders.

(D)                               Article.  Unless otherwise provided, reference to any
Article or an Exhibit means an Article or Exhibit of this Agreement.

(E)                                 Include.  “include”
and “including” shall mean include or
including without limiting the generality of the description preceding such
term and are used in an illustrative sense and not a limiting sense.

20.11                 Counterpart
Execution

This Agreement may
be executed in any number of counterparts and each such counterpart shall be
deemed an original Agreement for all purposes; provided that no Party shall be
bound to this Agreement unless and until all Parties have executed a
counterpart.  For purposes of assembling
all counterparts into one

 87
 

 

 

document, Operator
is authorized to detach the signature page from one or more counterparts and,
after signature thereof by the respective Party, attach each signed signature page
to a counterpart.

20.12                 Entirety

With respect to the subject matter contained herein,
this Agreement (i) is the entire agreement of the Parties; and (ii) supersedes
all prior understandings and negotiations of the Parties.

IN WITNESS of their
agreement each Party has caused its duly authorized representative to sign this
instrument on the date indicated below such representative’s signature.

	
   

  	
   

  	
   

  
	
   

  	
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EXHIBIT A

 

 

2004

AIPN
MODEL FORM

INTERNATIONAL
ACCOUNTING PROCEDURE

Block 5(C), Offshore Trinidad

DISCLAIMER

This
model contract has been prepared only as a suggested guide and may not contain
all of the provisions that may be required by the parties to an actual
agreement. This model contract has not been endorsed by the Association of
International Petroleum Negotiators (AIPN) or by any members of the AIPN. Use
of this model contract or any portion or variation thereof shall be at the sole
discretion and risk of the user parties. Users of the model contract or any
variation thereof are encouraged to seek the advice of legal counsel to ensure
that the final document reflects the actual agreement of the parties. The AIPN
disclaims any and all interests or liability whatsoever for loss or damages
that may result from use of this model contract or portions or variations
thereof.  All logos and references to the
AIPN must be removed from this model contract when used as an actual agreement.

© Association of International Petroleum
Negotiators

 1
 

 

 

EXHIBIT “A”

ACCOUNTING PROCEDURE

TABLE OF CONTENTS

	
  SECTION

  	
   

  	
  PAGE

  
	
   

  	
   

  	
   

  
	
   

  	
  SECTION 1  GENERAL PROVISIONS

  	
  1

  
	
   

  	
  1.1

  	
  Purpose

  	
  1

  
	
   

  	
  1.2

  	
  Conflict with Agreement

  	
  1

  
	
   

  	
  1.3

  	
  Definitions

  	
  1

  
	
   

  	
  1.4

  	
  Joint Account Records and Currency Exchange

  	
  1

  
	
   

  	
  1.5

  	
  Statements and Billings

  	
  3

  
	
   

  	
  1.6

  	
  Payments and Advances

  	
  3

  
	
   

  	
  1.7

  	
  Adjustments

  	
  6

  
	
   

  	
  1.8

  	
  Audits

  	
  6

  
	
   

  	
  1.9

  	
  Allocations

  	
  9

  
	
   

  	
  SECTION 2  DIRECT CHARGES

  	
  10

  
	
   

  	
  2.1

  	
  Licenses, Permits, Etc.

  	
  10

  
	
   

  	
  2.2

  	
  Salaries, Wages and Related Costs

  	
  10

  
	
   

  	
  2.3

  	
  Employee Relocation Costs

  	
  11

  
	
   

  	
  2.4

  	
  Offices, Camps, and Miscellaneous Facilities

  	
  12

  
	
   

  	
  2.5

  	
  Material

  	
  12

  
	
   

  	
  2.6

  	
  Exclusively Owned Equipment and Facilities of
  Operator and Affiliates

  	
  12

  
	
   

  	
  2.7

  	
  Services

  	
  12

  
	
   

  	
  2.8

  	
  Insurance

  	
  14

  
	
   

  	
  2.9

  	
  Damages and Losses to Property

  	
  14

  
	
   

  	
  2.10

  	
  Litigation, Dispute Resolution and Legal
  Expenses

  	
  14

  
	
   

  	
  2.11

  	
  Taxes and Duties

  	
  15

  
	
   

  	
  2.12

  	
  Ecological and Environmental

  	
  15

  
	
   

  	
  2.13

  	
  Decommissioning (Abandonment) and Reclamation

  	
  15

  
	
   

  	
  2.14

  	
  Other Expenditures

  	
  15

  
	
   

  	
  SECTION 3  INDIRECT CHARGES

  	
  16

  
	
   

  	
  3.1

  	
  Purpose

  	
  16

  
	
   

  	
  3.2

  	
  Amount

  	
  16

  
	
   

  	
  3.3

  	
  Exclusions

  	
  17

  
	
   

  	
  SECTION 4  ACQUISITION OF MATERIAL

  	
  18

  
	
   

  	
  4.1

  	
  Acquisitions

  	
  18

  
	
   

  	
  4.2

  	
  Materials Furnished by Operator

  	
  18

  
	
   

  	
  4.3

  	
  Premium Prices

  	
  19

  
	
   

  	
  4.4

  	
  Warranty of Material Furnished by Operator

  	
  19

  
	
   

  	
  SECTION 5  DISPOSAL OF MATERIALS

  	
  20

  
	
   

  	
  5.1

  	
  Disposal

  	
  20

  
	
   

  	
  5.2

  	
  Material Purchased by a Party or Affiliate

  	
  20

  
	
   

  	
  5.3

  	
  Division In Kind

  	
  20

  
	
   

  	
  5.4

  	
  Sales to Third Parties

  	
  20

  
	
   

  	
  SECTION 6  INVENTORIES

  	
  21

  
	
   

  	
  6.1

  	
  Periodic Inventories - Notice and Representation

  	
  21

  
	
   

  	
  6.2

  	
  Special Inventories

  	
  21

  
	
   

  	
   

  
	
  APPENDIX 1

  	
  22

  
							

 

 2

 

 

EXHIBIT “A”

ACCOUNTING PROCEDURE

Attached to and made part
of the Operating Agreement, hereinafter called the “Agreement,” effective as of
the 17th day of November, 2004, by and between
Challenger Energy Corp. and Canadian Superior Energy Inc.

SECTION 1  

GENERAL PROVISIONS

1.1           PURPOSE.

1.1.1                                 The purpose of this
Accounting Procedure is to establish equitable methods for determining charges
and credits applicable to operations under the Agreement which reflect the
costs of Joint Operations to the end that no Party shall gain or lose in
relation to other Parties.

1.1.2                                 The Parties agree,
however, that if the methods prove unfair or inequitable to Operator or
Non-Operators, the Parties shall meet and in good faith endeavor to agree on
changes in methods deemed necessary to correct any unfairness or inequity.

1.2           CONFLICT WITH AGREEMENT.

In the event of a conflict between the provisions of
this Accounting Procedure and the provisions of the Agreement to which this
Accounting Procedure is attached, the provisions of the Agreement shall
prevail.

1.3           DEFINITIONS.

The definitions contained in the Agreement to which this Accounting
Procedure is attached shall apply to this Accounting Procedure and have the
same meanings when used herein.  Certain
terms used herein are defined as follows:

“Accrual basis” means that basis
of accounting under which costs and benefits are regarded as applicable to the
period in which the liability for the cost is incurred or the right to the
benefit arises, regardless of when invoiced, paid, or received.

“Cash basis” means that basis of
accounting under which only costs actually paid and revenue actually received
are included for any period.

“Country of Operations” means
the Republic of Trinidad and Tobago.

“Material” means machinery,
equipment and supplies acquired and held for use in Joint Operations.

“Section” means a section of
this Accounting Procedure.

1.4           JOINT ACCOUNT RECORDS
AND CURRENCY EXCHANGE.

1.4.1                                 Operator shall at all
times maintain and keep true and correct records of the production and
disposition of all liquid and gaseous Hydrocarbons, and of all costs and
expenditures under the Agreement, as well as other data necessary or proper for
the settlement of accounts between the Parties hereto in connection with their
rights and obligations under the Agreement and to enable Parties to comply with
their respective applicable income tax and other laws.

