AGREEMENT
FOR EXPLORATION, DEVELOPMENT AND
PRODUCTION
OF OIL IN KARAKUDUK OIL FIELD
IN MANGISTAU OBLAST
OF THE REPUBLIC OF KAZAKHSTAN
BETWEEN
MINISTRY OF OIL AND GAS INDUSTRIES
OF THE REPUBLIC OF KAZAKHSTAN
FOR AND ON BEHALF OF
THE GOVERNMENT OF THE REPUBLIC OF
KAZAKHSTAN
AND
JOINT STOCK COMPANY OF CLOSED TYPE
KARAKUDUK MUNAY JOINT VENTURE
ALMATY - 1995
CONTENTS
SUBJECT OF THE AGREEMENT......................................................................................1
SECTION 1. Definitions.......................................................................................2
SECTION 2. Ownership Rights..................................................................................6
SECTION 3. Duration of the Agreement and Termination.........................................................7
3.1. Duration.....................................................................7
3.2. Exploration Phase............................................................7
3.3. Development and Production Phase.............................................8
3.4. Termination..................................................................8
SECTION 4. Principle Rights and Obligations of the
Contractor and Investor.................................................................9
4.1. Rights of the Contractor and Investor........................................9
4.2. Obligations of the Contractor...............................................12
SECTION 5. Assistance and the Support of the
Authorized Body........................................................................14
SECTION 6. Board of Directors...............................................................................15
SECTION 7. Operational and Financial Requirements
and Budget.............................................................................15
7.1. Exploration.................................................................15
7.2. Development and Production..................................................16
7.3. Procedural and Approval Method of the
Operational Documents.................................................17
SECTION 8. Expenditures and Compensation....................................................................19
SECTION 9. Commercial and Financial Terms and Conditions....................................................19
9.1. Financial Matters...........................................................19
9.2. Customs.....................................................................20
9.3. Taxes and Payments..........................................................20
9.4. Compensation................................................................26
9.5. Accounting Procedures and Auditing..........................................26
SECTION 10. Protection of Subsurface Resources, Natural
Environment and Labor and Population Safety............................................27
SECTION 11. Other Legal Issues..............................................................................28
11.1. Transfer and Assignment of Rights..........................................28
11.2. Payments Related with Field Allocation
and Usage Right......................................................28
11.3. Insurance..................................................................28
11.4. Legal Adjustments in Relation with
Working Conditions...................................................29
11.5. Force Majeure..............................................................29
11.6. Local Consumption..........................................................29
11.7. Amendments to the Terms and Conditions
of the Agreement.....................................................30
11.8. Confidentiality............................................................30
11.9. Settlement of Disputes.....................................................31
11.10. Waiver....................................................................31
11.11. Correspondence............................................................32
11.12. Headings..................................................................32
SUBJECT OF AGREEMENT
This agreement (hereinafter referred to as "Agreement") is prepared and signed
on "30" August 1995 by and between the Ministry of Oil and Gas Industry of the
Republic of Kazakhstan, (hereinafter referred to as "Authorized Body") acting
for and on behalf of and representing the Government of Republic of Kazakhstan
in accordance with the legislation of the Republic of Kazakhstan and Joint Stock
Company of closed type "Karakuduk-Munay Inc." Joint Venture, established and
operating in accordance with and under the existing Laws of Republic of
Kazakhstan, (hereinafter referred to as "Contractor"); and having the following
shareholders: PGO "Mangistauneftegazgeologiya" with its new name GHK Zharkyn,
"Kazakhstanmunaygaz" National Petroleum Company with its new name GHK Munaygaz
and "Korporatsiya KRAMDS-Mangistau" Inc. which is owned by Korporatsiya
Mangistau Terra International, by assignment of shares, established and
operating under the laws of the Republic of Kazakhstan, hereinafter collectively
referred to as "Shareholders of Kazakhstan Side" and Central Asian Petroleum
(Guernsey) Limited, established and operating under the laws of Island of
Guernsey, (hereinafter referred to as "Investor"). The Authorized Body and the
Contractor are sometimes referred to individually as "Party" and collectively as
"Parties" hereinafter in this Agreement.
WHEREAS; as a result of the transfer of some of the rights and shares of the
Contractor to the Investor in accordance with the Clauses 4.1.9. and 11.1.1, the
parties to that certain agreement dated 1st of July 1993 between the Authorized
Body and the Contractor, signed in accordance with the Decree of the Cabinet of
Ministers of the Republic of Kazakhstan No: 498 dated June 11, 1993. Thus, by
execution of this Agreement, the 1st of July 1993 dated agreement, as amended by
this Agreement, is superseded by this Agreement and now this Agreement shall be
in full force and valid.
