PETROLEUM CONTRACT
FOR
ZHANG DONG BLOCK
SHALLOW WATER AREA, BOHAI BAY
THE PEOPLE'S REPUBLIC OF CHINA
BEIJING, CHINA
AUGUST, 1998
<PAGE.
PETROLEUM CONTRACT BY AND
BETWEEN XCL CATHAY LTD.
AND CHINA NATIONAL PETROLEUM CORPORATION
ON ZHANG DONG BLOCK IN THE BOHAI BAY SHALLOW WATER SEA AREA
OF THE PEOPLE'S REPUBLIC OF CHINA
BEIJING, CHINA
AUGUST 1998
TABLE OF CONTENTS
Preamble ----------------------------------------- 2
Article 1 Definitions ---------------------------------- 3
Article 2 Objective of the Contract -------------------- 8
Article 3 Contract Area -------------------------------- 9
Article 4 Contract Term -------------------------------- 10
Article 5 Relinquishment of Contract Area -------------- 13
Article 6 Minimum Appraisal Work Commitment
And Expected Minimum Appraisal Expenditures ------ 14
Article 7 Management and its Functions------------------ 17
Article 8 Operator-------------------------------------- 22
Article 9 Assistance Provided by CNPC ------------------ 27
Article 10 Work Program and Budget --------------------- 29
Article 11 Determination of Commerciality -------------- 31
Article 12 Financing and Cost Recovery ----------------- 34
Article 13 Crude Oil Production and Allocation---------- 37
Article 14 Quality, Quantity, Price and
Destination of Crude Oil ------------------------- 43
Article 15 Preference to Employment of
CNPC Personnel, Goods and
Services------------------------------------------ 48
Article 16 Training of CNPC Personnel and
Transfer of Technology --------------------------- 49
Article 17 Ownership of Assets and Data ---------------- 51
Article 18 Associated Natural Gas and
Non-Associated Natural Gas ----------------------- 52
Article 19 Accounting, Auditing and
Personnel Costs ---------------------------------- 55
Article 20 Taxation ------------------------------------ 57
Article 21 Insurance ----------------------------------- 58
Article 22 Confidentiality ----------------------------- 60
Article 23 Assignment ---------------------------------- 62
Article 24 Environmental Protection and Safety --------- 63
Article 25 Force Majeure ------------------------------- 64
Article 26 Consultation and Arbitration ---------------- 65
Article 27 Effectiveness and Termination of the
Contract ----------------------------------------- 67
Article 28 The Applicable Law -------------------------- 69
Article 29 Language of Contract and
Working Language --------------------------------- 70
Article 30 Miscellaneous ------------------------------- 71
Annex I Geographic Location and Coordinates of the
Boundary Lines of the Zhang Dong Contract
Annex II Accounting Procedure
Annex III Personnel Costs
Article IV Data Control Agreement
PREAMBLE
This Contract is entered into in Beijing on this 20th
_____ day of August of 1998 by and between China National
Petroleum Development Corporation (hereafter abbreviated as
"CNPC"), a company organized and existing under the laws of
the People's Republic of China, having its headquarters
domiciled in Beijing, the People's Republic of China, as one
part; and XCL Cathay Ltd., an international business company
organized under the laws of the British Virgin Islands with
corporate headquarters domiciled in Roadtown, Tortola,
B.V.I., (hereafter referred to as the "Foreign Contractor"),
and being a subsidiary of XCL Ltd., a company organized and
existing under the laws of the State of Delaware, United
States of America, having its corporate headquarters
domiciled in Delaware, as the other part.
WITNESSETH
WHEREAS, all Petroleum resources under the territory,
internal water, territorial sea, and continental shelf of
the People's Republic of China and under all sea areas
within the limits of national jurisdiction over the maritime
resources of the People's Republic of China are owned by the
People's Republic of China;
WHEREAS, the State Council of the People's Republic of
China has authorized CNPC to be responsible for the
negotiation, signature and implementation of the contracts
for the exploitation of China's onshore Petroleum resources
in cooperation with foreign enterprises and to have the
exclusive right to explore for, develop, produce and market
the Petroleum of the Contract Area; and
WHEREAS, the Foreign Contractor desires and agrees to
provide funds, and apply its appropriate and advanced
technology and managerial experience to cooperate with CNPC
for the exploitation of Petroleum resources within the
Contract Area and agrees to be subject to the laws, decrees,
and other rules and regulations of the People's Republic of
China in the implementation of the Contract.
NOW, THEREFORE IT IS MUTUALLY AGREED as hereafter set
forth:
Article 1
Definitions
The following words and terms used in the Contract
shall have, unless otherwise specified in the Contract, the
following meaning:
1.1 "Petroleum" means Crude Oil and Natural Gas
deposited in the subsurface and being extracted or already
extracted, including any valuable non-hydrocarbon substances
produced in association with Crude Oil and/or Natural Gas
separated or extracted therefrom.
1.2 "Crude Oil" means solid and liquid hydrocarbons in
their natural states and also includes any liquid
hydrocarbons extracted from Natural Gas except for methane
(CH4).
1.3 "Natural Gas" means Non-associated Natural Gas and
Associated Natural Gas in their natural state.
1.4 "Non-associated Natural Gas" means all gaseous
hydrocarbons produced from gas reservoirs, and includes wet
gas, dry gas and residue gas remaining after the extraction
of liquid hydrocarbons from wet gas.
1.5 "Associated Natural Gas" means all gaseous
hydrocarbons produced in association with Crude Oil from oil
reservoirs, and includes residue gas remaining after the
extraction of liquid hydrocarbons therefrom.
1.6 "Oil Field" means an accumulation of Petroleum
within the Contract Area composed of one or several oil-
bearing zones, within one trap or within traps of the same,
independent geological structure, which may or may not be
complicated by faulting, and which has been determined to be
of commercial value in accordance with the procedures
stipulated in Article 11 hereof.
1.7 "Gas Field" means an accumulation of Petroleum
within the Contract Area composed of one or several gas-
bearing zones, within one trap or traps of the same,
independent geological structure, which may or may not be
complicated by faulting, and which has been determined to be
of commercial value in accordance with the procedures
stipulated in Article 18 hereof.
1.8 "Petroleum Operations" means the Appraisal
Operations, the Development Operations, the Production
Operations, and other activities related to these Operations
carried out under the Contract.
1.9 "Appraisal Operations" means operations carried
out for the purpose of confirming Petroleum-bearing traps by
means of geological, geophysical, geochemical and other
methods; all the work undertaken to determine the
commerciality of traps in which Petroleum has been
discovered including Appraisal Well drilling and feasibility
studies, Trial Production, formulation of the Overall
Development Program; and activities related to all such
operations.
1.10 "Development Operations" means operations carried
out for the realization of Petroleum production from the
date of approval of the Overall Development Program for any
Oil Field and/or Gas Field by the Department or Unit,
including design, construction, installation, drilling, and
the related research work as well as production activities
carried out before the Date of Commencement of Commercial
Production.
1.11 "Production Operations" means operations and all
activities related thereto carried out for Petroleum
production of an Oil Field and/or Gas Field from the Date of
Commencement of Commercial Production, such as extraction,
injection, stimulation, treatment, storage, transportation,
lifting, etc.
1.12 "Progressive Appraisal and Development Program"
means an operational procedure during which Appraisal
Operations and Development Operations are conducted during
the appraisal period and development and production period
and during which Trial Production, if feasible, is conducted
simultaneously with Appraisal Operations and/or Development
Operations.
1.13 "Basic Block" means a section of the surface of
the earth bounded by the segments of longitude and latitude
of equal distance of ten (10) minutes. demarcated on the
map as Annex I hereto.
1.14 "Contract Area" means a surface area demarcated
with geographic coordinates for the cooperative exploitation
of Petroleum resources, and in the Contract, means the
surface area stipulated in Article 3.1 hereof.
1.15 "Appraisal Area" means a surface area within the
Contract Area which has not been relinquished before the
expiration of the appraisal period and in which Development
Operations have not begun.
1.16 "Development Area" means a portion of the
Contract Area covering an Oil Field and/or Gas Field and any
potential contiguous extension areas to such Field(s) within
the Contract Area which has been designated for development.
The Development Area(s) shall be proposed by the Operator,
demarcated by the Joint Management Committee ("JMC") and
delineated as such in the Overall Development Program
approved by the Department or Unit.
1.17 "Production Area" means a surface area within any
Development Area for the purpose of the performance of the
Production Operations within the said Development Area after
completion of the Development Operations.
1.18 "Date of Commencement of Commercial Production"
means, in respect of each Oil Field, the date on which a
cumulative total of sixty thousand (60,000) metric tons of
Crude Oil shall have been extracted and delivered out of the
Field; in respect of each Gas Field, the date on which a
cumulative total of sixty million (60,000,000) cubic meters
of Natural Gas (under standard atmospheric conditions) shall
have been extracted and delivered out of the Field. If any
field produces both oil and gas, and if the gas is sold,
then the net amount received by the Parties for the gas sold
shall be converted, on an equivalent dollar basis, into a
volume of oil.
1.19 "Calendar Year" means a period of twelve (12)
consecutive Gregorian months under the Gregorian Calendar,
beginning on the first day of January and ending on the
thirty-first day of December of the same year.
1.20 "Contract Year" means a period of twelve (12)
consecutive Gregorian months under the Gregorian Calendar,
within the term of the Contract, beginning on the effective
date of the Contract or any anniversary thereof.
1.21 "Production Year" means, in respect of each Oil
Field and/or Gas Field, a period of twelve (12) consecutive
Gregorian months under the Gregorian Calendar beginning on
the Date of Commencement of Commercial Production of such
Field or any anniversary thereof.
1.22 "Calendar Quarter" means a period of three (3)
consecutive Gregorian months under the Gregorian Calendar
beginning on the first day of January, the first day of
April, the first day of July, or the first day of October.
1.23 "Exploratory Well" means any Wildcat and/or
Appraisal Well drilled within the exploration period,
including dryhole(s) and discovery well(s).
1.24 "Wildcat" means a well drilled on any geological
trap for the purpose of searching for Petroleum
accumulations, including wells drilled for the purpose of
obtaining geological and geophysical parameters.
1.25 "Appraisal Well" means any well drilled for the
purpose of evaluating the commerciality of a geological trap
in which Petroleum has been or may be discovered.
1.26 "Development Well" means a well drilled after the
date of approval of the Overall Development Program for the
purpose of producing Petroleum, increasing production or
accelerating extraction of Petroleum, including production
wells, injection wells and dry holes. Any Appraisal Well
drilled during the production period shall be deemed a
Development Well.
1.27 "Work Program" means all types of plans
formulated for the performance of the Petroleum Operations,
including plans for appraisal, development and production.
1.28 "Overall Development Program" means a plan
prepared by the Operator for the development of an Oil Field
and/or Gas Field which has been reviewed and adopted by JMC,
confirmed by CNPC and approved by the Department or Unit and
such plan shall include, but shall not be limited to,
recoverable reserves, the Development Well pattern, master
design, production profile, economic analysis and time
schedule of the Development Operations.
1.29 "Deemed Interest" means interest on the
development costs calculated in accordance with the rate of
interest stipulated in Article 12.2.3.2. hereof when the
development costs incurred in each Oil Field and/or Gas
Field within the Contract Area are recovered by the Parties.
1.30 "Oil Field and/or Gas Field Straddling a
Boundary" means an Oil Field and/or Gas Field extending from
the Contract Area to one or more other contract areas and/or
areas in respect of which no Petroleum contracts have been
signed.
1.31 "Annual Gross Production of Natural Gas" means
the total amount of Natural Gas produced from each Oil Field
and/or Gas Field within the Contract Area considered
separately in each Calendar Year, less the amount of Natural
Gas used for Petroleum Operations and the amount of losses,
and which is saved and measured by a measuring device at the
Delivery Point as defined in Article 1.43 herein.
1.32 "Annual Gross Production of Crude Oil" means the
total amount of Crude Oil produced from each Oil Field
within the Contract Area considered separately in each
Calendar Year, less the amount of Crude Oil used for
Petroleum Operations and the amount of losses, which is
saved and measured by a measuring device at the Delivery
Point as defined in Article 1.43 herein.
1.33 "Basement" means igneous rocks, metamorphic rocks
or rocks of such nature which, or formations below which,
could not contain Petroleum deposits in accordance with the
knowledge generally accepted in the international oil
industry; and shall also include such impenetrable rock
substances as salt domes, mud domes and any other rocks
which make further drilling impracticable or economically
unjustifiable by the modern drilling technology normally
utilized in the international oil industry.
1.34 "Contractor" means the Foreign Contractor
specified in the Preamble hereto, including assignee(s) in
accordance with Article 23 hereof.
1.35 "Parties" means CNPC and Contractor.
1.36 "Operator" means an entity responsible for the
performance of the Petroleum Operations under the Contract.
1.37 "Subcontractor" means an entity which provides
the Operator with goods or services for the purpose of
implementing the Contract.
1.38 "Third Party" means an individual or entity
except CNPC, the Contractor and any of their Affiliates.
1.39 "Chinese Personnel" means any citizen of the
People's Republic of China, including CNPC's personnel and
Chinese citizens employed by the Contractor and/or the
Subcontractor(s), involved in Petroleum Operations under the
Contract.
1.40 "Expatriate Employee" means any person employed
by the Contractor, Subcontractor(s), or CNPC who is not a
citizen of the People's Republic of China. Overseas Chinese
who reside abroad and have the nationality of the People's
Republic of China and other overseas Chinese abroad, when
they are employed by the Contractor, Subcontractor(s) or
CNPC shall also be deemed to be Expatriate Employees within
the scope of the Contract.
1.41 "Affiliate" means in respect of the Contractor:
(a) any entity in which any company comprising the
Contractor directly or indirectly holds fifty percent (50%)
or more of the voting rights carried by its share capital;
or
(b) any entity which directly or indirectly holds
fifty percent (50%) or more of the aforesaid voting rights
of any company comprising the Contractor; or
(c) any other entity whose aforesaid voting rights are
held by an entity mentioned in (b) above in an amount of
fifty percent (50%) or more;
"Affiliate" means in respect of CNPC, any subsidiary,
branch or regional corporation of CNPC or CNPC and any
entity in which CNPC directly or indirectly holds fifty
percent (50%) or more of the voting rights carried by its
share capital.
1.42 "Department or Unit" means the department or unit
which is authorized by the State Council of the People's
Republic of China to be responsible for administration of
the petroleum industry of the People's Republic of China..
1.43 "Delivery Point" means a point for the delivery
of Petroleum located within or outside the Contract Area and
specified in the Overall Development Program.
1.44 "Date of Commencement of the Implementation of
the Contract" means the first day of the month following the
month in which the Contractor has received the notification
from CNPC of the approval by the Ministry of Foreign Trade
and Economic Cooperation of the People's Republic of China.
1.45 "Dagang" means Dagang Oilfield (Group) Co., Ltd.
1.46 "Trial Production" means, as to any Appraisal Well,
the oil and/or gas production which is produced during the
period from completion of that well to the Date of
Commencement of Commercial Production in the Oil Field or
Gas Field in which that well is located.
1.47 "Pre-Contract Appraisal Costs" is defined in
Article 12.1.1 hereinafter.
1.48 "Remaining Pre-Contract Appraisal Costs" is
defined in Article 13.2.2.2(a)(2) hereinafter.
1.49 "Pre-Contract Development Costs" is defined in
Article 12.1.2 hereinafter.
Article 2
Objective of the Contract
2.1 The objective of the Contract is to appraise,
develop and produce Petroleum that exists and may exist in
the Contract Area.
2.2 The Contractor shall apply a Progressive Appraisal
and Development Program approach in its efforts to comply
with the objectives of the Contract.
2.3 The Contractor shall apply its appropriate and
advanced technology and assign its competent experts to
perform the Petroleum Operations.
2.4 During the performance of the Petroleum
Operations, the Contractor shall transfer its technology to
the Chinese Personnel and train them.
2.5 The Contractor shall pay all appraisal costs
required during Appraisal Operations with the exception of
all previous costs incurred by Dagang. In the event that
any Oil Field and/or Gas Field is developed within the
Contract Area, the development costs of such Oil Field
and/or Gas Field or Fields shall be paid by the Parties in
proportion to their participating interests: fifty-one
percent (51%) by CNPC and forty-nine percent (49%) by the
Contractor. Contractor shall not be responsible for the
prior appraisal costs expended by Dagang, which are agreed
to be $19,312,000 U.S dollars, but Dagang's prior appraisal
costs shall be eligible for in accordance with the
provisions of Articles 12, 13 and 18, below. In the event
that CNPC elects to participate at a level less than fifty-
one percent (51%) of the participating interest, or not to
participate in the development of the Oil Field and/or Gas
Field, the Contractor shall pay the remaining development
costs necessary for the development of the Oil Field and/or
Gas Field in accordance with Article 12.1.2 hereof.
