AGREEMENT
ZHAO DONG BLOCK, OFFSHORE PEOPLE'S REPUBLIC OF CHINA
This Agreement is entered into between APACHE CHINA
CORPORATION LDC, a Cayman Islands corporation, having its
principal office at 2000 Post Oak Boulevard, Houston, Texas 77056
("Apache"), XCL-CHINA LTD., a company organized under the laws of
the British Virgin Islands, having its principal office at 110
Rue Jean Lafitte, Lafayette, Louisiana 70508 ("XCL-China") and
XCL LTD. , a Delaware corporation, having its principal office
at 110 Rue Jean Lafitte, Lafayette, Louisiana 70508 ("XCL") as
parent of XCL-China.
Apache, XCL-China and XCL are sometimes referred to below as
Party or Parties.
WITNESSETH
WHEREAS, XCL-China, as Foreign Contractor, entered into a
Contract for Petroleum Exploration, Development and Production on
February 10, 1993 on the Zhao Dong Block offshore the People's
Republic of China (the "Contract");
WHEREAS, XCL-China, XCL and Apache entered into a
Participation Agreement dated March 11, 1994 (the "Participation
Agreement") wherein Apache acquired thirty-three and one-third
percent (33.333%) of XCL-China's participating interest under the
Contract with the approval of MOFTEC and CNODC.
WHEREAS, XCL-China and Apache entered into an Operating
Agreement dated June 2, 1994 (the "Operating Agreement") wherein
the Parties defined their respective rights and obligations with
regard to their operations under the Contract;
WHEREAS, Apache is desirous of increasing its participation
with XCL-China in the exploration and development of the Contract
Area by providing a disproportionate share of the funds and
technical and managerial expertise in order to achieve the
objectives of the Contract; and
WHEREAS, Apache's additional participation with XCL-China as
provided herein is subject to and contingent upon CNODC's
approval and to the non-exercise by CNODC of its rights of first
refusal under the Contract;
IN CONSIDERATION of the mutual promises made herein, the
Parties agree as follows:
1. DEFINITIONS
Any terms used in this Agreement which are defined in the
Contract shall have the meanings given them in the Contract. All
sums of money referred to in this Agreement are in US dollars,
and "days" shall mean working days in the State of Texas. In
addition, as used in this Agreement,
"Acquired Interest" means a Participating Interest of
sixteen and two-thirds percent (16.667%) in and to all the rights
and obligations of XCL-China under the Contract.
"Approval Date" means the date on which written approval of
Apache's acquisition of the Acquired Interest and designation as
Operator in accordance with the Contract and the laws of the
People's Republic of China is given by both CNODC and the
Ministry of Foreign Trade and Economic Cooperation of the
People's Republic of China ("MOFTEC"), subsequent to the non-
exercise by CNODC of its right of first refusal.
"C Field" means the geological area with the depth
limitation described in Exhibit 3.
"Joint Account" shall have the meaning given it in the
Operating Agreement.
"Participating Interest" means the undivided percentage
interest of each Party in the Foreign Contractor's rights, title
and interest under the Contract from time to time.
"Producing Unit" means a fully developed facility of one or
more wells producing from a single platform that is part of a
development plan approved as specified under the Contract.
2. CONVEYANCE OF ACQUIRED INTEREST
2.1 Subject to the consent of both CNODC and MOFTEC and
in consideration of Apache's assumption of the obligations
described in Article 3, XCL-China shall sell, transfer and
assign to Apache the Acquired Interest on the Approval Date, free
of all liens, claims and security interests. Effective as of the
Approval Date, the Participating Interests of the Parties under
the Contract and the Operating Agreement shall be:
XCL-China 50.0%
Apache 50.0%
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100.0%
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2.2 Subject to the above consents and any other
governmental approvals required by the Contract, Apache shall be
designated Operator under the Operating Agreement with effect
from the Approval Date.
