Document:

Exhibit 10.3

 

EXPLORATION AND PRODUCTION CONTRACT NO. 27 OF 2009

MINIRONDA 2008 — LLANOS ORIENTALES BLOQUE LLA-34

 

AGENCIA NACIONAL DE HIDROCARBUROS/ NATIONAL HYDROCARBON AGENCY

 

	
SECTOR:
    	
LLANOS ORIENTALES BLOQUE LLA-34
    
	
CONTRACTOR:
    	
LLANOS 34 JOINT VENTURE (WINCHESTER   OIL AND GAS S.A.- RAMSHORN INTERNATIONAL LIMITED
    
	
DATE:
    	
MARCH 13, 2009
    

 

The Contracting parties:

 

Agencia Nacional de Hidrocarburos hereinafter referred to as ANH, a special administrative unit accountable the Ministry of Mines and Energy, created under Decree Law 1760 of June 26, 2003, having its principal place of business in Bogotá, D.C., represented by ARMANDO ZAMORA REYES, of legal age, bearer of Citizenship Card No. 19.303.017 issued in Bogotá, D.C., domiciled in Bogotá, D.C. and who states:

 

That as General Director of ANH, he acts on behalf of and represents this Agency.

 

That as evidenced in Minutes No. 15 of the Board of Director’s meeting held on December 18, 2007, he has been authorized by the Board of Directors of ANH to enter into this Agreement.

 

That under Resolution 254 dated June 20, 2008, the General Director acting under the authority granted by the Agency’s Superior Council in Agreement 01 of 2007, included the following areas as part of the Mini Ronda 2008 to contract the exploration and exploitation of hydrocarbons: Valle Medio Magdalena-Catatumbo, Valle Superior of the Magdalena River, Llanos Orientales, Putumayo and the Cordillera Oriental.

 

That under Resolution No. 401 dated July 30, the General Director of the ANH ordered the opening of a call to participate in Mini Ronda 2008 — Valle Medio Magdalena-Catatumbo, Valle Superior of the Magdalena River, Llanos Orientales, Putumayo and the Cordillera Oriental.

 

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After completing the above process, ANH awarded Bloque LLA-34 in Resolution No. 694 of December 26, 2008 to Winchester Oil and Gas S.A. and Ramshorn International Limited, which had presented a joint proposal, under the agreement that they would enter into a Joint Venture Agreement.

 

and UNION TEMPORAL LLANOS 34, formed by i) Ramshorn International Limited, a company organized and existing under the laws of Bermuda having its principal place of business in Bermuda, and a branch office established in Bogotá D.C., in accordance with public deed No. 3553 issued December 22, 2003 at the office of 11th Public Notary of Bogotá D.C., represented by Gladys Rocío del Pilar Bernal Duque, of legal age, a Colombian citizen, bearer of Citizenship Card No. 52.029.083 issued in Bogota, and ii) Winchester Oil and Gas S.A., a company organized and existing under the laws of Panama, having its principal place of business in Panama City and a branch office established in Bogotá D.C., in accordance with public deed No. 3429 issued on November 29, 2002, at the office of the 36th Public Notary of Bogotá D.C., represented by Orlando Sardi de Lima, of legal age, a Colombian citizen, bearer of Citizenship Card No. 14.983.640 issued in Cali.

 

That the Articles of Incorporation of Union Temporal Llanos 34 were executed on December four (4), 2008.

 

That Orlando Sardi de Lima is the main representative of Union Temporal Llanos 34 and that Gladys Rocío del Pilar Bernal Duque is the deputy representative.

 

That both are fully authorized to enter into this agreement, as stated in the Articles of Incorporation of Union Temporal Llanos 34, executed on December four (4), 2008.

 

The undersigned hereby state under oath that neither they nor the Joint Venture they represent have any incompatibility or are in any way ineligible to execute this Agreement

 

That the companies that make up Union Temporal Llanos 34, have proven to have and agree to maintain their legal, financial capacity, their technical expertise as well as the necessary professional skills to perform the activities included herein.

 

For all purposes hereof, Union Temporal Llanos 34 will be referred to as THE CONTRACTOR.

 

The companies that are part of Union Temporal Llanos 34 will be jointly and severally liable to the ANH and Third Parties for the full compliance of this Agreement.

 

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ANH and THE CONTRACTOR hereby agree to enter into this Exploration and Production Agreement (E&P) under the terms and conditions set forth in Annex A and in Annexes B,C,D, and E which are an integral part of this Agreement.

 

This Agreement will become effective upon its execution by the parties.

 

Notices and communications between the parties will be sent to the representative of each party, at the address indicated as the office registered for notices, which on the date hereof are as follows:

 

ANH: Calle 99 No. 9A-54, Piso 14, Bogotá, Colombia.

 

THE CONTRACTOR:

 

i)                                         RAMSHORN INTERNATIONAL LIMITED: Carrera 9 NO. 74-08, oficina 806, Bogotá, Colombia.

 

ii)                                      Winchester Oil and Gas S.A., Carrera 7 No. 71-52, Torre B, Oficina 1101, Bogotá, Colombia.

 

Any change in the individual acting as representative or in the addresses stated above must be officially reported to the other Party within the five (5) working days following the date in which it is registered before the Colombian Chamber of Commerce.

 

Communications between the parties with regards to his Agreement are effective upon receipt thereof by the Party to which they are addressed and at the address indicated above and in any event, when said communications have been received at the address registered at the Colombian Chamber of Commerce for judicial notices.

 

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In witness whereof, this Agreements is executed in Bogota, on the thirteenth (13) day of March, 2009 in three (3) originals.

 

AGENCIA NACIONAL DE HIDROCARBUROS

 

/s/ JOSE ARMANDO ZAMORA REYES

JOSE ARMANDO ZAMORA REYES

General Director

 

UNION TEMPORAL LLANOS 34

 

/s/ ORLANDO SARDI DE LIMA

ORLANDO SARDI DE LIMA

Representative

WINCHESTER OIL AND GAS S.A.

 

/s/ GLADYS ROCIO DEL PILAR BERNAL DUQUE

GLADYS ROCIO DEL PILAR BERNAL DUQUE

Representative

RAMSHORN INTERNATIONAL LIMITED

 

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ANNEX A- TERMS AND CONDITIONS

 

TABLE OF CONTENTS

	
 
    	
 
    
	
Clause
    	
 
    	
Section
    	
 
    	
Page
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
DEFINITIONS
    	
 
    	
9
    
						

 

	
CHAPTER I- PURPOSE, SCOPE AND DURATION
    
	
 
    
	
1. Purpose
    	
11
    
	
2. Scope
    	
11
    
	
3. Contract Area
    	
14
    
	
4. Duration and   Periods
    	
15
    
	
5. Exclusion of   Rights Over Other Natural Resources 
    	
17
    
	
 
    	
 
    
	
CHAPTER II- EXPLORATION ACTIVITIES
    
	
 
    	
 
    
	
6. Mandatory   Exploration Program
    	
18
    
	
7. Exploration   Plan
    	
18
    
	
8. Modifications   to the Mandatory Exploration Program 
    	
19
    
	
9. Subsequent   Exploration Program
    	
19
    
	
10. Additional   Exploration
    	
20
    
	
11. Remaining   Investment
    	
20
    
	
12. Problems   Arising During the Drilling of Exploration Wells 
    	
21
    
	
13. Notice of   Discovery
    	
21
    
	
14. Assessment   Program
    	
21
    
	
15. Declaration   of Marketability
    	
24
    
	
 
    	
 
    
	
CHAPTER III- PRODUCTION   ACTIVITIES
    
	
 
    	
 
    
	
16. Production   Area
    	
24
    
	
17. Broadening   the Production Area
    	
24
    
	
18. Development   Plan
    	
25
    
	
19. Delivery of   the Development Plan
    	
25
    
	
20. Updating the   Development Plan
    	
26
    
	
21. Annual   Operations Plan
    	
26
    
	
22. Abandonment   Fund
    	
27
    

 

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CHAPTER IV- CONDUCTING OPERATIONS
    
	
 
    	
 
    
	
23. Autonomy
    	
29
    
	
24. Operator
    	
29
    
	
25. Designated   Operator
    	
29
    
	
26. Obtaining   Permits
    	
30
    
	
27.   Subcontractors
    	
30
    
	
28. Metering
    	
30
    
	
29. Production   Availability
    	
31
    
	
30. Unification
    	
31
    
	
31. Natural Gas   Present
    	
31
    
	
32. Damages and   Loss of Assets
    	
32
    
	
33. Inspection   and Follow Up
    	
32
    
	
34. Programs to   Benefit Communities
    	
32
    
	
 
    	
 
    
	
CHAPTER V- ROYALTIES AND OTHER   GENERAL OBLIGATIONS
    
	
 
    	
 
    
	
35. Royalties
    	
34
    
	
36. Price for   Internal Supply
    	
34
    
	
37. Local Goods   and Services
    	
34
    
	
 
    	
 
    
	
CHAPTER VI- CONTRACTUAL RIGHTS   OF ANH
    
	
 
    	
 
    
	
38. Rights for   Subsoil Use
    	
34
    
	
39. Fees for   High Prices
    	
35
    
	
40. Economic   Right for Participation in Production
    	
35
    
	
41. Economic   Rights in Production Tests
    	
35
    
	
42.   Participation in Production During the Extension of the Production Period
    	
35
    
	
43. Technology   Transfer
    	
35
    
	
 
    	
 
    
	
CHAPTER VII- INFORMATION AND   CONFIDENTIALITY
    
	
 
    	
 
    
	
44. Supply of   Technical Information
    	
37
    
	
45.   Confidentiality of the Information
    	
37
    
	
46. Rights Over   Information
    	
37
    

 

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47.   Environmental and Social Information
    	
37
    
	
48. Half Yearly   Executive Report
    	
38
    
	
49.   Informational Meetings
    	
38
    
	
 
    	
 
    
	
CHAPTER VIII- GUARANTEES,   RESPONSIBILITIES AND INSURANCE
    
	
 
    	
 
    
	
50. Compliance   Guarantee
    	
38
    
	
51.   Responsibilities of the Contractor 
    	
37
    
	
52. Compliance   Policy for Labor Obligations
    	
42
    
	
53. Insurance
    	
42
    
	
54. Indemnity
    	
42
    
	
 
    	
 
    
	
CHAPTER IX- RELINQUISHING AREAS
    
	
 
    	
 
    
	
55. Mandatory   Relinquishing of Areas
    	
43
    
	
56. Voluntary   Relinquishing of Areas
    	
43
    
	
57. Limiting the   Areas Relinquished
    	
43
    
	
58. Restoring   Relinquished Areas
    	
43
    
	
59. Formalizing   Relinquished Areas
    	
43
    
	
 
    	
 
    
	
CHAPTER X- RESOLUTORY   CONDITIONS, BREACH AND PENALTIES
    
	
 
    	
 
    
	
60. Prior   Resolutory Conditions
    	
43
    
	
61. Procedure in   Case of a Breach
    	
44
    
	
62. Penalties
    	
44
    
	
 
    	
 
    
	
CHAPTER XI- TERMINATION
    
	
 
    	
 
    
	
63. Causes for   Termination
    	
45
    
	
64. Termination   of the Agreement for Expiration of the Exploration Period
    	
45
    
	
65. Voluntary   Termination of the Exploration Period
    	
45
    
	
66. Unilateral   Termination
    	
46
    
	
67. Termination   due to Failure to Comply
    	
46
    
	
68. Mandatory   Termination and Expiration
    	
46
    
	
69. Reversion of   Assets
    	
44
    

 

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70. Later   Obligations
    	
47
    
	
71. Abandonment
    	
48
    
	
72. Liquidation   of this Agreement
    	
48
    
	
 
    	
 
    
	
CHAPTER XII- SETTLEMENT OF   DISPUTES
    
	
 
    	
 
    
	
73. Executive   Stage
    	
49
    
	
74. Expert   Intervention and Arbitration
    	
49
    
	
 
    	
 
    
	
CHAPTER XIII- FINAL   DISPOSITIONS
    
	
 
    	
 
    
	
75. Assignment   Rights
    	
51
    
	
76. Force   Majeure and Acts of Third Parties
    	
51
    
	
77. Taxes
    	
53
    
	
78. Currency
    	
53
    
	
79. Applicable   Law
    	
53
    
	
80. Language
    	
53
    
	
81. Domicile
    	
54
    
	
 
    	
 
    
	
OTHER ANNEXES
    	
 
    
	
 
    	
 
    
	
Annex B-   Contract Area
    	
57
    
	
Annex C-   Mandatory Exploration Program
    	
59
    
	
Annex D-   Economic Rights
    	
61
    
	
Annex E — Model   Letter of Credit
    	
65
    

 

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DEFINITIONS

 

For the purposes hereof and without prejudice to any legal definitions that may apply, the terms stated below will have the meaning provided herein:

 

Abandonment: The closing and abandonment of wells, the dismantling of constructions and the cleaning and environmental restoration of areas in which Exploration, Assessment, or Production Operations have been conducted by virtue of this Contract, pursuant to Colombian law.

 

Year: The period of twelve (12) consecutive months according to the Gregorian calendar, counted as of a specific date.

 

Calendar Year: The twelve month period between January first (1st) and December thirty first (31st), both included, of each year.

 

Contract Area: The surface and its projection into the subsoil as identified in Chapter I, and whose boundaries are indicated in Annex B, in which THE CONTRACTOR is authorized by virtue of this Agreement, to undertake the Operations for the Exploration, Assessment and Production of hydrocarbons that are the subject of this Agreement.

 

Assessment Area: The portion of the Contract Area in which THE CONTRACTOR made a Discovery, and in which the CONTRACTOR decides to perform an Assessment Program in order to determine whether or not it is marketable under Clause 14.  This area will be framed on the surface, as a regular polygon preferably four-sided, which will include the limits of the vertical projection on the surface of the geological structure or trap, which contains the Discovery.

 

Production Area: The portion of the Contract Area containing one or more of the Commercial Fields, as determined in Chapter III. The area of each Commercial field will include the limits of the vertical projection on the surface of its oil field or oil fields and that is determined by the Ministry of Mines and Energy pursuant to Decree 1895 of 1973, Decree 3229 of 2003 or with any laws that amend or supersede them.

 

Barrel: The unit to measure the volume of Liquid Hydrocarbons equivalent to forty two (42) US gallons, corrected to standard conditions (a temperature of 60° Fahrenheit and one atmosphere of absolute pressure).

 

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Best Oil Industry Practices: These are good, safe and efficient operations and procedures, commonly used by prudent and diligent operators in the international oil industry, under conditions and circumstances similar to those arising in performing the activities of this Agreement, mainly in matters related to the use of proper methods and processes to obtain the maximum economic benefit in the final recovery of reserves, reduction of losses, operational safety, and protection of the environment, amongst others, to the extent that they are not contrary to Colombian law.

 

Commercial Field: Portion of the Contract Area, in the subsurface of which one or more oil fields have been discovered, and which THE CONTRACTOR has decided to exploit commercially.

 

Declaration of Marketability:  Written communication addressed by THE CONTRACTOR to ANH, declaring that the Discovery it has made in the Contract Area is a Commercial Field.

 

Discovery: A conventional oil field is considered discovered when drilling using a drill or equivalent equipment allows finding of the rock where hydrocarbons are accumulated and after undertaking the initial fluid tests its behavior as an independent unit in terms of production mechanisms, petro-physical and fluid properties is established.

 

Discovery of Non-associated Natural Gas: The Discovery whose official production test, provided that said test is representative of the oil field or oil fields discovered, indicates a Gas/Oil ratio (GOR) greater than 7,000 standard cubic feet of gas per barrel of Liquid Hydrocarbons, and a mole composition of heptane (C7+) less than 4.0%.  The GOR is understood to be the ratio between the volume of Natural Gas in cubic feet per day and the volume of Liquid Hydrocarbons in barrels per day produced by a well and the mole composition of heptane (C7+) as the mole percentage of heptane and other Hydrocarbons having higher molecular weight. The Gas/Oil Ratio (GOR) of a Discovery with several oil fields will be determined on the basis of the weighted average production of each oil field and the mole composition of heptane (C7+) as the simple arithmetic average.

 

Day: A period of 24 hours starting at zero hours (00:00) and ending at twenty four hours (24:00).

 

Development or Development Operations: Activities and work undertaken by THE CONTRACTOR, including, without this being the exhaustive list, drilling, completion of and provision of the equipment for development wells; the design, construction, installation and maintenance of equipment, pipe, flow lines, storage tanks, artificial lift systems, primary

 

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and secondary recovery systems, transfer systems, treatment, storage, among other, within an Exploitation Area under the Contract Area, and outside it when necessary.

 

Exploration or Exploration Activities and work undertaken by THE CONTRACTOR in the Contract Area with the purpose of determining the existence of hydrocarbons in the subsoil, including but not limited to geophysical, geochemical, geologic, cartographic methods and in general, superficial exploration activities, drilling of Exploration Wells and other activities that are directly related to the search for hydrocarbons ion the subsoil.

 

Assessment or Assessment Operations: All operations and activities undertaken by THE CONTRACTOR in an Assessment Area pursuant Clause 14 herein, addressed at assessing a Discovery, the geometry of the oil field or oil fields in the Assessment Area and determining, amongst other things, the viability of extracting the Hydrocarbons in economically exploitable quantities and qualities and the impact of commercial exploitation on the environment and social situation. Said operations include drilling of Exploration Wells, acquisition of detail seismic programs, conducting of production tests and, in general, other operations aimed at determining if a Discovery is a Commercial Filed and to establish its boundaries.

 

Exploitation: Includes Development and Production.

 

Effective Date: The calendar day that immediately follows the execution of this Agreement, or the date of termination of phase “zero” when applicable.

 

Natural Gas: The natural blend of Hydrocarbons in gaseous state at standard conditions (sixty degrees Fahrenheit (60oF) and at one (1) atmosphere of absolute pressure) composed of the most volatile elements of the paraffin series of Hydrocarbons.

 

Hydrocarbons: All organic compounds comprised mainly of the natural combination of carbon and hydrogen and substances that accompany or are derived therefrom.

 

Liquid Hydrocarbons: Hydrocarbons that at standard temperature and pressure conditions (60°F and one (1) atmosphere at absolute pressure) are in liquid state at the wellhead or at the separator, as well as distillates and condensates extracted from gas.

 

Heavy Liquid Hydrocarbons: Liquid Hydrocarbons with an API gravity less than or equal to fifteen degrees (15°API).

 

Non-Conventional Hydrocarbons: Hydrocarbons present in the subsoil in a state other than conventional Liquid Hydrocarbons or free gas, including gas associated with the

 

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former, or Hydrocarbons that are present in non-conventional oil fields. This definition includes crude hydrocarbons such as extra heavy grades of oil, tar sands, coal based gas, oil fields, tight oil fields and gas hydrates.

 

Penalty Interest: In pesos, the maximum legal penalty rate certified and allowed by the competent authority; in US dollars, 3-month LIBOR (London Interbank Borrowing Offered Rate) prime for deposits in US dollars plus four percentage points (LIBOR + 4%).

 

Month: Period counted from any Day of a calendar month and ending on the Day prior to the same Day of the next calendar month; or, if the first Day of a month, on the last Day of the month in progress.

 

Penalties: All constraints on the CONTRACTOR for the timely, effective and efficient compliance of its obligations; as a result, said penalties are not an anticipated estimate of damages, so they may accumulate with any other form of compensation. Payment or deduction of said penalties does not exempt the CONTRACTOR from complying with its obligations and commitments, nor from performing or terminating the activities under its responsibility, nor from providing results, products, documents or any other information that may be required.

 

Operator: Whoever has proven to ANH that pursuant to the contracting regulations of ANH, it has the legal, technical, operational, and financial capacity and that the ANH has approved for Exploration, Assessment, Development and Production. The operator will act as representative of the CONTRACTOR before ANH.

 

Designated Operator: The company designated by the CONTRACTOR prior approval by ANH to undertake the operations that are the subject of this Agreement under the responsibility of the CONTRACTOR.

 

Parties: At the time of execution of this Agreement, the parties are ANH and THE CONTRACTOR. Subsequently and at any time, ANH on one hand and THE CONTRACTOR and/or its assignees duly accepted by ANH, on the other. When the CONTRACTOR is made of a plural number of companies, the Operator will act as representative before ANH.

 

Production Period: With regards to the Production Area, a period of up to twenty-four (24) years and its extensions if any, starting on the corresponding Declaration of Marketability, during which THE CONTRACTOR must undertake the Development and Production Operations.

 

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Exploration Period: 6-Year Period counted as of the Effective Date, together with any extension granted, during which THE CONTRACTOR shall execute the Exploration Program.

 

Development Plan: The guiding document prepared by the CONTRACTOR in accordance with Clause 18 in order to undertake the technical, efficient and economic Exploitation of each Production Area and which will contain among others, an estimate of Hydrocarbon reserves, a description of Hydrocarbon production and transportation conditions, a short and medium term forecast of Hydrocarbon production, an Abandonment Program and an Exploitation Work Program for the time remaining in the current Calendar Year or the following Calendar Year.

 

Exploration Well: A well to be drilled by THE CONTRACTOR in the search for Hydrocarbon oil fields in an area not yet proven to be a Hydrocarbon producing area.

 

Production or Production Operations: All operations and activities undertaken by THE CONTRACTOR in an Production Area in relation to Hydrocarbon extraction, collection, treatment, storage and transfer processes up to the Delivery Point, Abandonment and other operations related to obtaining Hydrocarbons.

 

Exploration Program: The minimum Exploration Program that the CONTACTOR agrees to perform during each phase of the Exploration Period it enters.

 

Subsequent Exploration Program: Exploration Program THE CONTRACTOR agrees to undertake to execute after the end of the Exploration Period as stipulated in Clause 9.

 

Assessment Program: Assessment Operations plan presented by THE CONTRACTOR to ANH pursuant to Clause 14 below with the purpose of assessing a Discovery and determining whether or not it is a Commercial Field. The performance of the Assessment Program and the presentation of a final results report to ANH are mandatory to declare whether or not a Discovery is a Commercial Field.

 

Work Program: Description of activities and of Exploration, Assessment and/or Production Activities in the Contract Area under the terms of this Agreement. The Work Program will include the schedule according to which THE CONTRACTOR will begin and complete the activities, and the corresponding budget.

 

Point of Delivery: The place agreed by the Parties where THE CONTRACTOR will make available to ANH the portion of Hydrocarbons corresponding to the established legal Royalties and those stated in the law and in Chapter V, as well as the economic rights set 

 

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forth in Chapter VI resulting from the commercial field(s), with the minimum specifications to enter the CONTRACTOR’S transportation system and contained in applicable regulations. From this point onwards, the control and custody of said portion of Hydrocarbons produced will pass to ANH.In the event that the Parties do not reach an agreement to determine the Point of Delivery, ANH will determine this point and in any event, it will be a point located at the exit of the treatment unit or the entrance point to the CONTRACTOR’S transportation system.

 

Fiscalization Point: The place approved by the ministry of Mines and Energy or the entity that undertakes these responsibilities in the future, with the purpose of determining the volume of hydrocarbons corresponding to Royalties, the CONTRACTOR’S volume of Hydrocarbons, and defining the volumes relevant to estimate the rights of ANH as stated in Chapter VI.

 

Hydrocarbon Fields: All rock where accumulated hydrocarbons are found and that behaves as an independent unit with regards to production mechanisms, petro-physical properties and properties of fluids pursuant to the definitions of the Ministry of Mines and Energy in Decree 1895 of 1973, Decree 3229 of 2003 and any amendment thereto.

 

Discovered and Not Developed Hydrocarbon Field: A field discovered through drilling, returned to the administrator due to its non marketability or for any other reason and that is under its jurisdiction.

 

Note: In the event of a conflict between these definitions and legal definitions or judicial sentences, the latter will prevail.

 

CHAPTER I— PURPOSE, SCOPE AND DURATION

 

1. PURPOSE. By virtue of this Agreement, THE CONTRACTOR is granted the exclusive right to explore the Contract Area and to produce State-owned Hydrocarbons that are discovered in that area under the terms hereof. THE CONTRACTOR will be entitled to the share of the production of Hydrocarbons from the Contract Area, which are due to it under this Agreement.

 

2. SCOPE: In the exercise of this right, THE CONTRACTOR will perform the activities and conduct the operations that are the purpose of this Agreement, at its sole cost and risk, providing all necessary resources to project, prepare and perform all activities and Exploration, Assessment, Development and Production Operations in the Contract Area.