 1
 

 

 

1.4.2                                 Operator shall
maintain accounting records pertaining to Joint Operations in accordance with
generally accepted accounting practices used in the international petroleum
industry and any applicable statutory obligations of the Country of Operations
as well as the provisions of the Contract and the Agreement.

1.4.3                                 The Joint Account
shall be maintained by Operator in the English language and in United States of
America (“U.S.”) currency and in such other language and currency as may be
required by the laws of the Country of Operations or the Contract.  Conversions of currency shall be recorded at
the rate actually experienced in that conversion.  Currency translations are used to express the
amount of expenditures and receipts for which a currency conversion has not
actually occurred. Currency translations for expenditures and receipts shall be
recorded

Check one Alternative.

o                       ALTERNATIVE
NO. 1

in accordance with Operator’s normal practice.  A statement describing the practice will be
provided to the Non-Operators upon request.

o        ALTERNATIVE NO. 2

at the arithmetic average of the buying and selling exchange rates at the
close of business on the
                       
Day of the
             (insert “month of” or “month
preceding”) the current accounting period as published by
                              ,
or if not published by                         ,
then by                    .

o                       ALTERNATIVE
NO. 3

at the arithmetic average of the buying and selling exchange rates at
the close of business on the
             
(insert “first” or “last”)
Business Day of the
             (insert “month of” or “month
preceding”) the current accounting period as published by
                              ,
or if not published by                         ,
then by
                   .

o                       ALTERNATIVE
NO. 4

at the arithmetic average of the buying and selling
exchange rates at the close of each Business Day of the
            (insert “month of” or “month
preceding”) the current accounting period as published by
                              ,
or if not published by                         ,
then by
                   .

x                      ALTERNATIVE NO. 5

in accordance with the Contract.

1.4.4                                 Any
currency exchange gains or losses shall be credited or charged to the Joint
Account, except as otherwise specified in this Accounting Procedure.

Check if desired.

x       OPTIONAL PROVISION

 2
 

 

 

Any such exchange gains or losses shall be separately
identified as such.

1.4.5                                 This Accounting
Procedure shall apply, mutatis mutandis,
to Exclusive Operations in the same manner that it applies to Joint Operations;
provided, however, that the charges and credits applicable to Consenting
Parties shall be separately maintained. 
For the purpose of determining and calculating the remuneration of the
Consenting Parties, including the premiums for Exclusive Operations, the costs
and expenditures shall be expressed in U.S. currency (irrespective of the
currency in which the expenditure was incurred).

1.4.6                                 The Accrual basis for
accounting shall be used in preparing accounts concerning the Joint
Operations.  If a Cash basis for
accounting is used, Operator shall show accruals as memorandum items.

1.5           Statements
and Billings.

1.5.1                                 Unless otherwise
agreed by the Parties, Operator shall submit monthly to each Party, on or
before the 25th Day of each month, statements of the costs and
expenditures incurred during the prior month, indicating by appropriate
classification the nature thereof, the corresponding budget category, and the
portion of such costs charged to each of the Parties.

These statements, as a minimum, shall contain the following
information:

·                              advances
of funds setting forth the currencies received from each Party,

·                              the
share of each Party in total expenditures,

·                              the
accrued expenditures,

·                              the
current account balance of each Party,

·                              summary
of costs, credits, and expenditures on a current month, year-to-date, and
inception-to-date basis or other periodic basis, as agreed by Parties (such
expenditures shall be grouped by the categories and line items designated in
the approved Work Program and Budget submitted by Operator in accordance with
Article 6.4 of the Agreement so as to facilitate comparison of actual
expenditures against that Work Program and Budget), and

·                              details
of unusual charges and credits in excess of 
U.S. $50,000.00.

1.5.2                                 Operator shall, upon
request, furnish a description of the accounting classifications used by it.

1.5.3                                 Amounts included in
the statements and billings shall be expressed in U.S. currency and reconciled
to the currencies advanced.

1.5.4                                 Each Party shall be
responsible for preparing its own accounting and tax reports to meet the
requirements of the Country of Operations and of all other countries to which
it may be subject.  Operator, to the
extent that the information is reasonably available from the Joint Account
records, shall provide Non-Operators in a timely manner with the necessary
information to facilitate the discharge of such responsibility.

1.6           PAYMENTS AND ADVANCES.

1.6.1                                 Upon approval of any
Work Program and Budget, if Operator so requests, each Non-Operator shall
advance its share of estimated cash requirements for the succeeding month’s
operations.  Each such cash call shall be
equal to the Operator’s estimate of the money to be spent in the currencies
required to perform its duties under the approved Work Program and Budget
during

 3
 

 

 

the month concerned.  For
informational purposes the cash call shall contain an estimate of the funds
required for the succeeding 2 months detailed by the categories designated in
the approved Work Program and Budget submitted by Operator in accordance with
Article 6.4 of the Agreement.

1.6.2                                 Each such cash call,
detailed by the categories designated in the approved Work Program and Budget
submitted by Operator in accordance with Article 6.4 of the Agreement, shall be
made in writing and delivered to all Non-Operators not less than 15 Days before
the payment due date.  The due date for
payment of such advances shall be set by Operator but shall be no sooner than
the first Business Day of the month for which the advances are required.  All advances shall be made without bank
charges.  Any charges related to receipt
of advances from a Non-Operator shall be borne by that Non-Operator.

1.6.3                                 Each Non-Operator
shall wire transfer its share of the full amount of each such cash call to
Operator on or before the due date, in the currencies requested or any other
currencies acceptable to Operator and at a bank designated by Operator.  If currency provided by a Non-Operator is
other than the requested currency, then the entire cost of converting to the
requested currency shall be charged to that Non-Operator.

1.6.4                                 Notwithstanding the
provisions of Section 1.6.2, should Operator be required to pay any sums of
money for the Joint Operations which were unforeseen at the time of providing
the Non-Operators with said estimates of its requirements, Operator may make a
written request of the Non-Operators for special advances covering the
Non-Operators’ share of such payments. 
Each such Non-Operator shall make its proportional special advances
within 10 Days after receipt of such notice.

Check if
desired.

o                        OPTIONAL
PROVISION

When
the total of such cash calls for any month is U.S.
$            or less,
each Non-Operator shall advance its share thereof in accordance with
Section 1.6.  When the total cash
requirements exceed the aforesaid amount, each Non-Operator shall advance its share
of the estimated funds required in 3 installments of amounts to be specified by
Operator, the first installment to be paid not later than the first Business
Day of the month for which the advance is required and the second installment
to be paid not later than the tenth Day of the month for which the advance is
required or if such Day is not a Business Day, then the following Business Day
and the third installment to be paid not later than the twentieth Day of the
month for which the advance is required or if such Day is not a Business Day,
then the following Business Day.  The
third installment can be adjusted by Operator by notifying the Non-Operators of
the adjusted amount no later than the fifteenth Day of the month for which the
advance is required.

1.6.5                                 If a Non-Operator’s
advances exceed its share of cash expenditures, the next succeeding cash
advance requirements, after such determination, shall be reduced
accordingly.  However, if the amount of
such excess advance is greater than the amount of the next month’s estimated
cash requirements for such Non-Operator, the Non-Operator may request a refund
of the difference, which refund shall be made by Operator within 10 Days after
receipt of the Non-Operator’s request provided that the amount is in excess of
U.S. $25,000.00.

Check if desired.

x       OPTIONAL PROVISION

 4
 

 

 

If Operator does not refund the money within the time
required, the unpaid balance shall bear and accrue interest at the Agreed
Interest Rate from the due date until the payment is received by the
Non-Operator who requested the refund.

1.6.6                                 If Non-Operator’s
advances are less than its share of cash expenditures, the deficiency shall, at
Operator’s option, be added to subsequent cash advance requirements or be paid
by Non-Operator within 10 Days following the receipt of Operator’s billing to
Non-Operator for such deficiency.