3. TERMS OF PARTICIPATION
3.1 In consideration of XCL-China's conveyance of the
Acquired Interest and of Apache's being designated as Operator,
and subject to Article 6, Apache agrees to the following
obligations:
(a) to assume or reimburse as provided in Section 3.3 below
with effect from May 1, 1995 XCL-China's share of the
cost of drilling, logging and initial testing of:
(i) the next Appraisal well to be drilled at the C-3
location during the first phase of the exploration
period of the Contract in the C Field but only
through the base of the Minghuazhen sands as
encountered in the C-2 well. Drilling,
completion and testing costs in such well shall
thereafter be borne by the Parties equally or as
otherwise provided in the Operating Agreement.
(ii) the next two Wildcat wells to be drilled during
the first phase of the exploration period outside
the geographic boundaries of the C Field, one of
which is the D-1 well currently drilling; and
(iii)either (a) a third Wildcat, if one is drilled for
the Joint Account in the first phase; or (b) if no
third Wildcat is drilled in the first phase and
Apache elects to participate in the second phase
of the exploration period as defined in Section
6.2.2 of the Contract, the first Wildcat well to
be drilled during the second phase of the
exploration period.
(b) to assume or reimburse as provided in Section 3.3 below
with effect from May 1, 1995 fifty percent (50%) of all
costs, including costs of seismic and bonus, to be
incurred under the Contract.
(c) to pay XCL-China sixteen and two thirds percent
(16.667%) of the value of Foreign Contractor's share of
the recoverable proved reserves in the Producing
Unit(s) located in the C Field through the Minghuazhen
(as described in Exhibit 3), according to the valuation
procedure set out in Exhibit 1 hereto. If recoverable
proved reserves in the Guantao are established as a
result of the Parties' having deepened the C-3 Well
referred to in Section 3.1(a)(i) on a basis in which
XCL pays at least one-half of the costs of deepening,
sixteen and two-thirds percent (16.667%) of Foreign
Contractor's Share of such Guantao reserves shall be
included in the computation of reserve value as set out
in Exhibit 1.
3.2 XCL and XCL-China covenant and agree to bear two-
thirds of the expenditures made and to be made pursuant to the
Contract and the Operating Agreement through the Approval Date,
and after performance by Apache of its obligations under Article
3.1(a) to continue to bear and pay one-half of the ongoing
expenditures incurred by the Foreign Contractor pursuant to the
Contract and the Operating Agreement.
3.3 Reimbursement of expenditures made by XCL-China
relating to the period prior to the Approval Date which have
become the responsibility of Apache pursuant to Sections 3.1(a)
or 3.1(b) hereof shall be made by Apache within ten (10) days of
the Approval Date. Apache shall be entitled to audit such
reimbursable sums and the inventory costs referred to in Section
3.7 below, but any objection thereto must be made within ninety
(90) days of the Approval Date.
3.4 For the purposes of Section 3.1(c) above, the
determination of reserves shall be made within sixty (60) days
of the first sale of oil from a Producing Unit.
The engineering staff of Apache and XCL-China shall
reasonably attempt jointly to determine the reserve estimates of
proved reserves applicable to the Producing Unit(s). In the
event the engineering staff of Apache and XCL-China cannot
mutually agree to the reserve estimates for a particular
Producing Unit within the time specified above, Apache and XCL-
China shall accept reserve estimates determined in accordance
with Exhibit 1 by the independent engineering firm of DeGolyer
and McNaughton, and the cost of the independent determination
shall be shared equally by the Parties hereto.
Payment of the share of the value of the reserves in
each Producing Unit, as described in Section 3.1(c), shall be
made by Apache within thirty (30) days of its receipt of the
mutually agreed reserve report or the report of DeGolyer and
McNaughton, as the case may be; provided, however, that if
following the last Producing Unit being placed on production an
adjustment in value of prior Producing Units is due by either
Party to the other pursuant to clause (vi) of Exhibit 1, the
adjustment shall be made in and to the payment due from Apache to
XCL-China in respect of the last Producing Unit. If unpaid after
thirty (30) days as set forth above, the balance shall be a debt
due and shall at the election of the debtor Party either be
payable from the shares of production accruing to the debtor
Party or be secured by the guarantee of the parent of the debtor
Party.