 

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Paragraph: Discovered and Not Developed Hydrocarbon Fields that are in the Contract Area, and that are known to any of the Parties at the time this Agreement is executed, are excluded from this Agreement. The CONTRACTOR hereby states that it is not aware of the existence of Discovered and Not Developed Hydrocarbon Fields other than those related to the minutes prior to the execution of this agreement, as the case may be.

 

3. CONTRACT AREA: This includes the surface enclosed by the co-ordinates in Annex B. The Contract Area will gradually reduce pursuant to the provisions stated in Chapter IX.

 

3.1 Restrictions: In the event that a portion of the Contract Area extends into areas included in the Colombian National Natural Parks system or other reserved, excluded or restricted zones, geographically limited the relevant authority, or whenever zones of the above mentioned characteristics extend into the Contracted Area, THE CONTRACTOR agrees to comply the conditions imposed on those areas by the relevant authority. ANH will not be responsible in any way.

 

When ANH becomes aware of any claim for private ownership of Hydrocarbons in the subsoil of the Contract Area, it will proceed as required by the relevant legal provisions.

 

4. DURATION AND PERIODS:  The duration of each period and phase in this Agreement will be regulated as follows:

 

4.1 Exploration Period. The Exploration Period will last six (6) Years, as of the Effective Date and will be divided into the phases described in Annex C. The first phase begins on the Effective Date and the following phases on the Calendar Day immediately following the end of the preceding phase:

 

4.1.1 Right to withdraw during the Exploration Period. During any phase of the Exploration Period, THE CONTRACTOR may withdraw from the present Agreement provided it has satisfactorily complied with the Exploration Program of the phase in progress and its remaining obligations. To this end, THE CONTRACTOR will advise ANH of its decision in writing, prior to the expiration of the phase in progress.

 

However, whenever a phase of the Exploration Program is greater than or equal to eighteen (18) months, THE CONTRACTOR may withdraw from this Agreement during this period. In this event, it must provide ANH with the amount pending execution until completing fifty per cent (50%) of the activities not performed in the Exploration Program of the corresponding phase and one hundred per cent (100%) of the Additional Exploration 

 

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Program of the corresponding phase when applicable, which are part of he mandatory exploration program.

 

4.1.2 Extension of one phase of the Exploration Period. Upon request of THE CONTRACTOR, ANH will extend the phase of the Exploration Period, until the drilling, testing and ending of exploration activities of Exploration Wells and/or the acquisition of the seismic program have been completed, without this period exceeding six (6) months, provided following conditions are met:

 

a)             That the aforementioned Exploration Operations are part of the Exploration Program and had begun at least one (1) Month prior to the expiration date for the corresponding phase of the Exploration Period;

 

b)             That THE CONTRACTOR has performed said Exploration Operations uninterruptedly; and

 

c)              That notwithstanding the diligence applied in the performance of said Exploration Operations, THE CONTRACTOR reasonably believes that the remaining time is insufficient to complete them before the expiration date of the phase in progress.

 

Upon submitting the extension request, THE CONTRACTOR will provide ANH the documents supporting said request together with a schedule of activities that ensures the completion of the work within a reasonable period of time. Pursuant to the requirements set forth in Clause 50 below, the extension of the corresponding guarantee must be delivered to ANH within the five (5) days following the approval of the extension.

 

It is understood that, to enforce this clause, the seismic Exploration Operations begin with the uninterrupted registry. It is understood to this same end, that the drilling of wells begins at the time in which the continuous rotation of the drill begins for this perforation.

 

Paragraph: In the event that an exploration activity affects a community in a reservation or an ethnic settlement, the existence of which has been certified by a competent authority, ANH will assess granting an additional period to comply with the activities that are to be performed within the community’s area of influence. This period may be graded provided that the competent authorities consider that THE CONTRACTOR is diligent in the performance of the activities necessary for prior consultation.

 

4.2 Production Period: The production period will last for a period of twenty-four (24) years, starting on the date in which ANH receives from THE CONTRACTOR the Declaration of Marketability mentioned in Clause 15 below.

 

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The Production Period will be estimated separately for each Production Area, and consequently, all references to duration, extension or termination of the Production Period refer to each particular Production Area.

 

4.2.1 Extension of the Production Period.  At THE CONTRACTOR’s choice, ANH will extend the Production Period for successive periods of up to ten (10) years and up to the economic limit of the Commercial Field, provided that the following conditions are met for each period:

 

a)             That THE CONTRACTOR submits a written request to ANH not more than 4 Years in advance and no less than one (1) Year prior to the expiry of the Production Period for the corresponding Production Area;

 

b)             That the Production Area is producing Hydrocarbons regularly in the five (5) years prior to the date of the request.

 

c)              That THE CONTRACTOR proves that during the four (4) Calendar Years prior to the date of the request, it has conducted a drilling program that includes at least one (1) well per Calendar Year and has had an active project for pressure maintenance or secondary, tertiary or enhanced recovery; and,

 

d)             That during the extensions, THE CONTRACTOR provides ANH at the point of delivery, an additional ten percent (10%) of the Heavy Liquid Hydrocarbons or five per cent (5%) of the non associated gas production or Heavy Liquid Hydrocarbons, after royalties and other participations, and pursuant to the terms of Clause 42 herein.

 

Paragraph: If THE CONTRACTOR does not fully meet the scope of the condition required in the preceding item c), ANH may or may not grant the extension having previously analyzed the justifications submitted by THE CONTRACTOR. It is understood that denial by ANH will not give rise to a disagreement and will not be subject to the procedure established in Chapter XII below. In any event, the extension of the Production Period will be formalized by the execution of an Amendment to this Agreement.

 

5. EXCLUSION OF RIGHTS OVER OTHER NATURAL RESOURCES: The rights granted under this Agreement refer exclusively to State-owned Hydrocarbons that are discovered 

 

17

 

within the Contract Area and consequently, said rights will not be made extensive to any other natural resource that may exist in the aforementioned area.

 

Paragraph: For the purpose of avoiding the Exploration, Assessment, Development and /or Production Activities intended to be undertaken by THE CONTRACTOR in the Contract Area to interfere with working programs or investments previously approved by competent authorities, corresponding to contracts for the exploration and exploitation of minerals existing in the Contract Area, THE CONTRACTOR will agree with the third parties holding rights over said contracts, on the way in which each will conduct Operations and working programs in order to guarantee sustainable development of natural resources.

 

In the event that THE CONTRACTOR and the third party(ies) holding rights over said exploration and exploitation contract(s) do not reach an agreement regarding the above paragraph, said disagreement will be subject to the Ministry of Mines and Energy or the entity undertaking its duties, to make a decision and solve the disagreement. In any event, during the time the negotiation and resolution of this disagreement takes place, the compliance of Exploration, Assessment, Development and / or Production obligations that may be affected will be suspended, and ANH will acknowledge all of the remaining contract period at the time of suspension, provided that THE CONTRACTOR evidences that it has acted diligently in managing the suspension.

 

CHAPTER II- EXPLORATION ACTIVITIES

 

6. MANDATORY EXPLORATION PROGRAM- During the Exploration Period, THE CONTRACTOR will undertake the Exploration Program for each phase described in Annex C.

 

To comply with the obligations under the Exploration Program, the Exploration Wells suggested by the CONTRACTOR must be Exploration Wells for a new, type A-3 oil field. In any event, ANH reserves the right to approve other types of Exploration Wells when technical conditions so require.

 

7. EXPLORATION PLAN: The CONTRACTOR agrees to present ANH the Exploration Plan for the phase about to begin, describing how it will fulfill its obligations, including the terms and conditions under which it will develop the programs to benefit the communities in the area affected by the exploration work, with no less than eight (8) calendar days in advance with respect to the beginning of each phase of the Exploration Period. For the first phase, THE CONTRACTOR must provide the Exploration Plan within a period of thirty (30) calendar days starting on the Effective Date.

 

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8. MODIFICATIONS TO THE MANDATORY EXPLORATION PROGRAM: Modifications to the Mandatory Exploration Program will be regulated by the rules set forth below:

 

8.1 During the first half of any phase of the Exploration Period, THE CONTRACTOR may replace the acquisition and processing of a seismic program contained in the Exploration Program initially presented for the phase in progress, for the drilling of one or more exploration wells or for the acquisition and processing of a seismic program having more modern technology, provided that the financial effort of the new Exploration Program is equivalent or superior to the one initially presented for the corresponding phase. In this event, THE CONTRACTOR will previously inform ANH in writing of the replacements it intends to make of the Exploration Operations.

 

8.2 If after drilling an Exploration Well that results in a dry well, THE CONTRACTOR considers that the forecast of the Contract Area does not justify the drilling immediately after of an Exploration Well included in the Exploration Program, THE CONTRACTOR may replace the drilling of up to one (1) Exploration Well for the acquisition and processing of a seismic program, provided that the financial effort of the new Exploration Program is equivalent or superior to the one initially presented for the corresponding phase and that THE CONTRACTOR previously informs ANH in writing of the replacements it intends to make.

 

9. SUBSEQUENT EXPLORATION PROGRAM At the end of the Exploration Period, and provided an Assessment or Production Area or a Discovery made by THE CONTRACTOR during the last phase of the Exploration Period of the Contract Area exists, THE CONTRACTOR may withhold fifty per cent (50%) of the Contract Area (excluding the Assessment and Production Areas) to undertake a Subsequent Exploration Program in the area withheld and outside the Assessment and Production Areas. In this case, the following procedure will apply:

 

a)             Prior to the date of termination of the last phase of the Exploration Period, THE CONTRACTOR will inform ANH in writing of its intention to undertake a Subsequent Exploration Program.

 

b)             Said notice must describe the Exploration Operations that are part of the Subsequent Exploration Program that THE CONTRACTOR agrees to undertake from the end of the last phase of the Exploration Program. Each of the phases of the Subsequent Exploration Program, with a maximum of two (2) eighteen (18) month phases each, must contain at least the drilling of one type A-3 Exploration Well.

 

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c)              Having duly fulfilled the obligations of the first phase of the Subsequent Exploration Program, THE CONTRACTOR may decide not to continue onto the second phase, will results in having to return all of the areas withheld for this purpose or, alternately, the right to continue onto the second phase if appropriate, in which case it agrees to return fifty per cent (50%) of the areas withheld, excluding the existing Assessment and Production Areas. THE CONTRACTOR will inform ANH in writing of its decision within the month following the termination of the first phase.

 

It is understood that returning the areas referred to herein is without prejudice to the existing Assessment and Production Areas.

 

Once the Subsequent Exploration program is completed, the Contract Area will be reduced to the Assessment and / or Production existing at that time.

 

10. ADDITIONAL EXPLORATION: THE CONTRACTOR may undertake Exploration Operations that are additional to the ones contained in the Exploration Program or in the Subsequent Exploration Program, without these Exploration Operations resulting in a modifying of the period agreed for the performance of the Exploration Period or the Subsequent Exploration Period of the ongoing phase or the phases that follow. THE CONTRACTOR must previously inform ANH of the performance of the additional Exploration Operations it intends to undertake. If said Exploration Operations are the ones defined in the Exploration Program of the phase that follows and it is THE CONTRACTOR’s desire that said additional Exploration Operations are credited to the compliance of the exploration duties for the phase that follows, THE CONTRACTOR will request ANH in writing and the latter will discretionally decide whether it accepts this accreditation. In the event that ANH accepts the request, it will determine how the exploration operations additional to the agreements made for the phase of the Exploration Period that follows, will be partially or fully credited.

 

11. REMAINING INVESTMENT: If THE CONTRACTOR does not make the total amount of mandatory investments associated with the Exploration Program, it must transfer the balance that has not been invested to ANH within the sixty (60) days following the termination of the corresponding phase. At ANH’s criteria, the above sum may be destined to exploration programs in other areas selected by mutual consent.

 

For the purpose of verifying the execution of the investment budget established, THE CONTRACTOR must present ANH the Auditor’s certification evidencing the amount of the investment executed for each phase, within the thirty (30) days following its termination.

 

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12. PROBLEMS ARISING DURING THE DRILLING OF THE EXPLORATION WELLS: If uncontrollable geologic problems such as cavities, abnormal pressure, severe circulation loss, impermeable formations, or other technical conditions that hinder the drilling of the Exploration Well occur during the drilling of an Exploration Well corresponding to the Exploration Program or a Subsequent Exploration Program, before the target depth is reached and notwithstanding THE CONTRACTOR’S determination to continue in accordance with Good Oil Industry Practices, when drilling reaches a depth of fifteen hundred (1,500) meters, THE CONTRACTOR may request ANH to declare the fulfillment of the obligation to drill by presenting a technical report that provides a detailed description of the situation arising and the efforts undertaken to overcome the problem. Said report must be presented to ANH within a term no greater than fifteen (15) calendar days starting from the moment in which the above-mentioned uncontrollable problem arose.

 

If ANH accepts that THE CONTRACTOR ends the drilling operations of the well in question, THE CONTRACTOR must obtain a registry of resistivity and another of gamma rays up to the maximum possible depth and abandon or complete the well up to de depth reached. In this case, it is understood that the obligation under the Exploration Program has been fulfilled.

 

Otherwise, THE CONTRACTOR must drill the well in sidetrack or drill a new well and ANH will grant the period necessary to fulfill this obligation.

 

13.  NOTICE OF DISCOVERY: THE CONTRACTOR must inform ANH in writing at any time during the four (4) months following the end of the drilling of any Exploration Well, the results of which indicate that a Discovery has been made; this notice must be accompanied by a technical report containing the results of the tests made, a description of geological features and the analysis made to fluids and rocks as indicated by the Ministry of Mines and Energy or the authority performing its duties.

 

Paragraph: If he discovery is a Discovery of non Associated Natural Gas or Heavy Liquid Hydrocarbons, THE CONTRACTOR must likewise provide the estimates and other supporting evidence for classification purposes, to the Ministry of Mines and Energy or to the authority performing its duties.

 

14. ASSESSMENT PROGRAM: THE CONTRACTOR will present and perform an Assessment Program of the Discovery if it considers that the Discovery has commercial potential, pursuant to the rules set forth in this Clause. If the Discovery is made during the Exploration Period, THE CONTRACTOR will present an Assessment Program within the six (6) months following the end of the drilling of the Exploration Well where the Discovery

 

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was made or the end of the Exploration Period, whichever happens first. If the Discovery results from the performance of a Subsequent Exploration Program, THE CONTRACTOR will present the Assessment Program within the six (6) months following the end of the drilling of the Exploration Well where the Discovery was made.

 

14.1 Contents of the Assessment Program:  The Assessment Program must contain at least:

 

a)                                     A geologic map with the coordinates of the Assessment Area at the top of the target formation.

 

b)                                     A description and purposes of each of the Assessment Operations and the information that has been set out to obtain to determine whether a Discovery can be declared as a Commercial Field.

 

c)                                      The total budget for the Assessment Program discriminated on a year-to-year basis.

 

d)                                     The total Assessment Program, which may not exceed two (2) years when it includes the drilling of Exploration Wells or one (1) year in all other cases; this term will be counted starting on the date in which the Assessment Program is presented to ANH and must include the estimated times necessary for obtaining permits that must be granted by authorities.

 

e)                                      The schedule to Undertake the Assessment Operations within the period mentioned in letter (d) above.

 

f)                                       The information concerning the destination of the Hydrocarbons and other fluids that THE CONTRACTOR expects to recover as a result of the Assessment Operations.

 

g)                                     A proposed Point of Delivery to be considered by ANH.

 

14.2 Extension of the Assessment Program: If THE CONTRACTOR decides to drill Exploration Wells not forecast in the Assessment Program initially presented, ANH may extend the duration of the Assessment Program for an additional period that will not exceed one (1) year, provided the following conditions are met:

 

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a)             That THE CONTRACTOR makes a written request to ANH at least two (2) months prior to the date of termination of the initial period.

 

b)             That THE CONTRACTOR is diligently undertaking the Assessment Operations included in the Assessment Program.

 

c)              That the extension requested is reasonable for the time necessary for drilling and testing the Well or additional Exploration Wells.

 

With the request, THE CONTRACTOR will provide ANH the documents supporting the request.

 

14.3 Modifications to the Assessment Program: THE CONTRACTOR may modify the Assessment Program at any time during the six (6) months following the date in which the Assessment Program is presented to ANH, to which end it will timely inform ANH and will adapt the total period of said program, which in no case may exceed the term established in 14.1 (d) hereof, without modifying the starting date indicated.

 

14.4 Assessment Report: THE CONTRACTOR will present ANH a full report of the results of the Assessment Program within the three (3) months following the date of its termination. Said report will include at least: a geologic description of the Discovery and its structural configuration; the physical properties of the rocks and fluids present in the fields associated to the Discovery; the pressure, volume and analysis of the field fluids temperature; the production capacity (per well and for the entire Discovery); and an estimate of the recoverable reserves of hydrocarbons.

 

Paragraph 1: If THE CONTRACTOR includes the drilling of Exploration Wells in the Assessment programs undertaken during the Exploration Period, it may credit both compliance of the Exploration Program as well as corresponding Assessment Program by drilling two (2) Exploration Wells, provided that the same type of Exploration Well is contemplated in the phase of the Exploration Program immediately following the beginning of the Assessment Program and drilling concludes prior to the date of termination of the Assessment Program in which they were included or the phase of the Exploration Program to which said wells correspond, whichever is closest. In this case, THE CONTRACTOR will return ANH the portion of the Contract Area in which no exploration activities will be undertaken during the time remaining in the Exploration Period.

 

Paragraph 2: In case the discovery of Non Associated Natural Gas or Heavy Liquid Hydrocarbons or Non Conventional Hydrocarbons, and at any time during the second half of the Assessment Period, THE CONTRACTOR may request ANH an extension of the Assessment Program for up to two (2) additional years; this term may be extended at ANH’s criteria, with the purpose of undertaking feasibility studies to build infrastructure, 

 

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with regards to production methods and/ or market development. In these cases, the request will include in the Assessment Program, the information related to the feasibility studies that THE CONTRACTOR considers necessary to undertake. At the end of the extension granted, THE CONTRACTOR will provide ANH the conclusions and recommendations of the feasibility studies.

 

Paragraph 3: This clause only applies to discovering Exploration Wells drilled by THE CONTRACTOR outside of the areas designated as Assessment or Production. Consequently, when new volumes of Hydrocarbons found are part of one same Assessment or production Area, there will be no new Assessment Period.

 

15. DECLARATION OF MARKETABILITY: Within the three (3) months following the expiration of the term stipulated for the performance of the Assessment Program, or upon expiration of the term agreed under the Paragraph 2 of Clause 14, if applicable, THE CONTRACTOR will deliver to ANH a written declaration stating clearly and precisely its unconditional decision to commercially exploit the Discovery, or otherwise. If the decision is positive, the Discovery will be treated as a Commercial Field as of the time of said declaration.

 

15.1 Non-Marketable Discovery: If THE CONTRACTOR does not provide ANH the declaration of marketability within the stipulated term, it will be understood that THE CONTRACTOR has concluded the Discovery is not a Commercial Field. In such case or in the event that the declaration is negative, THE CONTRACTOR accepts no rights have been generated in its favor and therefore waives any claim of rights over the Discovery. The corresponding Assessment Area will be returned to ANH.

 

CHAPTER III — PRODUCTION ACTIVITIES

 

16. PRODUCTION AREA: The Production Area will be enclosed by a polygon or by a regular geometric shape that will include the Commercial Field or the portion of said field that is within the Contract Area, plus a margin around the Commercial Field no greater than one (1) kilometer, provided the Contract Area allows it. Because the area of the Commercial Field included in the Production Area may vary, the Production Area will remain unaltered, with the exception of the provisions included in the following clause.

 

17. BROADENING THE PRODUCTION AREA: If during the course of the production Period, THE CONTRACTOR determines that a Commercial Field extends beyond the Production Area but within the Contract Area in force, it may request ANH to broaden said 

 

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Production Area, all corresponding support will accompany the request. Having complied with the above to ANH’s satisfaction, the latter may extend the Production Area, in the understanding that if said extension overlaps with another Production Area, the duration of the Production Period that will apply to the joined Production Area will be the one applied to the Production Area in regards to which marketability was first declared.

 

Paragraph: When pursuant to this clause, the Production Area requested by THE CONTRACTOR extends beyond the Contract Area, ANH may extend the Contract Area treating the extension requested with the same contract rules as the Assessment Area, unless any of the following situations arises in regards to the requested area:

 

a)             That there are rights granted to another entity for the performance of activities that are equal or similar to the subject of this Agreement.

 

b)             That it is in process of negotiation or contest for ANH to grant rights.

 

c)              That there are restrictions ordered by a competent authority that hinder the undertaking of the activities of this Agreement.

 

d)             That ANH believes that economic conditions need to be adjusted.

 

18. DEVELOPMENT PLAN: Within three (3) months following the presentation of the Declaration of Marketability mentioned in Clause 15, THE CONTRACTOR will deliver ANH the initial Exploitation Plan, which must contain at least the following information:

 

a) The map with coordinates of the Production Area.

 

b) An estimate reserves and accumulated production of Hydrocarbon, broken down by types of Hydrocarbons.

 

c) The general scheme projected for the Development of the Commercial Field, including a description of the drilling plan for development wells, extraction methods, respective facilities and processes to which fluids extracted will be subject before the Point of Delivery.

 

d) An annual Hydrocarbon production forecast and its sensitivities, using the optimum production rate that will allow the maximum economic recovery of reserves.

 

e) An identification of critical factors for the execution of the Development Plan such as environmental, social, economic, logistics factors and options to manage them.

 

f) The terms and conditions under which it will develop programs to benefit the communities in the areas influenced by the Production Area.

 

g) Proposed Point of Delivery for ANH to consider.

 

h) An Abandonment program for the purposes of Clause 71.

 

19. DELIVERY OF THE DEVELOPMENT PLAN: ANH will acknowledge receipt of the Development Plan when THE CONTRACTOR provides all the above-described information. If ANH has not received the Development Plan with all the above stated 

 

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information, in the sixty (60) calendar Days following presentation, it may demand delivery of the pending information and THE CONTRACTOR will have thirty (30) calendar Days counted as of the date of receipt of said delivery demand to provide the information. If ANH has made no statement within ninety (90) calendar Days of presentation of the Development Plan by THE CONTRACTOR, the Plan will be understood to be provisionally accepted, until ANH makes a statement in this regards, in which case THE CONTRACTOR must accept observations made by ANH, when adopting them is reasonably feasible.

 

If THE CONTRACTOR does not deliver the Development Plan on the date stipulated in the preceding subsection or if ANH has not received the pending documentation in the thirty (30) Day term mentioned in this subsection, this will be considered as a failure to comply under clause 67.

 

20. UPDATING THE DEVELOPMENT PLAN: When THE CONTRACTOR needs to amend the Development Plan, it will adjust and present the amended Development Plan for each of the existing Production Areas in the Agreement, following the process set forth in Clause 19. When the real Hydrocarbon production of the immediately preceding year has a difference of more than fifteen (15%) percent with respect to of the production forecast in the Development for a Production Area, THE CONTRACTOR will provide the necessary explanations.

 

21. ANNUAL OPERATION PLAN: Within three (3) months following the date of Declaration of Marketability and within the three (3) first months of each Calendar Year, THE CONTRACTOR will present ANH an Annual Operations Plan that must meet the following requirements:

 

21.1 Content: The Annual Operations Plan will include at least:

 

a)             A detailed description of the Development and Production Operations that THE CONTRACTOR expects to undertake during the same and the following year with the corresponding schedule broken down by project and calendar trimester, which must also include the periods required to obtain authorizations and permits from competent authorities.

 

b)             The monthly production forecast for the Production Area for each corresponding Calendar Year.

 

c)              The average annual production forecast until the end of the economic life of the fields located within the Production Area.

 

d)             The estimated outcome (investments and expenses) for the following four (4) calendar years or until the end of the Production Period, whichever is shortest, and

 

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e)              The terms and conditions pursuant to which the programs benefitting the communities located in the area influenced by the Production Area will be developed.

 

21.2 Performance and Adjustments: The Development and Production Operations of the Annual Operations Plan mentioned in letter (a) above are of mandatory performance. THE CONTRACTOR will begin said Development and Production Operations in accordance with the schedule presented.

 

During the performance of the Annual Operations program, THE CONTRACTOR may make adjustments to said plan for ongoing the Calendar Year, provided that such adjustments do not entail reducing the production by more than fifteen per cent (15%) with respect to the initial forecast. Except for emergencies, adjustments may not me formulated with a frequency less than three (3) months. THE CONTRACTOR will inform previously and in writing of any adjustments to the Annual Operations Program.