WHEREAS; the Contractor has been formed with the re-registration of the Articles
of Association of joint stock company of closed type Karakuduk-Munay Inc. Joint
Venture (hereinafter referred to as the "Articles"); by the Registrar Office of
Economical Corporations, Incorporated Partnerships and Companies of Financial
Directorate of Mangistau Province No. 23625 dated March 1, 1995; and by the
National Agency of Foreign Investments No. 2262 dated April 27, 1995.
WHEREAS; the usage right of the Subsurface Resources of the Field of 68.4 sq.km.
in the Town of Mangistau of Mangistau Region of which the Geographical
Coordinates are given herein below in drawing number L-39-xx, and whereas the
Observation Map is provided as Enclosure-I to this Agreement; has been given to
joint stock Company of closed type Karakuduk-Munay Inc. Joint Venture, for a
period of 30 (thirty) years, for exploration, development, production,
treatment, storage, refining, transporting and sales including export of
hydrocarbons from Karakuduk oil field;
44o51'43" North Parallel 53o52'30" East Meridian 44o52'20" North Parallel
53o54'08" East Meridian 44o52'10" North Parallel 53o59'10" East Meridian
44o49'10" North Parallel 54o02'50" East Meridian 44o48'13" North Parallel
53o57'10" East Meridian 44o49'40" North Parallel 53o53'17" East Meridian
WHEREAS; the Contractor shall have the obligation to conduct the Work Program in
accordance with the terms and conditions of this Agreement by taking into
consideration the License for the Right to Use Natural Deposits (hereinafter
referred to as "License") issued by the Government of Republic of Kazakhstan on
June 28, 1995 with the serial number MG No:249 Oil.
SECTION-1
DEFINITIONS
Unless otherwise specifically referred to in this Agreement, any singular word
may define the plural and any plural word may define the singular.
1.1. "Agreement" means this Agreement signed by and between the Ministry of Oil
and Gas Industry of the Republic of Kazakhstan and joint stock company of closed
type Karakuduk-Munay Inc. Joint Venture for the implementation of the Petroleum
Activities.
1.2. "Petroleum Activities" means as foreseen in the Agreement; geological
research, development, production, treatment and purification (treatment and
drying process for the natural gas and the separation of it in different
elements from petroleum), refining, storage, pipeline transportation and
marketing and sales activities in local and international markets of the
hydrocarbons and any other preparation and sub-activities associated with.
1.3. "Expenditures for Petroleum Activities" means all types of costs and
expenditures incurred by the Contractor for the Petroleum Activities in
accordance with the Agreement i.e. (expenditures related with well and
equipment, maintenance, construction, subsurface and earth studies, repairs,
chemicals, oils and lubricants, spare parts, labor force, required services for
operations, catering and accommodation, management and administration, personnel
training and the preparation and issue of project-budget documentation and other
related documentation as well as removing the remaining).
1.4. "Authorized Body" means the Ministry of Oil and Gas Industry of the
Republic of Kazakhstan who is acting for and on behalf of the Government of the
Republic of Kazakhstan and legally empowered to conduct Petroleum Activities.
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1.5. "Contractor" means joint stock company of closed type Karakuduk-Munay Inc.
Joint Venture whose Shareholders are; GHK Zharkyn with 20% (twenty percent)
share, GHK Munaygaz with 20% (twenty percent) share, Korporatsiya Mangistau
Terra International with 10% (ten percent) share and the Investor, Central Asian
Petroleum (Guernsey) Limited with 50% (fifty percent) share.
1.6. "Sub-Contractor" means any private and/or juridical person who is used by
the Contractor for the supply of required equipment, material and services in
the required and demanded quality in order to fulfill the requirements of the
Agreement.
1.7. "Agreement Field" means Karakuduk Oil Field allocated for Petroleum
Activities, as defined in the Subject of the Agreement Section of this Agreement
and as shown in geographic coordinates in Enclosure-I. During the course of the
Petroleum Activities, in case the geographic settlement borders of the Oil and
Gas fields are determined to be extended the borders of the field defined in the
Subject of the Agreement Section of this Agreement and in Enclosure-I; issue of
expanding the "Agreement Field" shall be resolved by the Parties through mutual
negotiations.