3.5 Pursuant to Section 2.1(a) of the Participation
Agreement, Apache shall pay XCL-China the sum of $196,000 on
execution of this Agreement. Effective upon the Approval Date,
this sum shall be deemed full and final settlement of all issues
between Apache and XCL-China relating to costs incurred by XCL-
China under the said Section 2.1(a) of the Participation
Agreement, and XCL-China hereby agrees to accept such sum as
full settlement. If this Agreement terminates prior to the
Approval Date, the said sum of $196,000 shall be deemed to be on
account of any sums due by Apache to XCL-China pursuant to the
said Section 2.1 (a) of the Participation Agreement and not in
settlement thereof. The settlement set forth above shall be
without prejudice to either Party's rights under Section 2.1(b)
of the Participation Agreement including Apache's right to pursue
issues arising from its prior audit.
3.6 If a sum of $310,000 becomes due and payable
pursuant to Section 2.1(c) of the Participation Agreement in
respect of a well prior to the Approval Date, the said sum shall
be paid by Apache into the Joint Account and shall be used by XCL-
China solely to defray the drilling costs of the D-1 well and
subsequent Wildcats. Following the Approval Date, the said sum
or sums of $310,000 paid as provided in the prior sentence shall
be a reduction of the reimbursement due by Apache to XCL-China
pursuant to Section 3.3 of this Agreement. If the Approval Date
occurs before any sum becomes due and payable pursuant to Section
2.1(c) of the Participation Agreement, then notwithstanding the
terms of the Participation Agreement, no such sum shall be paid.
3.7 For the purpose of implementing the farmout
provisions of Section 3.1 hereof, within seven (7) days of the
date of execution of this Agreement, and subject to subsequent
audit as referred to in Section 3.3 above, Apache shall purchase
XCL-China's two-third's share of the inventory acquired for the
Joint Account for the purpose of drilling the wells described in
Section 3.1 (a), according to the following procedure:
(a) within the above seven (7) days, Apache will verify the
existence of usable inventory belonging to the Joint
Account which XCL-China represents has an approximate
cost basis of $1,500,000.
(b) following verification, Apache will pay XCL-China a sum
of approximately $1,000,000 representing two-thirds of
the cost of such inventory and XCL-China will deliver
to Apache a valid bill of sale for such inventory
containing the representations and warranties in
Section 5.1(f) below, with a mutually acceptable
inventory list attached.
(c) the above payment of $1,000,000 will be deposited in
the Joint Account and shall be used by XCL-China solely
towards defraying drilling costs of the D-1 Well.
(d) Inventory which has become the sole property of Apache
pursuant to subsection (b) above shall be solely used
to the extent reasonable and necessary, in the drilling
of the D-1 well on the same cost basis as was used for
the purpose of subsection (b) above. Apache shall be
deemed to have contributed one-third (in terms of cost)
of such inventory as and when used, and two-thirds of
such cost shall be debited to XCL-China.
(e) following the Approval Date, Apache's reimbursement due
to XCL-China for two-thirds of the cost of the D-1 well
pursuant to Section 3.1(a) above shall be reduced by
two-thirds of the cost of the inventory used in such
well up to the Approval Date.
(f) if a second well covered by Section 3.1(a) above is
spudded prior to the Approval Date, the procedure as
set out in subsections (d) and (e) above shall apply to
the second well until all usable inventory has been
exhausted.
(g) If this Agreement terminates, XCL-China shall re-
purchase from Apache at cost a two-thirds interest in
the balance of the inventory not theretofore used in
wells, and shall reimburse Apache at cost for two-
thirds of the inventory used.