 

Paragraph: THE CONTRACTOR will present the first of the annual operations programs for the remaining period of the corresponding Calendar Year. When the termination of the first Calendar Year is less than three (3) months ahead, the first annual operations program will include the year immediately after.

 

22. ABANDONMENT FUND:  THE CONTRACTOR will establish a fund to guarantee the financing of activities that are necessary to undertake an Abandonment program of the wells and an environmental renewal of production areas when their Production Period ends, in accordance with Good Oil Industry Practices and pursuant to the following stipulations:

 

22.1 Creation: Upon the expiration of the first calendar Year from the Month in which THE CONTRACTOR began commercial and regular production of Hydrocarbons in a Production Area, and uninterruptedly from thereon THE CONTRACTOR will keep a special accounting record called Abandonment Fund, in order to implement the Abandonment Program. To guarantee that the necessary financial resources are available, THE CONTRACTOR will establish an escrow account, a bank guarantee or any other instrument accepted by the ANH. In either case, the Parties will determine the terms and conditions of the agreed instrument in the Year immediately preceding the date on which the Abandonment Fund must be established. Should no agreement be reached, THE CONTRACTOR will, at any rate, establish a bank guarantee pursuant to the terms of this Clause.

 

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2.22 The Amount of the Abandonment Fund.  The amount of the Abandonment Fund at the end of each Calendar Year will be the one resulting from applying the following formula:

 

AMA = (PAH / RIH)2 x CAB

 

where:

 

AMA is the value of the Abandonment Fund that THE CONTRACTOR must register for each Production Area, at the end of the Calendar Year.

 

PAH is the accumulated volume of Hydrocarbons produced in each Production Area, from the beginning of its production until December 31 of the Year for which the calculation is made.

 

RIH are the proven reserves of Hydrocarbons in each Production Area, expressed in barrels of Liquid Hydrocarbons in accordance with the Development Plan and its updates.  This includes accumulated production (PAH   ) plus remaining proven reserves.

 

CAB is the estimated updated cost of the Abandonment operations for each Production Area. In case of annual adjustments, CAB will be reduced by the value of Abandonment costs already executed.

 

All estimates of Hydrocarbon production and reserves mentioned above (PAH and RIH) will be made in equivalent barrels of Liquid Hydrocarbons.  To this end, the Parties agree that for conversion purposes, fifty seven hundred cubic feet (5700 ft.3) of gas at standard conditions are equivalent to one Barrel of Liquid Hydrocarbons.

 

The variables in the formula will be reviewed and updated annually by THE CONTRACTOR, based on actual disbursements in Abandonment activities executed, and in terms of Hydrocarbons production and reserve volumes.

Paragraph 1: For the purposes of this Clause, proven reserves are those corresponding to the definition adopted by the competent authority in the Republic of Colombia, pursuant to the regulatory framework prevailing at the time the calculation is made.

 

Paragraph 2:  Compliance of the obligations referred to in this Clause does not relieve THE CONTRACTOR from its obligation to undertake, at its own cost and risk, all Abandonment operations in each Production Area.

 

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CHAPTER IV- CONDUCTING OPERATIONS

 

23. AUTONOMY: THE CONTRACTOR will have control over all operations and activities considered necessary for a technical, efficient and economic Exploration of the Contract Area and for the Assessment and Production of Hydrocarbons found in the area. THE CONTRACTOR will plan, prepare, perform and control all activities using its own means and with technical and management autonomy pursuant to Colombian legislation and observing Good Oil Industry Practices. THE CONTRACTOR will perform all activities directly or through subcontractors.

 

Paragraph: The autonomy of THE CONTRACTOR mentioned herein, does not hinder competent authorities, including ANH, from performing their legal and regulatory power with regards to every issue under their authority, which will in no way be limited by virtue of this Agreement.

 

24. OPERATOR: Whenever THE CONTRACTOR is formed by two or more companies, it will state which of them will act as operator. Prior approval of the operator by ANH is required.

 

If more than two (2) different operators are required at the same time in this Agreement, prior approval by ANH will be required.

 

25. DESIGNATED OPERATOR Without prejudice to direct operation, THE CONTRACTOR may contract a third party to act as Designated Operator provided it evidences legal, technical, operational and financial capacity pursuant to the contracting regulations of ANH. The third party designated by THE CONTRACTOR as operator may not perform its duties as such until it has been approved by ANH.

 

When the Designated Operator decides to resign, THE CONTRACTOR must inform ANH with no less than ninety (90) calendar day’s previous notice.

 

Paragraph:   Whenever ANH becomes aware that the Operator or Designated Operator has engaged in negligent practices or practices contrary to Good Oil Industry Practices in relation with the compliance of the obligations under this Agreement, it will so advise THE CONTRACTOR, who will have 90 calendar Days counted from the date of the requirement to adopt corrective measures.  If after this time the deficient conduct continues, ANH will require THE CONTRACTOR to change the operator. If within the sixty (60) calendar days following this demand, THE CONTRACTOR has not changed the operator, this will be considered as a breach with this Agreement.

 

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26. OBTAINING PERMITS: THE CONTRACTOR is under the obligation to obtain on its own and at its own risk, all licenses, authorizations, permits and any other rights granted under the law, and that are necessary to perform the operations subject to this Agreement.

 

27. SUBCONTRACTORS: To undertake the operations subject to this Agreement, and subject to Colombian law, only the Operator may enter into contracts at its own cost and risk, to obtain goods and services, including technical advising within the country or abroad.

 

The Operator will keep an updated relation of the work, service and supply agreements and will provide ANH with said relation when requested. The relation must specify at least the name of the supplier, contractor or subcontractor, the objective, value and duration of the agreement.

 

28. METERING: THE CONTRACTOR will effect metering, sampling and quality control of the Hydrocarbons produced and will keep the metering equipment or instruments calibrated in accordance with standards and methods accepted by Good Oil Industry Practice, and the legislation and regulations in force, making the analyses required, and effecting the relevant corrections to the Liquidation of the net volumes of Hydrocarbons received and delivered at standard conditions.

 

THE CONTRACTOR will adopt all actions necessary to preserve the integrity, reliability, and safety of the facilities and the equipment or instruments used for metering.  In addition during the term set forth by the Code of Commerce and additional relevant regulations, it will keep the regular calibration records for such equipment and instruments and of daily Hydrocarbon and fluids production and consumption metering in each Commercial Field, for ANH or the competent authorities to review.

 

ANH will be entitled to inspect the metering equipment installed by THE CONTRACTOR, and all the metering units used in general at any time.

 

Paragraph: When two or more production fields use the same development facilities, they must include a metering system, which enables determining the production resulting from each of those fields.

 

29. PRODUCTION AVAILABILTY: THE CONTRACTOR will transport produced Hydrocarbons to the Point of Delivery, except those used for the benefit of operations under this Agreement, and those that are inevitably lost in these functions.  The Hydrocarbons will be measured at the fiscalization point in accordance with the procedure described in Clause 28 above, and based on that measurement, the royalty volume 

 

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referred to in Chapter V and the ANH’s rights as stated in Chapter VI, as well as the volume which correspond to THE CONTRACTOR will be determined.

 

As of the Point of Delivery, and without prejudice of the legal provisions regulating this matter, THE CONTRACTOR will be free to sell its share of Hydrocarbons in Colombia or export them, or to dispose of them in any other manner.

 

30. UNIFICATION: When an economically viable oil field extends continuously to one or more areas outside the Contract area, THE CONTRACTOR, in agreement with ANH and the remaining interested parties, will implement, subject to prior approval by the competent authority, a cooperative unified exploitation plan, subject to the provisions of Colombian law.

 

31. NATURAL GAS PRESENT: Natural gas present in any assessment or Production area will be subject to the following rules:

 

31.1 Restriction of Waste and Use : THE CONTRACTOR is under the obligation to avoid wasting Natural Gas extracted from a field and, as provided for by the law and regulations in force on the matter, it may use that gas as fuel for operations, as a source of energy for maximum final recovery of Hydrocarbon reserves, or confine it in the same oil fields to be used for these purposes during the duration of the Agreement, before the corresponding Point of Delivery.

 

31.2 Associated Natural Gas.  If THE CONTRACTOR discovers one or more Commercial Fields with associated natural gas, it will present ANH a project for the use of the associated natural gas, in the three Years following the beginning of Production of each Commercial Field.  If THE CONTRACTOR fails to perform this obligation, ANH may dispose of the associated natural gas coming from those fields, free of charge, subject to the legal provisions in force.

 

32. DAMAGES AND LOSS OF ASSETS: All costs and / or expenses necessary to replace or repair damages or losses of goods or equipment resulting from fire, floods, storms, accidents or other similar events will be at the risk and expense of THE CONTRACTOR, which will inform ANH of the losses or damages occurred as fast as possible after the event.

 

33. INSPECTIONS AND FOLLOW UP: ANH will have the following rights and THE CONTRACTOR will have the following obligations related to the follow up of the agreements and inspections made by ANH and/ or its agents:

 

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33.1 Visits to the Contract Area.  During the duration of this Agreement, ANH may at its own risk and any time, and using procedures considered appropriate, visit the Contract Area to make inspections and to follow up on the activities of THE CONTRACTOR and subcontractors directly related to this Agreement, and to ensure that this Agreement is being complied.  Likewise, it may verify the accuracy of information received.

 

Whenever the inspector detects failures or irregularities on the part of THE CONTRACTOR, he may make observations that THE CONTRACTOR will respond to in writing, within the time given by ANH.

 

THE CONTRACTOR will place at its own expense, transport, accommodation, meals and other services at the disposal of the ANH representative on the same conditions to those provided for its own personnel, if required.

 

33.2 Delegation.  ANH may delegate the inspection of and the follow-up to the operations in the Contract Area in order to ensure that THE CONTRACTOR is complying with the obligations contracted under the terms of this Agreement, Colombian law and Good Oil Industry Practices.

 

Paragraph: The lack of inspection and follow-up activities by ANH in no way relieves THE CONTRACTOR from complying with obligations agreed by virtue of this Agreement, nor does it imply any reduction thereof.

 

34. PROGRAMS TO BENEFIT COMMUNITIES:  In the Exploration Plan, the Development Plan and the Annual Operations Plan, THE CONTRACTOR must include a chapter about the programs it will undertake to benefit the communities located within the areas affected by the project. This plan must adjust to the terms and conditions indicated by ANH, pursuant to the rules set forth in Article 5, subsection 5.7 of Decree Law 1760 of 2003. While ANH determines the terms ad conditions applicable to these programs, THE CONTRACTOR will subject them to ANH’s approval.

 

These activities are understood as agreed once ANH makes a statement in this regard within the three (3) months following the receipt of the corresponding plan or program referred to herein. THE CONTRACTOR will accept reasonable suggestions informed by ANH and which must be included in the plans and programs as the case may be. Once ANH has verified that its suggestions have been included, it will consider the corresponding activities as agreed upon. Should ANH fail to make any statement within the above-mentioned period, THE CONTRACTOR may undertake the programs to benefit the communities that were included in its initial proposal.

 

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CHAPTER V- ROYALTIES AND OTHER GENERAL OBLIGATIONS

 

35. ROYALTIES THE CONTRACTOR will make the percentage of Hydrocarbon production set forth by the law as royalties, available to ANH at the Point of Delivery. Royalty collection will be made in cash or in kind, as determined by ANH.

 

35.1 Collection in kind. When royalties are collected in kind, THE CONTRACTOR will deliver the corresponding volume of Hydrocarbons to ANH, to which end the Parties will agree on a procedure to program deliveries and other necessary aspects.

 

At any rate, ANH will have one (1) Month to withdraw said amount. If this term expires and ANH has not withdrawn the royalty volume, and if THE CONTRACTOR has available storage capacity in its facilities, THE CONTRACTOR agrees to store the Hydrocarbons for up to three (3) consecutive months. In this event, ANH will pay a storage fee, which will be agreed by the Parties on a case-by-case basis. In the event that the Parties do not each an agreement on this fee, it will be determined by the Ministry of Mines and Energy or by the entity regulating Hydrocarbon transport in the country.  At the end of this last term, THE CONTRACTOR may market this volume pursuant to Section 35.3 below.

 

If there is no storage capacity available, THE CONTRACTOR may continue producing and taking the royalty volume, crediting to ANH the royalty volume it was entitled to take but did not, for a later delivery.

 

Paragraph: Once eighty per cent (80%) of the storage capacity in the Production Area has been used, THE CONTRACTOR may dispose of the corresponding volume and ANH may begin withdrawing at its convenience, at a delivery rate compatible to the field’s production capacity.

 

35.2 Collection in cash. When THE CONTRACTOR is required to pay the royalties in cash, it will deliver ANH the corresponding sums within the period stated in the law or by the competent authority or as agreed by the Parties as the case may be. In the event of late payment, THE CONTRACTOR will pay ANH the amount necessary to cover the owed sum, together with the corresponding penalty interest and any expenses incurred by ANH in securing payment.

 

35.3 Sale of royalty volumes. When ANH considers it convenient and provided that regulations allow it, THE CONTRACTOR will market the portion of Hydrocarbon production corresponding to royalties and will deliver the proceeds of said sale to ANH. To this end, the Parties will agree on the specific details of the sale.  At any rate, THE 

 

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CONTRACTOR will make its best effort to sell said production at the highest price in available markets. ANH will pay THE CONTRACTOR the direct cost and a reasonable selling margin to be agreed by the Parties. If no agreement has been made, the expert mechanism included in Clause 74 will apply.

 

35.4 Paying Participation: ANH will be solely responsible for making payments to which beneficiary entities are entitled under the law for royalty participation.

 

36.  PRICE FOR INTERNAL SUPPLY: Whenever THE CONTRACTOR is required to sell its crude to meet refining needs for internal supply, the price of said sale will be estimated based on international prices, as established in Resolution No. 18-1709 of December 23, 2003 issued by the Ministry of Mines and Energy, or in any other law or regulation that amends or substitutes it.

 

37. LOCAL GOODS AND SERVICES: THE CONTRACTOR will give preference to local suppliers of goods and services under equal competitive conditions in terms of quality, opportunity and price.

 

CHAPTER VI- CONTRACTUAL RIGHTS OF ANH.

 

38. RIGHTS FOR SUBSOIL USE:  THE CONTRACTOR’s use of subsoil will cause the following rights in favor of ANH:

 

38.1 Exploration Areas. For each phase, THE CONTRACTOR will acknowledge and pay ANH a fee per surface unit in accordance with the rules set forth in Annex D, subsection D.1. These sums will be paid within the month following the beginning of the corresponding phase.

 

38.2 Assessment and Production Areas. THE CONTRACTOR will acknowledge and pay ANH a fee per production unit it has ownership rights to, which sum, payable in United States dollars, will be the one defined in Annex D, subsection D.1. This payment will be made half-yearly in arrears, in the first month of the next half-year.

 

Paragraph: Production of natural gas destined to reinjection operations or to other processes directly related to the production of the same field from which extractions are made, will not give rise to payment for production rights as stated in this subsection.

 

39. FEE FOR HIGH PRICES:  THE CONTRACTOR will pay ANH a fee for high prices over the production it owns, whether in cash or in kind at ANH’s choice, as defined in Annex D, subsection D.2.

 

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40. ECONOMIC RIGHT FOR PARTICIPATION IN PRODUCTION: Whenever agreed, THE CONTRACTOR will pay ANH a percentage of total production after royalties, as a fee for participation in production pursuant to Annex D, subsection D.3. The fees referred to in Clauses 38 and 39 will not result from this participation. During the extension of the Production Period, the fees for subsoil use and high prices referred to in Clauses 38 and 39 respectively, will only result from THE CONTRACTOR’s volume, after subtracting the right to participation stated herein.

 

41. ECONOMIC RIGHTS IN PRODUCTION TESTS: Liquid Hydrocarbons obtained as a result of the production tests undertaken by THE CONTRACTOR will also cause the fees mentioned in the preceding clauses.

 

42. PARTICIPATION IN PRODUCTION DURING THE EXTENSION OF THE PRODUCTION PERIOD: In all extensions to the Production Period, THE CONTRACTOR will acknowledge and pay ANH as a fee for participating in production, a sum equivalent to ten percent (10%) of the cost of production of light Liquid Hydrocarbons at the Point of Delivery or five percent (5%) in the event of non associated Natural Gas or heavy Liquid Hydrocarbons — having API gravity less than or equal to fifteen degrees (15o) - obtained by THE CONTRACTOR from the date in which the initial Production Period ends, and valued at the Point of Fiscalization after discounting the percentage corresponding to royalties and the Economic Rights, as the participation percentage referred to in Clause 40. The fees stated in Clause 38 and 39 will not result from this participation.

 

Paragraph: During the extension of the Production Period, the rights resulting from the use of subsoil, from high prices and other ANH rights, will only result from the volume of THE CONTRACTOR after having subtracted the participation rights indicated herein.

 

43. TECHNOLOGY TRANSFER: In order to strengthen the institution and the sector, THE CONTRACTOR agrees to undertake at its own expense and cost, research, training, and education programs and to support ANH scholarships, the terms, conditions and beneficiaries of which will be determined by ANH during the duration of this Agreement.

 

All costs involved in research, training, education and support to ANH scholarships, until the limit indicated herein and except for labor rights, but which result from the compliance of the obligations agreed to by THE CONTRACTOR in this Clause, will be paid one hundred per cent (100%) by THE CONTRACTOR. THE CONTRACTOR will not pay under any circumstance for any labor costs related to the beneficiaries of the research, training, education or scholarships.

 

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To comply with the obligation to do stated in this Clause, during each phase of the Exploration Period and its extensions, THE CONTRACTOR agrees to undertake and pay for research, raining, education and ANH’s scholarships program in an amount up to twenty five per cent (25%) of the sum resulting from multiplying the number of hectares and the fraction hectare of the Contract Area, by the amount presented in the table in Annex D, subsection D.1. This estimate will be made at the beginning of each phase, including the first one. Regarding Production Areas, the obligation to do under this Clause will be up to ten percent (10%) of the amount corresponding to the right to use the subsoil indicated in Clause 38 (subsection 38.2) for each Calendar Year.

 

In no case, will THE CONTRACTOR be demanded to fulfill the obligation stated in this clause in an amount greater than one hundred thousand dollars (US$100,000.oo) constant in 2004 per phase or Calendar year as the case may be. The amount in current dollars of the nominal value of this maximum limit will be estimated for each calendar year considering the consumer index price published by the US Department of Labor for the end of June of the immediately preceding year.

 

Compliance of this obligation will be demanded from the month following the beginning of each phase or Calendar Year as the case may be, in accordance with the estimate made by ANH for that purpose.

 

Paragraph: THE CONTRACTOR may fulfill this obligation through a third party designated through and agreement by the Parties, or adhering as trustor in an administration and payment trust that is established for this purpose.

 

CHAPTER VII- INFORMATION AND CONFIDENTIALITY

 

44. SUPPLY OF TEHCNICAL INFORMATION: THE CONTRACTOR will keep ANH timely and permanently informed of the progress and results of operations.  Therefore, in addition to documents required in other Clauses herein, THE CONTRACTOR will provide ANH all scientific, technical and environmental information obtained during the performance of this Agreement, as they are obtained, and before the expiry date of each of the phases of the Exploration Period, and per Calendar Year during the Production Period.  This Exploration and Production information will be delivered to ANH in accordance with the Manual for the Provision of Information Concerning Exploration and Production.

 

45.  CONFIDENTIALITY OF THE INFORMATION.  The Parties agree that all data and information produced, obtained or developed as a result of the operations under this 

 

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Agreement are considered to be strictly confidential during the five (5) following calendar Years, starting as of the end of the calendar Year in which they are produced, obtained or developed, or until termination of the Agreement or upon the partial relinquishment of the area, regarding the information acquired in those relinquished areas, whichever occurs first.

 

For interpretations based on data from the operations performed under this Agreement, the term will be twenty (20) calendar years, counted as of the date of the obligation to relinquish to ANH or upon termination of the Agreement or the partial relinquishment of areas regarding the information acquired in the relinquished areas, whatever shall occur first.

 

This stipulation does not apply to data or information the Parties must provide in accordance with legal provisions or regulations in force, nor those required by its affiliates, consultants, contractors, auditors, legal advisors, financial institutions and competent authorities having venue over the Parties or their affiliates, or due to the regulations of any stock exchange in which the shares of THE CONTRACTOR or its related parties are listed; however, the delivery of information must be notified to the other Party.

 

Restrictions on the disclosure of information will not prevent THE CONTRACTOR from supplying data or information to companies interested in the eventual assignment of rights regarding the Contract Area, provided that such companies sign the corresponding confidentiality agreement that fulfills the stipulations contained in this clause.

 

ANH agrees to refrain from delivering to third parties any information or data obtained as a result of THE CONTRACTOR’s operations, except as necessary to comply with some legal provision applicable to ANH, or in the normal course of its duties. For the remaining cases, ANH will require prior authorization by THE CONTRACTOR.

 

46. RIGHTS OVER INFORMATION Upon the expiration of the period of confidentiality set forth in the preceding Clause, it is understood that THE CONTRACTOR transfers to ANH all rights over all data and its interpretations, without THE CONTRACTOR losing the right to use said information. From that moment on, ANH may dispose of the information freely.

 

47.                             ENVIRONMENTAL AND SOCAL INFORMATION: THE CONTRACTOR will maintain ANH timely and permanently informed of the progress of environmental processes, including everything related to: the beginning of said processes, the procurement of the corresponding licenses, permits and other substantial decisions, the beginning of administrative procedures to sanction and the imposing of preventive measures and sanctions. Likewise, THE CONTRACTOR will timely inform of any difficulty 

 

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presented during the course of these processes or that may affect the compliance of the foreseen periods.

 

48.  HALF-YEARLY EXECUTIVE REPORT.  In addition to the information referred to in other Clauses of this Agreement, the Manual for the Provision of Information, and the requirements of Colombian legislation, THE CONTRACTOR will deliver ANH basic and summarized information on matters such as but not limited to prospectivity, Exploration, Assessment and Production Operations, reserves- current production and forecasts, performance and projections for the following Calendar Year, personnel, industrial safety, environment and communities, national hiring percentage, among others.

 

These reports will be delivered within the sixty (60) calendar Days following the end of each calendar half-year. The report for the second semester will be the Annual operations Report.

 

49. INFORMATIONAL MEETINGS: ANH may summon THE CONTRACTOR to informational meetings at any time during the duration of this Agreement.

 

CHAPTER VIII- GUARANTEES, RESPONSIBILITIES AND INSURANCE

 

50. COMPLIANCE GUARANTEE: THE CONTRACTOR will issue guarantees in favor of ANH, in the form and on the terms and conditions provided for in this Agreement, to secure the compliance and appropriate performance of all obligations of each phase of the Exploration Period, and of the Subsequent Exploration Program, if any, and the remaining activities inherent to such obligations, and to secure payment of penalties imposed for failure to comply under this Agreement. The execution of this guarantee does not exempt THE CONTRACTOR from paying all damages resulting from failure to comply or for the inappropriate performance of this Agreement, and consequently, said payments may be cumulative.

 

50.1 Form Of Guarantees: THE CONTRACTOR will, at its own expense, establish one or more standby letters of credit, which shall be unconditional and irrevocable, payable at sight and opened with a bank or financial institution legally established in Colombia. THE CONTRACTOR may present another instrument and/or agency, which must be previously approved by ANH.

 

50.2 Amount Of Guarantees: THE CONTRACTOR: will grant the guarantees corresponding to each phase of the Exploration Period or the Subsequent Exploration Programs the case may be, in a percentage of the estimated value of the budget for each phase of the Exploration Program or the Subsequent Exploration Program as the case 

 

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may be, for no less than the ten percent (10%) commonly applied in areas directly assigned, estimated in dollars of the United States of America and payable in Colombian pesos as stated in Annex E. The amount of the guarantee may in no event be less than one hundred thousand dollars (US$100,000.oo) of the United States of America.

 

50.3 Delivery Of Guarantees: THE CONTRACTOR will deliver the guarantees mentioned in this Clause to ANH, in accordance with the essential terms in the forms included in Attachment E hereto, not less than eight (8) calendar Days prior to the start of each phase of the Exploration Period, or of the subsequent Exploration Program, as the case may be. For the first Phase, THE CONTRACTOR will provide the guarantee in the fifteen (15) calendar Days following the date the contract is executed. If THE CONTRACTOR is reasonably unable to deliver the guarantees to ANH for causes not attributable to THE CONTRACTOR in the term stipulated above, ANH may extend the delivery date upon the request of THE CONTRACTOR.