2.6 If any Oil Field and/or Gas Field is developed
within the Contract Area, the Petroleum produced therefrom
shall, from the Date of Commencement of Commercial
Production of such Field, be allocated in accordance with
Articles 12, 13 and/or 18 hereof.
2.7 Nothing contained in the Contract shall be deemed
to confer any right on the Contractor other than those
rights expressly granted hereunder.
Article 3
Contract Area
3.1 The Contract Area as of the date of signature of
the Contract comprises, in part, three (3) blocks, covering
a total of fifty and two tenths (50.2)) square kilometers,
as marked out by the geographic location and the coordinates
of the connecting points of the boundary lines in Annex I
attached hereto.
The said total area of the Contract Area shall be
reduced in accordance with Articles 4, 5, 11 and 18 hereof.
3.2 For the proper execution of operations under the
Contract, the Operator shall be permitted to use those
portions of the seabed, mudflats and land surface inside or
outside the Contract Area under the control of CNPC as may
be necessary for Petroleum Operations, for as long as
Appraisal Operations, Development Operations or Productions
Operations continue. All reasonable costs incurred by CNPC
for this purpose shall be reimbursed by the Operator from
the Joint Account.
3.3 The Operator shall be permitted to use for the
purpose of Petroleum Operations any water source located
within the Contract Area, subject to Government rules any
payment of reasonable charges at the rates not more than
rates charged to other users of similar water sources in the
area.
3.4 If the Operator is unable to secure in its own
name any rights to use of the surface area necessary for
Petroleum Operations or for the delivery of Crude oil to the
delivery point defined in any overall development plan, CNPC
will assist the Operator by securing such rights in CNPC's
name for the benefit of the joint venture. All reasonable
costs incurred by CNPC for this purpose shall be reimbursed
by Operator from the Joint Account.
3.5 Except for the rights as expressly provided by the
Contract, no right is granted in favor of the Contractor to
the surface area, lake bed, stream bed and subsoil or any
bodies of water or any natural resources or aquatic
resources other than Petroleum existing therein, and any
thing under the surface within the Contract Area.
Article 4
Contract Term
4.1 The term of the Contract shall include an
appraisal period, a development period and a production
period.
4.2 The appraisal period, beginning on the Date of
Commencement of the Implementation of the Contract, shall be
divided into three (3) phases and shall consist of five (5)
consecutive Contract Years, unless the Contract is sooner
terminated, or the appraisal period is extended in
accordance with Article 25 hereof and/or Article 4.3 herein.
The three (3) phases shall be as follows:
The first phase of one (1) Contract Year (the
first Contract Year);
The second phase of two (2) Contract Years (the
second Contract Year through the third Contract
Year); and
The third phase of two (2) Contract Years (the
fourth Contract Year through the fifth Contract
Year).
4.3 Where time is insufficient to complete the
appraisal work on a Petroleum discovery prior to the
expiration of the appraisal period or where the time of the
appraisal work on a Petroleum discovery in accordance with
the appraisal Work Program approved by JMC as stated in
Articles 11 and 18 hereof extends beyond the appraisal
period, the appraisal period as described in Article 4.2
herein shall be extended. The period of extension shall be
whatever period CNPC regards as a reasonable period of time
required to complete the above mentioned appraisal work in
order to enable JMC to make a decision on the commerciality
of the said Petroleum discovery in accordance with Article
11 or 18 hereof, and until the Department or Unit approves
or finally rejects the Overall Development Program.
4.4 The development of any Oil Field and/or Gas Field
within the Contract Area shall begin on the date of approval
by the Department or Unit of the Overall Development Program
of the said Oil Field and/or Gas Field, and end on the date
of the entire completion of the Development Operations set
forth in the Overall Development Program, excluding the time
for carrying out additional development projects in the
production period in accordance with Article 11.9 hereof.
The Contractor and CNPC will commence preparation of the
Overall Development Program when appraisal of any potential
Oil Field and/or Gas Field indicates by reinterpretation of
seismic and mapping and integrated reservoir study that such
field is commercial. The Overall Development Program will be
submitted for approval by the Department or Unit as soon as
approved by the JMC.
4.5 The production period of any Oil Field and/or Gas
Field within the Contract Area shall be a period of twenty
(20) consecutive Production Years beginning on the Date of
Commencement of Commercial Production unless otherwise
provided in Article 4.6 herein and Article 18.2 or 25
hereof. Under such circumstances as where the overall
development of an Oil Field and/or Gas Field is to be
conducted on a large scale, and the time span required
therefor is long, or where separate production of each of
the multiple oil or gas producing zones of an Oil Field
and/or Gas Field is required, or under other special
circumstances, the production period thereof shall, when it
is necessary, be appropriately extended with the approval
of the Department or Unit.
4.6 Suspension Or Abandonment Of Production Of An Oil
Field and/or Gas Field.
4.6.1 In the event that the Parties agree to suspend
temporarily production from an Oil Field and/or Gas Field
which has entered into commercial production, the Production
Area covered by that Oil Field and/or Gas Field may be
retained within the Contract Area. In no event shall the
period of such retention extend beyond the date of the
expiration of the production period of that Oil Field and/or
Gas Field except as otherwise provided in Article 25.4
hereof. The duration of the relevant period of production
suspension and the arrangement for the maintenance
operations during the aforesaid period of suspension shall
be proposed by the Operator, and shall be decided by JMC
through discussion. With respect to the aforesaid Oil Field
and/or Gas Field which has been suspended and retained
within the Contract Area, in the event that production is
restored during the period of such retention, the production
period of that Oil Field and/or Gas Field shall be extended
correspondingly. In the event that the Parties fail to
reach an agreement on the restoration of production by the
expiration of the production suspension period decided by
JMC through discussion, the party who wishes to restore
production shall have the right to restore production
solely. The other party may later elect to participate in
production but shall have no rights or obligations in
respect of such Field for the solely restored production
period.
4.6.2 Abandonment Of Production From An Oil Field
and/or Gas Field Within The Production Period.
4.6.2.1 During the production period, either party to
the Contract may propose the abandonment of production from
any Oil and/or Gas Field within the Contract Area, provided,
however, that prior written notice shall be given to the
other party to the Contract. The other party shall make a
response in writing within ninety (90) days from the date on
which the said notice is received. If the other party also
agrees to abandon production from the said Oil Field and/or
Gas Field, then abandonment costs shall be paid by the
Parties in proportion to their participating interests in
the development of such Oil Field and/or Gas Field. From
the date on which the other party makes the response in
writing, the production period of such Oil Field and/or Gas
Field shall be terminated and such Oil Field and/or Gas
Field shall be excluded from the Contract Area.
4.6.2.2 If the Contractor notifies CNPC in writing of
its decision on abandoning production from an Oil Field
and/or Gas Field, and CNPC decides not to abandon production
from such Oil Field and/or Gas Field, then from the date on
which the Contractor receives CNPC's written response of its
aforesaid decision, all of the Contractor's rights and
obligations, including but not limited to the
responsibilities for payment of abandonment in respect of
such Field, shall be terminated automatically, provided that
the Contractor shall not transfer to CNPC any of the
Contractor's liabilities and obligations in respect of the
said Field. The said Field shall be excluded from the
Contract Area.
4.7 The term of the Contract shall not go beyond
thirty (30) consecutive Contract Years from the Date of
Commencement of the Implementation of the Contract, unless
otherwise stipulated hereunder.
Article 5
Relinquishment
5.1 In any of the following cases, the Contractor
shall relinquish the remaining Contract Area except any
Development Area and/or Production Area:
(a) at the expiration of the last phase of the
appraisal period and development period; or
(b) at the expiration of the extended period, in the
event that the appraisal period and development period is
extended in accordance with Article 4.3. or Article 25
hereof.
5.2 At the expiration of the production period of the
last producing Oil Field and/or Gas Field within the
Contract Area, the contractor shall relinquish all rights to
the entire Contract Area.
Article 6
Minimum Appraisal Work Commitment
and Expected Minimum Appraisal Expenditures
6.1 The Contractor shall begin to perform the on
site Appraisal Operations within three (3) months after the
Date of Commencement of the Implementation of the Contract
and spud the first Appraisal Well within ten (10) moths
after the Date of Commencement of Implementation of the
Contract, unless otherwise agreed by the Parties.
6.2 The Contractor shall fulfill the minimum
appraisal work commitment and expected minimum appraisal
expenditures for each phase of the appraisal period in
accordance with the following provisions:
6.2.1 During the first phase of the appraisal
period, the Contractor shall:
(a) reprocess and reinterpret a minimum of
approximately three hundred (300) kilometers of existing 2-
D seismic data and seventy (70) square kilometers of
existing 3-D seismic data, provided necessary support data
is available. Contractor will have access to additional
seismic data outside the Contract Area as needed to make
geological and geophysical evaluations of the Contract Area;
(b) drill one (1) Appraisal Well with the footage of
three thousand (3,000) meters;
(c) spend a minimum of one million ($1,000,000) U.S.
dollars upgrading the artificial island and to recondition
the causeway and causeway drilling pad in preparation of
Petroleum Operations; and
(d) spend a minimum of four million ($4,000,000) U.S.
dollars (including the expenditures described in (c), above)
for such Appraisal Operations.
6.2.2 During the second phase of the appraisal
period, the Contractor shall:
(a) drill two (2) Appraisal Wells, one with the
footage of three thousand (3,000) meters, and one with the
footage of three thousand five hundred (3,500) meters;
(b) if the decision is made to drill from the
artificial island, the Contractor will spend a minimum of an
additional one million ($1,000,000) U.S. dollars upgrading
the drilling rig and other facilities on the artificial
island;
(c) If Contractor concludes and the JMC agrees that it
is feasible from an engineering, geological and economic
viewpoint to reevaluate the nine (9) existing wellbores on
the Contract Area, Contractor will commit to re-evaluate a
minimum of three (3) of the existing wells.
(d) spend a minimum of six million ($6,000,000) U.S.
dollars as its expected minimum appraisal expenditures for
such Appraisal Operations.
(e) Formulate the Overall Development Program if
appraisal of any potential Oil Field and/or Gas Field
indicates that such a field is commercial.
6.2.3 During the third phase of the appraisal period,
the Contractor shall:
(a) drill two (2) Appraisal Wells with the footage of
three thousand (3,000) meters each; and
(b) spend a minimum of six million ($6,000,000) U.S.
dollars as its expected minimum appraisal expenditures for
such Appraisal Operations.
6.2.4 With respect to the minimum appraisal work
commitment for each phase of the appraisal period committed
by the Contractor in accordance with Articles 6.2.1, 6.2.2.
and 6.2.3 herein when calculating whether the minimum
appraisal work commitment has been fulfilled, the number of
Appraisal Wells and the kilometers of seismic lines
reprocessed and reinterpreted shall be the basis of such
calculation. However, the Appraisal Wells abandoned for
technical reasons without reaching their predetermined
geological objective shall not count as Appraisal Wells
actually fulfilled by the Contractor thereunder, without the
consent of CNPC.
6.3 At the expiration of the first phase or the
second phase of the appraisal period, the Contractor has the
following options:
(a) to enter the next phase and continue appraisal; or
(b) to terminate the Contract.
6.4 At the expiration of any phase of the appraisal
period, if the actual appraisal work fulfilled by the
Contractor is less than the minimum appraisal work
commitment set forth for the said appraisal phase and if the
Contractor elects to enter the next phase and continue
appraisal under Article 6.3 (a) herein, the Contractor shall
give reasons to CNPC for the underfulfillment, and with the
consent of CNPC, the unfulfilled balance of the said phase
shall be added to the minimum appraisal work commitment for
the next appraisal phase.
In the event of a commercial appraisal at any time
within the appraisal period, JMC shall, at the request of
any party to the Contract, discuss the possibility of
increasing the appraisal work. Any Appraisal Wells involved
in such increase shall be deducted from the minimum
appraisal work commitment.
6.5 Where the Contractor has fulfilled ahead of time
the minimum appraisal work commitment for any phase of the
appraisal period, the duration of such appraisal phase
stipulated in Article 4.2 hereof shall not be shortened
thereby, and if the appraisal work actually fulfilled by
the Contractor exceeds the minimum appraisal work commitment
for the said appraisal phase, the excess part shall be
deducted from and credited against the minimum appraisal
work commitment for the next appraisal phase.
6.6 If any addition or deduction is made under
Article 6.4 or Article 6.5 herein in regard to the minimum
appraisal work commitment for any phase of appraisal period,
the increased or reduced appraisal work shall become the new
minimum appraisal work commitment for the Contractor to
fulfill in the said phase.
6.7 At the expiration of any phase during the
appraisal period, if the appraisal work actually fulfilled
by the Contractor is less than the minimum appraisal work
commitment for such phase or less than the new minimum
appraisal work commitment as mentioned in Article 6.6
herein, and if, regardless of whether the expected minimum
appraisal expenditures are fulfilled or not fulfilled, the
Contractor elects to terminate the Contract under Article
6.3 (b) herein or if the said phase is the last phase of the
appraisal period, the Contractor shall, within thirty (30)
days from the date of the decision of election to terminate
the Contract or thirty (30) days from the date of the
expiration of the exploration period, pay CNPC any
unfulfilled balance of the minimum appraisal work commitment
(or of the new one) in U.S. dollars after it has been
converted into a cash equivalent using the method provided
in Annex II-Accounting Procedure attached hereto. However,
if the minimum appraisal work commitment for the appraisal
period is fulfilled while its expected corresponding minimum
appraisal expenditures are not fulfilled, the unfulfilled
part shall be deemed as a saving and shall not be paid to
CNPC.
Article 7
Management Organization and Its Functions
7.1 For the purpose of the proper performance of the
Petroleum Operations, the Parties shall establish a Joint
Management Committee (JMC) within forty-five (45) days from
the effective date of the Contract.
7.1.1 CNPC and the Contractor shall each appoint an
equal number of representatives (three to five), to form
JMC, and each party to the Contract shall designate one of
its representatives as its chief representative. All the
aforesaid representatives shall have the right to present
their views on the proposals at the meetings held by the
JMC. When a decision is to be made on any proposal, the
chief representative from each party to the Contract shall
be the spokesman on behalf of the party to the Contract.
The chairman of the JMC shall be the chief
representative designated by CNPC, and the vice chairman
shall be the chief representative designated by the
Contractor. The chairman of JMC shall preside over the
meetings of JMC. In his absence, one representative present
at the meeting from CNPC shall be designated to act as the
chairman of the meeting. In the absence of the vice
chairman, one representative present at the meeting from the
Contractor shall be designated to act as vice chairman at
the meeting. The Parties may, according to need, designate
a reasonable number of advisors who may attend, but shall
not be entitled to vote at JMC meetings.
7.1.2 A regular meeting of JMC shall be held at least
once a Calendar Quarter, and other meetings, if necessary,
may be held at any time at the request of any party to the
Contract, upon giving reasonable notice to the other party
of the date, time and location of the meeting and the items
to be discussed.
7.2 The Parties shall empower JMC to:
7.2.1 Review and adopt the Work Program and budget
proposed by the Operator;
7.2.2 determine the commerciality of each trap on
which a Petroleum discovery has been made in accordance with
the Operator's appraisal report and report its decision to
CNPC for confirmation;
7.2.3 review and adopt the Overall Development Program
and budget for each Oil Field and/or Gas Field;
7.2.4 approve or confirm the following items of
procurement and expenditures:
(a) approve procurement of any item within the budget
with a unit price exceeding Five Hundred Thousand U.S.
dollars (U.S.$ 500,000) or any single purchase order of
total monetary value exceeding Two Million U.S. dollars
(U.S. $2,000,000);
(b) approve a lease of equipment, or an engineering
subcontract or a service contract within the budget worth
more than One Million U.S. dollars (U.S. $1,000,000); and
(c) confirm excess expenditures pursuant to Article
10.2.1 hereof and the expenditures pursuant to Article
10.2.2 hereof;
7.2.5 determine and announce the Date of Commencement
of Commercial Production of each Oil Field and/or Gas Field
within the Contract Area;
7.2.6 determine the type and scope of information and
data provided to any Third Party and Affiliate in relation
to the Petroleum Operations in accordance with Article 22.5
hereof and Annex IV - Data Control Agreement;
7.2.7 demarcate boundaries of the Development Area and
the Production Area of each Oil Field and/or Gas Field;
7.2.8 review and approve plans for transfer of the
Production Operations in accordance with Article 8.7 hereof;
7.2.9 review and approve the insurance program
proposed by the Operator and emergency procedures on safety
and environmental protection;
7.2.10 review and approve personnel training programs;
7.2.11 discuss, review, decide and approve other
matters that have been proposed by either party to the
Contract or submitted by the expert groups or the Operator;
and
7.2.12 review and examine matters required to be
submitted to relevant authorities of the Chinese Government
and/or CNPC for approval.
7.2.13 Approve Trial Production for any Appraisal
Well when feasible.