(h) XCL-China has been advised that no Chinese value added
tax is payable in respect of the inventory transaction
contemplated by this Section; however, if value added
tax is payable, it shall be the responsibility of XCL-
China and Apache will reasonably cooperate with XCL-
China to promptly and properly resolve any value added
tax questions.
4. APPROVALS AND EFFECTIVENESS
4.1 XCL-China and Apache shall exercise their best
efforts promptly to secure the approvals referred to in the
definition of "Approval Date" and to obtain execution by the
requisite Chinese authorities of a document substantially in the
form attached as Exhibit 2.
4.2 Prior to the Approval Date, XCL-China will
reasonably include Apache and its personnel in operating
activities, including particularly the management of inventory,
and will facilitate the changeover of operatorship to Apache on
the Approval Date, subject to Section 7.1 below. Following
Apache's designation as Operator, XCL-China shall continue to
assist Apache in the latter's capacity as Operator to the extent
Apache may reasonably request. The Parties will begin work
immediately to facilitate the changeover of operatorship to
Apache on the Approval Date.
4.3 If at the end of six (6) months from the date of
this Agreement, the approvals listed in the definition of
Approval Date have not been obtained, any Party may require a
further three (3) month period in which to continue to seek the
required approvals, by written notice to that effect to the other
Parties given at least twenty (20) days prior to the end of the
six (6) month period. If prior to the end of such six (6) month
period, any Party is officially informed that CNODC's right of
first refusal will be exercised or that approval will not be
granted, or if at the end of six (6) or nine (9) months as the
case may be, the required approvals have not been obtained, this
Agreement may at any time thereafter be terminated by any Party
on twenty (20) days written notice to the other Parties.
4.4 Apache shall provide XCL-China written notice of
Apache's election whether or not to participate in the second
phase of the exploration period of the Contract on or before
January 31, 1996, and Apache and XCL-China will cooperate
together to seek an extension of one year of the relinquishment
obligations relating to one exploration block normally arising at
the end of the first exploration phase of the Contract. If
Apache does not elect to participate in the second phase, it
shall be deemed to have satisfied its obligations under Section
3.1(a) hereof at the end of the first exploration phase and shall
retain its fifty percent (50%) Participating Interest in any
Development or Production Areas granted or applied for pursuant
to the Contract, but shall withdraw pursuant to the Operating
Agreement from the rest of the Contract Area. In that event,
Apache will remain as Operator of the said Development and
Production Areas.
5. REPRESENTATIONS AND WARRANTIES
5.1 As of the date of this Agreement and the Approval
Date, XCL and XCL-China represent and warrant that:
(a) the copy of the Contract delivered to Apache on or
about December 9, 1993 is the full and complete
agreement between CNODC and the Foreign Contractor
named therein; there have been no amendments thereof
except the Modification Agreement dated March 11, 1994
to which Apache is a party, and there are no side
agreements, letter agreements or memoranda which modify
the effect of the Contract as disclosed or represented
to Apache;
(b) to the best of their knowledge and belief no act has
been done in connection with the execution or
performance of the Contract which is a breach of the
Foreign Corrupt Practices Act of the United States;
(c) all the conditions of the Contract have been duly
satisfied and the Contract is in full force and effect
in accordance with its terms;
(d) the Foreign Contractor is not in default in the due and
punctual performance of its obligations under the
Contract, or to CNODC or MOFTEC;
(e) save for royalties or taxes potentially payable to the
PRC Government pursuant to the Contract, and except as
set forth in the Contract, the interest of Foreign
Contractor under the Contract, including the Acquired
Interest, is free from any overriding royalty
interests, mortgages, charges, pledges, bills of sale,
liens and other interests or encumbrances;
(f) no approvals to the transactions contemplated by this
Agreement are required from holders of security
interests in the stock of XCL-China or its assets; and
the inventory referred to in Section 3.7 hereof is free
and clear of all charges, pledges, bills of sale, liens