 

Paragraph: Pursuant to the rules set forth in Clause 60 (Resolution), if THE CONTRACTOR fails to deliver the guarantees or the extensions thereof requested by ANH within the terms stipulated, ANH may terminate this Agreement.

 

50.4.  Validity Of Guarantees:  Each and every guarantee must be valid for the (total or partial) term of the phase whose obligations are being secured, plus at least six (6) additional months.  In the event of extensions to the terms of the Agreement, guarantees must also be extended or replaced by others of the same value, and the minimum validity equal to the time of the extension or the term remaining in the phase plus six (6) additional months.

 

50.5 Rejection Of Guarantees:  ANH will reject guarantees provided by THE CONTRACTOR if they fail to comply with the requirements of this Clause.  ANH will advise THE CONTRACTOR of said rejection. As of said notice, THE CONTRACTOR will have fifteen (15) calendar Days to correct the mentioned guarantee. If not corrected, guarantees rejected will be deemed not delivered for the purposes of Subsection 50.3.

 

50.6 Calls On Guarantees:  ANH will call on guarantees if THE CONTRACTOR fails to comply all or part of any of the obligations secured, without prejudice to the performance of the remaining obligations contracted.  Payment of standby letter(s) of credit does not relieve THE CONTRACTOR of its obligation to pay indemnities for damages caused by its breach.  ANH reserves the right to resort to mechanisms for the settlement of disputes when the value of the guarantee is not sufficient to cover the amount of indemnities.

 

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51. RESPONSIBILITIES OF THE CONTRACTOR: THE CONTRACTOR will undertake the following responsibilities among others, at its own cost:

 

51.1 Labor Responsibilities: For all legal purposes, THE CONTRACTOR will be the sole employer of the workers hired to develop the activities under this Agreement and, as a result, shall be liable for all labor obligations resulting from labor contracts or relations, such as paying wages, benefits, tax related contributions, registration and contributions towards pension funds, health benefits and professional hazards to the Social Security System under the law.

 

THE CONTRACTOR will diligently and appropriately train any Colombian personnel required to replace foreign personnel that THE CONTRACTOR considers necessary to undertake the activities under this Agreement.

 

At any rate, THE CONTRACTOR must comply with the legal regulations indicating the percentage of local and foreign employees and workers.

 

51.2 Responsibility Resulting From Operations: THE CONTRACTOR will perform the obligations under this Agreement in a responsible, diligent, efficient as well as in a technically and economically appropriate manner. It will ensure that all subcontractors fulfill the terms of this Agreement, Colombian laws and follow Good Oil Industry Practices.

 

THE CONTRACTOR will be solely liable for damages and losses caused as a result of the activities and operations under this Agreement, including those caused by subcontractors, in the understanding that it will not be liable  to ANH at any time for mistakes in criteria or for losses or damages that do not result from gross negligence or intentional misconduct.

 

When THE CONTRACTOR subcontracts, the work or services subject to subcontracting will be performed in its name, as a result of which THE CONTRACTOR will keep its direct responsibility for the obligations established in the subcontract and resulting therefrom, an it cannot be released from said responsibilities as a result of the subcontract.

 

ANH will not undertake any responsibility for losses or damages caused to third parties by THE CONTRACTOR, its employees, subcontractors or the employees of the subcontractors in performing the activities under this Agreement.

 

51.3 Environmental Responsibility:  THE CONTRACTOR will give special care to the protection of the environment, and the compliance of regulations applicable on the matter and Good Practices. Likewise, THE CONTRACTOR will adopt and implement specific 

 

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contingency plans to attend to emergencies, and repair damages in the most efficient and timely manner possible.

 

In the phases of the Agreement involving activities the performance of which is subject to environmental licenses, permits, concessions or authorizations, THE CONTRACTOR must begin the corresponding procedure before the competent authorities within ninety (90) calendar days after starting the corresponding phase.

 

It is understood that the process to request an environmental license has begun when the following documents are filed:

 

a)             evidence of the request filed before the MAVDT, to make a statement concerning the need to elaborate he Environmental Alternative Diagnosis.

 

b)             Evidence of the request filed before the Ministry of the Interior and Justice to certify that ethnic groups exist in the area affected by the project.

 

c)              Evidence of the beginning of the environmental impact study or environmental management plan as the case may be.

 

THE CONTRACTOR’s failure to meet the terms stated in this subsection or lack of diligence during the corresponding procedures, will not allow THE CONTRACTOR to argue to ANH a delay in obtaining licenses, permits, concessions or authorizations as support to request an extension or suspension of the obligations of each corresponding phase, and will give rise to a breach of this Agreement.

 

Whenever any activity or Exploration Operation requires permits, authorizations, concessions or environmental licenses, THE CONTRACTOR will refrain from undertaking them until the said permits, authorizations, concessions or environmental licenses are obtained. THE CONTRACTOR may not start production if the environmental impact studies are not approved and the corresponding environmental licenses and other requirements are not issued.

All sanctions and preventive measures adopted by environmental authorities against THE CONTRACTOR for failure to comply with environmental duties under its charge will result in a breach of this Agreement and its subsequent termination, provided that said failure affects compliance of the obligations under this Agreement.

 

THE CONTRACTOR will inform ANH on a semester-by-semester basis, of the of the environmental aspects of the Operations, how preventive and contingency plans are applied, and the state of ongoing procedures before the competent environmental authorities regarding permits, authorizations, concessions or licenses as the case may be.

 

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52. COMPLIANCE POLICY FOR LABOR OBLIGATIONS: Within the fifteen (15) days after starting the first phase, THE CONTRACTOR will acquire an insurance policy that ensures payment of salaries, labor related benefits and compensations and any other labor related credits resulting from judicial decisions made to decide on a claim filed by a worker hired by THE CONTRACTOR as the sole and true employer to perform the activities under this Agreement.

 

Eight (8) days prior to the beginning of each subsequent phase of the Exploration Period, and of each calendar year during the Production Period, THE CONTRACTOR will renew the policy or present a new one to replace it. The policy may not have duration of less than the term of the corresponding phase plus three (3) additional years during the exploration period or four (4) years for the extensions during the Production Period and at any rate, for three (3) years starting on the date stipulated for the termination of the Agreement.

 

The value insured will be at least five per cent (5%) of the amount of the annual investment for each exploration phase or ten per cent (10%) of the total estimated costs for each Calendar Year during the Exploration Period, at THE CONTRACTOR’S choice; or ten per cent (10%) of the total annual cost of personnel directly assigned to the Production Area during the Production Period, for the first year of the duration of the policy or for each subsequent year, which will be adjusted every time it is renewed.

 

53. INSURANCE: THE CONTRACTOR will procure all insurances required by Colombian law and any other regular insurance expected in Good Oil Industry Practices.  Likewise, it will require each contractor performing works under this Agreement, to procure and maintain the insurances it considers necessary in full force and effect.  The costs incurred by the procurement and maintenance in full force and effect of these insurances will be borne by THE CONTRACTOR.

 

54. INDEMNITY: THE CONTRACTOR will compensate, defend and maintain ANH, as well as its employees and properties free of any claim or action resulting from acts or failures of THE CONTRACTOR, its directors, agents, personnel, employees and representatives during the development and performance of this Agreement. THE CONTRACTOR will be solely liable for losses or damages caused to third parties resulting from actions or failures of THE CONTRACTOR, its directors, agents, personnel, employees and representatives during the development and performance of this Agreement.

 

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CHAPTER IX- RELINQUISHING AREAS

 

55. MANDATORY RELINQUISHING OF AREAS: THE CONTRACTOR will relinquish the Exploration, Assessment and Production Areas in all cases stated in this Agreement as a cause to relinquish, whether by waiver, expiration of terms, for the causes stated in Clause 15 (subsection 15.1) hereof, for failing to undertake the activities corresponding to Work Programs or in general, for any other cause resulting from this Agreement that imposes onto THE CONTRACTOR the obligation to relinquishing areas.

 

56. VOLUNTARY RELINQUISHMENT OF AREAS: At any time, THE CONTRACTOR may relinquish parts of a Contract Area, provided that compliance of the obligations agreed to herein is not affected. If said areas are voluntarily relinquished during the Exploration Period, they will be credited to mandatory relinquishment.

 

57. LIMITING THE AREAS RELINQUISHED: The Areas relinquished by THE CONTRACTOR will include the minimum possible number of joint rectangular blocks limited by North-South and East-West boundaries, following whenever possible a grid similar to the maps of the Instituto Geográfico Agustin Codazzi with coordinates referred to datum MAGNA-SIRGAS.

 

58. RESTORING RELINQUISHED AREAS: THE CONTRACTOR will undertake all necessary abandonment activities and will restore the areas returned in accordance with Colombian laws and this Agreement.

 

59. FORMALIZING RELINQUISHED AREAS: All relinquishment of areas under this Agreement will be formalized by a minute executed by the Parties. If the above is not possible, ANH will formalize the relinquishment through an administrative decision.

 

CHAPTER X- RESOLUTORY CONDITIONS, BREACH AND PENALTIES

 

60. PRIOR RESOLUTORY CONDITIONS: In cases requiring compliance of conditions prior to starting a phase or period, or within a specific period after the beginning of a phase or period, ANH may terminate Agreement if the condition is not met. To this end, ANH will communicate to THE CONTRACTOR so it will provide the necessary explanations within a period of five (5) calendar days. If THE CONTRACTOR does not provide a reasonable explanation, ANH will terminate the Agreement and THE CONTRACTOR will not be entitled to any claim whatsoever.

 

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61. PROCEDURE IN CASE OF A BREACH: In the event that during the performance of this Agreement THE CONTRACTOR fails to fulfill obligation(s) herein, the Parties agree that penalties will be imposed and / or the Agreement will terminate, in which case

 

ANH will complete the following procedure:

 

In the event of a breach to this Agreement, ANH will report said breach to THE CONTRACTOR in writing, which will include the facts, supporting evidence and the reasons for which the Agreement is breached. If during the twenty (20) working days following receipt of the communication, THE CONTACTOR does not object it in a motivated and supported writing addressed to ANH within the same period indicated in the preceding paragraph, it is understood that THE CONTRACTOR accepts that the breach existed.

 

Once the breach has been established, ANH will have a period of sixty (60) days to repair the breach if it considers that the reasons for THE CONTRACTOR’S breach are acceptable.

 

If ANH considers that the reasons for the breach are unacceptable, or that it was not repaired within the period provided for this purpose, it will discretionally decide depending on how serious the breach is, whether it will impose a penalty or terminate the Agreement pursuant to the following clauses.

 

62.  PENALTIES: Once the breach has been established ANH may impose penalties as sanctions on THE CONTRACTOR that ensure the timely, effective and efficient compliance of the obligations of THE CONTRACTOR.

 

In the event that Penalties are imposed, these shall be a sum up to the value of the activity not fulfilled, if the obligation has a set amount. In the event that the amount of the obligation is undetermined, penalties will be up to fifty thousand (US$50,000.oo) dollars of the United States of America for the first time, and up to twice the fine initially imposed when there is a second breach and so on, doubling the maximum limit of the penalties caused until it equals the amount of the guarantee.

 

Once the periods set by ANH to pay Penalties and / or comply with THE CONTRACTOR’S failed obligations, without the latter fulfilling said obligations, ANH may terminate the Agreement and execute the guarantee.

 

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CHAPTER XI- TERMINATION

 

63. CAUSES FOR TERMINATION. This Agreement will terminate and THE CONTRACTOR’s rights will cease in any of the following circumstances:

 

a)             Resignation of THE CONTRACTOR during the Exploration Period, in the cases provided for in Clause 4 (Subsection 4.1.1);

 

b)             Expiry of the Exploration Period, without notice of discovery by THE CONTRACTOR under the provisions of Clause 13;

 

c)              Expiry of the Exploration Period when THE CONTRACTOR has given notice of Discovery without presenting the corresponding Assessment Program in accordance to Clause 14.

 

d)             Resignation of THE CONTRACTOR at any time during the Production Period;

 

e)              Termination of the Production Period;

 

In these cases, the effects of the Agreement will terminate concerning the Production Area in which the Production Period has terminated.

 

f)               Through the application of any of the causes for Unilateral Termination foreseen in this Agreement;

 

g)             Through a declaration of breach on the part of THE CONTRACTOR;

 

h)             With the occurrence of any of the causes for termination or lapsing ordered by the law.

 

i)                At any time, by mutual agreement between the Parties;

 

In the circumstances provided for in (f), (g) and (h) above, ANH will call on the guarantee mentioned in Clause 50, without prejudice to any recourse it may have, or actions the ANH may decide to file.

 

64. TERMINATION OF THE AGREEMENT FOR EXPIRATION OF THE EXPLORATION PERIOD: This Agreement will terminate upon the expiration of the Exploration Period if there is no Production Area, and Assessment Area or a Discovery made by THE CONTRACTOR in the last phase of the Exploration Period in the Contract Area. In this case, THE CONTRACTOR will return all of the Contract Area to ANH, without prejudice to the compliance of the remaining obligations and is under the obligation to provide evidence that it has complied with the Abandonment, evidencing that the wells drilled have been duly sealed and abandoned, that surface structures have been completely dismounted and it has completed cleaning and environmental restoration work in accordance with applicable legal provisions.

 

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65. VOLUNTARY TERMINATION OF THE PRODUCTION PERIOD:  THE CONTRACTOR may terminate this Agreement with regards to any Production Area at any time during Production Period, to which end it will inform ANH no less than three (3) months in advance, without prejudice to the compliance of remaining obligations.

 

66. UNILATERAL TERMINATION: ANH may unilaterally declare the termination of this Agreement at any time, in the following cases:

 

a)             The beginning of THE CONTRACTOR’S liquidation process, if it is a legal entity;

 

b)             A judicial embargo to THE CONTRACTOR if it seriously affects the compliance of this Agreement;

 

c)              When THE CONTRACTOR is composed of several legal entities and / or individuals, the causes stated in the preceding subsections will apply when they seriously affect the compliance of this Agreement;

 

67. TERMINATION DUE TO FAILURE TO COMPLY:  The causes for termination and / or penalties resulting from a breach, are as follows:

 

a) Failure to timely initiate the process to obtain environmental licenses, pursuant to the provisions of Clause 51, subsection 51.3.

 

b) Assigning of all or part of this Agreement, without observing the provisions of Clause 75;

 

c) Unreasonable suspension of Exploration Operations for more than six (6) consecutive months in any given phase;

 

d) Unreasonable suspension of Assessment and/or Exploration Operations for a period of time exceeding half the term of the Assessment Program in an Assessment Area, or for six (6) consecutive months in an Exploration Area.

 

In such cases, the effects of this Agreement will cease with regard to the Assessment or the Production Area in which the suspension of Operations has occurred;

 

e) Inappropriate use of resources and minerals, which are not part of the object of this Agreement;

 

f) Unreasonable omission of the delivery, in the terms set forth for this end, of technical information resulting from the Exploration, Assessment, Development or Production Operations;

 

g) Unreasonable breach of any other obligation agreed to by THE CONTRACTOR by virtue of this Agreement and related to its object.

 

68. MANDATORY TERMINATION AND EXPIRATION: ANH will declare termination, expiry and the mandatory liquidation of this Agreement with the occurrence of causes provided in the law, such as those foreseen in Law 418 of 1997, successively extended

 

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and amended by Laws 418 of 1997 successively by law 548 of 1999 amended and 782 of 2002 or Law 40 of 1993, or in laws which replace or amend them.

 

69.REVERSION OF ASSETS: Whenever the operating rights and obligations concerning a Production Area terminate, THE CONTRACTOR will leave the wells that are productive at the time in good condition, and construction and other real estate properties, all of which will be transferred free of charge to ANH with the right of passage and goods acquired to benefit production up to the Point of Delivery, even if such goods are outside the Production Area.

 

With regards to the movable goods exclusively destined to the service of the said Production Area, if termination results from the cause sated in Clause 63 subsection d), before the end of the ten (10) year production period, THE CONTRACTOR must offer them for sale to ANH at the price listed in accounting records. If in a period of three (3) months starting on the date the offer is made, ANH has not given a positive answer, THE CONTRACTOR may freely dispose of such goods. If termination occurs after the first ten (10) years of the Production Period, said goods will be transferred free of charge to ANH.   In all other cases, the goods will revert free of charge to ANH.

 

ANH will determine which wells, including those that are productive at the time, must be abandoned and which will continue producing.

 

Any disagreement concerning the nature and / or the destination given o those goods will be solved pursuant to the procedure indicated in Chapter XII.

 

THE CONTRACTOR is obliged to assign to ANH the environmental license and the economic resources necessary to meet the obligations concerning Abandonment. Enforcement of this clause does not entail a substitution of employers between THE CONTRACTOR and ANH.

 

69.1 Project Financing: Upon the return of the area or termination of the Agreement when one or the other have occurred after the ten (10) year Production Period, THE CONTRACTOR will transfer free of charge to ANH all rights resulting from contracts under project financing mode such as Leasing, Construction, Operation and Reversal of Goods — BOT (Build, Operate and Transfer), BOM (Build, operate, Maintain and Transfer), MOT (Modernize, Operate and Transfer) and any similar contracts, upon the termination of which said contracts establish the obligation to transfer property of goods, equipment and facilities to THE CONTRACTOR, when said contracts have been executed to develop the Production Period of the corresponding Area. At any rate, said contracts will require prior

 

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authorization of ANH in the event that are executed for a period greater than the Production Period.

 

69.2 Inventories: THE CONTRACTOR may dispose at any time of the goods and equipment located up to the Point of Delivery and that are not essential to maintain the existing production conditions. Notwithstanding the above, after ten (10) years of the Production Period for each Production Area, or when eighty per cent (80%) of proven reserves have been produced, whichever happens first, THE CONTRACTOR will require prior authorization from ANH to make said disposals.

 

70. LATER OBLIGATIONS: Once this Agreement is terminated for any cause and at any time, the Parties are under the obligation to satisfactorily meet their legal obligations, whether mutual or with third parties and those agreed to under this Agreement. For THE CONTRACTOR, this includes the responsibility for losses or damages resulting when the Agreement has terminated unilaterally and when for causes attributable to THE CONTRACTOR, compensation whether legal or otherwise is due.

 

71. ABANDONMENT: Without prejudice to the terms of Clause 69 of this Agreement, in all cases where there is an application for the relinquishment of onshore or offshore areas, THE CONTRACTOR will schedule and undertake all Abandonment activities, pursuant to Colombian legislation, and observing Good Oil Industry Practices.

 

71.1 Starting Abandonment.  In the sixty (60) Days following the date on which an Exploration or Assessment Area should be relinquished, THE CONTRACTOR will begin an Abandonment process to ANH’s satisfaction, which may not be unreasonably interrupted.

 

71.2 Abandonment Of Production Areas.  The Exploitation Plan for each Production Area will include the corresponding Abandonment Program. Likewise, when updating the Development Plan mentioned in Clause 20, THE CONTRACTOR will make the necessary adjustments to the Abandonment Program.

 

72. LIQUIDATION OF THIS AGREEMENT: Within the four (4) months following the termination of activities concerning this Agreement, the Parties will liquidate the Agreement, to which end they will execute a minute of liquidation. If the Parties have not liquidated the Agreement or have not agreed on the contents of said liquidation within the term provided, ANH will unilaterally liquidate the Agreement when it has all the information necessary for this purpose and will inform THE CONTRACTOR whether there are or not any obligations pending.

 

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CHAPTER XII- SETTLEMENT OF DISPUTES

 

73. EXECUTIVE STEP.  Any difference or disagreement arising in regard to the performance of this Agreement and related hereto, will be solved by the officers of the Parties authorized for this purpose.

 

If the disagreement has not been resolved within thirty (30) calendar Days from the date of written notice, the matter will be referred to the most senior executive of the Parties residing in Colombia, in order to seek a joint solution.

 

If within thirty (30) calendar Days following the date on which one of the Parties has requested the other to subject the disagreement to the above mentioned senior executives, the Parties reach an agreement or decision on the matter in question, that agreement or decision adopted will be signed within fifteen (15) calendar Days after reaching such an agreement or decision.

 

74. EXPERT INTERVENTION AND ARBITRATION:  If within the thirty (30) Days mentioned, the senior executives of the Parties (residing in Colombia) cannot reach an agreement or decision, or if within the fifteen (15) Days mentioned, no agreement or decision or agreement reached is signed, either Party may resort to the mechanisms provided for in this Clause as the case may be, and as follows:

 

74.1 Technical Experts.  If the matter is a technical disagreement, it will be submitted to the opinion of experts appointed as follows: one by each party, and the third named by the other two experts.  Should the experts not agree and upon the petition of either party, the third expert will be appointed by the association of professionals with greatest relation to the matter under dispute or a related area, where the association is a technical consultative body for the Government, based in Bogotá.

 

Once the experts have been appointed:

 

a)             They will issue their opinion in the thirty (30) Days following their appointment.  The experts will indicate the place and time for the receipt of information from the Parties.  At the request of the experts, the Parties may grant an extension of the initial term allowed.

 

49

 

b)             The Parties will deliver all relevant information, which the experts may consider necessary;

 

c)              The Parties will focus on and set a limit to the matters which they are to decide;

 

d)             The costs and expenses of technical experts will be borne by the Parties in equal portions.

 

e)              The opinion will be issued by majority, will be binding on the Parties and will have the effect of a transaction.

 

74.2 Accounting Experts.  If the disagreement concerns an accounting matter, it will be submitted to the opinion of experts who will be certified public accountants, appointed as follows: one appointed by each party, and the third by the two principal experts.  Should the two experts fail to agree, and at the petition of either party, the third expert will be appointed by the Junta Central de Contadores de Bogotá (Bogotá’s Board of Public Accountants). Once the experts have been appointed, the procedure will be similar to that stipulated in the preceding Subsection.

 

74.3 Dispute As To Nature.  If the disagreement between the Parties is with regard to the technical, accounting or legal quality of the dispute, then it will be considered to be a legal matter.

 

74.4 Arbitration.  Any disagreement or controversy derived from or related to this Agreement, and which is not a technical or accounting in nature, will be solved by arbitration.

 

The arbitration tribunal will be composed of three (3) arbitrators appointed by mutual consent between the Parties.  If the Parties cannot agree on the appointment of the arbitrators, they will be appointed by the Bogota Chamber of Commerce Arbitration and Conciliation Centre, prior request of either Party.

 

At any rate, the arbitrators must have credited experience of more than five (5) Years in matters related to the oil industry.  The tribunal will apply Colombian substantive law in force, and its decision will be in law.

 

Arbitration proceedings will be conducted in Spanish.

 

50

 

74.5 Exclusion.  In accordance with the terms of Clause 4 (Subsection 4.2.1) above, the lack of agreement between the Parties regarding the extension of the Production Period for each Production Area will not be deemed to be a disagreement, and will not be subject to the procedures established in this Clause.

 

CHAPTER XIII- FINAL DISPOSITIONS

 

75. ASSIGNMENT RIGHTS: THE CONTRACTOR has the right to assign or transfer all or part of its interest, rights and obligations under this Agreement, prior written authorization by ANH, to another person or company with the financial capacity, the technical competence, the professional skills and the legal capacity required to act in Colombia.

 

75.1 Procedure. To this end, THE CONTRACTOR will submit a written request to ANH, indicating the essential elements of the negotiations, such as the name of the potential assignee, the information on its legal, financial, technical and operational capacities, the value of the rights and obligations to be assigned, the scope of operations, etc.

 

Within sixty (60) business Days of receipt of the request presented in full form, ANH will exercise its discretion to analyze information supplied by THE CONTRACTOR, after which it will make a decision it will not be obliged to explain.

 

If any of the companies making up THE CONTRACTOR is involved in any merger, spin off, absorption, or transformation into another type of Corporation, prompt advise thereof to ANH will suffice, without prejudice to the information that other Colombian authorities may require.

 

ANH reserves the right to evaluate the new circumstance of THE CONTRACTOR or any of the companies that are a part thereof, concerning its financial capacity, technical competence, professional skills and legal capacity required to act, and may require that guarantees be procured.

 

Paragraph: When assignments are made in favor of companies that control or manage THE CONTRACTOR, or in favor of one of the companies that are a part thereof or its affiliates or subsidiaries, or among the companies that make up the same financial group if ANH does not provide an answer within the established term, it will be understood that the operation has been authorized, provided that the assignee meets the minimum regulatory requirements.