7.3 Decisions of JMC shall be made unanimously through
consultation. All decisions made unanimously shall be
deemed as formal decisions and shall be equally binding upon
the Parties. When matters arise on which agreement cannot
be reached, the Parties may convene another meeting in an
attempt to find a new solution thereto based on the
principle of mutual benefit.
7.3.1 In the appraisal period, the Parties shall
endeavor to reach agreement through consultation on
appraisal programs and annual appraisal Work Programs. If
the Parties fail to reach agreement through consultation,
the Contractor's proposal shall prevail, provided that such
proposal is not in conflict with the relevant provisions in
Articles 4, 5, and 6 hereof.
7.3.2 If it is considered by the chairman and/or the
vice chairman or their nominees that a matter requires
urgent handling or may be decided without convening a
meeting, JMC may make decisions through conference telephone
calls, telefax transmissions or the circulation of documents
to produce decisions.
7.4 JMC shall establish the following subordinate
bodies:
7.4.1 Secretariat
The secretariat shall be a permanent organization
consisting of two (2) secretaries. One secretary shall be
appointed by each of the Parties. The secretaries shall not
be members of JMC, but may attend meetings of JMC as
observers. The duties of the secretariat are as follows:
(a) to keep minutes of meetings;
(b) to prepare summaries of and resolutions for JMC
meetings;
(c) to draft and transmit notices of meetings: and
(d) to receive and transmit proposals, reports or
plans, etc. submitted by the Operator and/or any party to
the Contract, which require discussion, review and/or
approval by JMC.
7.4.2 Expert Groups
Advisory expert groups shall be established in
accordance with the requirements of the Petroleum Operations
in various periods. Each expert group shall consist of an
equal number of CNPC and the Contractor's personnel, and,
with the agreement of JMC, any other personnel. JMC shall
discuss and decide upon their establishment or dissolution,
size, and the appointment of their leaders in accordance
with requirements of their work. The expert groups shall
have the following functions;
(a) to discuss and study matters assigned to them by
JMC and submitted by the Operator to JMC for its review and
approval and any other matter assigned to them by JMC and to
make constructive suggestions to JMC;
(b) to have access to and observe and investigate the
Petroleum Operations conducted by the Operator at its office
and operating sites as work requires and to submit relevant
reports to JMC; and
(c) to attend meetings of JMC as observers at the
request of JMC.
7.5 When the Contractor acts as the Operator, CNPC
shall have the right to assign professional representatives
to the Operator's administrative and technical departments
which are related to the Petroleum Operations, who may work
on a long-term basis together with the Operator's staff.
The professional representatives shall have access to
the centers of research, design, and data processing related
only to the execution of the Contract and to the operating
sites to observe all of the activities and study all the
information with respect to the Petroleum Operations. Such
access to the aforesaid centers outside the People's
Republic of China shall be decided by JMC through discussion
and shall be arranged by the Operator. The Operator shall
use all reasonable endeavors to assist the professional
representatives to have access to Third Parties' sites. The
Operator's staff shall regularly discuss their work with the
professional representatives of CNPC. The work of
professional representatives of CNPC shall be arranged by
the manager(s) of the departments of the Operator in which
professional representatives work.
Professional representatives of CNPC, except for the
professional representatives in charge of procurement who
shall undertake their functions in accordance with Article
7.6 herein, shall not interfere in the decision making on
relevant matters by departmental manager(s) of the Operator.
However, such professional representatives shall have the
right to make proposals and comments to departmental
manager(s) of the Operator or to report directly to CNPC
representatives in JMC.
When CNPC acts as the Operator, the Contractor may also
assign professional representatives including professional
representatives in charge of procurement.
7.5.1. On the principle of mutual cooperation and
coordination, the Operator shall provide the professional
representatives with necessary facilities and assistance to
perform office work and to observe the operating sites, etc.
7.5.2. The number of professional representatives
shall be decided by JMC though consultations.
7.6 When one of the companies comprising the
Contractor acts as the Operator, in respect of the items
listed in the procurement plan, the procedures and
provisions herebelow shall be followed:
7.6.1. The procurement department of the Operator
shall inform the professional representatives appointed by
CNPC in charge of procurement of all the items of
procurement.
7.6.2. The Operator shall be subject to Articles 15.1
and 15.3 hereof and reach agreement through consultation
with the professional representatives of CNPC in charge of
procurement when preparing the procurement plan in
accordance with the Work Program and budget. The
professional representatives of CNPC in charge of
procurement shall work out an inventory listing the
equipment and materials which can be made and provided in
China and a list of manufacturers, engineering and
construction companies and enterprises in China which can
provide services and undertake subcontracting work.
7.6.3. Unless otherwise agreed upon by the Parties,
the Operator shall, in general, make procurement by means of
calling for bids and shall notify at the same time
manufacturers and enterprises concerned both inside and
outside China, and the work of calling for bids shall be
done within the territory of China.
7.6.4. When any procurement is to be made by means of
calling for bids, the manufacturers and enterprises in China
applying for bidding, which are included in a list delivered
in advance to the Operator by the professional
representative of CNPC in charge of procurement, shall be
invited. The professional representatives of CNPC in charge
of procurement shall have the right to take part in the work
of calling for bids, including examination of the list of
bidders to be invited, preparing and issuing bidding
documents, opening bids, evaluation of bids, negotiation,
and award of contracts through consultation, as well as
negotiation for subcontracts and services contracts.
7.6.5. With respect to the items of procurement by
means of not calling for bids, the Operator's procurement
department and the professional representatives of CNPC in
charge of procurement shall, in accordance with the
provisions specified in Article 7.6.2 herein define which
items are to be procured in the People's Republic of China
and which items are to be procured abroad.
7.6.6 With respect to the use of personnel, equipment
and services to be procured in the People's Republic of
China, it is expressly understood that quality and costs
shall be competitive with personnel, equipment and services
that can be procured outside of the People's Republic of
China subject to Article 15 hereof.
7.7 All costs and expenses with respect to the staff
members of the Parties in the subordinate bodies of JMC
established in accordance with Article 7.4 herein, and those
with respect to the professional representatives referred to
in Article 7.5 herein and wages and salaries, costs and
expenses incurred by the representatives of JMC referred to
in Article 7.1.1 herein while attending JMC meetings shall
be paid by the Operator and charged respectively to the
appraisal costs, development costs and production costs in
accordance with Annex II-Accounting Procedure hereto.
7.8 The specific responsibilities and working
procedures within JMC shall be discussed and determined by
JMC in accordance with the relevant provisions herein.
7.9 For the purpose of assisting the Operator in the
proper implementation of Development Operations, an
Integrated Project Team ( the "IPT") shall be established to
act as a working group under the direction of the Operator.
Within the IPT in working roles, and charged with oversight
of development planning and execution will be a group of six
(6) persons designated by the Parties hereto. The six-
person group (the "Management Group") will consist of three
(3) CNPC designees and three (3) designees of the
Contractor, including one Operator designee who shall be
General Manager of the IPT and one CNPC designee who shall
be Deputy Manager. The Management Group will operate on the
principles of cooperation and mutual consultation. The IPT
shall be established within thirty (30) days from the date
of approval of the Overall Development Program.
The specific organization, staffing and working system
of the IPT and the responsibilities and competence of
various positions, including those of CNPC's personnel
assigned to the IPT, shall be determined by the parties
through consultation based on the principal of efficiency of
operations. The IPT shall comprise those personnel
designated by the parties and the number of CNPC's personnel
shall be no less than one third (1/3) of the total number of
personnel within the IPT. The working location(s) of the
members of the IPT shall be decided according to the needs
of the work.
Article 8
Operator
8.1 The Parties agree that XCL Cathay Ltd. ("XCL")
shall act as the Operator for the Petroleum Operations
within the Contract Area, unless otherwise stipulated in
Article 8.7 herein.
8.2 For the implementation of the Contract, the
companies comprising the Contractor shall register with the
State Administration for Industry and Commerce of the
People's Republic of China in accordance with the relevant
provisions of the said State Administration for Industry and
Commerce and shall obtain the necessary approval from CNPC.
The person in charge of the Operator shall have the
full right to represent the Contractor in respect of the
performance of the Petroleum Operations. The names,
positions and resumes of the staff and an organization chart
of the Operator shall be submitted in advance to CNPC and
the appointment of the Operator's senior staff shall be
subject to the consent of CNPC.
The parent corporation of each company comprising the
Contractor which is not itself a parent corporation shall,
at the request of CNPC, provide CNPC with a written
performance guarantee with terms acceptable to CNPC.
8.3 The Operator shall have the following obligations:
8.3.1 To apply the appropriate and advanced technology
and business managerial experience of the Contractor,
including each company comprising the Contractor or its and
their Affiliates, to perform the Petroleum Operations
reasonably, economically and efficiently in accordance with
sound international practice.
8.3.2 To prepare Work Programs and budgets related to
the Petroleum Operations and to carry out the approved Work
Programs and budgets.
8.3.3 To be responsible for procurement of
installations, equipment, and supplies and entering into
subcontracts and service contracts related to the Petroleum
Operations, in accordance with the approved Work Programs
and budgets and the applicable provisions of Articles 7.2.4,
7.6 and 10.2 hereof.
8.3.4 To prepare in advance, in accordance with
Article 16 hereof, a personnel training program and budget
before the commencement of the Appraisal Operations,
Development Operations and Production Operations,
respectively, and, in accordance with the said program and
budget, to be responsible for preparing an annual personnel
training program and budget and carrying out the annual
program and budget after approval by JMC.
8.3.5 To establish an insurance program, and to enter
into and implement the insurance contracts in accordance
with Article 21 hereof.
8.3.6 To issue cash-call notices to all the parties to
the Contract to raise the required funds based on the
approved budgets and in accordance with Article 12 hereof
and Annex II-Accounting Procedure hereto.
8.3.7 To maintain complete and accurate accounting
records of all the costs and expenditures for the Petroleum
Operations in accordance with the provisions of Annex II-
Accounting Procedure hereto and to keep securely the
accounting books in good order.
8.3.8 To make necessary preparation for regular
meetings of JMC, and to submit in advance to JMC necessary
information related to the matters to be reviewed and
approved by JMC.
8.3.9 To inform directly or indirectly all the
Subcontractors which render services for the Petroleum
Operations in China and all the Expatriate Employees of the
Operator and of Subcontractors who are engaged in the
Petroleum Operations in China that they shall be subject to
the laws, decrees, and other rules and regulations of the
People's Republic of China.
8.3.10 To report its work to JMC as provided in
Article 7.2 hereof.
8.4 In the course of the performance of the Petroleum
Operations, any direct loss arising out of the gross
negligence or willful misconduct of the Operator or its
employees shall be solely borne by the Operator. The
Operator shall make its best efforts in accordance with the
international Petroleum industry practice to include
provisions similar to this Article 8.4 herein in related
subcontracts and service contracts.
8.5 In the course of the performance of the Petroleum
Operations, the Operator shall handle the information,
samples or reports in accordance with the following
provisions:
8.5.1 The Operator shall provide CNPC with various
information and data and the Operator shall have the right
to use and handle such information and data. The
information and data shall be reported to CNPC at the same
time when the Operator reports them to its parent
corporation.
8.5.2 The Operator shall furnish CNPC in a timely
manner with reports on safety, environmental protection and
accidents related to the Petroleum Operations and with
financial reports prepared in accordance with the provisions
of Annex II-Accounting Procedure hereto.
8.5.3 The Operator shall provide the non-operator(s)
with copies of the relevant information and reports
reasonably required by non-operator(s) and referred to in
Articles 8.5.1. and 8.5.2. herein.
8.5.4 The Operator shall, at the request of any party
to the Contract, furnish that party to the Contract with the
following:
8.5.4.1 Procurement plans for purchasing equipment and
materials, inquiries, offers, orders and service contracts,
etc.;
8.5.4.2 Manuals, technical specifications, design
criteria, design documents (including design drawings),
construction records and information, consumption
statistics, equipment inventory, spare parts inventory,
etc.;
8.5.4.3 Technical investigation and cost analysis
reports; and
8.5.4.4 Other information relating to the Petroleum
Operations already acquired by the Operator in the
performance of the Contract.
8.6 In the course of performing the Petroleum
Operations, the Operator shall abide by the laws, decrees,
and other rules and regulations with respect to
environmental protection and safety of the People's Republic
of China and shall endeavor in accordance with
international Petroleum industry practice to:
8.6.1 Minimize the damage and destruction to
environment, community and ecology;
8.6.2 Control blowouts promptly and prevent or avoid
waste or loss of Petroleum discovered in, or produced from,
the Contract Area;
8.6.3 Prevent Petroleum from flowing into low pressure
formations or damaging adjacent Petroleum-bearing
formations;
8.6.4 Prevent water from flowing into Petroleum-
bearing formations through dry holes or other wells, except
for the purpose of secondary recovery;
8.6.5 Prevent land, forests, crops, buildings and
other installations from being damaged and destroyed; and
8.6.6 Minimize the danger to personnel safety and
health.
8.7 Transfer And Take Over Of The Production
Operations.
Before the full recovery of all appraisal and
development costs incurred in accordance with the Work
Program of any Oil Field and/or Gas Field within the
Contract Area, CNPC may, after agreement reached through
consultations with JMC, take over the Production Operations
of that Oil Field and/or Gas Field, if conditions permit.
After the full recovery of all appraisal and development
costs incurred in accordance with the Work Program of any
Oil Field and/or Gas Field within the Contract Area, CNPC
shall, at any time, have the right by giving written notice
to the Contractor, to take over the Production Operations of
that Oil Field and/or Gas Field. The transfer and take over
shall be effected in accordance with the procedures
described hereunder.
8.7.1 The Contractor shall submit a transfer plan of
the Production Operations to CNPC and JMC respectively
within sixty (60) days following the date of receiving the
written notice from CNPC. Such transfer plan shall include,
but not be limited to, a list of various posts to be taken
over by CNPC, a schedule of transfer by stages, inventories
of the relevant facilities and equipment and an inventory of
all documents, manuals, data and information necessary for
the Production Operations. Where the transfer of some of
the Production Operations involves any Third Party, the
Contractor shall consult with CNPC in advance and propose a
solution thereto in the transfer plan. However, this
situation shall not be taken by the Contractor as an excuse
to delay and hinder the transfer of the Production
Operations.
JMC shall, within thirty (30) days after receiving the
said plan, review and approve it.
8.7.2 CNPC shall, within sixty (60) days from the date
of receiving the transfer plan of the Production Operations
approved by JMC, submit to the Contractor and JMC
respectively the lists and resumes of CNPC personnel who
will take over the posts. The personnel named in the lists
shall be persons who have been trained by the Contractor in
accordance with provisions set forth in Article 16 hereof or
personnel who are considered by CNPC to be competent.
Within one hundred and eighty (180) days from the date of
receiving CNPC's lists of the personnel who will take over
the operations, the Contractor shall arrange for such
personnel to undergo step by step practical training for
the posts to be taken over by them and shall assist CNPC to
manage the qualification test.
8.7.3 Within three hundred and thirty (330) days from
the date of receiving the written notice from CNPC, the
Contractor shall submit to JMC a report on the completion of
preparation for the transfer of the Production Operations.
Such report shall include the results of the qualification
test for CNPC's personnel who will take over the Production
Operations and shall be confirmed by JMC within thirty (30)
days after the receipt of the said report. The transfer of
the Production Operations shall begin on the date when JMC
makes such confirmation.
8.7.3.1 When the completion of preparations for the
transfer of the Production Operations is confirmed by JMC,
the Contractor shall, in accordance with the transfer
schedule by stages, transfer to CNPC's take-over personnel
control of all facilities and equipment relating to the
Production Operations in the Oil Field and/or Gas Field, and
all documents, manuals, data and information regarding the
use and operation of such facilities and equipment, so that
CNPC's personnel are able to manage the Production
Operations.
8.7.3.2 If JMC believes that preparations for the
transfer of the Production Operations have not been
completed and sets another deadline for the completion of
preparations for the transfer of the Production Operations,
the preparations for the transfer shall be completed prior
to the deadline and the transfer shall begin thereafter.
8.7.4 The transfer in respect of the accounting and
financial aspects shall be handled in accordance with Annex
II-Accounting Procedure hereto.
8.7.5 During the preparation for the transfer of the
Production Operations and in the course of the actual
transfer, the Contractor shall perform the functions
provided for in Articles 8.3, 8.4, 8.5 and 8.6 herein in
respect of an Oil Field and/or Gas Field undergoing the
transfer of the Production Operations, until the date when
CNPC has completely assumed control of and taken over the
Production Operations of the Oil Field and/or Gas Field.
Thereafter, the functions of the Operator provided for in
Articles 8.3, 8.4, 8.5 and 8.6 herein shall be an analogy
applicable to CNPC.