and encumbrances;
(g) subject to the provisions of the Contract, XCL-China
legally and beneficially owns the Acquired Interest and
has the absolute right to assign and transfer the same
to Apache;
(h) save the right of first refusal in favor of CNODC in
Section 23.2 of the Contract and rights created by the
Participation Agreement and the Operating Agreement,
there do not exist any rights of first offer or first
refusal, pre-emptive rights or similar rights in favor
of third parties which could inhibit XCL-China's
ability to assign all or any part of the interest of
Foreign Contractor to Apache;
(i) there are no actions, suits or other proceedings
pending or threatened against XCL-China or XCL in or by
any court or other tribunal which might call into
question the title of XCL-China to the Acquired
Interest or its ability to assign the same in
accordance with this Agreement;
(j) subject to the approvals required by the Contract, XCL-
China has full power and authority to enter into this
Agreement, to transfer title to the inventory referred
to in Section 3.7 hereof, and to assign the Acquired
Interest and all required corporate acts have been or
will prior to the Approval Date be done to enable it to
perform its obligations under this Agreement; and
(k) operations under the Operating Agreement have been
conducted in accordance therewith and with the
Contract, and there have been no delinquencies in
payment or satisfaction of Joint Account obligations,
and no obligations or commitments have been entered
into by XCL-China as Operator except those contracted
in the ordinary course of business and pursuant to
Approved Work Programs and Budgets.
5.2 As of the date of this Agreement and as of the
Approval Date, Apache represents and warrants that:
(a) Apache has full power and authority to enter into this
Agreement and to acquire the Acquired Interest, and all
required corporate acts have been or will be done prior
to the Approval Date to enable Apache to perform its
obligations under this Agreement;
(b) There are no actions, suits or other proceedings
pending or threatened against it in or by any court or
other tribunal which would prevent Apache from
performing its obligations hereunder or acquiring the
Acquired Interest.
5.3 As of the Approval Date, Apache shall also represent
and warrant that it has met the registration and licensing
requirements of the PRC to enable it to carry on business as
contemplated by this Agreement.
6. TERMINATION
6.1 Notwithstanding approval of this Agreement by CNODC
and MOFTEC, if any of the representations and warranties made by
one Party to another are not true on May 1, 1995 or on the
Approval Date, and such deficiency is material to the
transaction contemplated by this Agreement, the Party adversely
affected may give notice thereof to the other Parties at latest
within five (5) days of the Approval Date. If the deficiency is
capable of cure, Apache, XCL or XCL-China as the case may be
shall use their best efforts to cure as promptly as possible. If
the deficiency has not been cured within five (5) days after
notice, the affected Party may at its election waive the
deficiency by notice in writing or, in Apache's case, by making
the payment referred to in Section 3.3 above; or may terminate
this Agreement by written notice to the other Parties with the
effect set out in Section 6.2.
6.2 In the event this Agreement is terminated as
provided above, it shall become void and of no effect upon the
giving of the last notice referred to in Section 6.1 above. In
that event, XCL-China will use its best efforts to withdraw and
cancel the request for permission to assign to Apache and will
inform CNODC of the termination of this Agreement in a way that
does not reflect adversely on any Party, and Apache will return
management of any part operations already being managed by it to
XCL-China pursuant to the Operating Agreement.
7. OTHER COVENANTS
7.1 By May 31, 1995 XCL and XCL-China will furnish to
Apache all the records, data and information required to be
furnished to a successor Operator pursuant to the Operating
Agreement and such other information pertaining to operations and
to the Acquired Interest as Apache may reasonably request in
writing at least five (5) days prior to May 31, 1995. However,
Apache will not hold itself out or act towards Chinese
authorities as Operator, until the Approval Date. In its
capacity as Operator, Apache shall not charge XCL-China for
general and administrative expenses of its Houston office; the
"indirect charge" permitted by the Contract and the Operating
Agreement may continue to be charged as from time to time agreed.