 

51

 

76 - FORCE MAJEURE AND ACTS OF THIRD PARTIES: For the purposes of this Agreement, force majeure is an unforeseen event impossible to resist, such as a law, an act of authority, shipwreck, earthquake, or similar events; an act by a third party is an irresistible act, legally alien to the party alleging it, such as war, and ill-intentioned act by third parties, or similar acts.

 

For the purposes of this Agreement, both force majeure and acts by third parties will be considered to relieve from liability, and to suspend performance of non-financial obligations affected by such circumstances, provided that they constitute a cause that is alien to the party effected, and the Party receiving notice of the same accepts that it is irresistible, and that the event occurring is an impediment to fulfilling the contractual obligations of the alleged event.

 

The performance of obligations under this Agreement will be suspended during the time in which either Party is unable to perform all or part of its obligations, due to force majeure or irresistible acts by third parties.

 

The existence of Force Majeure and / or Irresistible Acts by Third Parties will be determined as follows:

 

76.1 Notice: Whenever either Party is affected by any of said circumstances, it will advise the other within the following fifteen (15) calendar Days, invoking this Clause, and presenting proper justification, specifying the nature of the circumstances arising, the manner in which compliance of the related obligation is affected, the estimated period of suspension of activities, and any other information indicating the occurrence of the event and the irresistibility of its effects.

 

76.2 Acceptance and Temporary Suspension.  Within twenty (20) calendar Days following receipt of notice, the unaffected Party will respond in writing, accepting or not the circumstance relieving liability. This acceptance will suspend the terms to fulfill the obligations affected. In this case, suspension of affected obligations will commence from the moment when the event invoked as a cause for exoneration occurred.

 

If the Party not affected does not reply within the stipulated time, it will be provisionally understood that it accepts the occurrence of the cause invoked, and performance of the obligations affected will be suspended until the unaffected party makes a statement.  Suspension will only interrupt compliance of the obligations affected.

 

52

 

76.3 End of Suspension.  The Party affected by the cause relieving liability will resume compliance of obligations suspended within the month following the disappearance of the event invoked as a cause for suspension.  In this case, it will inform the other Party in the following twenty (20) calendar Days.

 

The Party obliged to perform the obligation will make its best efforts to perform it according to the terms and conditions agreed by the Parties.

 

76.4 Restoration of Terms.  If the suspension prevents the performance of any of the Operations and said impediment is prolonged for more than two (2) consecutive months, ANH will acknowledge the entire contract term that was missing when the suspension began, in order to terminate the corresponding phase or period without prejudice to the fact that THE CONTRACTOR must extend the existing guarantee or procure a new one, under the terms of Clause 50.

 

Paragraph: For the purposes hereof, normal winter or the process to obtain an environmental license will not be cause to relieve responsibility as force majeure or acts of third parties with respect to the obligation to drill the well, while said circumstances are foreseeable by THE CONTRACTOR.

 

77. TAXES: THE CONTRACTOR will be subject to Colombian tax laws.

 

78. CURRENCY. All payments made by THE CONTRACTOR to ANH under this Agreement will be made in United States dollars when permitted by exchange regulations or in Colombian pesos and at the bank designated for this purpose by ANH. THE CONTRACTOR may make payments in other currencies when exchange regulations allow it and ANH authorizes it.

 

78.1 Exchange Rate. If currency conversion is required from United States dollars to Colombian pesos, the market index rate certified by the Office of the Colombian Financial Superintendent or the agency that replaces it, for the date of payment will be applied.

 

78.2 Penalty interest. If payments due from THE CONTRACTOR to ANH by virtue of this Agreement are not made within the terms established, THE CONTRACTOR will pay Penalty Interest.

 

79 — EXTERNAL COMMUNICATIONS- Whenever THE CONTRACTOR needs to make a public statement or announcement or communiqué with respect to this Agreement concerning information that might affect the normal performance thereof, THE CONTRACTOR will previously advise ANH.

 

53

 

In any case external communications with regard to Discoveries made, Discoveries declared or to be declared commercial and Hydrocarbon volume reserves will be informed to ANH at least two (2) business days in advance.

 

80- APPLICABLE LAW: This Contract will be governed in all its parts by Colombian law. THE CONTRACTOR waives any attempt at diplomatic claims to support its rights and obligations under this Agreement, except in the case of denial of justice.  It is understood that there will be no denial of justice if THE CONTRACTOR has had access to all recourses and means of action available under Colombian law.

 

81— LANGUAGE: The official language for all purposes and actions related to this Agreement will be Spanish.

 

82- DOMICILE For all purposes of this Agreement, the Parties establish the city of Bogota, D.C., Republic of Colombia as their domicile.

 

(END OF ANNEX A)

 

54

 

ANNEX B

CONTRACT AREA

 

ANNEX TO THE EXPLORATION AND PRODUCTION AGREEMENT FOR THE “LLA34” BLOCK

 

The total area comprised in the block described below is thirty three thousand two hundred and fifty eight (33,258) hectares with one thousand seventy five (1,075) square meters. The Cartographic information was taken from the political map of Colombia, I.G.A.C’s digital file at a scale of 1:1’500.000.

 

BLOCK LLA34

 

The area of the polygon formed by the vertexes listed below is thirty three thousand two hundred and fifty eight (33,258) hectares and one thousand seventy five (1,075) square meters, which is in its entirety within Polygon B as defined in Article 4 of Agreement No. 008 of May 3, 2004.The block is located within the municipalities of Tauramena and Villanueva in the Department of Casanare and Cabuyaro in the Department of Meta.  This area is described below and, as indicated in the map attached as attachment “B” that is a part of this Agreement, as well as in the corresponding charts; the Geodesic Vertex “GPS-D-CA-001” of the Instituto Geográfico Agustín Codazzi has been taken as the point of reference, and whose GAUSS Bogotá origin flat coordinates datum MAGNA- SIRGAS are: N-1069800,670 meters, E — 1146047.362 meters, corresponding to the geographic coordinates datum MAGNA-SIRGAS Latitude 5o 13’ 33,6964” North of the Equator, Longitude 72o 45’ 36, 7819” West of Greenwich.

 

Point A:

 

From this vertex a S 1o 27’ 49,873” W direction is followed for a distance of 80342,788 meters until reaching point “A”, whose coordinates are N- 989484,103 meters, E- 1143994,902 meters.

 

Point B:

 

From this vertex a N 89o 53’ 44 026” E is followed for a distance of 7968,622 meters until reaching point “B”, whose coordinates are N- 989498,628 meters, E- 1151963,496 meters Line “A-B” limits in its entirety with the BALAY sector that is operated by PETROBRAS.

 

55

 

Point C:

 

From this point an N 0o 6’ 33,184” W is followed for a distance of 7,869 meters until reaching point “C”, whose coordinates are N- 989506,497 meters, E- 1151963,496 meters. Line “B-C” limits in its entirety with sector LLA 32 that is operated by TC OIL & SERVICES S.A.

 

Point D:

 

From this point a N 89o 53’ 21,42” E is followed for a distance of 19588,904 meters until reaching point “D”, whose coordinates are N- 989544,35 meters, E- 1171552,363 meters. Line “C-D” limits in its entirety with sector LLA 32 that is operated by TC OIL & SERVICES S.A.

 

Point E:

 

From this point a S 43o 1’ 34,9” W is followed for a distance of 2257,527 meters until reaching point “E”, whose coordinates are N- 987894,008 meters, E 1170011,974- meters. Line “D-E” limits in its entirety with sector GARIBAY sector that is operated by SOLANA.

 

Point F:

 

From this point a N 89o 59’ 59,712”W is followed for a distance of 5017,821 meters until reaching point “F”, whose coordinates are N- 987894,015 meters, E- 1164994,153 meters. The “E-F” line limits along its entire extension with the TIPLE sector operated by CEPCOLSA.

 

Point G:

 

From this point a S 0o 0’ 0,255” W is followed for a distance of 13770,316 meters until reaching point “G”, whose coordinates are N- 974123,699 meters, E- 116994,136 meters. The “F-G” line limits along its entire extension with the TIPLE sector operated by CEPCOLSA.

 

Point H:

 

From this point a N 89o 59’ 59,745” W is followed for a distance of 20999 meters until reaching point “H”, whose coordinates are N- 974123,725 meters, E- 1143994,885 meters. The “G-H” line limits along its entire extension with the CABRESTERO sector operated by CEPCOLSA.

 

From this point a N 0o 0’ 0,228 E is followed for a distance of 15360,378 meters until reaching point “A”, starting and finishing points to establishment of boundaries. Line “ H-A” limits in its entirety with sector CORCEL that is operated by PETROMINERALES.

 

56

 

ANNEX B

 

 

(End of Annex B)

 

57

 

Calculation of the Area, Directions and Distances based on Gauss Coordinates,
 Bogotá Origin. Datum MAGNA-SIRGAS

Data and Results Table for the BLOUQUE LLA34sector

 

Municipal jurisdictions of Tauramena and Villanueva in the Department of Casanare and Cabuyaro in the Department of Meta

 

	
 
    	
 
    	
FLAT COORDINATES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Point
    	
 
    	
NORTH
    	
 
    	
EAST
    	
 
    	
Distance
    	
 
    	
Dif. North
    	
 
    	
Dif. East
    	
 
    	
DIRECTION
    
	
VERT
    	
 
    	
1069800,670
    	
 
    	
1146047,362
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
80342,788
    	
 
    	
-80316,57
    	
 
    	
-2052,46
    	
 
    	
S 1o 27’   49.873” W
    
	
A
    	
 
    	
989484,103
    	
 
    	
1143994,902
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
7968,622
    	
 
    	
14,53
    	
 
    	
7968,61
    	
 
    	
N 89o 53’   44.026” E
    
	
B
    	
 
    	
989498,628
    	
 
    	
1151963,511
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
7,869
    	
 
    	
7,87
    	
 
    	
-0.01
    	
 
    	
N 0o 6’   33.184” W
    
	
C
    	
 
    	
989506,497
    	
 
    	
11151963,496
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
19588,904
    	
 
    	
37,85
    	
 
    	
19,588,87
    	
 
    	
N 89o 53’   21.42” E
    
	
D
    	
 
    	
989544,350
    	
 
    	
1171552,363
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
2257,527
    	
 
    	
-1,650,34
    	
 
    	
-1,540,39
    	
 
    	
S 43o 1’   34.9” W
    
	
E
    	
 
    	
987894,008
    	
 
    	
1170011,974
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
5017,82
    	
 
    	
0,01
    	
 
    	
-5,017,82
    	
 
    	
N 89o59’   59.712” W
    
	
F
    	
 
    	
987894,015
    	
 
    	
1164994,153
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
13770,316
    	
 
    	
-13,770,32
    	
 
    	
-0,02
    	
 
    	
S 0o   40’0,225” W
    
	
G
    	
 
    	
974123,699
    	
 
    	
1164994,136
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
20999,251
    	
 
    	
0.03
    	
 
    	
-20,999,25
    	
 
    	
N 89o 59’   59.745” W
    
	
H
    	
 
    	
1,127,460.934
    	
 
    	
1,388,166.614
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
15360,378
    	
 
    	
15,360,38
    	
 
    	
0.02
    	
 
    	
N 0o 0’   0.228” E
    
	
A
    	
 
    	
989494,103
    	
 
    	
1143994,902
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    

 

Area of the Block (Ha) :              33.258,1075

 

58

 

ANNEX C

 

MANDATORY EXPLORATION PROGRAM

 

THE CONTRACTOR agrees to undertake at least the Exploration Program described below:

 

Phase 0 Prior to including Phase 0, the presence of ethnical groups in the areas affected by the exploration work must be identified. To this end, THE CONTRACTOR must confirm this circumstance by informing ANH in writing, within the first thirty (30) days after the execution of the Agreement.

 

Duration: Up to six (6) months starting on the date the Agreement is executed.

 

Activities:

 

To undertake the process for prior consultation, whenever necessary, before beginning the first phase.

 

During this period, the contractor companies are expected to simultaneously undertake the planning, work location, socialization and environmental license as well as he processes prior to contracting goods and services.

 

Note. ANH may terminate Phase 0 when the process of making prior consultation has ended or when THE CONTRACTOR does not advance diligently in the above activities. This phase may be extended if difficulties arise in the process of making prior consultation that are beyond the control of THE CONTRACTOR. Prior consultation will be made in coordination with ANH.

 

No payment or obligation will be due to ANH during the performance of Phase 0.

 

To begin both Phase 0 as well as Phase 1 of the Agreement, THE CONTRACTOR agrees to issue an insurance policy in favor of State entities within the ten (10) calendar days following the signing of the Agreement, to secure compliance of the initial obligations of the Agreement in an amount equivalent to one hundred thousand dollars (US$100,000.oo) and for a term of six (6) months starting on the date the Agreement is executed. The above does not exclude the obligation to execute the compliance guarantee referred to in Clause 50 and Annex E of the Agreement draft.

 

59

 

Minimum Exploration Program

 

	
Phase
    	
 
    	
Duration
    	
 
    	
Activity
    	
 
    	
Total Activity
    US$
    	
 
    
	
1
    	
 
    	
36 months
    	
 
    	
Acquisition,   processing and interpretation of 67km of 2D seismic.
    	
 
    	
1,223,889  
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
Drilling of 1 A3   exploratory well.
    	
 
    	
7,900,000
    	
 
    
	
2
    	
 
    	
36 months
    	
 
    	
Drilling of 2 A3   exploratory wells.
    	
 
    	
15,800,000
    	
 
    
	
Investment: X
    	
 
    	
24,923,889
    	
 
    

 

Additional Exploratory Program:

 

	
Phase
    	
 
    	
Duration
    	
 
    	
Activity
    	
 
    	
Total Activity
    US$
    	
 
    
	
1
    	
 
    	
36 months
    	
 
    	
Acquisition,   processing and interpretation of 253 km of 2D seismic.
    	
 
    	
4,700,000  
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
Drilling of 1 A3   exploratory well.
    	
 
    	
7,888,000
    	
 
    
	
2
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Investment: X
    	
 
    	
12,588,000
    	
 
    
	
 
    	
 
    	
 
    	
 
    
	
Total Investment  
    	
 
    	
37,511,889
    	
 
    

 

Note 1: THE CONTRACTOR agrees to undertake preliminary studies in environmental matters, such as identifying the area where possible changes that generate the foreseen activities and the measures required for managing each one.

 

Note 2: It is understood that this exploratory program is exclusively designed to search for Conventional Hydrocarbons. It does not include any exploratory activity related to Methane Gas Associated to Coal, a hydrocarbon for which exploratory permits have been suspended under Agreement 042 issued on November 29, 2006 by the Director’s Council at ANH.

 

(End of Annex C)

 

60

 

ANNEX D

 

ECONOMIC RIGHTS

 

D.1 Fee for the use of the subsoil. Under the provisions of Article 38, Annex A, for each phase during the exploration period, THE CONTRACTOR will pay ANH a fee in United States Dollars, which will result from multiplying  the number of hectares and fraction of hectare of each Contract Area, excluding Production Areas, by the value indicated in the table below:

 

TABLE A: 2009 Value per phase in US$ / Hectare

 

	
 
    	
 
    	
For the first 100,000
   Has.
    	
 
    	
For each additional
   Hectare to 100,000
   Has
    
	
Size of area à
    	
 
    	
<18
    	
 
    	
> 18
    	
 
    	
<18
    	
 
    	
> 18
    
	
Duration of the Phase
    	
 
    	
months
    	
 
    	
months
    	
 
    	
months
    	
 
    	
months
    
	
In polygons A and B
    	
 
    	
2.29
    	
 
    	
3.06
    	
 
    	
3.06
    	
 
    	
4.59
    
	
Outside the Polygons
    	
 
    	
1.53
    	
 
    	
2.29
    	
 
    	
2.29
    	
 
    	
3.06
    
	
Offshore Areas
    	
 
    	
0.76
    

 

Note: This fee will not apply When the first phase of the exploration period is less than or equal to twelve (12) months.

 

Assessment and Production Areas. THE CONTRACTOR will pay ANH a fee in United States dollars, which results from multiplying the production of Hydrocarbons corresponding to THE CONTRACTOR pursuant to Clause 29 by US$0.1162 for each barrel of Liquid Hydrocarbons.

 

For natural gas, this amount will be US$0.01162 per 1000 cubic feet.

 

Paragraph: The production of natural gas destined to reinjection operations or other processes directly related with production in the same field from which it is extracted, will not result in paying for productions rights under Clause 38, subsection 38.2.

 

D.2 FEE FOR HIGH PRICES.

 

From the moment when the accumulated production of liquid hydrocarbons from each Production Area, including the royalty volume, exceeds five (5) million Barrels, and in the event the price of the marker crude West Texas Intermediate  (WTI) exceeds the base price Po depending on the API gravity of crude oil, or when gas production has been

 

61

 

ongoing for a period of five (5) years and it is destined for exports, and the marker Natural Gas “U.S. Gulf Coast Henry Hub” exceeds the base price Po under Table A, THE CONTRACTOR will pay ANH at the Point of Delivery, a participation in the net production of royalties as determined by the following formula:

 

Q= [(P – Po)/P] x S

 

Where:

 

Q    = The economic right to deliver to ANH

P    =   WTI Price

Po  = Reference Base Price under Table A

S    = Percentage of Participation under Table B.

 

TABLE A. Reference Base Price

 

	
API Gravity of Liquid Hydrocarbons Produced
    	
 
    	
Po (USD$/BI)
    2009
    	
 
    
	
Greater than 29o API
    	
 
    	
$30.22
    	
 
    
	
Greater than 22 o API and less than or equal to 29o API
    	
 
    	
$31.39
    	
 
    
	
Greater than 15o API and less than or equal to 22o API
    	
 
    	
$32.56
    	
 
    
	
Discoveries located beyond 300 mts. depth of water
    	
 
    	
$37.20
    	
 
    
	
Greater than 10o and less than or equal to 15o API
    	
 
    	
$46.50
    	
 
    
	
Natural Gas Exported
    	
 
    	
Po
    	
 
    
	
Distance in a straight line   between the point of delivery and the point of receipt in the destination   country
    	
 
    	
(USD$/MMBTU)
    	
 
    
	
Less than or   equal to 500km
    	
 
    	
$6.98
    	
 
    
	
Greater than 500   and less than or equal to 1000km
    	
 
    	
$8.13
    	
 
    
	
Greater than 1000km or LNG plant
    	
 
    	
9.30
    	
 
    

 

TABLE B: Participation Percentages:

 

	
WTI Price (P)
    	
 
    	
Participation Percentage (S)
    	
 
    
	
Po < P < 2Po
    	
 
    	
30
    	
%
    
	
2Po < P < 3Po
    	
 
    	
35
    	
%
    
	
3Po < P < 4Po
    	
 
    	
40
    	
%
    
	
4Po < P < 5Po
    	
 
    	
45
    	
%
    
	
5Po < P
    	
 
    	
50
    	
%
    

 

62

 

The following definitions will apply to the formula above:

 

P:                 For Liquid Hydrocarbons, is the average price per barrel of the marker crude oil “West Texas Intermediate” (WTI), in US dollars per Barrel (USD $/Bl), and for Natural Gas is the average price of the marker natural gas “U.S. Gulf Coast Henry Hub” in US dollars per million of British Thermal Units (USD $/MMBTU). These average prices are for the relevant calendar Month, whose specifications and quotations are published by prestigious international media.

 

Po:   For Liquid Hydrocarbons, is the marker crude base price, in US dollars per Barrel (USD $/Bl), and for Natural Gas is the average price in US dollars per million of British Thermal Units (US$/MMBTU) stated in TABLE A.

For the exploitation of Heavy Liquid Hydrocarbons with an API less than or equal to ten degrees (10o) THE CONTRACTOR will pay no High Price Fees to ANH.

 

THE CONTRACTOR will not pay ANH a High Price fee For the production of Heavy Liquid Hydrocarbons with an API gravity less than or equal to ten degrees (10o).

 

For Natural Gas: This fee will be due starting on the fifth year after starting production in the oil field, as evidenced in the resolution of approval issued by the competent authority and provided the following conditions are met:

 

·  For natural gas destined for exports: This fee will be caused in the event that the average price for the calendar month of production of Natural Gas “U.S. Gulf Coast Henry Hub” marker is above the Po Base Price.

 

·  For natural gas destined for internal use: In the event its price is regulated by the Comisión de Regulación de Energía y Gas — CREG — or the agency acting on its behalf, THE CONTRACTOR will pay no High Price Fees to the ANH; otherwise, the parties will agree the natural gas marker reflecting internal market conditions and Po value, which must be equivalent to the regulated price and will sign the corresponding agreement.

 

All values corresponding to the economic rights referred to in this Annex, with the exception of the Po base Price corresponding to the regulated Price for gas for domestic use, will be adjusted annually as of January 1st of each year, applying the following formula:

 

63

 

Po = Po(n-1) x (1+I(n-2))

Where

n                                         is the calendar year starting and for which the estimate is being made.

n-1                              is the calendar year immediately preceding the year starting.

n-2                              is the calendar year immediately preceding n-1.

Po(n-1)               is the value of Po for the new year as a result of the formula and to the nearest two decimal points.

In-2)                           is the annual variation expressed as a fraction of the US producer price index during the Calendar Year, as published by the US Department of Labor - PPI Finished Goods WPUSOP 3000- between the end of calendar year n-2 and the index corresponding to the end of the year immediately preceding n-2 to the nearest four (4) decimal points.

 

The calculation mentioned above will be made in December of each Year and will apply to the following calendar year.

 

Paragraph: if the price of the marker crude oil “West Texas Intermediate” or of the natural gas marker “US Gulf Coast Henry Hub” (P) were to lose recognition as international marker price, ANH will select a new marker crude oil or natural gas marker to be used, and will modify the table based on the new index, maintaining equivalencies with the Po values for the marker crude oil “West Texas Intermediate” or for the Natural Gas marker “US Gulf Coast Henry Hub”.

 

ANH may request Contractor in writing to pay this fee to ANH in kind or in cash. In the event that ANH decides to change the way in which the fee will be paid, it must inform of this decision in writing to THE CONTRACTOR not less than three (3) months in advance.

 

In the event that ANH decides to receive this fee in cash, subsections 35.2, 35.3, and 35.4 of Annex A will apply.

 

D.3 ECONOMIC RIGHTS AS A PARTICIPATION PERCENTAGE

 

THE CONTRACTOR will pay ANH a fee for participation percentage of 1% of total production after royalties.

 

(End Annex D)

 

64

 

ANNEX E

MODEL LETTER OF CREDIT

 

	
LETTER OF CREDIT NO
    	
:
    	
 
    
	
 
    	
 
    	
 
    
	
ISSUANCE PLACE AND DATE
    	
:
    	
 
    
	
 
    	
 
    	
 
    
	
EXPIRATION DATE
    	
:
    	
[       Initially   corresponds to half of the duration of the first one]
    
	
 
    	
 
    	
 
    
	
NOMINAL VALUE
    	
:
    	
                                     (US$                )

[Corresponds to 50% of the value of the Exploration Program]
    
	
 
    	
 
    	
 
    
	
ISSUING BANK
    	
:
    	
[           Name of Issuing Bank              ]
    
	
 
    	
 
    	
 
    
	
BENEFICIARY
    	
:
    	
Agencia Nacional de Hidrocarburos - ANH
    
	
 
    	
 
    	
 
    
	
ORDERING ENTITY
    	
:
    	
[           Name of Company              ]
    
	
 
    	
 
    	
 
    
	
CONTRACT NAME
    	
:
    	
 
    

 

 

Please be advised that in the name and on account of [           Name of the Company            ] hereinafter referred to as THE CONTRACTOR, we have issued this Standby Irrevocable Setter of Credit to your name for the amount in Colombian currency resulting from the conversion at the market representative rate of the day a notice of non compliance foreseen below is sent to us, in an amount of                                        dollars of the United Status of America (US$                            ), to secure compliance and the appropriate performance of all or any of the obligations of Phase                  of the Exploration Period, with a duration up to               and the remaining activities inherent to said obligations stemming from the HYDROCARBON EXPLORATION AND PRODUCTION AGREEMENT entered by and between THE CONTRACTOR and ANH on                , hereinafter referred to as THE AGREEMENT.

 

It is understood that the liability of [           Name of the Issuing Bank           ] derived from the present standby letter of credit is limited solely to the aforementioned sum in Colombian legal tender.

 

65

 

In the event THE CONTRACTOR fails to comply any or all the obligations and the remaining activities inherent to said obligations derived from THE AGREEMENT mentioned in the first paragraph of this standby letter of credit, hereinafter referred to as GUARANTEED OBLIGATIONS, the Beneficiary will advise [           Name of Issuing Bank            ] of said failure to comply addressing said notice to its offices at                                  , within the term of the present letter of credit. On the same date we receive the mentioned communication we will proceed to unconditionally pay, to the name of the Beneficiary, the sums said Beneficiary claims from the present letter of credit, which will in no event exceed the total guaranteed value.