8.7.6 After CNPC has taken over the Production
Operations and become the Operator of an Oil Field and/or
Gas Field, the Contractor shall still have the obligation
pursuant to Article 2 hereof, to provide CNPC with the
relevant technical and personnel training assistance, and
the costs incurred thereby shall be charged to the operating
costs in accordance with the provisions of Annex II-
Accounting Procedure hereto.
8.7.7 When CNPC takes over the Production Operations
in any Oil Field and/or Gas Field, the Chinese Personnel
employed by the Contractor for the Production Operations of
the said Oil Field and/or Gas Field shall be transferred to
CNPC's employment. If CNPC needs to retain the services of
any of the Expatriate Employees employed by the Contractor
or the Contractor still needs to keep some of the Chinese
Personnel in its employment, an agreement shall be reached
through consultation between the Parties prior to the
transfer.
8.7.8 The expenses incurred in the transfer and take
over of the Production Operations shall be charged to the
operating costs.
8.8 With a view to efficiently conducting the
Petroleum Operations and Work Programs approved by JMC, the
Operator shall have the right to lease and/or use lands with
compensation therefor and to obtain rights of way subject to
Chinese laws and customs. Any costs incurred by the
Operator for this purpose shall be charged to appraisal
costs, development costs and operating costs having regard
to the date on which these costs are actually incurred.
Article 9
Assistance Provided by CNPC
9.1 To enable the Contractor to carry out
expeditiously and efficiently the Petroleum Operations, CNPC
shall have the obligation to assist the Contractor at its
request to:
9.1.1 Obtain the approvals or permits needed to open
accounts with the Bank of China;
9.1.2 Go through the formalities of exchanging foreign
currencies;
9.1.3 Obtain office space, office supplies,
transportation and communication facilities and make
arrangements for accommodation as required;
9.1.4. Go through the formalities of the Customs;
9.1.5 Obtain entry and exit visas for the Expatriate
Employees who will come to China for implementation of the
Contract and for their dependents who will visit them or
reside in China for a long period and provide assistance for
their transportation and moving as well as medical services
and travel in China;
9.1.6 Obtain necessary permission to send abroad, if
necessary, documents, data and samples for analysis or
processing during the Petroleum Operations; and
9.1.7 Contact departments engaged in fishing, aquatic
products, meteorology, ocean shipping, civil aviation,
railway, transportation, communication and services for
supply bases, etc., for relevant matters and otherwise
assist the Contractor in obtaining on a timely basis
approvals necessary for the conduct of the Petroleum
Operations under the Contract.
9.2 In accordance with Article 15 hereof, CNPC shall
assist the Contractor with the recruitment of the Chinese
Personnel.
9.3 CNPC shall, at the request of the Contractor, sell
to the Contractor data and samples concerning the Contract
Area other than those produced as a result of Petroleum
Operations hereunder in accordance with any relevant rules
and regulations and CNPC shall also assist the Contractor to
arrange the purchase of any marine, hydrological,
metrological and other data available from the relevant
departments in China.
9.4 CNPC shall, at the request of the Contractor, also
assist the Contractor with the matters other than those
under Article 9.1, 9.2 and 9.3 herein if possible.
9.5 All expenses incurred in the assistance provided
by CNPC in accordance with this Article 9 shall be paid by
the Contractor and shall be handled in accordance with the
provisions of Annex II-Accounting Procedures hereto.
Article 10
Work Program and Budget
10.1 Before the fifteenth (15th) of September of each
Calendar Year after the Contract becomes effective, the
Operator shall complete and submit to JMC for its review an
annual Work Program and budget for the next Calendar Year.
JMC shall complete the review of the annual Work Program and
budget and submit them to CNPC for review and approval
before the fifteenth (15th) of October of the Calendar Year
in which they are submitted to JMC. Within fifteen (15)
days following the receipt of the annual Work Program and
budget, CNPC shall notify JMC in writing of its approval or
any modifications thereto with its detailed reasons. If
CNPC requests any modifications on the aforesaid annual Work
Program and budget, the Parties shall promptly hold meetings
to make modifications and any modifications agreed upon by
the Parties shall be effected immediately. In case CNPC
fails to notify JMC of its approval within fifteen (15)
days, the annual Work Program and budget proposed by the
Operator shall be deemed to have been approved by CNPC. The
Operator shall make its best efforts to perform the
Petroleum Operations in accordance with the approved or
modified annual Work Program and budget.
10.1.2 The Operator shall submit a preliminary
appraisal Work Program and budget to the JMC prior to
commencement of the drilling of an Appraisal Well.
10.1.3 If the JMC approves the preliminary
appraisal Work Program and budget thereof, they will submit
the preliminary appraisal Work Program and budget thereof to
CNPC for review and approval. Within fifteen (15) days
following the receipt of the preliminary appraisal Work
Program and budget thereof, CNPC shall notify JMC in writing
of its approval or any modifications thereto with its
detailed reasons. If CNPC requests any modifications on the
aforesaid preliminary appraisal Work Program and budget
thereof, the Parties shall promptly hold meetings to discuss
modifications and any modifications agreed upon by the
Parties shall be effected immediately. In case CNPC fails
to notify JMC of its approval or disapproval within fifteen
(15) days following the receipt of the preliminary appraisal
Work Program, the preliminary appraisal Work Program and
budget thereof proposed by the Operator shall be deemed to
have been approved by CNPC. The Operator shall make its
best efforts to perform the Appraisal Operations in
accordance with the approved or modified preliminary
appraisal Work Program and budget thereof.
10.1.4 CNPC and JMC acknowledge that the
preliminary appraisal Work Program may need modifications as
the Operator drills Appraisal Wells. The Operator will
immediately notify CNPC if modifications to the plan
outlined in the preliminary Work Program appear to be
necessary along with detailed reasons. In case CNPC fails
to notify Operator of its approval or disapproval of the
modifications within one hundred twenty (120) hours, the
modifications shall be deemed to have been approved by CNPC.
The modifications to be made shall, in no case, reduce the
minimum appraisal work commitment stipulated in Article 6.2
hereof.
10.2 The Operator may, in accordance with the
following provisions, incur excess expenditures or
expenditures outside the budget in carrying out the Work
Program and budget, provided that the objectives in the
approved Work Program and budget are not changed:
10.2.1 In carrying out an approved budget for a
single item, such as the drilling of a well, the Operator
may, if necessary, incur excess expenditures of no more than
ten percent (10%) of the budgeted amount. The Operator
shall report quarterly the aggregate amount of all such
excess expenditures to JMC for confirmation.
10.2.2 For the efficient performance of the Petroleum
Operations, the Operator may, without approval, undertake
certain individual projects which are not included in the
Work Program and budget, for a maximum expenditure of One
Hundred Thousand U.S. dollars (U.S. $100,000), but the
Operator shall, within ten (10) days after such expenditures
are incurred, report to JMC for confirmation. In case of
emergency, the Operator may incur emergency expenditures for
the amount actually needed but shall report such
expenditures to JMC as soon as they are made. However, the
said emergency expenditures shall not be subject to Articles
10.2.3 and 10.2.4 herein.
10.2.3 In the event that the aggregate of excess
expenditures under Article 10.2.1 herein and expenditures
under Article 10.2.2 herein incurred in a Calendar Year
cause the total expenditures of that Calendar Year to exceed
the approved annual budget, such excess shall not exceed
five percent (5%) of the approved annual budget for that
Calendar Year. If the aforesaid excess is expected to be in
excess of five percent (5%) of the annual budget, the
Operator shall present its reasons therefor to JMC and
obtain its approval for incurring such expenditures.
10.2.4 When JMC confirms the excess expenditures
mentioned in Article 10.2.1 herein, and the expenditures
mentioned in Article 10.2.2 herein;
(a) If expenditures or excess expenditures are
determined to be reasonable, the Operator may incur such
expenditures or excess expenditures again during the same
Calendar Year, subject to Article 10.2 herein; or
(b) If expenditures or excess expenditures are
determined to be unreasonable, the Operator shall not incur
such expenditures or excess expenditures again during the
same Calendar Year and such unreasonable expenditures or
excess expenditures shall be dealt with in accordance with
Article 5.4 of Annex II-Accounting Procedure hereto.
Article 11
Determination of Commerciality
11.1 The preliminary appraisal Work Program in
accordance with Article 10.1.2 will consist of the minimum
Work Program as stipulated in Article 6.2.
11.2 After the approval by the JMC of the
preliminary appraisal Work Program referred to in Article
10.1.3 hereof, the Operator shall carry out the operations
as soon as possible without unreasonable delay in accordance
with the timetable set forth in the approved preliminary
appraisal Work Program referred to in Article 11.1 herein.
11.3 Within one hundred and eighty (180) days after
the completion of the last Appraisal Well, the Operator
shall submit to JMC a detailed report on the appraisal of
the commerciality of the discovered Petroleum-bearing trap.
Under special circumstances, the above-mentioned periods may
be reasonably extended upon agreement of the Parties.
The appraisal report shall include an evaluation of
geology, development, engineering and economics and the
Overall Development Program to be approved. The Overall
Development Program shall include the Maximum Efficient Rate
(MER) determined in accordance with international Petroleum
industry practice.
11.4 Within thirty (30) days following the submission
of the appraisal report on any Crude Oil bearing trap, JMC
shall convene a meeting to review such report. When JMC
decides unanimously after its review that the said Crude Oil
bearing trap is an Oil Field with commercial value and is to
be developed, or the Contractor considers, in accordance
with Article 11.6.2 herein, that a Crude Oil bearing trap is
an Oil Field with commercial value and decides it is to be
developed, JMC shall submit to CNPC for confirmation the
appraisal report and the Overall Development Program of the
said Oil Field to be developed and CNPC shall submit the
Overall Development Program of the Oil Field to the
Department or Unit as soon as possible for its review and
approval. The Operator shall perform the Development
Operations in accordance with the Overall Development
Program of each Oil Field approved by the Department or
Unit. If such Development Operations do not commence within
ninety (90) days after the date of approval of the Overall
Development Program of an Oil Field by the Department or
Unit, or if an intentional delay caused unilaterally by the
Contractor acting as the Operator results in a suspension or
a halt of ninety (90) continuous days in the Development
Operations of an Oil Field, the Contractor shall be deemed
to have automatically waived all its rights in the said Oil
Field.
11.5 If, after the appraisal, JMC determines that a
Crude Oil bearing trap is non-commercial, such Crude Oil
bearing trap may, at the Contractor's option, be retained
within the Contract Area during the term of the appraisal
period; before the expiration of the appraisal period, if,
because of certain positive factors, JMC considers
unanimously that it is necessary to reappraise the
commerciality of the Crude Oil bearing trap, the Operator
shall submit a further appraisal report on such Crude Oil
bearing trap to JMC for its review and adoption; if the
JMC's determination of non-commerciality of such Crude Oil
bearing trap has not altered by the expiration of the
appraisal period, the relevant area of such Crude Oil
bearing trap shall be excluded from the Contract Area.
11.6 If JMC can not reach an agreement on the
commerciality of a Crude Oil bearing trap, the Parties
shall make their best efforts to seek another solution
thereto. However, if JMC can not reach an agreement on the
commerciality of any Crude Oil bearing trap within ninety
(90) days following the submission of the appraisal report
prepared by the Operator in accordance with Article 11.3
herein or any further appraisal report prepared by the
Operator in accordance with Article 11.5 herein, then such
trap shall be dealt with in accordance with the following
procedure:
11.6.1 If the Contractor considers a Crude Oil bearing
trap without commercial value, then the Contractor shall be
deemed to have waived its rights to participate in the
development of that Crude Oil bearing trap. The relevant
area covered by that Crude Oil bearing trap shall, however,
be retained within the Contract Area until the expiration of
the appraisal period. In case that CNPC decides, within the
appraisal period, to develop solely and to pay the
development costs of such Oil Field, then, at any time
within the development period, the Contractor shall be
allowed to elect to participate in the development. If the
Contractor decides, within the development period of such
Oil Field, to participate in the development of such Oil
Field by giving a written notice to CNPC, then, the
Contractor shall pay CNPC an amount of money, in addition to
the forty-nine percent (49%) of the development costs spent
by CNPC on the said Oil Field with Deemed Interest thereon
up to the date of the Contractor's submission of the written
notice to CNPC. Such amount shall be equal to three times
(300%) the foregoing development costs paid by CNPC with
Deemed Interest thereon and such amount of money shall not
be recovered by the Contractor after commercial production
of the Oil Field commences. Thereafter, the development
costs to be incurred in such Oil Field shall be provided by
the Parties in proportion to their respective participating
interests. In the event that the Contractor still decides
not to participate in the development of the said Oil Field
by the expiration of the development period of such Oil
Field, then the said Oil Field shall be excluded from the
Contract Area upon the Date of Commencement of Commercial
Production of the said Oil Field.
11.6.2 If CNPC considers a Crude Oil bearing trap to
have no commercial value while the Contractor considers that
it is a Crude Oil bearing trap having commercial value, the
Contractor may solely provide the entire development costs
and undertake development of the said Oil Field, and the
said Oil Field shall be deemed as an Oil Field in which CNPC
has no participating interests. The entire risk related to
the development costs spent for the said Oil Field shall be
borne solely by the Contractor.
11.6.3 Unless otherwise decided by CNPC, the
Development Operations and Production Operations of an Oil
Field solely financed by CNPC shall still be, upon agreement
between the Parties through consultation, performed by the
Operator subject to agreement on terms and conditions
entered into by CNPC and the Operator.
11.7 In the event of an Oil Field and/or Gas Field
Straddling a Boundary, CNPC shall arrange for the Contractor
and the neighboring parties involved to work out a unitized
Overall Development Program for such Oil Field and/or Gas
Field and to negotiate the relevant provisions thereof.
11.8 If a Petroleum-bearing trap without commercial
value within the Contract Area can be more economically
developed as a commercial Oil Field by linking it up with
facilities located outside the Contract Area, the
development of such Oil Field shall be dealt with in the
same manner as provided in Article 11.7 herein.
11.9 The procedures specified in this Article 11 shall
be applied, by analogy, to determination of additional
development projects in any Oil Field and/or Gas Field
within the Contract Area during the production period, such
projects being designed to increase the level of production
and/or total quantity of Petroleum recoverable from the said
Field.
11.10 It is anticipated that Trial Production will
be conducted in connection with Appraisal Operations. If
Trial Production is to be conducted in any Oil Field and/or
Gas Field within the Contract Area, the Parties shall agree
to the procedure of such Trial Production.
Article 12
Financing and Cost Recovery
12.1 Funds required for the Petroleum Operations shall
be raised by the Operator in accordance with Work Programs
and budgets determined pursuant to the relevant provisions
of the Contract, the provisions described in Annex II-
Accounting Procedure hereto, and the provisions described
herebelow.
12.1.1 All of the appraisal costs required for
Appraisal Operations shall be provided by the Contractor,
with the exception of the previous costs incurred by Dagang
which are calculated to be nineteen million three hundred
twelve thousand ($19,312,000) U.S. dollars (hereinafter
referred to as Dagang's "Pre-Contract Appraisal Costs").
However, the appraisal costs required for the fulfillment of
the minimum appraisal work commitment shall be deemed the
equity capital of the Contractor.
12.1.2 With the exception of the previous
development costs incurred by Dagang, which are calculated
to be eleven million six hundred eighty one thousand
($11,681,000) U.S. dollars (hereinafter referred to as
Dagang's "Pre-Contract Development Costs"), which are to be
borne solely by Dagang, the development costs required for
Development Operations in each Oil Field and/or Gas Field
within the Contract Area shall be provided by CNPC and the
Contractor in proportion to their respective participating
interests: fifty-one percent (51%) by CNPC and forty-nine
percent (49%) by the Contractor, unless CNPC applies
provisions in the second paragraph of this Article 12.1.2
herein.
In the event that CNPC, at its option, decides not to
participate in the development of an Oil Field and/or Gas
Field, or decides to participate in the development to an
extent less than fifty-one percent (51%) of the
participating interest, CNPC shall notify the Contractor in
writing of its decision to not participate or to participate
at a specific percentage which is less than fifty-one (51%)
participating interest before the appraisal report is to be
reviewed by JMC pursuant to Article 11.4 or Article 18.2.2
hereof. In such case, if CNPC does not participate in the
development of such Field, the development costs therein
shall be borne solely by the Contractor, or in the event
CNPC participates in the development of such Field to an
extent of less than fifty-one percent (51%) of the
participating interests, such development costs shall be
borne by the Parties in proportion to their actual
respective participating interests.
12.1.3 The operating costs incurred for the
performance of the Production Operations of each Oil Field
and/or Gas Field before the Date of Commencement of
Commercial Production shall be considered as development
costs. The operating costs so incurred after the Date of
Commencement of Commercial Production shall be paid
respectively by CNPC and the Contractor in proportion to
their participating interests of the development costs of
the said Field.
12.1.4 For the purpose of implementation of the
Contract, CNPC shall agree that the Contractor may, when
financing, use the entitlement of its share of production
under the Contract as a security for loans, provided that
the Contractor shall apply to CNPC in advance and the
application therefor shall be examined by CNPC, and provided
further that the right and interests of CNPC under the
Contract shall not be impaired thereby.