1.6.7                                 If, under the
provisions of the Agreement, Operator is required to segregate funds received
from the Parties, any interest received on such funds shall be applied against
the next succeeding cash call or, if directed by the Operating Committee,
distributed quarterly.  The interest thus
received shall be allocated to the Parties on an equitable basis taking into
consideration date of funding by each Party to the accounts in proportion to
the total funding into the account.  A
monthly statement summarizing receipts, disbursements, transfers to each joint
bank account and beginning and ending balances thereof shall be provided by Operator
to the Parties.

Check if desired.

x                      OPTIONAL PROVISION 

Any
interest received by Operator from interest-bearing accounts containing
commingled funds received from the Parties shall be credited to the Parties in
accordance with the allocation procedure as set forth above.

1.6.8                                 If Operator does not
request Non-Operators to advance their share of estimated cash requirements,
each Non-Operator shall pay its share of cash expenditures within 10 Days
following receipt of Operator’s billing.

1.6.9                                 Payments of advances
or billings shall be made on or before the due date. In accordance with Article
8 of the Agreement, if these payments are not received by the due date the
unpaid balance shall bear and accrue interest from the due date until the
payment is received by Operator at the Agreed Interest Rate.  For the purpose of determining the unpaid
balance and interest owed, Operator shall translate to U.S. currency all
amounts owed in other currencies using the currency exchange rate, determined
in accordance with Section 1.4.3, at the close of the last Business Day prior
to the due date for the unpaid balance.

1.6.10                          Subject to governmental
regulation, Operator shall have the right, at any time and from time to time,
to convert the funds advanced or any part thereof to other currencies to the
extent that such currencies are then required for operations.  The cost of any such conversion shall be
charged to the Joint Account.

1.6.11                          Operator shall endeavor to
maintain funds held for the Joint Account in bank accounts at a level
consistent with that required for the prudent conduct of Joint Operations.

1.6.12                          If under the Agreement,
Operator is required to segregate funds received from or for the Joint Account,
the provisions under Section 1.6 for payments and advances by Non-Operators
shall apply also to Operator.

 5
 

 

 

Check if desired.

x                                   OPTIONAL PROVISION

1.6.13 Funding By Operator

The Parties may agree on additional funding mechanisms including
funding by Operator.

1.7           ADJUSTMENTS.

Payments of any advances
or billings shall not prejudice the right of any Non-Operator to protest or
question the correctness thereof; provided, however, all bills and statements
rendered to Non-Operators by Operator during any Calendar Year shall
conclusively be presumed to be true and correct after 24 months following the end
of such Calendar Year, unless within the said 24 month period a Non-Operator
takes written exception thereto and makes claim on Operator for
adjustment.  Failure on the part of a
Non-Operator to make claim on Operator for adjustment within such period shall
establish the correctness thereof and preclude the filing of exceptions thereto
or making claims for adjustment thereon. 
No adjustment favorable to Operator shall be made unless it is made
within the same prescribed period.  The
provisions of this paragraph shall not prevent adjustments resulting from a
physical inventory of the Material as provided for in Section 6.  Operator shall be allowed to make adjustments
to the Joint Account after such 24 month period if these adjustments result
from audit exceptions outside of this Accounting Procedure, third party claims,
or Government or Government Oil & Gas Company requirements.  Any such adjustments shall be subject to
audit within the time period specified in Section 1.8.1.

1.8           AUDITS.

1.8.1                                 A Non-Operator, upon
at least 60 Days advance notice in writing to Operator and all other
Non-Operators, shall have the right to audit the Joint Accounts and records of
Operator relating to the accounting hereunder for any Calendar Year within the
24 month period following the end of such Calendar Year except as otherwise
provided in Section 3.1.
Non-Operators shall have reasonable access to Operator’s personnel and to the
facilities, warehouses, and offices directly or indirectly serving Joint
Operations. The cost of each such audit shall be borne by Non-Operators
participating in the audit.  Where there
are two or more Non-Operators, the Non-Operators shall make a reasonable effort
to conduct joint or simultaneous audits in a manner that will result in a
minimum of inconvenience to the Operator. 
Non-Operators must take written exception to and make claim upon the
Operator for all discrepancies disclosed by said audit within said 24 month
period.  Non-Operators may request
information from the Operator prior to the commencement of the audit.  Operator will provide the information in
electronic format or hard copy documents, if electronic format is not
available.  Operator will provide the
information requested within 30 Days before commencement of the audit but in no
event sooner than 30 Days after the written request.  The information requested shall be limited to
that normally used for pre-audit work such as trial balance, general ledger,
and sub-ledger data.

1.8.2                                 Operator shall
endeavor to produce information from its Affiliates reasonably necessary to
support charges from those Affiliates to the Joint Account other than those
charges referred to in Section 3.1.

1.8.3                                 Except for charges
under Section 2.5.1, if selected, and Section 2.7.1, the following provisions
apply to all charges from Operator for its Affiliates.

Check one Alternative

 6
 

 

 

o  ALTERNATIVE NO. 1 – RESTRICTED AFFILIATE AUDIT

In addition to the information provided by the
Operator under Section 1.8.2, a Non-Operator may seek to audit the books and
records of an Affiliate of Operator relating to the charges by the Affiliate to
the Joint Account for the same Calendar Year as provided in Section 1.8.1
above.  The charges of the Affiliate
shall be subject to audit in accordance with (a), (b), or (c) below or any
combination thereof.

(a)       If the Affiliate of
Operator consents to the audit, the audit may be conducted in the same manner
as the audit of the books and records of Operator.

If all or part of the charges are not audited under (a) above, the
unaudited portion may be audited under (b) and/or (c) below.

(b)       The Affiliate may
require use of an internationally recognized independent public accounting firm
to confirm confidential or proprietary information and charges.  The cost of the internationally recognized
independent public accounting firm shall be
            (insert “borne by Operator”, “borne by Non-Operators who
requested the confirmation”, or “charged to the Joint Account”).   The Non-Operator will seek agreement with
the Affiliate on the audit scope to confirm the details and facts relating to
such information and charges.

If the independent public accounting firm of the Affiliate declines to
conduct the audit or is not internationally recognized, the Non-Operator will
seek agreement with the Affiliate on an accounting firm that is internationally
recognized .  The cost of using such firm
shall be
             
(insert 
“borne by Operator”, “borne by the Non-Operator who requested the audit”,
or “charged to the Joint Account”).

Operator will endeavor to cause its Affiliate to not unreasonably
withhold approval of the use of an internationally recognized independent
public accounting firm or the scope of examination requested by Non-Operators.

If all or part of the charges are not audited under (a) or (b) above,
the unaudited portion may be audited under (c) below.

(c)       Operator may request its
Affiliate to provide Non-Operators an annual report from an internationally
recognized independent public accounting firm attesting that charges billed
from such Affiliate to the Joint Account represent a complete and accurate
allocation of its costs to the Joint Operations, exclude any element of profit,
exclude any duplication of costs covered under Sections 2 and 3, and are
consistent in application to all of its activities.  The report will be furnished by the Operator
within 12 months of the request from the Non-Operator.  The cost of providing the annual report shall
be             (insert “borne by Operator” “borne by the Non-Operator who
requested the audit”, or “charged to the Joint Account”).

No amounts paid to an Affiliate of Operator, which the Non-Operator
seeks to audit, may be charged to the Joint Account if the Affiliate of the
Operator does not allow audit of such amounts as provided above.

o  ALTERNATIVE NO. 2 – AUDIT REPORT

The internal records of
an Operator’s Affiliate providing services to the Joint Operations may not be
audited by the Non-Operator.  However, in
addition to the information provided by the Operator under Section 1.8.2, and
upon request by a Non-Operator within 24 months following the end of the same
Calendar Year as provided in Section 1.8.1 above Operator will cause its
Affiliate to provide Non-Operator an annual report from an internationally
recognized independent public accounting firm. 
The report will attest that charges billed from such Affiliate to the
Joint Account represent a complete and accurate allocation of its costs to the
Joint Operations, exclude any element of profit, exclude any duplication of
costs covered under Sections 2 and 3, and are consistent in application to all
of its activities.  The report will be
furnished by the Operator within 12 months of the request from the
Non-Operator.  The cost of providing the
annual report shall be
            (insert “borne by Operator” “borne by the Non-Operator who
requested the audit”, or “charged to the Joint Account”).