 

If the aforementioned non-compliance related communication is not sent within the term of the present letter of credit, our liability stemming here from will cease.

 

The communication informing [           Name of the Issuing Bank            ] of the failure to comply with the GUARANTEED OBLIGATIONS, will consist of a document duly signed by the Legal Representative of the ANH or whoever acts in this capacity, stating THE CONTRACTOR’s failure to comply with GUARANTEED OBLIGATIONS and requesting payment of the present letter of credit. This communication must mention the number of the letter of credit and the value for which it is used, converted to Colombian legal tender at the market representative rate in force on the date said communication is sent to us, as stated in a certification issued by the Colombian Financial Superintendence or the agency that may act in that capacity for such purposes.

 

This document will be ruled by the “Rules and Uniform Practices relevant to Documentary Credit (last Draft) published by the International Chamber of Commerce (ICC).

 

 

	
 
    	
 
    
	
Legal   Representative of the Issuing Bank
    	
 
    

 

END OF ANNEX E

 

66GES-2013.8.03-10Q-Exhibit 10.1

Exhibit 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
This EXECUTIVE EMPLOYMENT AGREEMENT (the “Agreement”), is entered into this 11th day of July 2013 and made effective as of February 3, 2013 (the “Effective Date”) between Guess?, Inc., a Delaware corporation (the “Company”), and Paul Marciano (the “Executive”).
W I T N E S S E T H:
WHEREAS, the Executive is a co-founder of the Company and the Company and the Executive are parties to that certain Amended and Restated Executive Employment Agreement dated as of December 18, 2008 (the “Prior Agreement”).
WHEREAS, the Company and the Executive wish to replace the Prior Agreement upon the terms set forth in this Agreement effective as of the Effective Date.
WHEREAS, the Company recognizes that the Executive's talents and abilities are unique and have been integral to the success of the Company.
WHEREAS, the Executive is willing to commit himself to serve the Company on the terms and conditions herein provided.
WHEREAS, the Company wishes to continue to retain the services of the Executive and anticipates that the Executive's contribution to the growth and success of the Company will continue to be substantial.
NOW THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
		
	1.
	POSITION/DUTIES.

(a)During the Employment Term (as defined in Section 2 below), the Executive shall serve as the Company's Chief Executive Officer and as Vice Chairman of the Board of Directors.  In this capacity the Executive shall have such duties, authorities and responsibilities commensurate with the duties, authorities and responsibilities of persons in similar capacities in similarly sized companies and such other duties and responsibilities as the Board of Directors of the Company (the “Board”) shall designate that are consistent with the Executive's position as Chief Executive Officer.  The Executive shall report exclusively to the Board.  The Executive shall have authority as is appropriate to carry out his duties and responsibilities as set forth in this Agreement.
(b)During the Employment Term (as defined below), the Executive shall use the Executive's best reasonable efforts to perform faithfully and efficiently the duties and responsibilities assigned to the Executive hereunder and shall devote substantially all of the Executive's business time (excluding periods of vacation and other approved leaves of absence) as is reasonably necessary to such performance of the Executive's duties with the Company.  Subject to Board approval, the Executive may serve on the board of directors or advisory boards of other for profit companies provided that such service does not create a potential business conflict or the appearance thereof.  Nothing in this Agreement shall prevent the Executive from managing his family's personal investments so long as such activities do not materially interfere with the performance of the Executive's duties hereunder or create a potential business conflict or the appearance thereof.
(c)During the Employment Term, the Board shall nominate the Executive for re-election as a member of the Board at the expiration of the Executive's then-current term.
(d)The Company shall not relocate the Executive's principal place of business outside of the Los Angeles metropolitan area without the Executive's written consent.

(e)The Executive shall be provided with appropriate office and secretarial facilities in each of the Company's principal executive offices and any other location that the Executive reasonably deems necessary to have an office and support services in order for the Executive to perform his duties to the Company.
2.EMPLOYMENT TERM.  The Executive's term of employment under this Agreement (such term of employment, as it may be extended or terminated, is herein referred to as the “Employment Term”) shall be for a term commencing on the Effective Date and, unless terminated earlier as provided in Section 7 hereof, ending on January 30, 2016 (the “Employment Term”).
3.BASE SALARY.  The Company agrees to pay the Executive a base salary (the “Base Salary”) at an annual rate of not less than One Million Five Hundred Thousand Dollars ($1,500,000), payable in accordance with the regular payroll practices of the Company, but not less frequently than monthly; provided, however, that with respect to the Company's fiscal year ending February 1, 2014, only $1,000,000 of Base Salary shall paid to the Executive with the remaining $500,000 to be paid upon the earlier of (i) the Executive's separation from service (as defined in Section 8(d) below) with the Company or (ii) the Executive's death (the “Deferred Payment Date”).  If payment is triggered by the Executive's separation from service, the payment shall be subject to the six-month delay provisions of the Company's Nonqualified Deferred Compensation Plan (the “NQDC Plan”).  The Executive's Base Salary shall be subject to annual review by the Board (or a committee thereof) and may be increased, but not decreased, from time to time by the Board.  No increase to Base Salary shall be used to offset or otherwise reduce any obligations of the Company to the Executive hereunder or otherwise.  The base salary as determined herein from time to time shall constitute “Base Salary” for purposes of this Agreement.  Payment of the Executive's Base Salary in excess of the Base Salary that would be paid each applicable pay period at an annualized rate of $1,000,000 that becomes payable during the Company's fiscal years ending on January 31, 2015 and on January 30, 2016 under this Section 3 shall be deferred until the Deferred Payment Date (as defined above in this Section 3).  Payments of Base Salary that are required to be deferred under this Section 3 shall be credited under and subject to the NQDC Plan and the Executive shall be entitled to select deemed investments for such amounts under and in accordance with the NQDC Plan.  The deferral credit to the NQDC Plan with respect to the deferred portion of the Executive's Base Salary for the Company's fiscal year ending February 1, 2014 that results from the increase in the Executive's Base Salary pursuant to this Agreement and relates to the period of time prior to execution of this Agreement shall be credited to the NQDC promptly after execution of this Agreement.
4.ANNUAL INCENTIVE BONUS AND OTHER BONUSES.  During the Employment Term, the Executive shall be eligible to participate in the Company's annual bonus and other incentive compensation plans and programs for the Company's senior executives at a level commensurate with the Executive's position.  For each whole fiscal year (“Fiscal Year”) of the Company that begins on or after the Effective Date and ends not later than the expiration of the Employment Term, the Executive shall be eligible to earn an annual cash bonus (the “Bonus”) under the Company's Annual Incentive Bonus Plan, as amended and restated and as further amended from time to time (the “Bonus Plan”) and the Company's 2004 Equity Incentive Plan, or any successor thereto and as the applicable plan may be amended from time to time (the “Equity Plan”), based upon the achievement by the Company and its subsidiaries of performance goals for each such Fiscal Year established by the Compensation Committee of the Board of Directors (the “Compensation Committee”).  The range of the Bonus opportunity for each Fiscal Year (and, in lieu of a Bonus opportunity for the full Fiscal Year ending February 1, 2014, the last three quarters of the Company's 2014 Fiscal Year) will be as determined by the Compensation Committee based upon the extent to which such performance goals are achieved, provided that the annual target Bonus opportunity shall be at least 400% of the Executive's Base Salary (for each such year, the “Target Bonus”) with the potential payments based on performance ranging from 0% to 125% of the Target Bonus, subject to the maximum amount permitted under the Bonus Plan and the Equity Plan and the Compensation Committee's discretion to reduce the bonus below the maximum determined pursuant to the Bonus Plan or Equity Plan, as applicable.  Each Bonus as described above that becomes payable to the Executive will be paid at the same time that bonuses are paid to other executives of the Company, but in any event within seventy-four (74) days after 

2

the conclusion of the Fiscal Year (or portion thereof, in the case of the last three quarters of the Company's 2014 Fiscal Year referred to above) to which such Bonus relates.  The Compensation Committee may, in its sole discretion, award additional bonuses to the Executive.  Any Bonus, as well any other bonus paid to the Executive by the Company, is subject to the terms of the Company's recoupment, clawback or similar policy as it may be in effect from time to time, as well as any similar provisions of applicable law, any of which could in certain circumstances require repayment or forfeiture of such award.
5.EQUITY BASED INCENTIVE AWARDS.
(a) TIME-BASED RESTRICTED STOCK UNITS. The Company shall grant the Executive Time-Based RSUs (as defined below) under the Equity Plan with respect to 100,000 shares of the Company's common stock (the “Initial Time-Based RSU Grant”) not later than July 11, 2013 using the form of Time-Based RSU award agreement attached hereto as Exhibit A.  The Company will grant additional Time-Based RSUs to the Executive for the 2015 Fiscal Year and the 2016 Fiscal Year in such number of shares as determined by the Committee to be appropriate in its sole discretion.  All grants of Time-Based RSUs following the Initial Time-Based RSU Grant shall be made subject to terms and conditions set forth in Exhibit A except to the extent required to comply with applicable law and except as appropriate to reflect the specific vesting schedule (it being intended that future Time-Based RSUs be subject to time-based vesting in annual installments over three years from the date of grant of the award, to the extent the applicable performance goal is satisfied), performance requirement, grant date and number of shares subject to the award.  “Time-Based RSUs” means restricted stock units awarded under the Equity Plan that are subject to a time-based vesting requirement and, in order to preserve deductibility for the award under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), a performance-based vesting condition established by the Committee with respect to the fiscal year (or portion thereof, as the case may be) for which such award is granted.
(b)PERFORMANCE SHARES.  The Company shall grant the Executive Performance Shares (as defined below) under the Equity Plan not later than July 11, 2013 (the “Initial Performance Share Grant”) using the form of Performance Share award agreement attached hereto as Exhibit B.  The target number of shares of Company common stock subject to the Initial Performance Share Grant shall equal $4.5 million divided by the average of the closing stock prices for a share of the Company's common stock on the New York Stock Exchange for the period of 20 consecutive New York Stock Exchange trading days ending with (and including, if such date is a trading day) the date of grant of such award, rounded to the nearest 100 whole shares.  The Company will grant additional Performance Shares to the Executive for the 2015 Fiscal Year and the 2016 Fiscal Year in such number of shares as determined by the Committee to be appropriate in its sole discretion.  All grants of Performance Shares following the Initial Performance Share Grant shall be made subject to terms and conditions set forth in Exhibit B except to the extent required to comply with applicable law and except as appropriate to reflect the specific vesting schedule (it being intended that future Performance Shares credited based on performance be subject to time-based vesting on a “cliff” basis two years following the end of the applicable performance period), performance requirement, grant date and number of shares subject to the award.  “Performance Shares” means restricted share units awarded under the Equity Plan that are subject to time-based and performance-based vesting requirements and are intended to qualify as performance-based compensation within the meaning of Section 162(m) of the Code, with the performance-based vesting condition established by the Committee with respect to the fiscal year (or portion thereof, as the case may be) for which such award is granted.
(c)DISCRETIONARY GRANTS.  In addition to the Time-Based RSUs under Section 5(a) and the Performance Shares under Section 5(b) above, at the sole discretion of the Board or the Committee, the Executive shall be eligible to participate throughout the Employment Term in such long-term incentive plans and programs as may be in effect from time to time in accordance with the Company's compensation practices and the terms and provisions of any such plans or programs.

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6.EMPLOYEE BENEFITS.
(a)BENEFIT PLANS.  The Executive shall be entitled to participate in all employee benefit plans of the Company including, but not limited to, equity, pension, thrift, Section 401(k), profit sharing, medical coverage, education, or other retirement (including without limitation supplemental executive retirement plans) or welfare benefits that the Company has adopted or may adopt, maintain or contribute to for the benefit of its senior executives at a level commensurate with the Executive's positions subject to satisfying the applicable eligibility requirements.  The Executive shall at all times during the Employment Term be entitled to participate in the Guess?, Inc. Supplemental Executive Retirement Plan, as amended and restated effective December 18, 2008 and as subsequently amended as noted below (the “SERP”), the NQDC Plan and any deferred compensation plan which may be maintained by the Company from time to time.  The Executive hereby consents to the SERP amendment being adopted in connection with this Agreement that limits to $6.25 million the Executive's “Compensation” as defined in and taken into account under the SERP for any year after 2013. 
(b)VACATION.  The Executive shall be entitled to accrue annual paid vacation in accordance with the Company's policy applicable to senior executives, but in no event less than twenty vacation days per calendar year (as prorated for partial years), which vacation may be taken at such times as the Executive elects with due regard to the needs of the Company.  The Executive shall not be permitted to accrue more than a total of twenty five (25) vacation days at any time.  Once the Executive reaches the maximum accrual, the Executive shall not accrue any additional vacation days until a portion of the Executive's accrued vacation time is used.
(c)HOME SECURITY AND AUTOMOBILE.  During the Employment Term, the Company shall continue to reimburse the Executive for home security expenses (not in excess of $144,000 for any one calendar year) and provide the Executive with an automobile in a manner consistent with its past practice.
(d)PERQUISITES.  The Company shall provide to the Executive, at the Company's cost, all perquisites which other senior executives of the Company are generally entitled to receive in accordance with Company policy as set by the Board from time to time.
(e)LIFETIME RETIREE MEDICAL OPTION.  The Company shall provide the Executive and his eligible family members with access to Post-Retirement Health Benefits at the applicable group rate for such benefits commencing upon expiration of the Employment Term.   If the Executive elects Post-Retirement Health Benefits, he shall pay for the full cost of such benefits on a monthly basis.  The term “Post-Retirement Health Benefits” means health benefits (including medical, prescription, dental and vision coverage, if and to the extent applicable) for the remainder of the Executive's life under the plans provided to the Company's executive officers and their eligible family members, as in effect from time to time.  In the event that the Post-Retirement Health Benefit set forth under this Section 6(e) cannot be provided by the Company in compliance with applicable law, would result in other participants in the applicable plan being taxed on their benefits, would result in additional coverage costs for the Company, or would be taxable to the Executive, the parties shall cooperate in good faith to structure a mutually satisfactory alternative arrangement.
(f)LIFE INSURANCE BENEFIT.  For the Employment Term, the Company will continue to purchase, and will pay the premiums for, life insurance coverage on the Executive's life (on terms the same in all material respects as those currently in effect (i.e., term coverage of $10 million) with the Executive (or his assignee) as the owner of the policy and with the right to designate the beneficiary of the death benefit.  The premiums paid on the policy shall be imputed as income to the Executive.  Such insurance coverage shall be structured to comply with the requirements of the Sarbanes-Oxley Act and similar legal requirements.  The Executive's rights pursuant to this Section 6(f) shall be fully vested and non-forfeitable at all times.  The Company shall be obligated in all events to pay all scheduled premium payments unless the Executive dies prior to the end of the last scheduled premium payment.  The Executive's rights to the policy and any premium payments by the Company shall not be subject to attachment, garnishment, alienation or other similar action by any person to the maximum extent permitted by law.  

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(g)BUSINESS AND ENTERTAINMENT EXPENSES.  Upon presentation of appropriate documentation, the Executive shall be reimbursed in accordance with the Company's expense reimbursement policy for all reasonable and necessary business and entertainment expenses incurred in connection with the performance of the Executive's duties hereunder.
(h)CHANGE IN CONTROL.  In the event there is a Change in Control (as defined in this Section 6(h)) the Company shall establish a “rabbi trust” for the benefit of the Executive and fund it with cash or cash equivalents sufficient to fully pay when due and payable all payments that potentially would be required to be made under Section 8(d) hereof if the Executive were to be terminated without Cause.  Notwithstanding the foregoing, in no event shall the Company establish or fund any such rabbi trust in a manner or on terms that would result in the imposition of any tax, penalty or interest under Section 409A(b)(1) of the Code and in no event shall the Company be obligated to, nor shall it, fund any such rabbi trust “in connection with a change in the employer's financial heath” within the meaning of Section 409A(b)(2) of the Code.  For purposes of this Agreement, the term “Change in Control” is used as defined in the Equity Plan.
7.TERMINATION.  The Executive's employment and the Employment Term shall terminate on the first of the following to occur:
(a)DISABILITY.  Upon written notice by the Company to the Executive of termination due to Disability, while the Executive remains Disabled.  For purposes of this Agreement, “Disabled” and “Disability” shall (i) have the meaning defined under the Company's then-current long-term disability insurance plan, policy, program or contract as entitles the Executive to payment of disability benefits thereunder, or (ii) if there shall be no such plan, policy, program or contract, mean permanent and total disability as defined in Section 22(e)(3) of the Code.
(b)DEATH.  Automatically on the date of death of the Executive.
(c)CAUSE.  Immediately upon written notice by the Company to the Executive of a termination for Cause.  “Cause” shall mean (i) the Executive's conviction or plea of guilty or nolo contendere to a felony or any crime involving moral turpitude; (ii) a willful act of theft, embezzlement or misappropriation from the Company; or (iii) a determination by the Board that the Executive has willfully and continuously failed to perform substantially the Executive's duties (other than any such failure resulting from the Executive's Disability or incapacity due to bodily injury or physical or mental illness), after (A) a written demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties and provides the Executive with the opportunity to correct such failure if, and only if, such failure is capable of cure; and (B) the Executive's failure to correct such failure which is capable of cure within 30 days of receipt of the demand for performance.  For the avoidance of doubt, the parties expressly agree that only Cause pursuant to Section 7(c)(iii) shall be deemed capable of cure.  Notwithstanding the foregoing, “Cause” shall not include any act or omission that the Executive believes in good faith to have been in or not opposed to the interest of the Company (without intent of the Executive to gain therefrom, directly or indirectly, a profit to which he was not legally entitled).  The Company may only terminate the Executive's employment for Cause if (A) a determination that Cause exists is made and approved by three fourths of the independent directors of the Company's Board, (B) for a termination for Cause under Section 7(c)(iii), the Executive is given at least five (5) days' written notice of the Board meeting called to make such determination, and (C) for a termination for Cause under Section 7(c)(iii), the Executive and his legal counsel are given the opportunity to address such meeting.  In the event that the Board has so determined in good faith that Cause exists, the Board shall have no obligation to terminate the Executive's employment if the Board determines in its sole discretion that such a decision not to terminate the Executive's employment is in the best interest of the Company.
(d)WITHOUT CAUSE.  Upon written notice by the Company to the Executive of an involuntary termination without Cause and other than due to death or Disability prior to January 30, 2016.

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(e)GOOD REASON.  Upon written notice by the Executive to the Company of termination for Good Reason unless the reasons for any proposed termination for Good Reason are remedied in all material respects by the Company within thirty (30) days following written notification by the Executive to the Company.  “Good Reason” means the occurrence of any one or more of the following events prior to January 30, 2016 unless the Executive specifically agrees in writing that such event shall not be Good Reason:
(i)    Any material breach of this Agreement by the Company,
including:
(A)    the failure of the Company to pay the compensation and benefits set forth in Sections 3 through 6 of this Agreement;
(B)    any material adverse change in the Executive's status, position or responsibilities as Chief Executive Officer of the Company;
(C)    any failure to nominate or elect the Executive as Chief Executive Officer of the Company or as member of the Board;
(D)    causing or requiring the Executive to report to anyone other than the Board; or
(E)    assignment of duties materially inconsistent with his position and duties described in this Agreement,
(ii)    the failure of the Company to assign this Agreement to a successor to all or substantially all of the business or assets of the Company or failure of such a successor to the Company to explicitly assume and agree to be bound by this Agreement,
(iii)    requiring the Executive to be principally based at any office or location outside of the Los Angeles metropolitan area; or
(iv)    purported termination of the Executive's employment for “Cause” in a bad faith violation of the substantive and procedural requirements of Section 7(c).
In addition, in order to constitute a termination for Good Reason, (1) the termination must occur not later than two years following the initial existence of the circumstance(s) giving rise to Good Reason, and (2) the Executive's notification to the Company of the circumstance(s) giving rise to Good Reason must be given within 90 days following the initial existence of such circumstance(s). 
(f)RETIREMENT. Upon thirty (30) days' prior written notice by the Executive to the Company of the Executive's termination of employment without Good Reason (which the Company may, in its sole discretion, make effective earlier than any notice date).
8.CONSEQUENCES OF TERMINATION.  Any termination payments made and benefits provided under this Agreement to the Executive shall be in lieu of any termination or severance payments or benefits for which the Executive may be eligible under any of the plans, policies or programs of the Company or its affiliates.  Except to the extent otherwise provided in this Agreement, all benefits and awards under the Company's compensation and benefit programs shall be subject to the terms and conditions of the plan or arrangement under which such benefits accrue, are granted or are awarded.  The following amounts and benefits shall be due to the Executive:
(a)DISABILITY.  Upon such termination, the Company shall pay or provide the Executive with the Accrued Amounts (defined in Section 8(f) below).  The Executive will also be paid a pro-rata portion of the Executive's Bonus for the performance year in which the Executive's termination occurs, which shall be paid at the time that annual Bonuses are paid to other senior executives, but in any event within seventy-four (74) days after the conclusion of the Fiscal Year to which such Bonus relates (determined by multiplying the amount the Executive would have received based upon target performance had employment continued through the end of 

6

the performance year by a fraction, the numerator of which is the number of days during the performance year of termination that the Executive is employed by the Company and the denominator of which is 365).
(b)DEATH.  In the event the Employment Term ends on account of the Executive's death, the Executive's estate (or to the extent a beneficiary has been designated in accordance with a program, the beneficiary under such program) shall be entitled to any Accrued Amounts.  The Executive's estate (or beneficiary) will also be paid a pro-rata portion of the Executive's Bonus for the performance year in which the Executive's termination occurs, which shall be paid at the time that annual Bonuses are paid to other senior executives, but in any event within seventy-four (74) days after the conclusion of the Fiscal Year to which such Bonus relates (determined by multiplying the amount the Executive would have received based upon target performance had employment continued through the end of the performance year by a fraction, the numerator of which is the number of days during the performance year of termination that the Executive is employed by the Company and the denominator of which is 365).
(c)TERMINATION FOR CAUSE.  If the Executive's employment should be terminated by the Company for Cause or by the Executive without Good Reason, the Company shall pay to the Executive any Accrued Amounts.
(d)TERMINATION WITHOUT CAUSE OR FOR GOOD REASON.  If the Executive's employment by the Company is terminated by the Company other than for Cause (other than a termination due to Disability or death) or by the Executive for Good Reason, the Company shall pay or provide the Executive with
  (i)    the Accrued Amounts;
(ii)    a pro-rata portion of the Executive's Bonus for the performance year in which the Executive's termination occurs, which shall be paid at the time that annual Bonuses are paid to other senior executives, but in any event within seventy-four (74) days after the conclusion of the Fiscal Year to which such Bonus relates (determined by multiplying the amount the Executive would have received based upon actual performance had employment continued through the end of the performance year by a fraction, the numerator of which is the number of days during the performance year of termination that the Executive is employed by the Company and the denominator of which is 365); and
(iii)    an amount equal to the product of (A) the sum of (1) the Executive's Base Salary and (2) the then Target Bonus multiplied by (B) three (3), payable in a single lump-sum.
Subject to Section 21(a), the payments provided for in this Section 8(d)(iii) (to the extent provided therein) shall be paid to the Executive in the month immediately following the month in which the Executive's termination of employment occurs, provided that the date of the Executive's termination of employment occurs on the same date as the Executive's “separation from service” (within the meaning of Section 409A of the Code) and after giving effect to the presumptions set forth in Treasury Regulations Section 1.409A-1(h)(1)(ii)) from the Company and its subsidiaries, otherwise such amounts shall be paid to the Executive in the month immediately following the month in which the Executive incurs such a “separation from service.”  Notwithstanding anything to the contrary contained herein, the Company shall have no obligation to provide any of the monetary payments and/or benefits provided for in this Section 8(d) (other than Accrued Amounts) unless and until the Executive executes an effective general release of all claims in favor of the Company in a form acceptable to the Company (the “Release”) and delivers such executed Release to the Company within twenty-one (21) days following the date of his “separation from service.”  For the avoidance of doubt, the Executive's execution of the Release is a condition precedent to any obligation of the Company to provide the monetary payments and/or benefits provided for in this Section 8(d) (other than Accrued Amounts).
(e)RETIREMENT.  If the Executive retires under Section 7(f) of this Agreement or if Executive's employment by the Company terminates at the end of the Employment Term, the Company shall pay to the Executive:

7

(i)    any Accrued Amounts; and
(ii)    a pro-rata portion of the Executive's Bonus for the performance year in which the Executive's termination occurs, which shall be paid at the time that annual Bonuses are paid to other senior executives, but in any event within seventy-four (74) days after the conclusion of the Fiscal Year to which such Bonus relates (determined by multiplying the amount the Executive would have received based upon actual performance had employment continued through the end of the performance year by a fraction, the numerator of which is the number of days during the performance year of termination that the Executive is employed by the Company and the denominator of which is 365).
In addition, the Executive shall be considered to have “retired” for purposes of any plans, programs, agreements or arrangements with the Company or its affiliates, subject to meeting any additional requirements for “Retirement” set forth in the award agreement for any Time-Based RSUs or Performance Shares.  For purposes of clarity, if the Executive is employed through the last day of a Fiscal Year, the Executive's Bonus for that Fiscal Year is included under clause (ii) of the definition of Accrued Amounts below and the Executive shall not be entitled to a duplicate payment pursuant to clause (ii) above.
(f)DEFINITION OF ACCRUED AMOUNTS. As used in this Agreement, “Accrued Amounts” shall mean:
(i)    any unpaid Base Salary through the date of the Executive's termination and any accrued vacation in accordance with Company policy, which shall be paid not later than the next regularly scheduled payroll date following the date of termination;
(ii)    any unpaid Bonus earned with respect to any Fiscal Year ending on or preceding the date of the Executive's termination, which shall be paid at the time that annual Bonuses for such Fiscal Year are paid to other senior executives, but in any event within seventy-four (74) days after the conclusion of the Fiscal Year to which such Bonus relates;
(iii)    reimbursement due to the Executive pursuant to the terms of Section 6(g) for any unreimbursed business expenses incurred through the date of termination, which shall be paid as soon as practicable but in all events no later than thirty (30) days following the date of termination or, if later, promptly following the Executive's request for reimbursement of such expenses and upon presentation of appropriate documentation in accordance with the Company's expense reimbursement policy subject to the time limitations of Section 21(c); and
(iv)    all other payments, benefits or perquisites to which the Executive may be entitled under the terms of any applicable compensation arrangement or benefit, equity or perquisite plan or program or grant or this Agreement, which in each case shall be paid in accordance with the terms and conditions of the applicable arrangement, plan, program, grant or agreement.