12.2 All the costs incurred in the performance of
Petroleum Operations shall be recovered in accordance with
Annex II-Accounting Procedure hereto and the provisions
described as follows:
12.2.1 The operating costs for any given Calendar Year
actually incurred by CNPC and the Contractor in respect of
each Oil Field pursuant to Article 12.1.3 herein shall be
recovered in kind by the Parties out of the Crude Oil
produced from the said Oil Field during that Calendar Year
in accordance with Annex II-Accounting Procedure hereto,
after the operating costs have been converted into a
quantity of Crude Oil on the basis of the Crude Oil price
determined in accordance with Article 14 hereof.
Unrecovered operating costs shall be carried forward to the
succeeding Calendar Year.
12.2.2 The appraisal costs incurred by the Parties
shall be recovered as follows:
After the Date of Commencement of Commercial Production
of an Oil Field within the Contract Area, the appraisal
costs incurred by the Parties in respect of the Contract
Area shall be recovered in kind out of the Crude Oil
produced from any Oil Field within the Contract Area in
accordance with Article 13.2.2 hereof, after the appraisal
costs have been converted into a quantity of Crude Oil based
on the Crude Oil price determined in accordance with Article
14 hereof. The appraisal costs shall be recovered without
interest.
If no Oil Field and/or Gas Field is developed within
the Contract Area, the appraisal costs incurred by the
Parties shall be deemed as their loss. Under no
circumstances shall CNPC or Contractor be required to
reimburse the Parties for such loss.
12.2.3 The development costs in respect of each Oil
Field incurred by CNPC and the Contractor and Deemed
Interest thereon for each Oil Field shall be recovered as
follows:
12.2.3.1 After the Date of Commencement of Commercial
Production of any Oil Field within the Contract Area, the
development costs in respect of such Field incurred by CNPC
and the Contractor and Deemed Interest thereon calculated in
accordance with Article 12.2.3.2 herein shall be recovered
in kind out of the Crude Oil produced from such Field in
accordance with Article 13.2.2.2 hereof, after the
development costs have been converted into a quantity of
Crude Oil based on the Crude Oil price determined in
accordance with Article 14 hereof.
12.2.3.2 Deemed Interest on the development costs
incurred by CNPC and the Contractor for each Oil Field
and/or Gas Field within the Contract Area shall be
calculated with the fixed annual compound rate of nine
percent (9%) from the first day of the month following the
month in which such development costs expended by each party
to the Contract are actually received in the bank account of
the Joint Account opened by the Operator. Dagang's Pre-
Contract Development Costs will earn Deemed Interest at the
fixed annual compound rate of nine percent (9%), commencing
from the date that the Overall Development Program for the
Oil Field and/or Gas Field has received all necessary
approvals. The detailed method of such calculation shall
be as provided in Annex II-Accounting Procedure hereto.
12.2.4 The amount of Crude Oil up to a quantity of
sixty thousand (60,000) metric tons extracted and delivered
from an Oil Field before the Date of Commencement of
Commercial Production shall be allocated in accordance with
Article 13 hereof.
12.3 The provisions in Article 12.2 herein shall
apply, by analogy, to Gas Fields.
Article 13
Crude Oil Production and Allocation
13.1 The Operator shall, in accordance with the
production profile, adjusted as the case may be, set forth
in the Overall Development Program for each Oil Field as
approved by the Department or Unit, work out a Crude Oil
production plan for each Oil Field in each Calendar Year and
carry out Crude Oil production pursuant to such plan.
13.2 The Annual Gross Production of Crude Oil of each
Oil Field within the Contract Area in each Calendar Year
within the production period shall be allocated in
accordance with the following sequence and proportions.
13.2.1 The percentages of the Annual Gross Production
of Crude Oil specified in paragraphs (a) and (b) hereunder
shall be used for payments of the Value-Added Tax and
royalty, respectively, and shall be paid in kind to the
relevant authorities of the Chinese Government through CNPC.
(a) Value Added Tax shall be paid in accordance with
relevant regulations of the People's Republic of China; and
(b) Royalty shall be paid in accordance with relevant
regulations of the People's Republic of China.
13.2.2 Sixty percent (60%) of the Annual Gross
Production of Crude Oil shall be deemed as the "cost
recovery oil" and shall be used for payments for cost
recovery in the following sequence:
13.2.2.1 Payment in kind for the operating costs
actually incurred but not yet recovered by the Parties
pursuant to Article 12.2.1 hereof after the price of the
said "cost recovery oil" has been determined in accordance
with Article 14 hereof.
13.2.2.2 The remainder of the "cost recovery oil"
shall, after payment for operating costs in accordance with
Article 13.2.2.1 herein, be deemed as "investment recovery
oil". Such "investment recovery oil" shall be used for the
recovery of the appraisal costs in respect of the Contract
Area which were incurred and not yet recovered by the
Parties, and shall be used for the recovery of the
development costs in respect of the Oil Field itself which
were incurred and not yet recovered by CNPC and the
Contractor in accordance with Articles 12.2.2 and 12.2.3
hereof, and Deemed Interest thereon. The method of recovery
and the recovery sequence are as follows:
(a) Beginning in the Calendar Year during which the
production of any Oil Field within the Contract Area
commences, the "investment recovery oil" referred to in
Article 13.2.2.2 herein, based on the price which has been
determined in accordance with Article 14 hereof shall be
paid in kind first to the Parties for the recovery of the
appraisal costs thereon which were incurred in respect of,
and have not yet been recovered from, the Contract Area.
Such "investment recovery oil" for any Calendar Year shall
be shared by the Parties for the recovery of the unrecovered
appraisal costs on the following basis:
(1) "Investment recovery oil" shall be allocated 49% to
recover Contractor's appraisal costs and 51% to recover
Dagang's Pre-Contract Appraisal Costs.
(2) If, at the end of the appraisal period, the
Contractor's appraisal costs do not exceed eighteen million,
five hundred fifty-five thousand ($18,555,000) U.S. dollars,
then the portion of Dagang's Pre-Contract Appraisal Costs
that will not be recovered proportionate with Contractor's
appraisal costs (hereinafter referred to as Dagang's
"Remaining Pre-Contract Appraisal Costs") shall be carried
forward to be recovered as at the same time as development
costs are recovered on the first Oil field to attain
Commencement of Commercial Production, as provided in
Article 13.2.2.2 (b)(1),below. Remaining Pre-Contract
Appraisal costs shall accrue Deemed Interest beginning on
the first day of the Contract Year following the end of the
appraisal period described in Article 4.2.
(3) If Contractor's appraisal costs exceed eighteen
million, five hundred fifty-five thousand ($18,555,000) U.S.
dollars, then, after Dagang has fully recovered all of its
Pre-Contract Appraisal Costs, Contractor's remaining
appraisal costs shall be recovered from 100% of "investment
recovery oil", as an incentive to Contractor's appraisal
efforts.
The unrecovered appraisal costs shall be carried forward to
succeeding Calendar Years until fully recovered.
(b)(1) In the case of the first Oil Field to attain
Commencement of Commercial Production, beginning in the
Calendar Year during which the appraisal costs incurred by
the Parties in respect of the Contract Area have been fully
recovered, the remainder of the "investment recovery oil" of
such Oil Field shall be used for the simultaneous recovery
of (1) the development costs incurred and not yet recovered
respectively by CNPC and the Contractor and Deemed Interest
thereon in respect of such Field, (2) Dagang's Pre-Contract
Development Costs and Deemed Interest thereon calculated in
accordance with Article 12.2.3.2, above, and (3) Dagang's
Remaining Pre-Contract Appraisal Costs without Deemed
Interest on the following basis:
I. Until Dagang has fully recovered its Pre-Contract
Development Costs together with Deemed Interest thereon
together with its Remaining Pre-Contract Appraisal Costs
together with Deemed Interest thereon, such "investment
recovery oil" shall be shared on the following basis after
the price of such remainder of the "investment recovery oil"
has been determined in accordance with Article 14 hereof:
(1) the Contractor's share of such "investment
recovery oil" shall be based on the ratio of
(A) Contractor's share of the budgeted costs
to develop the Oil Field, as set forth in the approved
Overall Development Program
to
(B) (1)CNPC's share of the budgeted costs to
develop the Oil Field, as set forth in the approved Overall
Development Program, plus (2) Dagang's Pre-Contract
Development Costs, plus (3) Dagang's Remaining Pre-Contract
Appraisal Costs;
(2) the balance of "investment recovery oil"
shall be allocated to CNPC and Dagang. The unrecovered
development costs and Deemed Interest thereon, unrecovered
Pre-Contract Development Costs and Deemed Interest thereon,
and unrecovered Pre-Contract Appraisal Costs and Deemed
Interest thereon shall be carried forward to succeeding
Calendar Years until fully recovered.
II. After Dagang has fully recovered its Pre-Contract
Development Costs together with Deemed Interest thereon
together with its Remaining Pre-Contract Appraisal Costs
together with Deemed Interest thereon, such "investment
recovery oil" for any Calendar Year shall be used for the
simultaneous recovery of the development costs incurred and
not yet recovered respectively by CNPC and the Contractor
and Deemed Interest thereon is respect of such Field in
proportion to their respective participating interests
therein after the price of such remainder of the "investment
recovery oil" has been determined in accordance with Article
14 hereof. The unrecovered development costs and Deemed
Interest thereon shall be carried forward to succeeding
Calendar Years until fully recovered.
(b)(2) In the case of each Oil Field other than the
first Oil Field to attain commencement of Commercial
Production, beginning in the Calendar Year during which the
appraisal exploration costs incurred by the Parties in
respect of the Contract Area have been fully recovered, the
remainder of the "investment recovery oil" of such an Oil
Field shall be used for the simultaneous recovery of the
development costs incurred and not yet recovered
respectively by CNPC and the Contractor and Deemed Interest
thereon in respect of such Field in proportion to their
respective participating interests therein after the price
of such remainder of the "investment recovery oil" has been
determined in accordance with Article 14 hereof. The
unrecovered development costs and Deemed Interest thereon
shall be carried forward to succeeding Calendar Years until
fully recovered.
(c) During the production period of an Oil Field,
costs for an additional development project incurred
pursuant to Article 11.9 hereof and Deemed Interest thereon
shall be recovered together with the unrecovered development
costs and Deemed Interest thereon. If the development costs
and Deemed Interest thereon have been fully recovered, then
costs for the said additional development project and Deemed
Interest thereon shall be recovered from the "investment
recovery oil" of such Field referred to in Article 13.2.2.2
herein in accordance with the provisions specified in
Article 13.2 herein. The unrecovered costs for the
additional development project and Deemed Interest thereon
shall be carried forward to succeeding Calendar Years until
fully recovered.
(d) After the recovery of an Oil Field's development
costs and Deemed Interest thereon and/or costs for the
additional development project and Deemed Interest thereon
from the said Field by the Parties, the remainder of the
"investment recovery oil" shall automatically be regarded as
part of the "remainder oil" referred to in Article 13.2.3
herein. By the date of expiration of the production period
of an Oil Field pursuant to Article 4.5 hereof, if any
development costs and Deemed Interest thereon and/or costs
for the additional development project incurred in respect
of such Field and Deemed Interest thereon have not yet been
fully recovered, then such unrecovered costs and Deemed
Interest thereon shall be regarded as a loss, and the
Parties shall bear the loss in proportion to their
respective participating interests. Any unrecovered Pre-
Contract Appraisal Costs and Deemed Interest thereon or Pre-
Contract Development Costs and Deemed Interest thereon shall
be regarded as a loss and be borne by Dagang.
13.2.3 The remainder of the Annual Gross Production of
Crude Oil after the allocation referred to in Articles
13.2.1 and 13.2.2 shall be deemed as "remainder oil". Such
"remainder oil" shall be divided into "share oil" of the
Chinese side and "allocable remainder oil". The "allocable
remainder oil" of each Oil Field in each Calendar Year shall
be equal to the "remainder oil" of that Calendar Year
multiplied by the factor (x) for each Oil Field within the
Contract Area in that Calendar Year. The factor (X) of each
Oil Field in each Calendar Year shall be determined in
accordance with the following successive incremental tiers
on the basis of the Annual Gross Production of Crude Oil
from such Oil Field during that Calendar Year.
Annual Gross Production Factors in Percentage
of Crude Oil Applicable to Each
from Production Tier of
Each Oil Field Each Oil Field within
(Thousands of Metric Tons) the Contract Area
- -------------------------- ----------------------
Equal to or less than 300 X 1 = 96%
Over 300 to 600 X 2 = 92%
Over 600 to 1200 X 3 = 90%
Over 1200 to 1,800 X 4 = 86%
Over 1,800 to 2,400 X 5 = 82%
Over 2,400 to 3,500 X 6 = 78%
Over 3,500 X 7 = 73%
An example of application in calculating the factor
(X):
Assuming that there are two producing commercial Oil Fields
A and B within the Contract Area and the Annual Gross
Production of Crude Oil from Oil Field A in a Calendar Year
is one (1) million metric tons, and that from Oil Field B is
one point five (1.5) million metric tons, the factor (X) of
Oil Field A in that Calendar Year shall be:
300X + 300X + 400X
X= ____1______2_______3 x 100% = 92.4%
1,000
and the factor (X) of Oil Field B in that Calendar Year
shall be:
300X + 300X + 600X + 300X
X= ____1______2_______3_______4 x 100% = 90.8%
1,500
13.2.4 The "allocable remainder oil" of each Oil Field
in each Calendar Year referred to in Article 13.2.3 herein
shall be shared by the Parties in proportion to their
respective participating interests in the development costs,
fifty-one percent (51%) for CNPC and forty-nine percent
(49%) for the Contractor. In the event that CNPC does not
participate in the development of an Oil Field within the
Contract Area, the Contractor shall obtain one hundred
percent (100%) of the "allocable remainder oil" of that
Field. In the event that CNPC participates to an extent
less than fifty-one percent (51%) in the development of an
Oil Field within the Contract Area, the "allocable remainder
oil" of such Field in that Calendar Year shall be shared by
the Parties in proportion to their actual respective
participating interests in such Oil Field.
13.3 Pursuant to the method of allocation specified in
this Article, the Contractor may obtain an aggregate amount
of Crude Oil consisting of the following three categories:
13.3.1 The total amount of Crude Oil as converted from
the actual operating costs paid by the Contractor in all Oil
Fields in proportion to its participating interests in the
development costs stipulated in 12.1.3 hereof when
recovering such costs;
13.3.2 The total amount of the "investment recovery
oil" from all Oil Fields due to the Contractor provided for
in Article 13.2.2.2 herein; and
13.3.3 The total amount of the "allocable remainder
oil" of all Oil Fields due to the Contractor in accordance
with Article 13.2.4 herein.
13.4 In the event that the Contractor wishes to
purchase a portion of or all of the total amount of the
Crude Oil obtained by CNPC from the "investment recovery
oil" in addition to the Crude Oil obtained by the Contractor
in accordance with Article 13.3 herein, the Parties shall
negotiate the terms and conditions of purchasing such Crude
Oil and reach an agreement as a supplementary document
hereto.
13.5 CNPC and each company comprising the Contractor
shall, throughout the entire Contract term, have the right
and obligation, in each Calendar Quarter to lift and take,
and separately dispose of their respective full shares of
all Crude Oil produced, and determined pursuant to Articles
13.3 and 13.4 herein.
In the event that the Crude Oil production of any Oil
Field is reduced because CNPC or any company comprising the
Contractor does not lift and take its full share of Crude
Oil or lifts nothing, then such reduction in Crude Oil
production shall not affect the full shares of Crude Oil due
to or the shares of Crude Oil available to be lifted and
disposed of by the other party as provided in Article 13.6
(c) herein.
13.6 A Crude Oil lifting procedure shall be agreed
upon by the Parties no later than six (6) months prior to
the Date of Commencement of Commercial Production within the
Contract Area, and shall include, but not be limited to:
(a) Operator's notification of Crude Oil production to
CNPC and the Contractor;
(b) Notification by CNPC and each company comprising
the Contractor of its expected offtake to the Operator;
(c) Operator's notification to CNPC and each company
comprising the Contractor of the final Crude Oil lifting
schedule which shall be binding on CNPC and each company
comprising the Contractor;
(d) Limitation and calculation of overlift and
underlift of CNPC and each company comprising the
Contractor; and provisions to ensure timely and ratable
lifting of Crude Oil;
(e) Determination of allowable operational tolerance
of liftings; and
(f) other terminal procedures as may be required to
reflect the particular circumstances.
13.7 For the purpose of implementing the procedures as
described in Article 13.6 herein, CNPC and each company
comprising the Contractor shall jointly set up a Crude Oil
lifting coordination group consisting of representatives
each appointed by CNPC and each company comprising the
Contractor, with the representative of CNPC as the chairman.