 7
 

 

 

No amounts paid to an Affiliate of Operator, which the
Non-Operator seeks to audit, may be charged to the Joint Account if the
Affiliate of the Operator does not furnish the audit report as provided above.

o  ALTERNATIVE NO. 3 – INDEPENDENT PUBLIC AUDITOR

In addition to the information provided by the Operator under Section
1.8.2, a Non-Operator may seek to audit the books and records of an Affiliate
of Operator relating to the charges by the Affiliate to the Joint Account for
the same Calendar Year as provided in Section 1.8.1.  The audit shall be conducted by an
independent public accounting firm designated by the Affiliate.  The cost of such firm shall be
            (insert “borne by Operator”, “borne by Non-Operators who
requested the confirmation”, or “charged to the Joint Account”).   The Non-Operator will seek agreement with
the Affiliate on the audit scope to confirm the details and facts relating to
such charges. The audit scope proposed by Non-Operator shall be fair and
reasonable.

If the independent public accounting firm of the Affiliate declines to
conduct the audit or is not internationally recognized, the Non-Operator will
seek agreement with the Affiliate on a firm that is an internationally
recognized independent public accounting firm. 
The cost of using such firm shall be
             
(insert 
“borne by Operator”, “borne by the Non-Operator who requested the audit”,
or “charged to the Joint Account”).

Operator will endeavor to
cause its Affiliate to not unreasonably withhold approval of the use of an
internationally recognized independent public accounting firm or of the scope
of examination requested by Non-Operators.

No amounts paid to an Affiliate
of Operator, which the Non-Operator seeks to audit, may be charged to the Joint
Account if the Affiliate of the Operator does not allow audit of such amounts
as provided above and the scope of audit proposed by the Non-Operator was fair
and reasonable.

x  ALTERNATIVE NO. 4 – FULL AUDIT

In addition to the
information provided by the Operator under Section 1.8.2, and upon request by a
Non-Operator, Operator will cause its Affiliate to allow the Non-Operator to
audit the books and records of the Affiliate relating to the charges by the
Affiliate to the Joint Account for the same Calendar Year as provided in
Section 1.8.1 above.  The audit may be
conducted in the same manner as the audit of the books and records of Operator.

No amounts paid to an Affiliate of Operator, which the
Non-Operator seeks to audit, may be charged to the Joint Account if the
Affiliate of the Operator does not allow audit of such amounts as provided
above.

1.8.4                                 Any
Party may audit the records of an Affiliate of another Party relating to that
Affiliate’s charges under Section 2.7.1. 
The provisions of Section 1.8.3 shall apply mutatis
mutandis to such audits unless otherwise agreed by the Parties.
Should such charges be rejected under the provisions of 1.8.3, such charges
shall be charged back to the Party whose Affiliate provided the service.

Any Party may audit the records of Operator’s
Affiliate relating to charges under Section 2.6.  The provisions of Section 1.8.3 shall apply mutatis mutandis to such audits unless otherwise agreed by
the Parties.

Any Party may audit the records of a Non-Operator or
its Affiliate relating to charges under Section 2.7.3.  The provisions of Section 1.8.3 shall apply mutatis mutandis to such audit, unless

 8
 

 

 

otherwise agreed by the Parties.  Should such charges be rejected under the
provisions of 1.8.3, such charges shall be charged back to the Party whose
Affiliate provided the service.

1.8.5                                 Any information
obtained by a Party under the provisions of Section 1.8 which does not relate
directly to the Joint Operations shall be kept confidential and shall not be
disclosed to any party, except as would otherwise be permitted by Article
15.2(A)(3) and (10) of the Agreement.

1.8.6                                 In the event that the
Operator is required by law or the Contract to employ a public accounting firm
to audit the Joint Account and records of Operator relating to the accounting
hereunder, the cost thereof shall be a charge against the Joint Account, and a
copy of the audit shall be furnished to each Party.

1.8.7                                 At the conclusion of
each audit, the Parties shall endeavor to settle outstanding matters
expeditiously.  To this end the Parties
conducting the audit will make a reasonable effort to prepare and distribute a
written report to the Operator and all the Parties who participated in the
audit as soon as possible and in any event within 90 Days after the conclusion
of each audit.  The report shall include
all claims, with supporting documentation, arising from such audit together
with comments pertinent to the operation of the accounts and records.  Operator shall make a reasonable effort to
reply to the report in writing as soon as possible and in any event no later
than 90 Days after receipt of the report. 
Should the Non-Operators consider that the report or reply requires further
investigation of any item therein, the Non-Operators shall have the right to
conduct further investigation in relation to such matter notwithstanding the
provisions of Sections 1.7 and 1.8.1 that the period of 24 months may have
expired.  However, conducting such
further investigation shall not extend the 24 month period for taking written
exception to and making a claim upon the Operator for all discrepancies
disclosed by said audit. Such further investigations shall be commenced within
30 Days and be concluded within 60 Days after the receipt of such report or
reply, as the case may be.

1.8.8                                 All adjustments
resulting from an audit agreed between the Operator and the Non-Operator
conducting the audit shall be reflected promptly in the Joint Account by the
Operator and reported to the Non-Operator(s). 
If any dispute shall arise in connection with an audit, it shall be
reported to and discussed by the Operating Committee, and, unless otherwise
agreed by the parties to the dispute, resolved in accordance with the
provisions of Article 18 of the Agreement. If all the parties to the dispute so
agree, the adjustment(s) may be referred to an independent expert agreed to by
the parties to the dispute e.g. an independent accounting firm.  At the election of the parties to the
dispute, the decision of the expert will be binding upon such parties.  Unless otherwise agreed, the cost of such
expert will be shared equally by all parties to the dispute.

1.8.9                                 The
provisions of this Section 1.8 apply to audits conducted under Article 4.11(D)
of the Agreement except that the 60 Day advance notice and the advance
information provisions of Section 1.8.1 shall not apply.

1.9           ALLOCATIONS.

If it becomes necessary
to allocate any costs or expenditures to or between Joint Operations and any
other operations, such allocation shall be made on an equitable basis.  For informational purposes only, Operator
shall furnish a description of its allocation procedures pertaining to these
costs and expenditures and its rates for personnel and other charges, along
with each proposed Work Program and Budget. Such allocation basis shall be
subject to audit under Section 1.8.

 9
 

 

 

SECTION 2

DIRECT CHARGES

 

Operator shall charge the
Joint Account for all costs and expenditures incurred by Operator for the
conduct of Joint Operations within the limits of approved Work Programs and
Budgets or as otherwise specified in the Agreement .  Charges for services normally provided by an
operator such as those contemplated in Sections 2.7.2 and 2.7.3 which are
provided by a Party’s Affiliate shall reflect the cost to the Affiliate,
excluding profit, for performing such services, except as otherwise provided in
Section 2.6, Section 2.7.1, and Section 2.5.1 if selected.

The costs and
expenditures shall be recorded as required for the settlement of accounts
between the Parties hereto in connection with the rights and obligations under
the Agreement and for purposes of complying with the tax laws of the Country of
Operations and of such other countries to which any of the Parties may be
subject.

Chargeable costs and
expenditures may include:

2.1           LICENSES, PERMITS, ETC.

All costs, if any,
attributable to the acquisition, maintenance, renewal or relinquishment of
licenses, permits, contractual and/or surface rights acquired for Joint
Operations and bonuses paid in accordance with the Contract when paid by
Operator in accordance with the provisions of the Agreement.