1.8. "Commercial Disclosure" or "Commercial Exploration" means the exploration
of the Hydrocarbon reserves in the Agreement Field of which their operation is
found economical and where the income to be obtained from their production shall
meet with the operation and production expenditures and shall generate the
profit to be found appropriate and reasonable by the Parties. In such a case,
the field is considered productive for the purpose of operation.
1.9. "Field" means one or more natural accumulation of Hydrocarbons, which are
deposited in the Agreement Field one over the other either in connected or
isolated levels or reservoirs, within one or several interconnected geological
traps in vertical form and considered as the whole for the purpose of the
operations.
1.10. "Hydrocarbons" means Crude Oil, Condensate, Natural Gas, natural gas
liquids and any other associated substances found during the production of
those. Natural gas liquid is the Hydrocarbons where the Natural Gas and
Associated Gas is turning into liquid in a different environment than normal
conditions.
1.11. "Petroleum" or "Crude Oil" means; asphalt bithium and liquid Hydrocarbons
that are also known as "Distillate" or "Condensate" and obtained from the wells
in the form of liquid under normal heat and pressure without being dependent
upon their density by densing Natural Gas that can also easily be steamed.
1.12. "Gas" or "Natural Gas" means the gas which is not Hydrocarbon but obtained
from the wells with the Hydrocarbons in the form of gas liquid and Gas remains
after densing different type of Hydrocarbons and elements, sulfur, carbonic
acid, helium (excluding densed gasses that can become liquid), greasy mineral
gas, dry mineral gas, Associated Gas and Hydrocarbons, under normal heat and
pressure.
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1.13. "Associated Gas" means the gas comes out during the production of the
Petroleum which is mixed with Crude Oil or accumulated in the Gas cap.
1.14. "Subordinate Petroleum Components" means various mineral and other
elements.
1.15. "Work Program" means all programs that are prepared and issued for the
implementa- tion of the Petroleum Activities in accordance with the License and
the terms and conditions of the Agreement.
1.16. "Investment" means all amounts required for the Petroleum Operations
including properties, rights on properties and intellectual rights.
1.17. "Effective Date" means the date when this Agreement is signed by the
Parties.
1.18. "Commencement Date of the Productive Production" means the date when the
income achieved from the sale of the Petroleum becomes in excess of the
expenditures made for the production and sales of the same.
1.19. "Payout" means the date when Contractor has repaid Investor the
Investment.
1.20. "Shareholders Of The Kazakhstan Side Profit" means the amount of the
Shareholders of the Kazakhstan Side are collectively entitled to as their share
of the distributable profit of Contractor. Such amount shall be calculated and
distributed on a quarterly basis, unless the Board of Directors determines
otherwise, and shall be equal to 50% (fifty percent) of the amount of Contractor
cash flow remaining after subtracting from Contractor's gross revenue for the
quarter: Royalty, Investment Recovery, all operating expenditures, Fiscal
Obligations as required pursuant to this Agreement, any other actual
expenditures made by Contractor during the quarter.
1.21. "License" means a permission granted by the Government of the Republic of
Kazakhstan to the Contractor for conducting exploration and production
activities for a period of 25 (twenty five) years within the Agreement Field.
1.22. "Delivery Point" means the point where the link is established to the
existing pipeline for the further transportation of the product. Such point is
determined with the mutual agreement of the Parties and shall be placed either
within the boundaries of the Agreement Field or outside of such boundaries, in
the most economical point for the transportation of the product.
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1.23. "Force-Majeure" means any occurrence that can not be predicted by and
outside the reasonable control of the Parties preventing or delaying any of the
Parties' timely performance of obligations. (Such as riot or civil commotion,
declared or undeclared war, hostilities, actions of not being compliant with the
law, terrorism, natural hazards and disasters, decisions issued by the
Government Authorities, etc.).
1.24. "Investor" means Central Asian Petroleum (Guernsey) Limited who possesses
the 50% (fifty percent) shares of closed type Karakuduk Munay Inc. Joint Venture
or any other juridical body that its shares are transferred and/or assigned to.
The priority for the assignment of the shares is given to the Shareholders of
the Kazakhstan Side.