Such group shall be responsible for the preparation of Crude
Oil lifting plans of Calendar Year, of Calendar Quarter and
of calendar month and shall also be responsible for the
reasonable and unified arrangements and adjustments of the
aforesaid Crude Oil lifting plans through close contact with
any operator in charge of the storage and loading
facilities.
Article 14
Quality, Quantity,
Price and Destination of Crude Oil
14.1 In accordance with Article 13.3 hereof, the
Contractor may obtain the aggregate amount of three (3)
categories of the Crude Oil referred to in Articles 13.3.1,
13.3.2 and 13.3.3 hereof. In addition the Contractor may
purchase a portion or all of the total amount of the Crude
Oil allocated to CNPC from the "investment recovery oil" in
all Oil Fields within the Contract Area in accordance with
Article 13.4 hereof.
14.2 Quality of the Crude Oil.
14.2.1 The quality analysis of the Crude Oil produced
from each Oil Field within the Contract Area shall be
undertaken at the Delivery Point. Such analysis shall be
carried out on a sample taken by the State Administration of
Import and Export Commodity Inspection (hereafter referred
to as the "Administration") or any representative agency
delegated by the Administration pursuant to standards issued
by the State Bureau of Standardization of the People's
Republic of China or by the Department or Unit.
14.2.2 The Crude Oil quality analysis referred to in
Article 14.2.1 above shall include the following:
(a) density at 20 degrees Centigrade, in grams per
cubic centimeter;
(b) sulfur content, in weight percentage;
(c) water content, in weight percentage; and
(d) basic sediment content, in weight percentage.
14.3 Quantity of the Crude Oil.
14.3.1 The quantity measurement of the Crude Oil
produced from each Oil Field within the Contract Area, when
being lifted, shall be made at a Delivery Point and with
measuring devices both to be agreed upon by the Parties. A
relevant measuring organization of the Chinese Government or
a representative agency delegated thereby shall, at
appropriate regular intervals, calibrate all the measuring
devices, conduct special testing and issue certificates or
confirmation with respect thereto before the measuring
devices are put into use. The quality and quantity of the
Crude Oil delivered shall be authenticated in accordance
with the commodity quality certificate and weight
certificate issued by the Administration and such quality
and quantity shall be the basis for the accounting
settlement.
14.3.2 If any party to the Contract believes that the
Crude Oil measuring devices, sampling or analysis are
inaccurate, or has any objection to the results specified in
the above mentioned certificates, on-site investigations,
technical exchanges and discussions may be conducted by the
Parties to resolve the issue in a manner satisfactory to the
Parties.
14.4 Determination of the Crude Oil Price.
14.4.1 The price of various grades of the Crude Oil
shall be expressed as FOB price at the Delivery Point.
Determination of the Crude Oil price shall be made with
reference to the prevailing price in arm's length
transactions of the long term contract sales of similar
quality crude oil on the main world oil markets and the
adjustments in such price shall be made in accordance with
such determinants as the quality of the Crude Oil, the terms
of delivery, transportation, payment and other terms.
The aforesaid price in arm's length transactions in
this Article refers to a price at which a seller sells its
crude oil to a buyer who is independent of the seller, but
not including the prices used by them for government to
government transactions which do not reflect international
oil market price, crude oil exchange, barter or spot
transactions.
14.4.2 Where the Crude Oil produced from each Oil
Field within the Contract Area differs in grades, the prices
of such Crude Oil with different quality shall be
individually determined.
14.4.3 The price of the Crude Oil produced from all
the Oil Fields within the Contract Area shall be denominated
in U.S. dollars per metric ton. However, if an
international currency other than the U.S. dollar prevails
on the main world oil markets as the pricing unit of crude
oil, the Parties may also use that international currency
therefor upon mutual agreement.
14.4.4 Procedure for the Determination of the Crude
Oil price.
14.4.4.1 The Crude Oil price shall be determined each
Calendar Quarter. In case the crude oil price prevailing on
most world oil markets fluctuates, CNPC and the Contractor
each shall have the right to propose, at any time, that a
new Crude Oil price be negotiated and determined.
14.4.4.2 The Contractor shall, no later than forty-
five (45) days prior to commencement of any Calendar
Quarter, notify CNPC of its proposed price for the Crude Oil
to be lifted in such Calendar Quarter (for the purpose of
this Article thereafter referred to as the said Calendar
Quarter).
14.4.4.3 CNPC shall notify the Contractor of its
decided price within ten (10) days after the receipt of the
aforesaid proposed price notified by the Contractor. In the
absence of a different price notified by CNPC to the
Contractor within ten (10) days after the receipt of the
aforesaid notification, the proposed price notified by the
Contractor as referred to in Article 14.4.4.2 herein shall
be applied to the Crude Oil to be lifted in the said
Calendar Quarter.
14.4.4.4 The Contractor shall, within five (5) days
following its receipt of notice of a price decided by CNPC,
state to CNPC whether the price is acceptable. If it is
acceptable, the said decided price shall be regarded as the
price agreed upon by the Parties for the said Calendar
Quarter. If not acceptable, the Parties shall, within ten
(10) days, carry out further negotiation in an amicable
manner to determine the price for the said Calendar Quarter.
14.4.4.5 In the event that the Parties still cannot
reach an agreement on the Crude Oil price for the said
Calendar Quarter through further negotiations by the
Parties, the Contractor may lift the Crude Oil in accordance
with the quota specified for the said Calendar Quarter in
Article 13.2 hereof, and the Crude Oil price for the
preceding Calendar Quarter shall apply provisionally to the
Crude Oil of such quota and/or the payment shall be made
accordingly. Then, the Parties shall negotiate further on
the Crude Oil price for the said Calendar Quarter taking
into account relevant independent and non-proprietary market
data on Third Party long-term-contract-sales of crude oil in
substantial quantities on the main world oil markets,
adjusted for quality, transportation and other applicable
differentials. The Parties shall each take into account the
information supplied and discussed and attempt to agree on a
Crude Oil price based upon such information by the end of
the said Calendar Quarter.
(A) In the event that the Parties still cannot reach
an agreement on the Crude Oil price by the end of the said
Calendar Quarter, then the Crude Oil price shall be the
weighted average FOB price of the Crude Oil of the same or
similar quality sold by CNPC and/or the Contractor to a
Third Party or Third Parties and produced in the said
Calendar Quarter from the Oil Fields described hereafter,
adjusted for such differences as the quality, delivery,
transportation, payment and other terms, but excluding the
government to government transactions which do not reflect
international oil market price, crude oil exchange, barter
or spot transactions.
The application of the above-mentioned price of Crude
Oil sold to a Third Party or Third Parties shall be in the
following sequence:
(i) Firstly, the price, calculated and determined in
accordance with the above-mentioned stipulations, of the
Crude Oil produced from the relevant Oil Field or Oil Fields
in the Contract Area and sold to a Third Party or Third
Parties shall be applied;
(ii) In the event no sales as referred to in paragraph
(i) above were made in the said Calendar Quarter, the price,
calculated and determined in accordance with the above-
mentioned stipulations, of the Crude Oil produced from other
Oil Fields in the Contract Area and sold to a Third Party or
Third Parties shall be applied; and
(iii) In the event no sales mentioned in paragraphs
(i) and (ii) above were made in the said Calendar Quarter,
the price, calculated and determined in accordance with the
above-mentioned stipulations, of the Crude Oil produced from
the oil fields of other contract areas for Chinese-foreign
cooperative exploitation of petroleum resources and sold to
a Third Party or Third Parties shall be applied;
(B) In the event there are no such Third Party sales
of the Crude Oil during the said Calendar Quarter, then the
Crude Oil price for the said Calendar Quarter shall be equal
to the same Crude Oil price of the preceding Calendar
Quarter adjusted by the differences in the individual
arithmetic average of the daily weighted average of the
official government selling price of a basket of three or
more internationally traded Crude Oils in the said Calendar
Quarter compared with that of such basket of Crude Oils for
the preceding Calendar Quarter. The adjusted price shall be
the Crude Oil price for the said Calendar Quarter. The
Crude Oils selected for the basket shall each be similar in
quality to that from the Contract Area and chosen from
different countries and shall reflect the conditions of the
main world oil markets and shall be mutually agreed upon by
the Parties at a reasonable time prior to the Date of
Commencement of the Commercial Production of Crude Oil.
(C) If the Parties are unable to agree on a Crude Oil
Price for a Calendar Quarter in which Crude Oil is first
produced and delivered from or the production of Crude Oil
is restored in a Field in the Contract Area, then the Crude
Oil for the Calendar Quarter shall be priced and/or paid in
accordance with the arithmetic average price of the prices
finally proposed by the Parties in the Calendar Quarter.
Based on the Crude Oil price agreed upon by the Parties for
the succeeding Calendar Quarter, the Crude Oil price for the
Calendar Quarter shall be determined by adjusting
retroactively by the differences between the arithmetic
average prices of the basket of the Crude Oils for the
Calendar Quarter and the succeeding Calendar Quarter in
accordance with the calculation method referred to in
paragraph 14.4.4.5 (B) herein.
14.4.4.6 If, due to the delayed announcement of crude
oil prices by the main world oil-producing countries or the
main world oil markets, or if, as agreed by CNPC and the
Contractor, an unstable main world oil market exists, then
the period for the determination of the price referred to in
Article 14.4.4.2 herein may be extended to the end of the
said Calendar Quarter in question.
14.4.4.7 If the Crude Oil prices are adjusted
retroactively by the main world oil-producing countries,
then the Crude Oil price may be retroactively adjusted by
the Parties after consultation, provided that the period for
such retroactive adjustment shall not exceed the current
Calendar Quarter.
14.4.5 The Crude Oil for each Calendar Quarter due to
CNPC pursuant to Article 13 hereof shall be converted into
an amount of money in the currency utilized pursuant to
Article 14.4.3 herein based on the Crude Oil price for that
Calendar Quarter finally determined in accordance with the
aforesaid provisions specified in Article 14.4 herein and
such amount of money shall be entered into the Joint Account
as of the date on which such Crude Oil is lifted.
14.4.6 The Crude Oil for each Calendar Quarter due to
the Contractor pursuant to Article 13 hereof shall be
converted into a amount of money in the currency utilized
pursuant to Article 14.4.3 herein based on the Crude Oil
price for the Calendar Quarter finally determined in
accordance with the aforesaid provisions specified in
Article 14.4 herein and such amount of money shall be
entered into the Joint Account as of the date on which the
Crude Oil is lifted.
14.4.7 Notwithstanding any provision in this Article
14.4 to the contrary, if Contractor agrees to sell its share
of production into the Chinese domestic market by a sale to
CNPC or its designated subsidiary, the realized price
received by the Contractor shall be deemed a Third Party
price for the purposes of this Article 14.4.
14.5 Terms of payment for the purchased Crude Oil
pursuant to Article 13.4.
14.5.1 Before the Crude Oil price is determined, the
time limit for payment shall be agreed upon by the Parties
through consultation in accordance with the practice then
prevailing on the main world oil markets.
14.5.2 In case the Contractor is in default of such
payment, the Contractor shall pay interest on arrears of the
payment, starting from the first day of such default. The
interest rate shall be the seven day term London Interbank
Offered Rate (LIBOR) for U.S. dollars quoted by Midland Bank
in London at eleven (11:00) a.m. on the first working day
following the due date of payment plus five percent (5%).
14.6 Destination of the Crude Oil.
14.6.1 The destination of the Crude Oil lifted by the
Contractor shall be at the discretion of the Contractor,
except as stipulated in Article 14.6.2 herein.
14.6.2 In accordance with the decisions of the Chinese
Government, CNPC shall notify the Contractor of any
prohibited destinations which infringe on the political
interests of the People's Republic of China. The Contractor
shall not deliver the Crude Oil to the prohibited
destinations as notified.
Article 15
Preference to the Employment of the
Chinese Personnel, Goods and Services
15.1 The Contractor shall give preference to CNPC
and/or local goods, equipment and service when procuring
necessary goods, and leasing equipment as well as entering
into subcontracts or other service contracts for the
performance of the Petroleum Operations provided that they
are competitive in terms of price, quality, term of
delivery, technology and service.
15.2 The Contractor shall give preference to the
employment of CNPC Personnel in the performance of the
Petroleum Operations. For this purpose, the Contractor
shall submit in advance to CNPC and JMC, respectively, all
plans for the employment of CNPC Personnel listing all the
posts and the number of persons involved. CNPC shall, in
accordance with the plan, provide or assist in recruiting
Chinese employee candidates for such employment. For the
performance of Petroleum Operations, the Contractor shall
have the obligation to employ competent CNPC Personnel and
to employ those who have become qualified after being
trained in accordance with the training program. The
Contractor shall, in the employment, give preference to the
CNPC Personnel who have participated in the training program
provided by the Contractor.
15.3 The engineering design corporations under CNPC
shall have the right to participate in the master designs
and engineering designs made by the Contractor for the
purpose of the implementation of the Contract. Engineering
design companies within the territory of the People's
Republic of China shall be given preference in entering into
the subcontracts for the aforesaid master designs and
engineering designs, provided that their technical level,
price and delivery time are competitive.
15.4 After the Contractor signs equipment leasing
contracts, service contracts or subcontracts with CNPC or
its Affiliates in accordance with Article 15.1 herein, the
Contractor shall endeavor to provide technical assistance to
CNPC or its Affiliates, at the request of CNPC, so as to
enable them to meet the needs of operations to be
undertaken. The expenses so incurred shall be borne by CNPC
or its Affiliates.
Article 16
Training of Chinese Personnel and Transfer of Technology
16.1 In the implementation of the Contract, the
Contractor or its Affiliates, including each company
comprising the Contractor, shall apply in the Petroleum
Operations their appropriate and advanced technology and
managerial experience, including their proprietary
technology, e. g. patent, know-how or other confidential
technology, etc. At the same time, the Contractor shall
have the obligation to transfer technology and experience,
the necessary data and/or information for mastering those
technologies and experience, to CNPC and its Affiliates.
Provided however, such technology to be transferred shall be
proprietary to the Contractor and if the transfer of any of
such technology is restricted in any way during the term of
the Contract, the Contractor shall, to the extent reasonably
possible, endeavor to obtain permission for the transfer of
such restricted technology. In the Petroleum Operations,
the Contractor shall train, in planned, systematic and
various ways, the Chinese Personnel relating to the
implementation of the Contract, for the purpose of improving
their knowledge and skill, so that such Chinese Personnel
shall gradually reach the level of knowledge and skill as
that possessed by the Contractor's employees.
16.2 Within ninety (90) days following the Date of
Commencement of the Implementation of the Contract, the
Contractor shall, after consultation with CNPC, complete and
submit a training and technology transfer program for the
Chinese Personnel in the appraisal period and the
corresponding budget to JMC for review and approval, and
upon approval by JMC, put it into practice. The Contractor
shall, after the consultation with CNPC, complete and submit
training and technology transfer programs and corresponding
budgets for the Chinese Personnel in the development period
and production period, respectively, to JMC for its review
and approval before the commencement of Development
Operations and Production Operations, and upon approval by
JMC, put them into practice in time so as to have ample time
in advance for such training and technology transfer.
16.3 The purpose, requirement, fields of
specialization, scope of personnel, specific job categories,
type, method, etc. shall be determined through consultations
by the Parties.
16.4 The expenses and costs incurred for performing
the training and technology transfer program stipulated in
this Article shall be charged to the appraisal costs if such
costs are incurred before the date of approval of the
Overall Development Program of the first Oil Field and/or
Gas Field, and shall be charged to the development costs if
such costs are incurred after the date of approval of the
Overall Development Program of the first Oil Field and/or
Gas Field, and before the Date of Commencement of Commercial
Production of the first Oil Field and/or Gas Field, or shall
be charged to the operating costs if such costs are incurred
after the Date of Commencement of Commercial Production of
the first Oil Field and/or Gas Field.
16.4.1 The annual Work Program and Budget shall
include provisions for meeting the training and technology
transfer requirements of this Article 16. The training
program for CNPC Personnel shall be formulated to meet the
needs of the Petroleum Operations and shall be based on
principles of mutual benefit and efficiency of operation.
To the extent practicable, the training program shall
principally consist of CNPC Personnel working directly with
personnel of the Operator on matters that relate to the
Petroleum Operations or in other ways agreed by the Parties.
The Parties shall establish the content and associated costs
for training and technology transfer through discussions
within the JMC and this amount shall be included in the
annual Work Program and Budget. The Parties agree that the
budget for the annual training program for all Petroleum
Operations shall be fifty thousand ($50,000) U.S. dollars
during Phase 1 of the Appraisal Period and eighty thousand
($80,000) U.S. dollars per year during Phases 2 and 3.
During Development Operations, the budget for the annual
training program shall be increased to one hundred fifty
thousand ($150,000) U.S. Dollars per year. These amounts
shall include the cost of training provided by the Operator.