2.2           SALARIES, WAGES AND RELATED COSTS.

Salaries, wages and related costs include everything constituting the
employees’ total compensation, as well as the cost to Operator of holiday,
vacation, sickness, disability benefits, living and housing allowances, travel
time, bonuses, and other customary allowances applicable to the salaries and
wages chargeable hereunder, as well as the costs to Operator for employee
benefits, including but not limited to employee group life insurance, group
medical insurance, hospitalization, retirement, severance payments required by
the laws or regulations of the Country of Operations

(Check only one of the following Alternative
Provisions.)

o    (additional severance payments in excess of
those provided by the laws or regulations of the Country of Operations shall be
chargeable to the Joint Account to the extent that they are in accordance with
Operator’s benefit policies),

o    (additional severance payments in excess of
those provided by the laws or regulations of the Country of Operations, which
are made in accordance with Operator’s benefit policies, shall be allocated to
the Joint Account in the proportion that the time the employee was directly
engaged in Joint Operations on a full time basis bears to the employee’s total
tenure with the Operator and its Affiliates),

x   (approval of the Parties (insert either “Operating Committee” or
“Parties”) shall be required to charge the Joint Account with any severance
payments in excess of those provided by the laws or regulations of the Country
of Operations),

and
other benefit plans of a like nature applicable to labor costs of Operator.

All costs associated with organizational restructuring (e.g.,
separation benefits, relocation costs, asset disposition costs) of Operator or
its Affiliates, other than those costs which are directly related to employees
of Operator who are directly engaged in Joint Operations on a full time basis,
will require the approval of the Parties to be chargeable to the Joint Account.

Any costs associated with Country of Operations benefit plans which are
not currently funded shall be accrued and not be paid by Non-Operators, unless
otherwise approved by the Operating Committee, until

 10
 

 

the same are due and payable to the employee, upon withdrawal of a
Party pursuant to the Agreement and then only by the withdrawing Party, or upon
termination of the Agreement, whichever occurs first.

Expenditures or
contributions made pursuant to assessments imposed by governmental authority
for payments with respect to or on account of employees described in Section
2.2.1 and Section 2.2.2 shall be chargeable to the Joint Account.

Check if desired.

o            OPTIONAL PROVISION

Because the funding of a
defined benefit plan is not necessarily representative of the cost to the
Operator for the retirement plan, the actuarially determined service cost shall
be charged to the Joint Account instead of the amount of cash paid to fund the
retirement plan.

2.2.1                                 The salaries, wages
and related costs of employees of Operator and its Affiliates temporarily or
permanently assigned in the Country of Operations and directly engaged in Joint
Operations shall be chargeable to the Joint Account.

2.2.2                                 The salaries, wages
and related costs of employees of Operator and its Affiliates temporarily or
permanently assigned outside the Country of Operations directly engaged in
Joint Operations and not otherwise covered in Section 2.7.2 shall be chargeable
to the Joint Account.

2.2.3                                 Costs for salaries,
wages and related costs may be charged to the Joint Account on an actual basis
or at a rate based upon the average cost in accordance with Operator’s usual
practice.  In determining the average
cost, expatriate and national employees’ rates shall be calculated separately
and reviewed at least annually.

2.2.4                                 Reasonable expenses
(including related travel costs) of those employees whose salaries and wages
are chargeable to the Joint Account under Sections 2.2.1 and 2.2.2 and for
which expenses the employees are reimbursed under the usual practice of
Operator shall be chargeable to the Joint Account.

2.2.5                                 If employees are
engaged in other activities in addition to the Joint Operations, the cost of
such employees shall be allocated on an equitable basis.

2.3           EMPLOYEE RELOCATION COSTS.

2.3.1                                 Except as provided in
Section 2.3.3, Operator’s cost of employees’ relocation to or from an
assignment with the Joint Operations, whether within or outside the Country of
Operations and whether permanently or temporarily assigned to the Joint
Operations, shall be chargeable to the Joint Account. If such employee works on
other activities in addition to Joint Operations, such relocation costs shall
be allocated on an equitable basis.

2.3.2                                 Such relocation costs
shall include transportation of employees, families, personal and household
effects of the employee and family, transit expenses, and all other related
costs in accordance with Operator’s usual practice.

2.3.3                                 Relocation costs to an
assignment that is not with the Joint Operations shall not be chargeable to the
Joint Account unless the place of the new assignment is the point of origin of
the employee or unless otherwise agreed by the Operating Committee.

 11

 

2.4           OFFICES, CAMPS, AND MISCELLANEOUS
FACILITIES.

Cost of maintaining any
offices, sub-offices, camps, warehouses, housing, and other facilities of the
Operator and/or Affiliates directly serving the Joint Operations.  If such facilities serve operations in
addition to the Joint Operations the costs shall be allocated to the properties
served on an equitable basis.

2.5           MATERIAL.

Cost, net of discounts taken by Operator, of Material purchased or
furnished by Operator.  Such costs shall
include, but are not limited to, export brokers’ fees, transportation charges,
loading, unloading fees, export and import duties and license fees associated
with the procurement of Material and in-transit losses, if any, not covered by
insurance.  So far as it is reasonably
practical and consistent with efficient and economical operation, only such
Material shall be purchased for, and the cost thereof charged to, the Joint
Account as may be required for immediate use.

Check if desired.

o                                  OPTIONAL
PROVISION

2.5.1                                 Purchasing
Fee.

When economical to do so, and required for the benefit of the Joint
Operations, Operator may request its Affiliates to provide purchasing,
expediting and traffic coordination services. 
Charges to the Joint Account for the provision of these purchasing services
shall be based on the Affiliate’s standard purchasing fee currently set at:

      %
on the amount of each purchase order subject to a minimum fee of
$       and a maximum fee of
$      per purchase order.

The fee shall be reviewed periodically by Operator’s Affiliates, and
future changes shall be made upward or downward as indicated by the Affiliate’s
cost experience for the provision of these purchasing services.  Any changes affecting the charges to the
Joint Account shall be subject to notification by Operator and approval by the
Parties.  Such charges shall be in lieu
of any charges for the same or similar services provided herein.

2.6           EXCLUSIVELY OWNED EQUIPMENT AND
FACILITIES OF OPERATOR AND AFFILIATES.

Charges for exclusively
owned equipment, facilities, and utilities of Operator or any of its Affiliates
at rates not to exceed the average commercial rates of non-affiliated third
parties then prevailing for like equipment, facilities, and utilities for use
in the area where the same are used hereunder. 
On request, Operator shall furnish Non-Operators a list of rates and the
basis of application.  Such rates shall
be revised from time to time if found to be either excessive or insufficient,
but not more than once every six months.

Exclusively owned
drilling tools and other equipment lost in the hole or damaged beyond repair
may be charged at replacement cost less depreciation plus transportation costs
to deliver like equipment to the location where used.

2.7           SERVICES.

2.7.1                                 The charges for
services provided by third parties, including the Affiliates of the respective
Parties which have contracted with Operator to perform services that are
normally provided by third parties, other than those services covered by
Section 2.7.2 and Section 2.7.3, shall be

 12
 

 

 

chargeable to the Joint Account. 
Such charges for services by the Affiliates of the respective Parties
shall not exceed those currently prevailing if performed by non-affiliated
third parties, considering quality and availability of services.

2.7.2                                 The
cost of services performed by Operator’s Affiliates technical and professional
staffs not located within the Country of Operation and not otherwise covered
under Section 2.2.2, shall be chargeable to the Joint Account. The individual
rates shall include salaries and wages of such technical and professional
personnel, lost time, governmental assessments, and employee benefits.  Costs shall also include all support costs
necessary for such technical and professional personnel to perform such
services, such as, but not limited to, rent, utilities, support staff,
drafting, telephone and other communication expenses, computer support,
supplies, depreciation, and other reasonable expenses.  Examples of such services include the
following:

Geologic Studies and Interpretation

Seismic Data Processing

Well Log Analysis, Correlation and Interpretation

Laboratory Services

Ecological and Environmental Engineering

Decommissioning (Abandonment) and Reclamation

Well Site Geology

Project Management and Engineering

Source Rock Analysis

Petrophysical Analysis

Geochemical Analysis

Drilling Supervision

Development Evaluation

Project Accounting and Professional Services

Other Data Processing

Check if desired.

o                    OPTIONAL
PROVISION 

Costs incurred as payment for access to, and use of, technical data,
intellectual property and know-how of the Operator’s group of Affiliates in
accordance with the technology participation agreement between the Operator and
its Affiliates and in accordance with the customary cost sharing system
applicable to operating companies within the Operator’s group of
Affiliates.  Such costs shall be included
in annual Work Program and Budgets as a separate line item subject to the
approval of the Operating Committee.