8

9.SECTION 4999 EXCISE TAX.  If any payments, rights or benefits (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement of the Executive with the Company or any person affiliated with the Company) (the “Payments”) received or to be received by the Executive will be subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed), then the Payments shall be reduced to the extent necessary so that no portion thereof shall be subject to the Excise Tax, but only if, by reason of such reduction, the net after-tax benefit received by the Executive shall exceed the net after-tax benefit that would be received by the Executive if no such reduction was made.  The process for calculating the Excise Tax, and other procedures relating to this Section, are set forth in Exhibit C attached hereto.  For purposes of making the determinations and calculations required herein, the Accounting Firm (as defined in Exhibit C) may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code, provided that the Accounting Firm shall make such determinations and calculations on the basis of “substantial authority” (within the meaning of Section 6662 of the Code) and shall provide opinions to that effect to both the Company and the Executive.
10.CONFIDENTIALITY.  The Executive agrees that the Executive shall not, directly or indirectly, use, make available, sell, disclose or otherwise communicate to any person, other than in the course of the Executive's employment and for the benefit of the Company, either during the period of the Executive's employment or at any time thereafter, any nonpublic, proprietary or confidential information, knowledge or data relating to the Company, any of its subsidiaries, affiliated companies or businesses, which shall have been obtained by the Executive during the Executive's employment by the Company.  The foregoing shall not apply to information that (i) was known to the public prior to its disclosure to the Executive; (ii) becomes known to the public subsequent to disclosure to the Executive through no wrongful act of the Executive or any representative of the Executive; or (iii) the Executive is required to disclose by applicable law, regulation or legal process (provided that the Executive provides the Company with prior notice of the contemplated disclosure and reasonably cooperates with the Company at its expense in seeking a protective order or other appropriate protection of such information).  Notwithstanding clauses (i) and (ii) of the preceding sentence, the Executive's obligation to maintain such disclosed information in confidence shall not terminate where only portions of the information are in the public domain.
11.ATTORNEY'S FEES.  To the extent permitted by law, all reasonable costs and expenses incurred by the Executive in evaluating and negotiating the terms and conditions of this Agreement (up to the limit established by the Compensation Committee) shall be promptly paid on behalf of, or reimbursed, to the Executive by the Company.  If the Executive incurs legal or other fees and expenses in a good faith non-frivolous effort to secure or preserve or establish entitlement to compensation and benefits under this Agreement, the Company shall, to the extent permitted by law and regardless of the outcome of such effort, reimburse the Executive monthly for such fees and expenses.  
12.NO ASSIGNMENT.
(a)This Agreement is personal to each of the parties hereto.  Except as provided in Section 12(b) below, no party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other party hereto.
(b)The Company may assign this Agreement to any successor to all or substantially all of the business and/or assets of the Company provided the Company shall require such successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place and shall deliver a copy of such assignment to the Executive.

9

13.NOTICE.  For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (a) on the date of delivery if delivered by hand, (b) on the date of transmission, if delivered by confirmed facsimile, (c) on the first business day following the date of deposit if delivered by guaranteed overnight delivery service, or (d) on the fourth business day following the date delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
At the address (or to the facsimile number) shown on the records of the Company
If to the Company:
Guess?, Inc.
1444 South Alameda Street 
Los Angeles, California 90021 
Attention:  General Counsel 
Facsimile No.:  (213) 765-0911
or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
14.SECTION HEADINGS; INCONSISTENCY.  The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.  In the event of any inconsistency between this Agreement and any other agreement (including but not limited to any option, stock, long-term incentive or other equity award agreement), plan, program, policy or practice (collectively, “Other Provision”) of the Company the terms of this Agreement shall control over such Other Provision to the extent that the terms of this Agreement are more beneficial to the Executive.
15.SEVERABILITY.  The provisions of this Agreement shall be deemed severable and the invalidity of unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.
16.COUNTERPARTS.  This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instruments.  One or more counterparts of this Agreement may be delivered by facsimile, with the intention that delivery by such means shall have the same effect as delivery of an original counterpart thereof.
17.DISPUTE RESOLUTION.  In the event of any controversy, dispute or claim between the parties under, arising out of or related to this Agreement (including but not limited to, claims relating to breach, termination of this Agreement, or the performance of a party under this Agreement) whether based on contract, tort, statute or other legal theory (collectively referred to hereinafter as “Disputes”), the parties shall follow the dispute resolution procedures set forth below.  Any Dispute shall be settled exclusively by arbitration, conducted before a single arbitrator in Los Angeles, California, administered by the American Arbitration Association (“AAA”) in accordance with its Commercial Arbitration Rules then in effect.  The parties agree to (i) appoint an arbitrator who is knowledgeable in employment and human resource matters and, to the extent possible, the industry in which the Company operates, and instruct the arbitrator to follow substantive rules of law; (ii) require the testimony to be transcribed; and (iii) require the award to be accompanied by findings of fact and a statement of reasons for the decision.  The arbitrator shall have the authority to permit discovery, to the extent deemed appropriate by the arbitrator, upon request of a party.  The arbitrator shall have no power or authority to add to or detract from the written agreement of the parties.  If the parties cannot agree upon an arbitrator within ten (10) days after demand by either of them, either or both parties may request the American Arbitration Association name a panel of five (5) arbitrators.  The Company shall strike the names of two (2) off this list, the Executive shall also strike two (2) names, and the remaining name shall be the arbitrator.  The parties shall stipulate that arbitration shall be 

10

completed within ninety (90) days.  The decision of the arbitrator will be final and binding upon the parties hereto.  Judgment may be entered on the arbitrator's award in any court having jurisdiction.  The Company shall bear the costs of the arbitrator and any related forum fee.
18.INDEMNIFICATION.  The Company hereby agrees to indemnify the Executive and hold the Executive harmless to the fullest extent permitted by applicable law and under the by-laws of the Company against and in respect to any and all actions, suits, proceedings, claims, demands, judgments, costs, expenses (including reasonable attorneys' fees), losses, and damages resulting from the Executive's performance of his duties and obligations with the Company.  This provision is in addition to any other rights of indemnification the Executive may have.
19.LIABILITY INSURANCE.  The Company shall cover the Executive under directors and officers liability insurance both during and, while potential liability exists, after the term of this Agreement in the same amount and to the same extent as the Company covers its other officers and directors.
20.MISCELLANEOUS.  No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer or director as may be designated by the Board.  No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.  This Agreement together with all exhibits hereto sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein.  No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof, have been made by either party which are not expressly set forth in this Agreement.  This Agreement replaces and supersedes the Prior Agreement in its entirety as of the Effective Date.  The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without regard to its conflicts of law principles.  Notwithstanding the foregoing, the Company's rights pursuant to any confidentiality, proprietary information, assignment of inventions or similar agreement shall survive and continue in effect.
21.SECTION 409A.  Notwithstanding anything in this Agreement or elsewhere to the contrary:
(a)If the Executive is a “specified employee” as determined pursuant to Section 409A of the Code as of the date of the Executive's “separation from service” (within the meaning of Section 409A of the Code) and if any payment or benefit provided for in this Agreement or otherwise both (x) constitutes a “deferral of compensation” within the meaning of Section 409A of the Code and (y) cannot be paid or provided in the manner otherwise provided without subjecting the Executive to additional tax, interest or penalties under Section 409A of the Code, then any such payment or benefit shall be delayed until the earlier of (i) the date which is six (6) months after his “separation from service” for any reason other than death, or (ii) the date of the Executive's death.  The provisions of this paragraph shall only apply if, and to the extent, required to avoid the imputation of any tax, penalty or interest pursuant to Section 409A of the Code.  Any payment or benefit otherwise payable or to be provided to the Executive upon or in the six (6) month period following the Executive's “separation from service” that is not so paid or provided by reason of this Section 21(a) shall be accumulated and paid or provided to the Executive in a single lump sum, not later than the fifth day after the date that is six (6) months after the Executive's “separation from service” (or, if earlier, the fifteenth day after the date of the Executive's death) together with interest for the period of delay, compounded annually, equal to the prime rate (as published in The Wall Street Journal), and in effect as of the date the payment or benefit should otherwise have been provided.  
(b)It is intended that any amounts payable under this Agreement and the Company's and the Executive's exercise of authority or discretion hereunder shall comply with and avoid the imputation of any tax, penalty or interest under Section 409A of the Code.  This Agreement shall be construed and interpreted consistent with that intent.

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(c)Any reimbursement payment due to the Executive under Section 6(c), Section 6(g), and Section 11 (only to the extent that legal fees incurred under Section 11 are not reimbursed in connection with a bona fide legal claim exempt under Section 409A of the Code pursuant to Treasury Regulations Section 1.409A-1(b)(11)) shall be paid to the Executive on or before the last day of the Executive's taxable year following the taxable year in which the related expense was incurred.  Any reimbursement payment due to the Executive pursuant to such provisions and the provision of any taxable benefits to the Executive under Sections 6(d), 6(f), 6(g) and Section 11 are not subject to liquidation or exchange for another benefit and the amount of such expenses eligible for reimbursement or such benefits that the Executive receives in one taxable year shall not affect the expenses eligible for reimbursement or the amount of such benefits that the Executive receives in any other taxable year.
(d)Each item of remuneration referred to in this Agreement shall be treated as a separate payment for purposes of Section 409A of the Code.
22.FULL SETTLEMENT. Except as set forth in this Agreement, the Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others, except to the extent any amounts are due the Company or its subsidiaries or affiliates pursuant to a judgment against the Executive.  In no event shall the Executive be obliged to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, nor shall the amount of any payment hereunder be reduced by any compensation earned by the Executive as a result of employment by another employer, except as set forth in this Agreement.
23.REPRESENTATIONS.  Except as otherwise disclosed to the Company in writing, the Executive represents and warrants to the Company that the Executive has the legal right to enter into this Agreement and to perform all of the obligations on the Executive's part to be performed hereunder in accordance with its terms and that the Executive is not a party to any agreement or understanding, written or oral, which could prevent the Executive from entering into this Agreement or performing all of the Executive's obligations hereunder.
24.WITHHOLDING.  The Company may withhold from any and all amounts payable under this Agreement such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.
25.NON-EXCLUSIVITY OF RIGHTS.  Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any restricted stock unit, performance share or other agreement with the Company or any of its affiliated companies.  Except as otherwise provided herein, amounts and benefits which are vested benefits or which the Executive is otherwise entitled to receive under any plan, program, agreement or arrangement of the Company at or subsequent to the date of termination shall be payable in accordance with such plan or program.
26.SURVIVAL.  The respective obligations of, and benefits afforded to, the Company and the Executive that by their express terms or clear intent survive termination of the Executive's employment with the Company, including, without limitation, the provisions of Sections 8, 9, 10, 11, 12, 17, 18, 19, 21, 22 and 24 of this Agreement, will survive termination of the Executive's employment with the Company, and will remain in full force and effect according to their terms.
27.AGREEMENT OF THE PARTIES.  The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto.  Neither the Executive nor the Company shall be entitled to any presumption 

12

in connection with any determination made hereunder in connection with any arbitration, judicial or administrative proceeding relating to or arising under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
	
	
	GUESS?, INC.

	 

	 

	By: /s/ NIGEL KERSHAW                     

	Name:  Nigel Kershaw

	Its:  Interim Chief Financial Officer

	 

	 

	 

	PAUL MARCIANO

	 

	/s/ PAUL MARCIANO                           

    

13

EXHIBIT A
FORM OF TIME-BASED RSU AWARD AGREEMENT

This RESTRICTED STOCK UNIT AGREEMENT (this “Agreement”), dated as of «GRANT_DATE» (the “Date of Grant”), is entered into by and between GUESS?, INC., a Delaware corporation (the “Company”), and Paul Marciano (the “Grantee”).

RECITALS

WHEREAS, the Company maintains the Guess?, Inc. 2004 Equity Incentive Plan (as Amended and Restated as of April 15, 2011) (the “Plan”).

WHEREAS, the Compensation Committee of the Company's Board of Directors (the “Committee”) has determined to grant a restricted stock unit award (this “Award”) to the Grantee under the Plan in order to increase Grantee's participation in the success of the Company;

NOW, THEREFORE, the parties hereto agree as follows:

		
	1.
	Definitions; Incorporation of Plan Terms.  Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan, except where a capitalized term is defined in the Executive Employment Agreement between the Company and the Grantee, effective February 3, 2013 (the “Employment Agreement”), and this Agreement indicates the definition used in the Employment Agreement shall apply for purposes of this Agreement as well.  This Award and all rights of the Grantee under this Agreement are subject to, and the Grantee agrees to be bound by, all of the terms and conditions of the Plan, incorporated herein by this reference.  Except as specifically provided in this Agreement, in the event of any conflict or inconsistency between the Plan and this Agreement, the Plan shall govern.

		
	2.
	Grant of Restricted Stock Units.  The Company hereby grants to the Grantee as of the Date of Grant (set forth above) a right to receive 100,000 shares of the Company's common stock subject to the terms, conditions, and restrictions set forth herein (the “Restricted Stock Units”).  As used herein, the term “Restricted Stock Unit” shall mean a non-voting unit of measurement which is deemed for bookkeeping purposes to be equivalent to one outstanding share of the Company's common stock, par value $0.01 per share (the “Common Stock”) solely for purposes of the Plan and this Agreement.  The Restricted Stock Units shall be used solely as a device for the determination of the number of shares of Common Stock to eventually be delivered to the Grantee if such Restricted Stock Units vest pursuant to this Agreement.  The Restricted Stock Units shall not be treated as property or as a trust fund of any kind.  The Grantee shall have no rights as a stockholder of the Company, no dividend rights (except as expressly provided in Section 4 with respect to Dividend Equivalent Rights) and no voting rights with respect to the Restricted Stock Units and any shares of Common Stock underlying or issuable in respect of such Restricted Stock Units (“Award Shares”) until such shares of Common Stock are actually issued to and held of record by the Grantee.  

		
	3.
	Vesting.  

		
	A.
	Subject to the performance condition set forth in Section 3(B) below and except as otherwise expressly provided in Sections 7 and 8 herein, this Award shall vest as to (i) 33,333 Restricted Stock Units on January 30, 2014 (the “First Tranche”), (ii) 33,333 Restricted Stock Units on January 30, 2015 (the “Second Tranche”); and (iii) 33,334 Restricted Stock Units on January 30, 2016 (the “Third Tranche”); provided that Grantee has been continuously employed with the Company from the Date of Grant through each applicable vesting date.  Except as specifically 

A- 1

provided herein, employment or service for only a portion of the vesting period, even if a substantial portion, will not entitle the Grantee to any proportionate vesting.
		
	B. 
	No portion of this Award shall vest notwithstanding satisfaction of the continued employment requirement for vesting described in Section 3(A) above unless the Committee certifies, following the end of the Company's 2014 fiscal year, that the Company achieved Licensing Segment Earnings from Operations (as defined below) for the last three quarters of the Company's 2014 fiscal year (the “Performance Period”) equal to or above the level established by the Committee with respect to the Award in connection with the grant of the Award; provided, however, that if either a Change in Control (as defined in the Employment Agreement) or the death or Disability (as defined in the Employment Agreement) of the Grantee occurs before the last day of the Performance Period, the performance requirement of this Section 3(B) shall be deemed met as of the date of such event.  If such performance requirement is not met (and no such Change in Control, death or Disability (as defined in the Employment Agreement) occurs before the last day of the Performance Period), this Award and the Restricted Stock Units subject hereto shall terminate and be cancelled as of the last day of the Performance Period.

		
	C.
	For purposes of this Award, “Licensing Segment Earnings from Operations” means: the Company's earnings from operations derived from the Company's Licensing Segment for the Performance Period as calculated in accordance with generally accepted accounting principles (“GAAP”), but adjusted to exclude the financial statement impact of any new changes in accounting standards announced during the Performance Period that are required to be applied during the Performance Period in accordance with GAAP.

		
	4.
	Dividend Equivalents.  If a cash dividend is paid with respect to the Common Stock while any Restricted Stock Units subject to the Award are outstanding, the Grantee shall be credited with an amount in cash equal to the dividends the Grantee would have received if he had been the owner of the shares of Common Stock subject to such outstanding Restricted Stock Units; provided, however, that no amount shall be credited with respect to shares that have been delivered to the Grantee as of the applicable dividend record date.  Any amounts credited under this Section 4 (“Dividend Equivalents”) shall be subject to the same terms and conditions as the Restricted Stock Units to which they relate and shall vest and be paid (or, if applicable, be forfeited) at the same time as the Restricted Stock Units to which they relate.  

		
	5.
	Delivery of Shares.  Except as otherwise provided in Section 8 below with respect to a Change in Control, the Company shall deliver or cause to be delivered to the Grantee the number of Award Shares subject to the First Tranche that vest pursuant to the terms hereof within ten days following certification by the Committee of the satisfaction of the performance criteria set forth in Section 3(B) (and in no event later than 74 days following the end of the Performance Period), the number of Award Shares subject to the Second Tranche that vest pursuant to the terms hereof on (or within three business days following) January 30, 2015 and the number of Award Shares subject to the Third Tranche that vest pursuant to the terms hereof on (or within three business days following) January 30, 2016.  Any Dividend Equivalents described in Section 4 above related to such Award Shares shall be paid in cash at the same time as the delivery of the Award Shares under this Section 5.  Notwithstanding the foregoing:  (a) in the event of the Grantee's death or Disability (as such term is defined for purposes of Section 409A of the Code), then such shares shall be settled as soon as administratively practicable after (and in all events within 90 days after) such event; and (b) in the event of the Grantee's “separation from service” (as such term is defined for purposes of Code Section 409A) upon or within two years following a Section 409A Change in Control (as such term is defined in Section 8(A)), then such shares shall be settled as soon as administratively possible after (and in all events within ten days after) such event (subject to Section 10(C)).

		
	6.
	Adjustments Upon Specified Events.  Upon the occurrence of certain events relating to the Company's Common Stock contemplated by Section 16(b) of the Plan, the Committee will make adjustments, if appropriate, in the number of Restricted Stock Units and the number and kind of securities subject to the Award. 

A- 2

		
	7.
	Effect of Certain Cessations of Employment.  The continued employment vesting requirement set forth under Section 3(A) of this Award shall be deemed to be satisfied, and any then-outstanding Restricted Stock Units shall be deemed vested, in the event that (a) the Grantee's employment is terminated by the Company without “Cause” (as defined in the Employment Agreement), (b) the Grantee's employment is terminated by the Grantee for “Good Reason” (as defined in the Employment Agreement) or (c) in the event of the Grantee's Disability (as defined in the Employment Agreement) or death while employed by the Company.  For purposes of clarity, any Restricted Stock Units that vest pursuant to the preceding sentence shall still be paid at the applicable time set forth in Section 5.  If the Grantee's employment terminates for any other reason, or the Grantee fails to satisfy the Release requirement referred to above in connection with a termination of employment referred to above to which such Release requirement applies, this Award and the Restricted Stock Units subject hereto, to the extent outstanding and unvested as of the date of such termination of employment, shall terminate and be cancelled as of the date of such termination of employment.  Sections 14(a) and 14(b) of the Plan shall not apply to the Award.

		
	8.
	Change in Control.  Notwithstanding anything to the contrary in Section 3, Section 5 or Section 7 of this Agreement or any provision of the Plan, the following provisions shall apply upon a Change in Control (as defined in the Employment Agreement):

		
	A.
	If a Change in Control occurs and the then-outstanding and unvested portion of this Award is not continued following such event or assumed or converted into restricted stock units of any successor entity to the Company or a parent thereof (the “Successor Entity”), the continued employment vesting requirement set forth under Section 3(A) of this Award shall be deemed to be satisfied, the outstanding Restricted Stock Units subject to such portion shall be deemed vested, and such Restricted Stock Units shall be settled at the time(s) otherwise provided in Section 5; provided that if such Change in Control constitutes a “change in the ownership or effective control” of the Company, or a change “in the ownership of a substantial portion of the assets” of the Company within the meaning of Section 409A of the Code (a “Section 409A Change in Control”), outstanding and vested Restricted Stock Units (including any that vest pursuant to the foregoing provisions of this sentence) and related Dividend Equivalents shall be settled upon or as soon as practicable after the date of such Change in Control to the extent such acceleration of payment can be made in accordance with Treas. Reg. §1.409A-3(j)(4)(ix) (or other exemption from the general prohibitions on accelerations of payments under Section 409A of the Code) and not result in any tax, penalty or interest under Section 409A of the Code.  In connection with any such Change in Control where payment of outstanding Restricted Stock Units subject to the Award will not be made in connection with the Change in Control, the Committee may make provision for such Restricted Stock Units to become payable in cash based on the Fair Market Value of a share of Common Stock at the time of such Change in Control (with interest for the period from the date of such Change in Control to the applicable payment date at such rate as determined by the Committee based on the interest earned by interest bearing, FDIC insured deposits) as opposed to being payable in securities.

		
	B.
	If the then-outstanding and unvested portion of this Award is continued following such event or is assumed or converted into restricted stock units of any Successor Entity, the continued employment requirement set forth in Section 3(A) above (and the accelerated vesting provisions set forth in Section 7 above) shall continue to apply following such Change in Control, and any portion of the Award that vests pursuant to such provisions shall be settled as provided in Section 5 of this Agreement.

Section 17 of the Plan shall not apply with respect to the Award.
		
	9.
	Restrictions on Transfer.  The Grantee may not sell, assign, transfer, pledge, encumber or otherwise alienate, hypothecate or dispose of this Award or the Grantee's right hereunder to receive Award Shares, except as otherwise provided in the Committee's sole discretion consistent with the Plan and applicable securities laws.   

A- 3

		
	10.
	Taxes.

		
	A.
	The settlement of this Award is conditioned on the Grantee making arrangements reasonably satisfactory to the Company for the withholding of all applicable federal, state, local or foreign taxes as may be required under applicable law.

		
	B.
	It is intended that any amounts payable under this Agreement shall either be exempt from or comply with Section 409A of the Code (including the Treasury regulations and other published guidance relating thereto) (“Code Section 409A”) so as not to subject the Grantee to payment of any additional tax, penalty or interest imposed under Code Section 409A.  The provisions of this Agreement shall be construed and interpreted to avoid the imputation of any such additional tax, penalty or interest under Code Section 409A yet preserve (to the nearest extent reasonably possible) the intended benefit payable to the Grantee.