Such costs and expenditures incurred during the production
period shall be determined by the Parties at the first
meeting of the JMC in the production period.
16.5 In the course of the implementation of the
Contract, the Parties shall have scientific and technical
cooperation and exchange in connection with the Petroleum
Operations. The relevant provisions concerning the plan,
participating personnel and the type related to the
scientific and technical cooperation and exchange shall be
determined by the Parties. The expenses required by
scientific and technical cooperation and exchange shall be
included in the budget specified in Article 16.2 herein and
charged to the Joint Account. In the scientific and
technical cooperations, all inventions, experiments or
research results shall be shared by and belong to the
Parties who, subject to the provisions of Article 22 hereof,
shall not disclose them to any Third Party.
16.5.1 In the course of the implementation of the
Contract, those scientific research projects which are
required by the Petroleum Operations but not carried out by
the Parties, with the approval of JMC, may be commissioned
to, and carried out by, a Third Party, and the Parties shall
enter into subcontracts or service contracts with relevant
scientific departments within the territory of China,
provided that they are competitive. The aforesaid required
expenses shall be included in the budget specified in
Article 16.2 herein and charged to the Joint Account. All
inventions and experimental or research results developed
from the aforesaid research projects carried out by a Third
Party delegated by the Operator shall also be shared by and
belong to the Parties who, subject to the provisions of
Article 22 hereof, shall not disclose any of them to any
Third Party. The Operator shall endeavor to incorporate the
provisions herein in the subcontracts or service contracts
signed with the Third Party.
16.6 The advanced technology and managerial
experience, including proprietary technology, e. g. patent,
know-how or other confidential technology that the
Contractor shall transfer to CNPC, shall remain the
exclusive property of the owner and also be subject to the
confidentiality restrictions of Article 22 hereof.
Article 17
Ownership of Assets and Data
17.1 All assets purchased, installed and constructed
under the Work Program and budget for an Oil Field and/or
Gas Field within the Contract Area shall be owned by CNPC
from the date on which all the development costs actually
incurred by the Contractor in the development period of such
Oil Field and/or Gas Field have been fully recovered or from
the date on which the production period expires, even though
the aforesaid costs have not been fully recovered. The
Operator shall be responsible for the acceptance inspection
or testing of the said assets and CNPC may, as it deems
necessary, send its experts to participate in such
acceptance inspection or testing. In the production period,
the Operator may use these aforesaid CNPC-owned assets free
of charge for performing the Petroleum Operations. Such
assets shall not be used in any operations other than the
Petroleum Operations or any operations by Third Parties
without the consent of the Parties.
17.2 Equipment and facilities which are owned by a
Third Party and are either leased by the Operator or
temporarily brought into the territory of the People's
Republic of China for the performance of the Petroleum
Operations shall not be deemed as assets owned by CNPC.
Such equipment and facilities may be exported from the
People's Republic of China, but, export formalities shall be
handled by CNPC.
17.3 The ownership of all of the data, records,
samples, vouchers, and other original data obtained in the
course of performing the Petroleum Operations shall vest in
CNPC.
Article 18
Associated Natural Gas
and Non-associated Natural Gas
18.1 Associated Natural Gas.
18.1.1 The Associated Natural Gas produced from any
Oil Field within the Contract Area shall be primarily used
for purposes related to the operations of production and
production enhancement of Oil Fields such as gas injection,
gas lifting and power generation.
18.1.2 Based on the principle of full utilization of
the Associated Natural Gas and with no impediment to normal
production of the Crude Oil, the Overall Development Program
of each Oil Field shall include a plan of utilization of the
Associated Natural Gas. If there is any excess Associated
Natural Gas in any Oil Field after utilization pursuant to
Article 18.1.1 herein (hereafter referred to as "excess
Associated Natural Gas"), the Operator or the Contractor
shall carry out a feasibility study regarding the
utilization of such excess Associated Natural Gas of such
Oil Field. Such feasibility study, if carried out before
the Development Operations of an Oil Field, shall be
included as part of the feasibility study on the development
of the Oil Field. With respect to any Oil Field already
under commercial production, if a further feasibility study
on the utilization of its excess Associated Natural Gas is
required, such study shall be carried out by the Operator
and a report thereon shall be submitted to JMC for review
and discussion. If the Parties decide to utilize the excess
Associated Natural Gas of any Oil Field, the construction of
facilities for such utilization and the production of the
excess Associated Natural Gas shall be carried out at the
same time as the Oil Field construction and production.
18.1.2.1 If the Parties agree that the excess
Associated Natural Gas of an Oil Field has no commercial
value, then such gas shall be disposed of by the Operator,
provided that there is no impediment to normal production of
the Crude Oil.
18.1.2.2 If any party to the Contract considers
unilaterally that the excess Associated Natural Gas of an
Oil Field has commercial value, such gas may be utilized by
that party to the Contract at its own expense without
affecting the amount of "cost recovery oil" and "allocable
remainder oil" due to the other party to the Contract which
does not invest in such utilization.
18.1.2.3 If the Parties agree that excess Associated
Natural Gas of an Oil Field has commercial value, they shall
make further investment in its utilization in proportion to
their respective participating interests in the development
of the Oil Field. If the Parties disagree on the commercial
utilization of such excess Associated Natural Gas of that
Oil Field, they shall, guided by the principle of mutual
benefit, carry out further negotiations to find a new
solution to utilization of the said excess Associated
Natural Gas and reach an agreement in writing. If the
Parties fail to reach an agreement through such
negotiations, CNPC shall reserve the right to dispose of
such excess Associated Natural Gas unilaterally.
18.1.3 Expenses incurred in the utilization of the
Associated Natural Gas of any Oil Field as stipulated in
Article 18.1.1 herein, and those incurred in carrying out a
feasibility study on the utilization of the excess
Associated Natural Gas after commencement of commercial
production of the Oil Field referred to in Article 18.1.2
herein shall be charged to the development costs of the Oil
Field.
18.2 Non-associated Natural Gas.
18.2.1 When any Non-associated Natural Gas Field
(hereafter referred to as the "Gas Field") is discovered
within the Contract Area, the Parties shall carry out
friendly negotiations regarding the development and
production of the Gas Field with a view to reaching an
agreement of principle, which shall form a supplementary
document to the Contract, and shall include the following
principles:
18.2.1.1 The price of the Natural Gas produced from
the Contract Area shall be determined based on general
pricing principles prevailing internationally taking into
consideration such factors as the market, the grade, quality
and quantity of the Natural Gas, etc.;
18.2.1.2 The Contract term for the Gas Field within
the Contract Area shall be separately determined according
to the conditions for development, production of such Field
and marketing of the Natural Gas; and
18.2.1.3 The allocation of the Natural Gas shall be in
conformity with the general principles of allocation for the
Crude Oil stipulated in Article 13 hereof. However, the
percentages of the allocation shall be adjusted by the
Parties through negotiations in light of actual conditions
in the Gas Field so that the Contractor shall be able to
obtain a reasonable economic benefit.
Following the signature of the agreement of principle
herein, the Operator shall work out an evaluation Work
Program for the discovered Gas Field in accordance with the
terms and conditions in the said agreement of principle and
submit it to JMC for its review and approval. Upon approval
by JMC, the Operator shall carry out an evaluation Work
Program. The expenses incurred by the Operator in carrying
out the said evaluation Work Program shall be charged to the
appraisal costs of the Contract Area.
18.2.2 After completion of evaluation of a Gas Field,
the Operator shall submit a report thereon to JMC for review
and discussion.
18.2.2.1 If JMC decides unanimously that a gas
reservoir is noncommercial, the corresponding area covered
by the gas reservoir may be retained in the Contract Area
during the appraisal period. But if, at the expiration of
the appraisal period, JMC still considers the said gas
reservoir to be noncommercial, the area covered by the gas
reservoir shall be excluded from the Contract Area. For a
Gas Field which has potential commercial value but which has
not been developed due to a lack of market or a shortage of
consuming facilities, the period for which the Gas Field is
retained in the Contract Area may be extended at the request
of any party to the Contract. Such extended period,
however, shall not exceed three (3) consecutive Contract
Years after the date of expiration of the appraisal period
hereunder. In case the time needed for the market to
develop or for the consuming facilities to be constructed
for the Gas Field exceeds such extended period, a further
extended period shall be subject to the approval of the
relevant authorities of the Chinese Government.
Prior to the expiration of the appraisal period, if
JMC considers that a gas reservoir which has been determined
to be noncommercial needs to be reappraised because of some
favorable factors, the Operator shall work out a new
evaluation report on that gas reservoir and submit it to JMC
for review and approval.
18.2.2.2 If the Contractor considers any gas reservoir
to be non-commercial, the Contractor shall be deemed to have
waived its rights of participating in the development of
that gas reservoir.
18.2.2.3 Where the Parties consider a gas reservoir to
be commercial, the Parties shall negotiate to reach an
agreement on the development of the said gas reservoir,
based on the terms and conditions provided in the agreement
of principle referred to in Article 18.2.1 herein. The
agreement concerning the development shall be a
supplementary document and an integral part hereof. If the
Parties fail to reach such agreement through negotiations
within three (3) years after the date of commencement of
such negotiations, CNPC shall have the right unilaterally to
put up the gas reservoir for bidding. In such case, the
Contractor shall still be entitled to participate in the
bidding.
18.3 If CNPC utilizes unilaterally the excess
Associated Natural Gas of an Oil Field or develops solely a
Gas Field and requires to apply thereto the Contractor's
appropriate and advanced technology and managerial
experience, the Parties shall negotiate terms and conditions
related thereto and the Operator shall carry out the
operations after an agreement has been reached on such terms
and conditions.
Article 19
Accounting, Auditing and Personnel Costs
19.1 Accounting.
Annex II - Accounting Procedure hereto contains the
guidelines for the Operator to keep accounting books and
records and make financial settlements. The Operator shall
keep and settle the accounts for all the financial
activities in respect of the Contract Area and maintain all
the accounting books and records in accordance with Annex II
- - Accounting Procedure hereto in order to accurately reflect
the appraisal costs, development costs with Deemed Interest
thereon and operating costs incurred in the performance of
Petroleum Operations in respect of the Contract Area, as
well as quantity and monetary value of the production and
allocation of Crude Oil and Natural Gas. The Operator shall
submit detailed statements and relevant written reports to
JMC and the departments concerned.
19.2 Auditing.
19.2.1. Any Non-Operator party to the Contract shall
have the right to audit all the Operator's Joint Account
accounting books and records after the end of each Calendar
Year and to give the Operator a written notice of the
auditing results. The audit of any Calendar Year shall be
completed within twenty-four (24) months after the end of
such Calendar Year. If written notice of the auditing
results and exceptions are not given by the non-Operator
party within such period or if the annual Joint Account
accounting books and records of the Operator are not audited
by any non-Operator party within such period, the Operator's
Joint Account accounting books and records shall be deemed
correct. A special auditing of the Operator's Joint Account
accounting books and records may be made due to some special
requirements during a Calendar Year.
19.2.2 If the auditing referred to in Article 19.2.1
herein is conducted, the Operator shall be given thirty (30)
days notice prior to the date of commencement of such
auditing. There shall be no impediment to normal Petroleum
Operations during any audit.
19.2.3 The auditors shall be entitled to access to all
relevant Joint Account records, files and other information
and may inspect such sites and facilities as are necessary.
19.2.4 Upon receipt of a notice of the non-Operator
party's exceptions to the auditing results, the Operator
shall resolve these matters in due time (no later than sixty
(60) days thereafter).
19.3 Personnel Costs.
19.3.1 The personnel costs means that remuneration and
other related charges paid on the basis of the working time
spent by personnel who are engaged in administration,
management, accounting, finance, tax, employee relations,
procurement, legal affairs, computer services, engineering,
geology, geophysics, drilling and the Production Operations
as well as all other work for the implementation of the
Contract.
19.3.1.1 The salaries or wages of personnel in various
subordinate bodies of JMC and of all employees engaged in
the performance of the Petroleum Operations shall be
included in the personnel costs as provided in Article
19.3.1 herein.
19.3.1.2 Personnel costs which are classified as the
overhead of the superior management organization pursuant to
Article 5.2.18 of Annex II - Accounting Procedure hereto
shall not be included in the personnel costs mentioned
herein.
19.3.2 After the Date of Commencement of the
Implementation of the Contract, the Operator shall work out
a staffing plan for its organization and planned personnel
costs with respect thereto (including an itemized plan of
personnel costs, such as basic salary or wage, overseas
allowance and area allowance, etc.) before the beginning of
each Calendar Year and submit such plan with the annual
Work Program and budget to JMC for review and examination.
CNPC shall have the right to audit the personnel costs
charged to the Joint Account.
19.3.3 The level of the salaries and wages paid to the
representatives appointed by CNPC to JMC established in
accordance with Article 7.1 hereof, the Chinese Personnel
working in various subordinate bodies of JMC established in
accordance with Article 7.4 hereof, the professional
representatives assigned by CNPC to all administrative and
technical departments of the Operator (the Contractor) in
accordance with Article 7.5 hereof and CNPC's personnel
employed by the Contractor shall be determined by the
Parties in the negotiations of the Contract.
The salaries and wages of the Chinese Personnel other
than CNPC's personnel employed by the Operator shall be
determined through consultation and specified in the
employment contracts. The settlement of accounts for the
salaries and wages of the Chinese Personnel mentioned in
Article 19.3.3 herein shall be made between CNPC and the
Operator, and the Operator shall not be liable for any
individual income tax thereon.
Before the Date of Commencement of Commercial
Production of the first Oil Field and/or Gas Field, the
level of the salaries and wages and other related charges
paid to the Expatriate Employees shall be made by the
Contractor through consultation with CNPC. After the Date
of Commencement of Commercial Production of the first Oil
Field and/or Gas Field, the level of the salaries and wages
and other related charges paid to the Expatriate Employees
shall be discussed and agreed by the Parties.
Article 20
Taxation
20.1 The Contractor shall pay taxes to the Government
of the People's Republic of China subject to the tax laws
and regulations of the People's Republic of China.
20.2 The Contractor shall advise the Subcontractors
who render services for the Contract that they and their
employees shall pay taxes to the Government of the People's
Republic of China subject to the tax laws and regulations of
the People's Republic of China.
Article 21
Insurance
21.1 The Operator shall work out an insurance program
for the Appraisal Operations and submit it to JMC for review
and approval within one hundred and twenty (120) days after
the Date of Commencement of the Implementation of the
Contract. The Operator shall, on behalf of the Parties,
obtain the insurance contracts in accordance with such
program as approved by JMC before commencement of Petroleum
Operations within the Contract Area.
Similar provisions shall apply in respect of
Development Operations and Production Operations.
21.2 All of the insurance items as approved in the
insurance program shall be insured in accordance with the
laws and regulations of the People's Republic of China and
on terms and conditions competitive with world markets.
21.3 The insurance program worked out by Operator
shall include, but not be limited to, the following
insurance covering;
(a) damages and expenses to all drilling installation
and equipment, including damages and expenses to the
properties used on worksites and supply bases for the
Petroleum Operations, while the equipment and properties
owned by a Third Party rendering services to the Operator
shall be handled in accordance with Article 21.5 herein;
(b) damages and expenses to any of the equipment or
installations for production, storage and transportation,
and buildings in the course of construction and
installation;
(c) damages and expenses to the Crude Oil and/or
Natural Gas production installations, facilities, equipment
and pipelines;
(d) liability to Third Parties;
(e) liability for pollution and expenses for cleaning
up in the course of drilling and the Production Operations;
(f) expenses for killing blowouts;
(g) liability incurred by the Operator in hiring
drilling rigs, vessels and aircraft serving the Petroleum
Operations; and
(h) losses and expenses incurred during the
transportation and storage in transit of goods shipped from
different parts of the world to the worksites.
21.4 In the insurance contracts, the deductibles borne
by the Operator alone shall be determined by the Parties
through consultation, and losses within the deductible
limits shall be borne by the Parties.
21.5 When signing subcontracts or lease contracts, the
Operator shall endeavor to compel Subcontractors and lessors
to insure their risks under the relevant subcontracts in
accordance with the laws and regulations of the People's
Republic of China.
21.6 In the course of the Petroleum Operations, the
Parties shall cover separately accidental death and personal
injury insurance with respect to personnel assigned by them
respectively. The premiums in respect thereof shall be
dealt with in the following way: the premiums for
accidental death and personal injury insurance with respect
to personnel whose costs are charged to the Joint Account
pursuant to the provisions of the Contract shall be charged
to the Joint Account, and those with respect to other
personnel shall be borne respectively by the Parties by
which they are assigned.
21.7 Insurance companies owned by or affiliated with
any party to the Contract, or the Parties themselves, may
approach insurer(s) for reinsurance if they are interested
in covering any part of the insurance program hereof.
21.8 All motor vehicles serving the Petroleum
Operations in communication, transportation and special
project shall be insured in accordance with the laws and
regulations of the People's Republic of China.