2.7.3                                 The cost of services
performed with the approval of Operator by the technical and professional
staffs of the Non-Operators and the Affiliates of the respective Non-Operators,
including the cost to such Affiliates and Non-Operators of their respective
secondees, shall be chargeable to the Joint Account.  The individual rates shall include salaries
and wages of such technical and professional personnel and secondees, lost
time, governmental assessments, and employee benefits.  Costs (other than for secondees) shall also
include all support costs necessary for such technical and professional
personnel to perform such services, such as, but not limited, to rent,
utilities, support staff, drafting, telephone and other communication expenses,
computer support, supplies, depreciation, and other reasonable expenses.

2.7.4                                 A
Non-Operator shall bill Operator for direct costs of services and of secondees
charged under the provisions of Section 2.7.3 on or before the last Day of each
month for charges for the preceding month, to which charges Non-Operator shall
(Option - insert
“not”, place a period after the word “rate” and delete the
remainder of this sentence) add an administrative overhead

 13
 

 

 

rate of 5.0%.  Within 30 Days after receipt of a bill for
such charges, Operator shall pay the amount due thereon.

Check if desired.

x           OPTIONAL PROVISION

2.7.5                                 The
charges for services under Section 2.7.2 and Section 2.7.3 shall not exceed
those currently prevailing if performed by non-affiliated third parties,
considering the quality and availability of such services.

2.8           INSURANCE.

Premiums paid for
insurance required by law, the Contract or the Agreement to be carried for the
benefit of the Joint Operations.

2.9           DAMAGES AND LOSSES TO PROPERTY.

2.9.1                                 All costs or
expenditures necessary to replace or repair damages or losses incurred by fire,
flood, storm, theft, accident, or any other cause shall be chargeable to the
Joint Account.  Operator shall furnish
Non-Operators written notice of damages or losses incurred in excess of U.S. $50,00.00
as soon as practical after report of the same has been received by
Operator.  All losses in excess of U.S.
$50,000.00 shall be listed separately in the monthly statement of costs and
expenditures.

2.9.2                                 Credits for
settlements received from insurance carried for the benefit of Joint Operations
and from others for losses or damages to Joint Property or Materials shall be
chargeable to the Joint Account.  Each
Party shall be credited with its Participating Interest share thereof except
where such receipts are derived from insurance purchased by Operator for less
than all Parties in which event such proceeds shall be credited to those
Parties for whom the insurance was purchased in the proportion of their
respective contributions toward the insurance coverage.

2.9.3                                 Expenditures incurred
in the settlement of all losses, claims, damages, judgments, and other expenses
for the account of Joint Operations shall be chargeable to the Joint Account.

2.10         LITIGATION, DISPUTE RESOLUTION AND
ASSOCIATED LEGAL EXPENSES.

The costs and expenses
of litigation, dispute resolution and associated legal services necessary for
the protection of the Joint Operations under the Agreement as follows:

2.10.1                          Legal services, other than
those provided by the Parties or their Affiliate employees, necessary or
expedient for the protection of the Joint Operations, and all costs and
expenses of litigation, arbitration or other alternative dispute resolution
procedure, including reasonable attorneys’ fees and expenses, together with all
judgments obtained against the Parties or any of them arising from the Joint
Operations.

2.10.2                          If the Parties (insert either “Operating Committee” or “Parties”) agree, litigation, arbitration or other alternative
dispute resolution procedures resulting from actions or claims affecting the
Joint Operations hereunder may be handled by the legal staff of one or any of
the Parties or their respective Affiliates; and a charge commensurate with the
reasonable costs of providing and furnishing such services rendered may be made
by the Party or its Affiliates providing such service to Operator for the Joint
Account.

 14
 

 

 

2.11         TAXES AND DUTIES.

All taxes, duties,
assessments and governmental charges, of every kind and nature, assessed or
levied upon or in connection with the Joint Operations, other than any that are
measured by or based upon the revenues, income and net worth of a Party.

If Operator or an
Affiliate is subject to income or withholding tax as a result of services
performed at cost for the operations under the Agreement, its charges for such
services may be increased (grossed up) by the amount of such taxes incurred.

2.12         ECOLOGICAL AND ENVIRONMENTAL.

Costs incurred on the
Joint Property as a result of statutory regulations for archaeological and
geophysical surveys relative to identification and protection of cultural
resources and/or other environmental or ecological surveys as may be required
by any regulatory authority.  Also, costs
to provide or have available pollution containment and removal equipment plus
costs of actual control, clean up and remediation resulting from
responsibilities associated with Hydrocarbon contamination as required by all
applicable laws and regulations.

2.13         DECOMMISSIONING (ABANDONMENT) AND
RECLAMATION.

Costs incurred for
decommissioning (abandonment) and reclamation of the Joint Property, including
costs required by governmental or other regulatory authority or by the
Contract.

2.14         OTHER EXPENDITURES.

Any other costs and
expenditures incurred by Operator for the necessary and proper conduct of the
Joint Operations in accordance with approved Work Programs and Budgets or as
otherwise specified in the Agreement and not covered in Section 2 or in Section
3.

 15
 

 

 

SECTION 3

INDIRECT CHARGES

3.1           PURPOSE.

Operator shall charge
the Joint Account monthly for the cost of indirect services and related office
costs of Operator and its Affiliates not otherwise provided in this Accounting
Procedure. Indirect costs chargeable under Section 3 represent the cost of
general assistance and support services provided by Operator and its Affiliates.  These costs are such that it is not practical
to identify or associate them with specific projects but are for services which
provide the Joint Operations with needed and necessary resources which Operator
requires and provide a real benefit to Joint Operations.  No cost or expenditure included under Section
2 shall be included or duplicated under Section 3.  The charges under Section 3 are not subject
to audit under Sections 1.8.1 and 1.8.2 other than to verify that the overhead
percentages are applied correctly to the expenditure basis.

3.2           AMOUNT.

3.2.1                     The indirect charge under Section
3.1 for any month shall equal the greater of the total amount of indirect
charges for the period beginning at the start of the Calendar Year through the
end of the period covered by Operator’s invoice (“Year-to-Date”) determined
under Section 3.2.2, less indirect charges previously made under
Section 3.1 for the Calendar Year in question, or the amount of the
minimum assessment determined under Section 3.2.3, calculated on an
annualized basis (but reduced pro rata for periods of less than one year), less
indirect charges previously made under Section 3.1 for the Calendar Year
in question.

3.2.2                     Unless exceeded by the minimum
assessment under Section 3.2.3, the aggregate Year-to-Date indirect
charges shall be a percentage of the Year-to-Date expenditures, calculated on
the following scale (U.S. Dollars):

Annual
Expenditures

$0 to $250,000 of expenditures = [*]

Next $250,000 of expenditures = [*]

Excess above $500,000 of expenditures = [*]

3.2.3                     A minimum amount of U.S. [*] shall be assessed each
Calendar Year calculated from the Effective Date and shall be reduced pro rata
for periods of less than a year.

3.2.4                     Indirect Charge for Projects.

As to major projects (such as, but not limited to, pipelines, gas
reprocessing and processing plants, final loading and terminalling facilities,
and dismantling for decommissioning of platforms and related facilities) when
the estimated cost of each project amounts to more than U.S. $ 30,000,000, a
separate indirect charge for such project shall be approved by the Parties (here insert either “Operating Committee” or “Parties”) at the time of approval of the project.

Check if
desired.

o            OPTIONAL PROVISION

During its process of winding-up Joint Operations Operator shall have
the right to charge the greater of the sliding scale percentage rate or the
minimum indirect charge for a period of     months.  If the winding-up process continues beyond
the end of such period, the charge shall be confined to and based upon the
sliding scale percentage rate.

 16
 

 

 

Check if desired.

o            OPTIONAL PROVISION

Notwithstanding the foregoing, the indirect rates and related
calculation method for development operations, production operations, and
dismantling for decommissioning of platforms and related facilities shall be
agreed upon by the           
(here insert either “Operating Committee”
or “Parties”) prior to the submission of
the first annual budget for those phases of operations.