Notwithstanding Apache's having become Operator pursuant to this
Agreement, XCL-China will file or cause to be filed all reports
or other filings required by the Contract in respect of the
periods through the Approval Date.
7.2 Following the Approval Date, Apache shall designate
three (3) representatives to the JMC, one of whom shall be the
Contractor's chief representative.
7.3 XCL-China and Apache agree upon the sharing of
exploration and appraisal cost recovery oil (as described in
Article 13.2.2.2 of the Contract) according to Exhibit 4 hereto.
7.4 The locations, drilling plans, AFEs and TDs of any
wells which are or are to become the responsibility of Apache
pursuant to Section 3.1(a) above shall be mutually agreed between
XCL-China and Apache before commitments to drill are made.
Following the Approval Date, Apache shall be entitled to exercise
XCL-China's voting rights under the Operating Agreement in regard
to decisions affecting such wells, to the extent Apache is
responsible for XCL-China's share of such costs.
8. ARBITRATION
8.1 Except for issues or disputes relating to the value
of XCL-China's percentage of participation interest in estimated
recoverable proved reserves to be produced from the C Field, any
dispute relating to the application or interpretation of this
Agreement, which the Parties are unable to resolve amicably,
shall be settled by arbitration as provided below. XCL and XCL-
China shall be treated as a single Party for the purposes of this
Article.
8.2 The Party who considers that a dispute exists shall
inform the other Party in writing of the nature of the dispute
and shall nominate, as an arbitrator, a non-affiliated person
having expertise in the international oil business. If the other
Party does not object to the nominated person, the nominated
person shall serve as the agreed arbitrator.
8.3 If the second Party does not accept the nominated
person within thirty (30) days of receiving notification, the
second Party shall nominate a second arbitrator and the two
arbitrators shall designate a third. If the second Party does
not name its arbitrator within sixty (60) days after the first
appointment, or if the two arbitrators once appointed fail to
appoint a third within sixty (60) days of the second appointment,
the required appointment(s) may be made by the American
Arbitration Association.
8.4 The place of arbitration shall be Houston, Texas,
and the tribunal shall conduct the arbitration in accordance with
the rules of the American Arbitration Association.
9. MISCELLANEOUS
9.1 Unless required by applicable laws or regulations,
no Party shall make a public announcement concerning this
Agreement without the prior approval of the other Party as to the
content, timing and dissemination of the public announcement.
9.2 XCL-China and XCL on the one hand and Apache on the
other agree to indemnify and hold each other harmless against any
demands from brokers, intermediaries or agents for commission,
finder's fees or similar claims in connection with this
transaction.
9.3 The Parties shall execute such other and further
instruments and do and perform such further acts as may be
reasonably required to complete the transaction contemplated by
this Agreement.
9.4 For the purpose of notices, the Parties' addresses
shall be those given in the preamble to this Agreement or the
telefacsimile numbers noted immediately below; any Party may
change its address notices at any time on written notice to the
Parties given by hand, by mail or by telefacsimile as provided
below:
To XCL: Facsimile No. (318) 261-0168
To XCL-China: Facsimile No. (318) 261-0168
To Apache: Facsimile No. (713) 296-6450
Notices shall be deemed given on actual receipt; or if by
telefacsimile, on confirmation of transmission.
9.5 Subject to the limitations on transfer contained in
the Contract, this Agreement shall inure to the benefit and be
binding on the successors of the Parties.
9.6 This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
IN WITNESS whereof each Party has caused its duly authorized
representative to sign this Agreement on the 10th day of May,
1995 but effective the 1st day of May, 1995.
APACHE CHINA CORPORATION LDC
/s/ G. Steven Farris
By:________________________________
XCL-CHINA LTD.
/s/ Marsden W. Miller, Jr.
By:________________________________
XCL LIMITED
/s/ Marsden W. Miller, Jr.
By:________________________________