		
	C.
	If the Grantee is a “specified employee” within the meaning of Treasury Regulation Section 1.409A-1(i) as of the date of the Grantee's “separation from service” (as such term is defined for purposes of Code Section 409A), the Grantee shall not be entitled to any payment or benefit pursuant to this Award until the earlier of (i) the date which is six (6) months after the Grantee's separation from service for any reason other than death, or (ii) the date of the Grantee's death.  The provisions of this Section 10(C) shall only apply if, and to the extent, required to avoid the imputation of any tax, penalty or interest pursuant to Code Section 409A.  Any amounts otherwise payable to the Grantee upon or in the six (6) month period following the Grantee's separation from service that are not so paid by reason of this Section 10(C) shall be paid (without interest, except as otherwise provided for in Section 8(A)) as soon as practicable (and in all events within thirty (30) days) after the date that is six (6) months after the Grantee's separation from service (or, if earlier, as soon as practicable, and in all events within thirty (30) days, after the date of the Grantee's death).  For avoidance of doubt, Dividend Equivalents under Section 4 shall continue to be credited during the period of such six-month delay until the vested Restricted Stock Units are actually settled.

		
	D.
	It is intended that this Award qualify as “performance-based compensation” for purposes of Section 162(m) of the Code and the provisions of this Agreement shall be construed and interpreted consistent with that intent.

		
	11.
	Compliance.  The Grantee hereby agrees to cooperate with the Company, regardless of Grantee's employment status with the Company, to the extent necessary for the Company to comply with applicable state and federal laws and regulations relating to the Restricted Stock Units.

		
	12.
	Notices.  Any notice required or permitted under this Agreement shall be deemed given when personally delivered, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to the Grantee either at the address on record with the Company or such other address as may be designated by Grantee in writing to the Company; or to the Company, Attention: Stock Plan Administration, 1444 South Alameda Street, Los Angeles, California  90021, or such other address as the Company may designate in writing to the Grantee.

		
	13.
	Failure to Enforce Not a Waiver.  The failure of the Company or the Grantee to enforce at any time any provision of this Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

		
	14.
	Governing Law.  This Agreement shall be governed by and construed according to the laws of the State of Delaware, without regard to Delaware or other laws that might cause other law to govern under applicable principles of conflicts of law.  For purposes of litigating any dispute that arises under this Agreement, the parties hereby submit to and consent to the jurisdiction of the State of California, and agree that such litigation shall be conducted in the courts of Los Angeles County, or the federal courts for the United States for the Central District of California, and no other courts, where this Agreement is made and/or to be performed.

A- 4

		
	15.
	Electronic Delivery.  The Company may, in its sole discretion, decide to deliver any documents related to the Restricted Stock Units awarded under the Plan or future restricted stock or restricted stock units that may be awarded under the Plan by electronic means or request Grantee's consent to participate in the Plan by electronic means.  Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

		
	16.
	Severability.  The provisions of this Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

		
	17.
	Amendments.  This Agreement may be amended or modified at any time by an instrument in writing signed by both parties.

		
	18.
	Agreement Not a Contract of Employment.  Neither the grant of the Restricted Stock Units, this Agreement nor any other action taken in connection herewith shall constitute or be evidence of any agreement or understanding, express or implied, that the Grantee is an employee of the Company or any subsidiary of the Company.

		
	19.
	Committee's Powers.  No provision contained in this Agreement shall in any way terminate, modify or alter, or be construed or interpreted as terminating, modifying or altering any of the powers, rights or authority vested in the Committee or, to the extent delegated, in its delegate pursuant to the terms of the Plan or resolutions adopted in furtherance of the Plan, including, without limitation, the right to make certain determinations and elections with respect to the Restricted Stock Units.

		
	20.
	Termination of this Agreement.  Upon termination of this Agreement, all rights of the Grantee hereunder shall cease.

		
	21.
	Clawback Policy.  This Award is subject to the terms of the Company's recoupment, clawback or similar policy as it may be in effect from time to time, as well as any similar provisions of applicable law, any of which could in certain circumstances require repayment or forfeiture of the Award or any shares of Common Stock or other cash or property received with respect to the Award (including any value received from a disposition of the shares acquired in respect of the Award).

A- 5

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by a duly authorized officer and the Grantee has hereunto set his or her hand as of the date and year first above written.

	
	
	GUESS?, INC.,

	a Delaware corporation

	 

	By:___________________________________________

	 

	Print Name:

	 

	Its:

	 

	GRANTEE

	 

	______________________________________________

	Signature

	______________________________________________

	Print Name

	______________________________________________

	Employee ID

A- 6

EXHIBIT B
FORM OF PERFORMANCE SHARE AWARD AGREEMENT

This PERFORMANCE SHARE AWARD AGREEMENT (this “Agreement”), dated as of «GRANT_DATE» (the “Date of Grant”), is entered into by and between GUESS?, INC., a Delaware corporation (the “Company”), and Paul Marciano (the “Grantee”).

RECITALS

WHEREAS, the Company maintains the Guess?, Inc. 2004 Equity Incentive Plan (as Amended and Restated as of April 15, 2011) (the “Plan”).

WHEREAS, the Compensation Committee of the Company's Board of Directors (the “Committee”) has determined to grant performance-based restricted stock units (this “Award”) to the Grantee under the Plan in order to increase Grantee's participation in the success of the Company;

NOW, THEREFORE, the parties hereto agree as follows:

		
	1.
	Definitions; Incorporation of Plan Terms.  Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan, except where a capitalized term is defined in the Executive Employment Agreement between the Company and the Grantee, effective February 3, 2013 (the “Employment Agreement”), and this Agreement indicates the definition used in the Employment Agreement shall apply for purposes of this Agreement as well.  This Award and all rights of the Grantee under this Agreement are subject to, and the Grantee agrees to be bound by, all of the terms and conditions of the Plan, incorporated herein by this reference.  Except as specifically provided in this Agreement, in the event of any conflict or inconsistency between the Plan and this Agreement, the Plan shall govern.

		
	2.
	Grant of Restricted Stock Units.  The Company hereby grants to the Grantee as of the Date of Grant (set forth above) a right to receive a “target” of [         ] shares of the Company's common stock subject to the terms, conditions, and restrictions set forth herein (the “Restricted Stock Units,” and such number of Restricted Stock Units, the “Target Number of Restricted Stock Units”).  As used herein, the term “Restricted Stock Unit” shall mean a non-voting unit of measurement which is deemed for bookkeeping purposes to be equivalent to one outstanding share of the Company's common stock, par value $0.01 per share (the “Common Stock”), solely for purposes of the Plan and this Agreement.  The Restricted Stock Units shall be used solely as a device for the determination of the number of shares of Common Stock to eventually be delivered to the Grantee if such Restricted Stock Units vest pursuant to this Agreement.  The Restricted Stock Units shall not be treated as property or as a trust fund of any kind.  The Grantee shall have no rights as a stockholder of the Company, no dividend rights (except as expressly provided in Section 4 with respect to Dividend Equivalent rights) and no voting rights with respect to the Restricted Stock Units and any shares of Common Stock underlying or issuable in respect of such Restricted Stock Units (“Award Shares”) until such shares of Common Stock are actually issued to and held of record by the Grantee.  

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	3.
	Vesting.  

		
	A. 
	The Grantee shall be credited with a number of Restricted Stock Units equal to the Target Number of Restricted Stock Units multiplied by a “Vesting Percentage” determined based on the Company's Earnings from Operations (as defined below) for the last three quarters of the Company's 2014 fiscal year (the “Performance Period”) in accordance with the following table:

	
			
	Earnings from Operations for Performance Period
	 
	Vesting Percentage

	Below Threshold
	 
	—%

	Threshold
	 
	50%

	Target
	 
	100%

	Stretch or Above
	 
	150%

If the Company's actual level of Earnings from Operations for the Performance Period is between the “Threshold” and “Target” performance levels or between the “Target” and “Stretch” performance levels, the Vesting Percentage will be determined by linear interpolation between the Vesting Percentages for those two levels.  In no event will the Vesting Percentage be greater than one hundred fifty percent (150%).  The number of Restricted Stock Units credited to the Grantee pursuant to this Section 3(A), as certified by the Committee based on the satisfaction of the performance criteria above, is referred to herein as the “Credited Restricted Stock Units.”  Notwithstanding the foregoing provisions, if either a Change in Control (as defined in the Employment Agreement) or the death or Disability (as such term is defined in the Employment Agreement) of the Grantee occurs before the last day of the Performance Period and while the Grantee is employed by the Company, the number of Credited Restricted Stock Units for purposes of the Award shall be equal to the Target Number of Restricted Stock Units.  Restricted Stock Units that are not Credited Restricted Stock Units, after giving effect to the foregoing provisions, as of the last day of the Performance Period (or, if earlier, the date of such a Change in Control or death or Disability (as such term is defined for purposes of the Employment Agreement) of the Grantee) shall immediately terminate and be cancelled.
		
	B.
	The “Threshold,” “Target” and “Stretch” levels of Earnings from Operations to be used to determine the Vesting Percentage under Section 3(A) will be established by the Committee in connection with the grant of the Award.

		
	C.
	For purposes of this Award, “Earnings from Operations” means: the Company's earnings from operations for the Performance Period as calculated in accordance with generally accepted accounting principles (“GAAP”), but adjusted (without duplication) to exclude the financial statement impact of the following items:

		
	i.
	any charges or accruals incurred for the Performance Period for litigation matters, but only where such charges or accruals for any particular matter exceed $500,000 for the Performance Period;

		
	ii.
	restructuring charges incurred for the Performance Period related to employee severance related costs, store closure related costs and other real estate closure related costs;

		
	iii.
	any new changes in accounting standards announced during the Performance Period that are required to be applied during the Performance Period in accordance with GAAP, and

		
	iv.
	acquisitions and costs associated with such acquisitions and the costs incurred in connection with potential acquisitions that are required to be expensed under GAAP. 

The Committee's determination of whether an adjustment is required (and the extent of any such adjustment) shall be final and binding.

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	D.
	Except as otherwise expressly provided in Sections 7 and 8 herein, the Credited Restricted Stock Units shall vest on the second (2nd) anniversary of the last day of the Performance Period (the “Vesting Date”); provided that the Grantee has been continuously employed with the Company from the Date of Grant through the Vesting Date.  Except as specifically provided herein, employment or service for only a portion of the vesting period, even if a substantial portion, will not entitle the Grantee to any proportionate vesting. 

		
	4.
	Dividend Equivalents.  If a cash dividend is paid with respect to the Common Stock after the end of the Performance Period (or, if earlier, following the occurrence of a Change in Control), and while any Restricted Stock Units subject to the Award are outstanding, the Grantee shall be credited with an amount in cash equal to the dividends the Grantee would have received if he had been the owner of the shares of Common Stock subject to such outstanding Credited Restricted Stock Units; provided, however, that no amount shall be credited with respect to shares that have been delivered to the Grantee as of the applicable dividend record date.  Any amounts credited under this Section 4 (“Dividend Equivalents”) shall be subject to the same terms and conditions as the Credited Restricted Stock Units to which they relate and shall vest and be paid (or, if applicable, be forfeited) at the same time as the Credited Restricted Stock Units to which they relate.  

		
	5.
	Delivery of Shares.  Except as otherwise provided in Section 8 below with respect to a Change in Control, the Company shall deliver or cause to be delivered to the Grantee the number of Award Shares subject to any Restricted Stock Units that vest pursuant to the terms hereof on (or within three business days following) the Vesting Date.  Any Dividend Equivalents described in Section 4 above related to such Award Shares shall be paid in cash at the same time as the delivery of the Award Shares under this Section 5.  Notwithstanding the foregoing:  (a) in the event of the Grantee's death or Disability (as such term is defined for purposes of Section 409A of the Code), then such shares shall be settled as soon as administratively practicable after (and in all events within 90 days after) such event; and (b) in the event of the Grantee's “separation from service” (as such term is defined for purposes of Code Section 409A) upon or within two years following a Section 409A Change in Control (as such term is defined in Section 8(A)), then such shares shall be settled as soon as administratively possible after (and in all events within ten days after) such event (subject to Section 10(C)).

		
	6.
	Adjustments Upon Specified Events.  Upon the occurrence of certain events relating to the Company's Common Stock contemplated by Section 16(b) of the Plan, the Committee will make adjustments, if appropriate, in the number of Restricted Stock Units and the number and kind of securities subject to the Award. 

		
	7.
	Effect of Certain Cessations of Employment.  

		
	A.
	If, at any time prior to the Vesting Date, the Grantee's employment is terminated by the Company without “Cause” (as defined in the Employment Agreement) or by the Grantee for “Good Reason” (as defined in the Employment Agreement) and a Change in Control has not previously occurred, the Award will vest as of the date of such termination of the Grantee's employment (or, if later, the last day of the Performance Period) with respect to a number of Restricted Stock Units equal to (i) the Credited Restricted Stock Units as determined under Section 3, multiplied by (ii) a fraction, the numerator of which is the number of days of the Grantee's employment between the first day of the Performance Period and the date of such termination of the Grantee's employment, and the denominator of which is the total number of days between the first day of the Performance Period and the Vesting Date.    

		
	B.
	If, at any time prior to the Vesting Date, the Grantee's death or Disability (as such term is defined in the Employment Agreement) occurs while the Grantee is employed by the Company, the Award will vest as of the date of such event with respect to the number of Credited Restricted Stock Units as determined under Section 3.   

B- 3

		
	C.
	If the Grantee's employment terminates for any other reason, this Award and the Restricted Stock Units subject hereto, to the extent outstanding and unvested as of the date of such termination of employment, shall terminate and be cancelled as of the date of such termination of employment.  Sections 14(a) and 14(b) of the Plan shall not apply to the Award.  

		
	D.
	For purposes of clarity, any Restricted Stock Units that vest pursuant to this Section 7 (and any Dividend Equivalents related thereto) shall still be paid at the applicable time set forth in Section 5.

		
	8.
	Change in Control.  Notwithstanding anything to the contrary in Section 3, Section 5 or Section 7 of this Agreement or any provision of the Plan, the following provisions shall apply upon a Change in Control (as defined in the Employment Agreement):

		
	A.
	If a Change in Control occurs and this Award (to the extent outstanding) is not continued following such event or assumed or converted into restricted stock units of any successor entity to the Company or a parent thereof (the “Successor Entity”), the Award will vest as of the date of such Change in Control with respect to the number of Credited Restricted Stock Units as determined under Section 3 (or, if the Change in Control occurs before the end of the Performance Period, the Target Number of Restricted Stock Units), and such Restricted Stock Units (and any related Dividend Equivalents) shall be paid at the time(s) otherwise provided in Section 5; provided that if such Change in Control constitutes a “change in the ownership or effective control” of the Company, or a change “in the ownership of a substantial portion of the assets” of the Company within the meaning of Section 409A of the Code (a “Section 409A Change in Control”), the outstanding vested Restricted Stock Units subject to the Award and any related Dividend Equivalents shall be paid upon or as soon as practicable after the date of such Change in Control to the extent such acceleration of payment can be made in accordance with Treas. Reg. §1.409A-3(j)(4)(ix) (or other exemption from the general prohibitions on accelerations of payments under Section 409A of the Code) and not result in any tax, penalty or interest under Section 409A of the Code.  In connection with any such Change in Control where payment of such Restricted Stock Units subject to the Award will not be made in connection with the Change in Control, the Committee may make provision for such Restricted Stock Units to become payable in cash based on the Fair Market Value of a share of Common Stock at the time of such Change in Control (with interest for the period from the date of such Change in Control to the applicable payment date at such rate as determined by the Committee based on the interest earned by interest bearing, FDIC insured deposits) as opposed to being payable in securities.  The foregoing provisions do not supersede Section 7(C) to the extent the Grantee's employment by the Company terminates and such provision is triggered prior to a Change in Control.

		
	B.
	If the Award (to the extent then outstanding) is continued following a Change in Control or is assumed or converted into restricted stock units of any Successor Entity, the continued employment requirement set forth in Section 3(D) above (and the accelerated vesting provisions set forth in Section 7(A) and 7(B) above) shall continue to apply following such Change in Control; provided, however, that if a termination of the Grantee's employment described in Section 7(A) above occurs after a Change in Control and prior to the Vesting Date, the Award will vest as of the date of such termination of the Grantee's employment with respect to the number of Credited Restricted Stock Units as determined under Section 3 (or, if such termination occurs before the last day of the Performance Period, the Target Number of Restricted Stock Units).  Any Restricted Stock Units (and any related Dividend Equivalents) that vest pursuant to this Section 8(B) shall be paid at the time(s) otherwise provided in Section 5.

Section 17 of the Plan shall not apply with respect to the Award.  
		
	9.
	Restrictions on Transfer.  The Grantee may not sell, assign, transfer, pledge, encumber or otherwise alienate, hypothecate or dispose of this Award or the Grantee's right hereunder to receive Award Shares, 

B- 4

except as otherwise provided in the Committee's sole discretion consistent with the Plan and applicable securities laws.   
		
	10.
	Taxes.

		
	A.
	The settlement of this Award is conditioned on the Grantee making arrangements reasonably satisfactory to the Company for the withholding of all applicable federal, state, local or foreign taxes as may be required under applicable law.

		
	B.
	It is intended that any amounts payable under this Agreement shall either be exempt from or comply with Section 409A of the Code (including the Treasury regulations and other published guidance relating thereto) (“Code Section 409A”) so as not to subject the Grantee to payment of any additional tax, penalty or interest imposed under Code Section 409A.  The provisions of this Agreement shall be construed and interpreted to avoid the imputation of any such additional tax, penalty or interest under Code Section 409A yet preserve (to the nearest extent reasonably possible) the intended benefit payable to the Grantee.

		
	C.
	If the Grantee is a “specified employee” within the meaning of Treasury Regulation Section 1.409A-1(i) as of the date of the Grantee's “separation from service” (as such term is defined for purposes of Code Section 409A), the Grantee shall not be entitled to any payment or benefit pursuant to this Award until the earlier of (i) the date which is six (6) months after the Grantee's separation from service for any reason other than death, or (ii) the date of the Grantee's death.  The provisions of this Section 10(C) shall only apply if, and to the extent, required to avoid the imputation of any tax, penalty or interest pursuant to Code Section 409A.  Any amounts otherwise payable to the Grantee upon or in the six (6) month period following the Grantee's separation from service that are not so paid by reason of this Section 10(C) shall be paid (without interest) as soon as practicable (and in all events within thirty (30) days) after the date that is six (6) months after the Grantee's separation from service (or, if earlier, as soon as practicable, and in all events within thirty (30) days, after the date of the Grantee's death).

		
	D.
	It is intended that this Award qualify as “performance-based compensation” for purposes of Section 162(m) of the Code and the provisions of this Agreement shall be construed and interpreted consistent with that intent.

		
	11.
	Compliance.  The Grantee hereby agrees to cooperate with the Company, regardless of Grantee's employment status with the Company, to the extent necessary for the Company to comply with applicable state and federal laws and regulations relating to the Restricted Stock Units.

		
	12.
	Notices.  Any notice required or permitted under this Agreement shall be deemed given when personally delivered, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to the Grantee either at the address on record with the Company or such other address as may be designated by Grantee in writing to the Company; or to the Company, Attention: Stock Plan Administration, 1444 South Alameda Street, Los Angeles, California  90021, or such other address as the Company may designate in writing to the Grantee.

		
	13.
	Failure to Enforce Not a Waiver.  The failure of the Company or the Grantee to enforce at any time any provision of this Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

		
	14.
	Governing Law.  This Agreement shall be governed by and construed according to the laws of the State of Delaware, without regard to Delaware or other laws that might cause other law to govern under applicable principles of conflicts of law.  For purposes of litigating any dispute that arises under this Agreement, the parties hereby submit to and consent to the jurisdiction of the State of California, and agree that such litigation shall be conducted in the courts of Los Angeles County, or the federal courts for the United States for the Central District of California, and no other courts, where this Agreement is made and/or to be performed.

B- 5

		
	15.
	Electronic Delivery.  The Company may, in its sole discretion, decide to deliver any documents related to the Restricted Stock Units awarded under the Plan or future restricted stock or restricted stock units that may be awarded under the Plan by electronic means or request Grantee's consent to participate in the Plan by electronic means.  Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

		
	16.
	Severability.  The provisions of this Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

		
	17.
	Amendments.  This Agreement may be amended or modified at any time by an instrument in writing signed by both parties.

		
	18.
	Agreement Not a Contract of Employment.  Neither the grant of the Restricted Stock Units, this Agreement nor any other action taken in connection herewith shall constitute or be evidence of any agreement or understanding, express or implied, that the Grantee is an employee of the Company or any subsidiary of the Company.

		
	19.
	Committee's Powers.  No provision contained in this Agreement shall in any way terminate, modify or alter, or be construed or interpreted as terminating, modifying or altering any of the powers, rights or authority vested in the Committee or, to the extent delegated, in its delegate pursuant to the terms of the Plan or resolutions adopted in furtherance of the Plan, including, without limitation, the right to make certain determinations and elections with respect to the Restricted Stock Units.

		
	20.
	Termination of this Agreement.  Upon termination of this Agreement, all rights of the Grantee hereunder shall cease.

		
	21.
	Clawback Policy.  This Award is subject to the terms of the Company's recoupment, clawback or similar policy as it may be in effect from time to time, as well as any similar provisions of applicable law, any of which could in certain circumstances require repayment or forfeiture of the Award or any shares of Common Stock or other cash or property received with respect to the Award (including any value received from a disposition of the shares acquired in respect of the Award).

B- 6

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by a duly authorized officer and the Grantee has hereunto set his or her hand as of the date and year first above written.

	
	
	GUESS?, INC.,

	a Delaware corporation

	 

	By:___________________________________________

	 

	Print Name:

	 

	Its:

	 

	GRANTEE

	 

	______________________________________________

	Signature 

	______________________________________________

	Print Name

	______________________________________________

	Employee ID

B- 7

EXHIBIT C
EXCISE TAX RULES AND PROCEDURES

1.    All determinations required to be made under Section 9 of this Agreement and this Exhibit C shall be made by an accounting firm (the “Accounting Firm”) selected in accordance with Paragraph 2 below.  The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the event that results in the potential for an excise tax liability for the Executive, which could include but is not limited to a Change in Control and the subsequent vesting of any cash payments or awards, or the Executive's termination of employment, or such earlier time as is required by the Company.  
2.    The Accounting Firm shall be a public accounting firm proposed by the Company and agreed upon by the Executive.  If the Executive and the Company cannot agree on the firm to serve as the Accounting Firm within ten (10) days after the date on which the Company proposed to the Executive a public accounting firm to serve as the Accounting Firm, then the Executive and the Company shall each select one accounting firm and those two firms shall jointly select the accounting firm to serve as the Accounting Firm within ten (10) days after being requested by the Company and the Executive to make such selection.  The Company shall pay the Accounting Firm's fee.
3.    If the Accounting Firm determines that one or more reductions are required under Section 9 of this Agreement, the Accounting Firm shall also determine which Payments shall be reduced (first from cash payments and then from non-cash payments) to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code, and the Company shall pay such reduced amount to the Executive.  The Accounting Firm shall make reductions required under Section 9 of this Agreement in a manner that maximizes the net after-tax amount payable to the Executive.
4.    As a result of the uncertainty in the application of Section 280G at the time that the Accounting Firm makes its determinations under this Section, it is possible that amounts will have been paid or distributed to the Executive that should not have been paid or distributed (collectively, the “Overpayments”), or that additional amounts should be paid or distributed to the Executive (collectively, the “Underpayments”).  If the Accounting Firm determines, based on either the assertion of a deficiency by the Internal Revenue Service against the Company or the Executive, which assertion the Accounting Firm believes has a high probability of success or controlling precedent or substantial authority, that an Overpayment has been made, the Executive must repay to the Company, without interest, the amount of the Overpayment; provided, however, that no loan will be deemed to have been made and no amount will be payable by the Executive to the Company unless, and then only to the extent that, the deemed loan and payment would either reduce the amount on which the Executive is subject to tax under Section 4999 of the Code or generate a refund of tax imposed under Section 4999 of the Code.  If the Accounting Firm determines, based upon controlling precedent or substantial authority, that an Underpayment has occurred, the Accounting Firm will notify the Executive and the Company of that determination and the amount of that Underpayment will be paid to the Executive promptly by the Company.  
5.    The parties will provide the Accounting Firm access to and copies of any books, records, and documents in their possession as reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by this Exhibit C.

* * *

C- 1

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