Check if desired.

o            OPTIONAL PROVISION

At
the beginning of each year, the dollar amounts noted in Section 3.2 shall be
adjusted based on the previous year’s annual change in the
                    
Index as published by
                         .  For this purpose, the starting index base
shall be
                  
as published on
                ,
20   .

3.3           EXCLUSIONS.

The expenditures used to calculate the monthly indirect charge shall
not include the indirect charge (calculated either as a percentage of
expenditures or as a minimum monthly charge), rentals on surface rights
acquired and maintained for the Joint Account, guarantee deposits, pipeline
tariffs, concession acquisition costs, bonuses paid in accordance with the
Contract, royalties and taxes on production or revenue to the Joint Account
paid by Operator, expenditures associated with major construction projects for
which a separate indirect charge is established hereunder, payments to third
parties in settlement of claims, and other similar items.

Credits arising from any
government subsidy payments, disposition of Material, and receipts from third
parties for settlement of claims shall not be deducted from total expenditures
in determining such indirect charge.

 17
 

 

 

SECTION 4 

ACQUISITION OF MATERIAL

4.1           ACQUISITIONS.

Materials
purchased for the Joint Account shall be charged at net cost paid by the
Operator.  The price of Materials
purchased shall include, but shall not be limited to export broker’s fees,
insurance, transportation charges, loading and unloading fees, import duties,
license fees, and demurrage (retention charges) associated with the procurement
of Materials,

(Check the following Optional Provision only if the
Optional Provision for Section 2.5.1 is selected.)

o            OPTIONAL PROVISION

the purchasing fee provided for in Section 2.5.1, and applicable taxes,
less all discounts taken.

4.2           MATERIALS FURNISHED BY OPERATOR.

Materials required for
operations shall be purchased for direct charge to the Joint Account whenever
practicable, except the Operator may furnish such Materials from its stock
under the following conditions:

4.2.1                                 New
Materials (Condition “A”).

New Materials transferred from the warehouse or other properties of
Operator shall be priced at net cost determined in accordance with Section 4.1
as if Operator had purchased such new Material just prior to its transfer.

Such net costs shall in
no event exceed the then current market price.

4.2.2                                 Used
Materials (Conditions “B” and “C”).

4.2.2.1                                               Material
which is in sound and serviceable condition and suitable for use without repair
or reconditioning shall be classed as Condition “B” and priced at 75% of such
new purchase net cost at the time of transfer.

4.2.2.2                                               Materials
not meeting the requirements of Section 4.2.2.1, but which can be made suitable
for use after being repaired or reconditioned, shall be classed as Condition “C”
and priced at 50% of such new purchase net cost at the time of transfer.  The cost of reconditioning shall also be
charged to the Joint Account provided the Condition “C” price, plus cost of
reconditioning, does not exceed the Condition “B” price; and provided that
Material so classified meet the requirements for Condition “B” Material upon
being repaired or reconditioned.

4.2.2.3                                               Material,
which cannot be classified as Condition “B” or Condition “C”, shall be priced
at a value commensurate with its use.

4.2.2.4                                               Tanks,
derricks, buildings, and other items of Material involving erection costs, if
transferred in knocked-down condition, shall be graded as to condition as

 18
 

 

provided in Section 4.2.2, and priced on the basis of
knocked-down price of like new Material.

4.2.2.5                                               Material
including drill pipe, casing and tubing, which is no longer useable for its
original purpose but is useable for some other purpose, shall be graded as to condition
as provided in Section 4.2.2.  Such
Material shall be priced on the basis of the current price of items normally
used for such other purpose if sold to third parties.

4.3           PREMIUM PRICES.

Whenever
Material is not readily obtainable at prices specified in Sections 4.1 and 4.2
because of national emergencies, strikes or other unusual causes over which
Operator has no control, Operator may charge the Joint Account for the required
Material at Operator’s actual cost incurred procuring such Material, in making
it suitable for use, and moving it to the Contract Area, provided that notice
in writing, including a detailed description of the Material required and the
required delivery date, is furnished to Non-Operators of the proposed charge at
least 30 Days (or such shorter period as may be specified by Operator) before
the Material is projected to be needed for operations and prior to billing
Non-Operators for such Material the cost of which exceeds U.S. $100,000.  Each Non-Operator shall have the right, by so
electing and notifying Operator within 20 Days (or such shorter period as may
be specified by Operator) after receiving notice from Operator, to furnish in
kind all or part of his share of such Material per the terms of the notice
which is suitable for use and acceptable to Operator both as to quality and
time of delivery.  Such acceptance by
Operator shall not be unreasonably withheld. 
If Material furnished is deemed unsuitable for use by Operator, all
costs incurred in disposing of such Material or returning Material to owner
shall be borne by the Non-Operator furnishing the same unless otherwise agreed
by the Parties.  If a Non-Operator fails
to properly submit an election notification within the designated period,
Operator is not required to accept Material furnished in kind by that
Non-Operator.  If Operator fails to
submit proper notification prior to billing Non-Operators for such Material,
Operator shall only charge the Joint Account on the basis of the price allowed
during a “normal” pricing period in effect at time of movement.

4.4           WARRANTY OF MATERIAL FURNISHED BY
OPERATOR.

Operator
does not warrant the condition or fitness for the purpose intended of the
Material furnished. In case defective Material is furnished by Operator for the
Joint Account, credit shall not be passed to the Joint Account until adjustment
has been received by Operator from the manufacturers or their agents.

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SECTION 5

DISPOSAL OF MATERIALS

5.1           DISPOSAL.

Operator shall be under
no obligation to purchase the interest of Non-Operators in new or used surplus
Materials.  Operator shall have the right
to dispose of Materials but shall advise and secure prior agreement of the
Operating Committee of any proposed disposition of Materials having an original
cost to the Joint Account either individually or in the aggregate of U.S.
$25,000 or more.  When Joint Operations
are relieved of Material charged to the Joint Account, Operator shall advise
each Non-Operator of the original cost of such Material to the Joint Account so
that the Parties may eliminate such costs from their asset records.  Credits for Material sold by Operator shall
be made to the Joint Account in the month in which payment is received for the
Material.  Any Material sold or disposed
of under this Section 5 shall be on an “as is, where is” basis without
guarantees or warranties of any kind or nature. 
Costs and expenditures incurred by Operator in the disposition of
Materials shall be charged to the Joint Account.

5.2           MATERIAL PURCHASED BY A PARTY OR
AFFILIATE.

Proceeds received from Material purchased from the Joint Property by a
Party or an Affiliate thereof shall be credited by Operator to the Joint
Account, with new Material valued in the same manner as new Material under
Section 4.2.1 and used Material valued in the same manner as used Material
under Section 4.2.2, unless otherwise agreed by the Parties (insert either “Operating Committee” or “Parties”).

5.3           DIVISION IN KIND.

Division of Material in kind, if made between the Parties, shall be in
proportion to their respective interests in such Material.  Each Party will thereupon be charged
individually with the value (determined in accordance with the procedure set
forth in Section 5.2) of the Material received or receivable by it.

5.4           SALES TO THIRD PARTIES.

Proceeds received from Material purchased from the Joint Property by
third parties shall be credited by Operator to the Joint Account at the net
amount collected by Operator from the buyer. 
If the sales price is less than the value determined in accordance with
the procedure set forth in Section 5.2, then approval by the Parties (insert either “Operating Committee” or “Parties”) shall be required prior to the sale.  Any claims by the buyer for defective
materials or otherwise shall be charged back to the Joint Account if and when
paid by Operator.