21.9 The premiums of insurance in the appraisal period
and the development period shall be charged to the appraisal
costs and development costs respectively and those in the
production period shall be charged to the operating costs.
21.10 Any claim under the insurance of the agreed
insurance program charged to the Joint Account shall be
handled by the Operator and any recovery made from insurers
shall be credited to the Joint Account.
Article 22
Confidentiality
22.1 CNPC shall, in conformity with applicable laws
and regulations of the Government of the People's Republic
of China on confidentiality and by taking into account the
international practice, determine the confidentiality
periods for which the Contract and all documents,
information, data and reports related to the Petroleum
Operations within the Contract Area shall be kept
confidential.
22.2 Without the written consent of the other party,
no party to the Contract shall disclose, in the
confidentiality periods, the Contract, documents,
information, data and reports referred to in Article 22.1
herein or any other information regarded by JMC as
confidential, to any Third Party except the Third Parties in
Article 22.5 herein and to any Affiliates not directly
connected with the implementation of the Contract, and no
party to the Contract shall otherwise transfer, present,
sell or publish them in any way within the confidentiality
periods. However, if the Department or Unit decides to
invite any Third Party to conduct cooperative exploration
for and development of Petroleum in the sedimentary basin in
which the Contract Area is located and/or other adjacent
areas, CNPC may furnish the following original data and
information or the interpretation thereon with respect to
the Contract Area to the relevant Third Parties:
(a) original data and information held by CNPC for
over two (2) years; and
(b) interpretation of original data and information,
which has been held by CNPC for over five (5) years
CNPC shall require relevant Third Parties to undertake
to keep confidential the aforesaid data, information, and
interpretation thereon furnished to tthem by CNPC.
22.3 During the term of the Contract and after
termination of the Contract, CNPC shall not disclose to any
Third Party any patent, know-how or proprietary technology
transferred to CNPC by the Contractor without the written
consent of the Contractor except for any technology, the
patent of which has expired and any proprietary and
confidential technology which have entered the public
domain.
22.4 After the termination of the Contract or after
any assignment of rights and/or obligations of the Contract
under Article 23 hereof, the Contractor and any assignee
shall, within the confidentiality periods, continue to be
obliged to keep confidential documents, information, data
and reports mentioned in Article 22.2 herein except for
official documents and information published with the
consent of the Parties.
22.5 For the implementation of the Contract, the
Operator may, after review by JMC and CNPC, furnish the
necessary documents, information, data and reports to Third
Parties and Affiliates related to the Petroleum Operations.
The Third Parties and Affiliates include:
22.5.1 Banks or other credit institutions from which
finance is sought by any party to the Contract for the
implementation of the Contract;
22.5.2 Third Parties and Affiliates which provide
services for the Petroleum Operations, including
Subcontractors and other service contractors; and
22.5.3 An assignee or assignees to whom the rights and
obligations under the Contract are intended to be assigned.
22.6 Necessary information, documents, data and
reports may be furnished by the Contractor in accordance
with the laws of its home country to the government and
stock exchange provided that the Contractor reports to JMC
in advance.
22.7 CNPC and each company comprising the Contractor,
when furnishing the documents, information, data and reports
to Third Parties and Affiliates as mentioned in Article 22.5
herein, shall require them to assume the confidentiality
obligations as set forth herein, or shall bear full
responsibility for any violation thereof.
Article 23
Assignment
23.1 The Contractor may assign part or all of its
rights and/or obligations under the Contract to its
Affiliate with the prior consent of CNPC and in accordance
with the following provisions:
(a) the Contractor shall submit to CNPC copies of a
written agreement on the corresponding part of its rights
and/or obligations to be assigned;
(b) the Contractor shall guarantee in writing to CNPC
the performance of the assigned obligations;
(c) no such assignment shall interfere with the
performance of the Petroleum Operations or affect the
organizational structure.
23.2 The Contractor may assign part or all of its
rights and/or obligations under the Contract to any Third
Party, provided that such assignment shall be agreed to by
CNPC in advance and approved by Ministry of Foreign Trade
and Economic Cooperation in China ("MOFTEC"). However, CNPC
shall have the right of first refusal with respect to such
assignment provided that the conditions offered by CNPC are
comparable.
23.3 CNPC may authorize its subsidiaries, branches,
regional corporations or its Affiliates to implement the
Contract, but CNPC shall remain responsible for the
performance of the Contract.
23.4 CNPC may assign part of its rights and/or
obligations hereunder to a Chinese Government controlled
Third Party, provided that prior written consent of the
Government of the People's Republic of China shall be
obtained. CNPC shall guarantee the performance of the
assigned obligations and such assignment shall not interfere
with the performance of Petroleum Operations.
Article 24
Environmental Protection and Safety
24.1 In the performance of the Petroleum Operations,
the Operator shall be strictly subject to the laws, decrees
and regulations on environmental protection and safety
promulgated by the Chinese Government and make its best
efforts to prevent pollution and damage to the atmosphere,
oceans, rivers, lakes, ground water, harbors, land and
ecology and secure the safety and health of the operating
personnel. The Operator shall use all reasonable endeavors
to eliminate promptly any pollution occurring in the
performance of the Petroleum Operations and minimize its
consequences. Economic loss caused by any pollution shall
be charged to the Joint Account, unless otherwise provided
in Article 8.4 hereof.
24.2 When competent authorities under the Chinese
Government assign any person to inspect environmental
protection and safety within the scope of the Petroleum
Operations according to the laws, decrees, rules and
regulations, the Operator shall provide all necessary
facilities and assistance to enable the inspectors to carry
out such inspection smoothly.
24.3 In the performance of the Petroleum Operations
in any fixed fishing net casting area and/or aquatic
breeding area, the Operator shall make prior contact with
the appropriate authorities of the Chinese Government.
24.4 Before the commencement of Appraisal Operations,
the Operator shall provide CNPC with documentation on the
possible impact by the Appraisal Operations on the
environment and the adopted measures to prevent pollutions.
Before the Development Operations the Operator shall provide
CNPC with an environment impact statement as an integral
part of the Overall Development Program of the Oil Field
and/or Gas Field.
24.5 During the term of the Contract, the Operator
shall, after the completion of various Petroleum Operations,
level or restore or reclaim the land of the operating sites
in accordance with the local rules and regulations.
Article 25
Force Majeure
25.1 Except as to any payment under the Contract, no
party to the Contract shall be considered in default of the
performance of any of its obligations hereunder, if any
failure to perform or any delay in performing its
obligations is in conformity with all the events described
as follows:
The performance of any obligations hereunder is
prevented, hindered or delayed because of any event or
combination of events which could not be foreseen and/or
which is beyond the control of such party;
The normally occurring weather conditions, such as
wind, wave and current, of the Contract Area shall not be
considered as an event of force majeure.
Any such event or combination of events is the direct
cause of preventing, hindering or delaying of such party's
performance of its obligations hereunder; and
When any such event or combination of events has
occurred, such party has taken all reasonable actions to
overcome any cause that prevents, hinders or delays
performance of its obligations and shall in so far as is
practicable continue to perform its obligations hereunder.
25.2 Notice of any event of force majeure and the
conclusion thereof shall forthwith be given to the other
party by the party claiming force majeure.
25.3 In the event of force majeure, the Parties shall
immediately consult in order to find an equitable solution
thereto and shall use all reasonable endeavors to minimize
the consequences of such force majeure.
25.4 If the Petroleum Operations in the Contract Area
are partially or entirely suspended as a result of the force
majeure referred to in Article 25.1 herein, the period of
the Petroleum Operations may be extended by a period not
exceeding the corresponding period of such suspension.
Within fifteen (15) days following the end of each Calendar
Year, the Operator shall report to JMC in writing on the
suspension of the Petroleum Operations caused by force
majeure, if any, during the preceding Calendar Year.
25.5 Should, however, the Force Majeure condition
continue for a period of twenty-four (24) consecutive
months, then Contractor shall have the option to terminate
this Contract without any further liability.
Article 26
Consultation and Arbitration
26.1 The Parties shall make their best efforts to
settle amicably through consultation any dispute arising in
connection with the performance or interpretation of any
provision hereof.
26.2 Any dispute mentioned in Article 26.1 herein that
has not been settled through such consultation within ninety
(90) days after the dispute arises may be referred to
arbitration at the request of and by either party to the
Contract. The arbitration shall be conducted in accordance
with the following provisions:
26.2.1 If agreed upon by the Parties, such dispute
shall be referred to arbitration conducted by the China
International Economic and Trade Arbitration Commission
("CIETAC") in accordance with the provisional arbitration
proceeding rules thereof.
26.2.2 If the Parties fail to reach an agreement on
the arbitration arrangement mentioned in Article 26.2.1
herein, the Parties shall establish an ad hoc arbitration
tribunal to conduct arbitration in accordance with the
following provisions:
26.2.2.1 The ad hoc arbitration tribunal shall consist
of three (3) arbitrators. The Parties shall each appoint an
arbitrator and the two arbitrators so appointed shall
designate a third arbitrator. If one of the Parties does
not appoint its arbitrator within sixty (60) days after the
first appointment, or if the two arbitrators once appointed
fail to appoint the third within sixty (60) days after the
appointment of the second arbitrator, the relevant
appointment shall be made by the Arbitration Institute of
the Stockholm Chamber of Commerce, Sweden.
26.2.2.2 The third arbitrator shall be a citizen of a
country which has formal diplomatic relations with both the
People's Republic of China and any home country of the
companies comprising the Contractor, and shall not have any
economic interests of relationship with the Parties.
26.2.2.3 The place of arbitration shall be determined
by the Parties through consultations or, failing the
agreement of the Parties by a majority of arbitrators of the
ad hoc arbitration tribunal.
26.2.2.4 The ad hoc arbitration tribunal shall conduct
the arbitration in accordance with the arbitration rules of
United Nations Commission on International Trade Law
("UNCITRAL") of 1976. However, if the above-mentioned
arbitration rules are in conflict with the provisions of
this Article 26 including the provisions concerning
appointment of arbitrators, the provisions of this Article
26 shall prevail.
26.3 Both the Chinese and English languages shall be
official languages used in the arbitration proceedings. All
hearing materials, statements of claim or defence, award and
the reasons supporting them shall be written in both Chinese
and English.
26.4 Any award of arbitration shall be final and
binding upon the Parties.
26.5 The right to arbitrate disputes under the
Contract shall survive the termination of the Contract.
Article 27
Effectiveness and Termination of the Contract
27.1 After the Contract is signed, it shall be
approved by the Ministry of Foreign Trade and Economic
Cooperation of the People's Republic of China. The Contract
shall be effective on the date of such approval. However,
the Contractor's obligations shall begin on the Date of
Commencement of the Implementation of the Contract, as
defined in Article 1, herein above. CNPC shall notify the
Contractor of the said approval in writing as soon as
possible.
27.2 All annexes to the Contract shall be regarded as
integral parts of the Contract. If there is any
inconsistency between the provisions of the annexes and the
main body of the Contract, the main body of the Contract
shall prevail. All references to the "Contract" hereof
refer to the main body of the Contract.
27.3 If in the course of implementation of the
Contract the Parties decide through consultation to make
amendment to or supplement to any part of the Contract, a
written agreement signed by the authorized representatives
of the Parties shall be required. Such written agreement
shall be subject to the approval of the Ministry of Foreign
Trade and Economic Cooperation should there be any
significant modifications hereof. Such agreement shall be
regarded as an integral part of the Contract.
27.4 The Contract shall terminate under any of the
following circumstances:
27.4.1 exercise of the Contractor's election to
terminate the Contract under Article 6.3 (b) hereof;
27.4.2. failure to identify any commercial oil or gas
reservoir within the Contract Area by the expiration of the
appraisal period or the extended appraisal period granted
under Articles 4.3 or 18.2.2.1 hereof;
27.4.3 if there is only one (1) commercial Oil Field
or Gas Field in production in the Contract Area, on
termination of the production period of such Field;
27.4.4. if there are two (2) or more commercial Oil
Fields or Gas Fields in production in the Contract Area, on
termination of the production period of the Field with the
latest termination date; or
27.4.5 at the end of the last day of the thirtieth
(30th) Contract Year from the Date of Commencement of the
Implementation of the Contract, unless the production period
is extended by approval of the Department or Unit under
Article 4.5. hereof or unless otherwise stipulated in
Articles 4.6.1, 18.2.1.2 or 25.4 hereof.
27.5 Before the expiration of the first phase of the
appraisal period as specified in Article 4.2 hereof, the
Contractor shall not propose terminating the Contract unless
the Contractor has fulfilled the minimum appraisal work
commitment for the first phase of the appraisal period ahead
of time.
27.6 If either party to the Contract commits a
material breach of the Contract, the other party to the
Contract shall have the right to demand that such breach be
remedied within a reasonable specified period of time. If
such breach is not remedied within such period of time, the
complaining party shall have the right to terminate the
Contract by giving ninety (90) days' written notice to the
defaulting party. However, such material breach of the
Contract and unremedied material breach shall have been
judged by the final award of arbitration in accordance with
Article 26 hereof.
27.7 Notwithstanding the provisions in Article 6.8
hereof, CNPC has the right to unilaterally terminate the
Contract, except as otherwise provided in Article 25
hereof, in the event the Contractor failed to:
(1) spud the first Appraisal Well within ten (10)
months after the Date of Commencement of Implementation of
the Contract provided in Article 6.2 hereof; or
(2) fulfill the minimum appraisal work commitment as
specified in Article 6.2.1 herein at the expiration of the
first phase of the appraisal period specified in Article 4.2
hereof.
The Contractor shall within thirty (30) days from the
date CNPC decides to terminate the Contract as specified
above, pay CNPC any unfulfilled balance of the minimum
appraisal work commitment in the said period in U.S. dollars
after it has been converted into a cash equivalent using the
method provided in Annex II - Accounting Procedure.
Article 28
The Applicable Law
28.1 The validity, interpretation and implementation
of the Contract shall be governed by the laws of the
People's Republic of China. Failing the relevant provisions
of the laws of the People's Republic of China for the
interpretation or implementation of the Contract, the
principles of the applicable laws widely used in the
petroleum resources countries acceptable to the Parties
shall be applicable.
28.2 If a material change occurs to the Contractor's
economic benefit after the effective date of the Contract
due to the promulgation of new laws, decrees, rules and
regulations or any amendment to the applicable laws,
decrees, rules and regulations made by the People's Republic
of China, the Parties shall consult promptly and make
necessary revisions and adjustments to the relevant
provisions of the Contract in order to maintain the
Contractor's normal economic benefits hereunder.
Article 29
Language of Contract and Working Language
29.1 The text of the Contract, annexes and
supplementary documents attached hereto shall be written in
both Chinese and English languages, and both versions shall
have equal force and effect.
29.2 The Parties agree that both Chinese and English
shall be used as working languages. After the effective
date of the Contract, technical documents and information
concerning the Petroleum Operations hereunder shall, in
general, be written in English except for technical
documents and information available previously and from
Third Parties.
Unless otherwise agreed by CNPC, documents and
information in respect of administration shall be written in
both Chinese and English. Forms for production and other
reports and records shall be printed with headings in both
Chinese and English and may be filled out in either Chinese
or English.
Article 30
Miscellaneous
30.1 All notices and documents required hereunder
shall be deemed to have been properly given and delivered to
either party to the Contract only when received.
30.2 Notices and documents shall be delivered by hand
or sent by mail, registered airmail or telefax to address
hereunder specified:
Address of CNPC: Address of the Contractor:
Liu Pu Kang 110 Rue Jean Lafitte
Beijing 100724 Lafayette, LA 70508
U.S.A.
People's Republic of China Telefax: 318-237-0168
Tel. No. 86-10-620906007
Tel. No. 86-10-620906008
Telefax No.: 86-10-62096006
For the attention of: For the attention of:
Zeng Xingqiu Danny M. Dobbs
30.3 Each party to the Contract may change its address
or representative by a written notice to each other party to
the Contract.
30.4 The Contractor's participating interest hereunder
as of the effective date of the Contract is one hundred
percent (100%) held by XCL Cathay LTD.
30.5 The Contractor shall pay CNPC a signature fee of
Three Hundred Thousand U.S. dollars (U.S.$300,000) within
thirty (30) days from the effective date of the Contract;
and Two Hundred Thousand U.S. dollars (U.S.$200,000) payable
within thirty (30) days of the date of approval of the
Overall Development Program of the first Oil Field and/or
Gas Field by the Department or Unit. Such signature fee
shall, in no case, be charged to the Joint Account, nor be
deemed recoverable costs.
30.6 Companies comprising the Contractor agree to
undertake the obligation of the Contractor under the
Contract jointly and severally.
In witness whereof, THIS CONTRACT is signed in Beijing
by the authorized representatives of the Parties hereto on
the first above-mentioned date.
CHINA NATIONAL XCL CATHAY LTD.
PETROLEUM CORPORATION
By: ________________________ By:______________________