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SECTION 6 

INVENTORIES

6.1           PERIODIC INVENTORIES - NOTICE AND
REPRESENTATION.

At reasonable intervals,

Check the following Optional Provision if desired.

x           OPTIONAL PROVISION

but
at least annually,

inventories
shall be taken by Operator of all Material held in warehouse stock on which
detailed accounting records are normally maintained.  The expense of conducting periodic
inventories shall be charged to the Joint Account.  Operator shall give Non-Operators written notice
at least 60 Days in advance of its intention to take inventory, and
Non-Operators, at their sole cost and expense, shall each be entitled to have a
representative present.  The failure of
any Non-Operator to be represented at such inventory shall bind such
Non-Operator to accept the inventory taken by Operator.  Operator shall in any event furnish each
Non-Operator with a reconciliation of overages and shortages.  Inventory adjustments to the Joint Account
shall be made for overages and shortages. 
Any adjustment equivalent to U.S. $25,000 or more shall be brought to
the attention of the Operating Committee.

6.2           SPECIAL INVENTORIES.

Whenever there is a sale
or change of a Participating Interest in the Agreement, a special inventory may
be taken by the Operator provided the seller and/or purchaser of such interest
agrees to bear all of the expense thereof. 
In such cases, both the seller and the purchaser shall be entitled to be
represented and shall be governed by the inventory so taken.

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APPENDIX 1

1.6.13     Funding by Operator

EXAMPLE NO. 1

1.6.13.1                                        Notwithstanding
any of the provisions of Sections 1.6.1 through 1.6.6 to the contrary, Operator
may elect to fund the costs of the Joint Operations and bill each Non-Operator
for its Participating Interest share of such funding pursuant to the provisions
of Section 1.6.13.  Operator shall
exercise such election by submission of notice to  Non-Operators at the time of submission of
any proposed Work Program and Budget to the Parties pursuant to Article 6 of
the Agreement.  In consideration for such
funding, each Non-Operator shall pay Operator the financing charge specified in
Section 1.6.13.3.

1.6.13.2                                        Not later than
the 10th Day after the end of any month for which the
Operator has funded the Joint Operations, Operator shall bill each Non-Operator
for (1) its share of the cash expenditure, and (2) the financing charge
calculated in accordance with Section 1.6.13.3.

1.6.13.3                                        Operator’s
financing charge to a Non-Operator for funding the Joint Operations shall be calculated
in accordance with the following formula:

F = (C x P) x I x S/365

Where:

F = the finance charge payable by the Non-Operator.

C = cash expenditures funded by the Operator on behalf
of the Parties in accordance with Section 1.6.13.1.

P = the Participating Interest of the Non-Operator.

I = interest at the London Interbank Offered U S Dollar rate (“LIBOR”)
for 1 month specified in the Financial Times or if not published, then by The
Wall Street Journal, applicable on the 15th Day of the month during which such
funding cost was incurred, or if such Day is not a Business Day, the first such
Business Day thereafter.

S = the number of Days from the fifteenth Day of the
month during which such funding costs were incurred until the due date for the
payment (both dates inclusive).

1.6.13.4                                        Notwithstanding
the provisions of Section 1.6.8, each bill under Section 1.6.13 shall be due on
the 20th Day of the month in which the bill was issued,
or if such Day is not a Business Day in the Country of Operations, the first
Business Day thereafter.

1.6.13.5                                        In any
subsequent Calendar Year, Operator may elect to adopt a cash call procedure in
accordance with Sections 1.6.1 through 1.6.6 by notice submitted to the
Non-Operators at the time of submission of any proposed Work Program and Budget
to the Parties pursuant to Article 7 of the Agreement.

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1.6.13.6                                        Whenever a
successor Operator is appointed pursuant to Article 4.11 of the Agreement, such
successor Operator shall notify the Non-Operators, within 30 Days of its appointment,
as to whether it intends to adopt a cash call procedure or an Operator funding
procedure for the Joint Operations.

EXAMPLE NO. 2

1.6.13.1                                        Notwithstanding
any of the provisions of Sections 1.6.1 through 1.6.6 to the contrary, the
Operator may elect to fund the costs of Joint Operations on behalf of the
Parties during each accounting period subject to reimbursement of such costs by
the Parties pursuant to Section 1.6.13.

1.6.13.2                                         Not later than
the 10th Day after the end of any month for which the
Operator has funded the Joint Operations, Operator shall bill each Non-Operator
for (1) its share of the cash expenditure, and (2) the financing charge
calculated in accordance with Section 1.6.13.4.

1.6.13.3                                        When significant expenditures are envisaged
during a year Operator may request a funding payment that will remain with
Operator for a fixed period of time. However, such payment, if any, will be
periodically reviewed and adjustments made as appropriate between Operator and
the other Parties. Any funding payment requested by Operator will be called for
receipt on the first Day of a calendar month subject to the provision of 10
Days notice of settlement.

1.6.13.4                                        Operator’s financing charge to a Non-Operator for
funding the Joint Operations shall be calculated in accordance with the
following formula:

F = [(CxP) x (I x S/365)] less [D x (I x T/365)]

Where:

F = the financing charge or credit to be settled between the relevant
Non-Operator and Operator.

C = cash expenditures funded by the Operator on behalf of the Parties
in accordance with Section 1.6.13.1.

D = the funding payment received by the Operator from the Non-Operator
pursuant to Section 1.6.13.3.

P = the Participating Interest of the relevant Non-Operator under the
Agreement;

I = interest at London Interbank Offered U.S. Dollar rate (“LIBOR”) for
1 month specified in the Financial Times or if not published, the by The Wall
Street Journal applicable on the 15th Day of the month during which such
funding cost was incurred, or if such Day is not a Business Day, the first such
Business Day in London, the first such Business Day thereafter.

S = the number of Days from the 15th Day of the month during which
funding was incurred until the due date for the payment (both dates inclusive).

 23
 

 

 

T = the number of Days in the month relating to the invoice.

1.6.13.5                                         Notwithstanding
the provisions of Section 1.6.8, each bill under Section 1.6.13 shall be due on
the 20th Day of the month in which the bill was issued,
or if such Day is not a Business Day in the Country of Operations, the first
Business Day thereafter.

1.6.13.6                                        In times of
major expenditures, Operator reserves the right to introduce cash call advances
as provided in Section 1.6.1 through 1.6.6 as an alternative method of funding
Joint Operations.

o                    OPTIONAL
PROVISION

“Similarly cash calls
shall also be applied upon the unanimous request of all Non-Operators.

1.6.13.7                                         In any
subsequent Calendar Year, Operator may elect to adopt a cash call procedure in
accordance with Sections 1.6.1 through 1.6.6 by notice submitted to the
Non-Operators at the time of submission of any proposed Work Program and Budget
to the Parties pursuant to Article 7 of the Agreement.

1.6.13.8                                        Whenever a successor Operator is appointed
pursuant to Article 4.11 of the Agreement, such successor Operator shall notify
Non-Operators, within 30 Days of its appointment, as to whether it intends to
adopt a cash call procedure or an Operator funding procedure for the Joint
Operations.

 24

 

 

* * * * * * * * * * * * * * * * * * * *

THIS PAGE IS NOT A PART OF

THE ACCOUNTING PROCEDURE OR

THE OPERATING AGREEMENT

* * * * * * * * * * * * * * * * *
* * * * *

References to the
following Model Operating Agreement Articles may be found in this Accounting
Procedure in the Sections indicated.

	
  Article 4.11

  	
   

  	
  Section 1.6.13.5, 1.6.13.8 (Appendix 1)

  
	
  Article 6

  	
   

  	
  Section 1.6.13.1 (Appendix 1)

  
	
  Article 6.4

  	
   

  	
  Sections 1.5.1, 1.6.1 and 1.6.2

  
	
  Article 7

  	
   

  	
  Sections 1.6.13.5, 1.6.13.7 (Appendix 1)

  
	
  Article 8

  	
   

  	
  Section 1.6.9

  
	
  Article 15

  	
   

  	
  Section 2.7.2 Optional

  
	
  Article
  15.1(A)(3) and (10)

  	
   

  	
  Section 1.8.4

  
	
  Article 18

  	
   

  	
  Section 1.8.8

  

 

 

 1

 

 

Schedule “C”

This is Schedule “C” attached to and forming part
of an Amended and Restated

Participation Agreement, dated December 30, 2005 between Challenger Energy
Corp.,

and Canadian Superior Energy Inc.

 1

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