1.25. "Investment Recovery" means the amount of each installment Investor is
entitled to receive as partial repayment of the Investment from the Contractor,
inclusive of interest at the rate of Libor plus 1% (one percent). Such
installments shall be calculated and paid on a quarterly basis and shall be
equal to 65% (sixty-five percent) of Contractor's gross revenues after deduction
of Royalty (State Share). Any amount of Investment, plus interest, remaining
unpaid after each quarterly installment shall be carried forward to the next
quarter until the full amount of the Investment, plus interest, is repaid. The
Investment Recovery shall be exempt from all Fiscal Obligations.
1.26. "Investor Profit" means the amount the Investor is entitled to as its
share of the dividend (distributable profit) of Contractor. Such amount shall be
calculated and distributed on a quarterly basis, unless the Board of Directors
determines otherwise, and shall be equal to 50% (fifty percent) of the amount of
Contractor cash flow remaining after subtracting from Contractor's gross revenue
for the quarter. Royalty, Investment Recovery, all operating expenditures,
Fiscal Obligations as required pursuant to this Agreement, and any other actual
expenditures made by Contractor during the quarter.
1.27. "Libor" means the annual interest rate on US Dollars ("US$") for one night
offered to the leading banks of the London Interbank by Citibank N.A., London
Branch on the 15th day of each month at 11:00 hr. and published by the Financial
Times Journal in London/United Kingdom. In case the 15th day of the month is a
holiday then the immediately subsequent working day shall be accepted as the
base date for the purpose of such calculation.
1.28. "Royalty (State Share)" means the percentages of the gross production of
the Contractor as shown in Clause 9.3.1. hereinbelow.
1.29. "Board of Directors" means the highest Executive Committee of Karakuduk
Munay Inc. (Contractor) consisting of 8 (eight) members, 4 (four) members each
assigned by Shareholders of the Kazakhstan Side including the Authorized Body
and by the Investor.
1.30. "Fiscal Obligations" means without limitations: all taxes, royalties,
levies, imposts, fees, fines, withholdings, forced savings, mandatory funds,
escrow's, accounting or valuation procedures which impact the timing or
magnitude of Shareholders Of the Kazakhstan Side Profit, Investor's Profit, or
5
Investment Recovery or any other amounts to be received by the shareholders of
the Contractor.
SECTION - 2
OWNERSHIP RIGHTS
2.1. The Contractor, as a result of the expenditures incurred and due to the
obligations undertaken, has the exclusive right to perform any type of
activities to conduct research, exploration, development, operations,
production, sales activities, transportation, export, and any other related
activities or sub-activities regarding any, and all, Hydrocarbon (hereinafter
referred to as "HC") reserves within the boundaries of the Agreement Field, for
the full term of this Agreement.
Republic of Kazakhstan has the authority to protect the ownership right of earth
and subsurface. Contractor is not the owner of natural resources in the
Agreement Field and can only demand the HC produced in accordance with the terms
and conditions of this Agreement.
2.2. Contractor receives the ownership to all HC produced from the Agreement
Field at the point of severance from the wellhead, free of any debts or
financial obligations except as may be provided for in this Agreement.
2.3. If the Government of the Republic of Kazakhstan elects to take Royalty in
kind as provided in Clause 9.3.1. then any such amount of HC shall be brought to
the Point of Delivery by the Contractor and shall be transported by the
Authorized Body on behalf of the Government of the Republic of Kazakhstan
promptly without any delay. Contractor can transport and sell the HC share of
the Government if the Parties so agree. In such a case, Contractor has the
authority to buy and sell the HC share of the Government. If the Government
intends to raise a demand to have its own share partially or wholly sold by the
Contractor, then Government shall notify the Contractor in written form 3
(three) months before the end of each calendar year and semi-annual year and
shall reach an agreement with the Contractor about the terms and conditions and
time period for the sale of its own HC share by the Contractor. Contractor can
be compensated as a result of performing such services. This compensation should
be equal to transportation and marketing expenses. Therefore, the amount
received by the Government out of this HC shall equal to the amount obtained out
of sale after deduction of the mentioned compensation. In case the Contractor
wishes to buy the HC share of the Government, then sales price shall be
determined in accordance with Clause 9.4.2. In such a case, the payment shall
take place on monthly basis. (Within 30 (thirty) days commencing from the end of
the month that the HC share of the Government is sold.)
2.4. Contractor shall bear the ownership of the tangible assets in the Agreement
Field after the execution of the Assignment/Delivery Certificate of the
6
Karakuduk Field in accordance with the balance sheet of the Ministry of Geology
and Preservation of Underground Resources (GHK Zharkyn).
The right of ownership of the tangible assets shall be transferred to the
Authorized Body after the completion of the amortization. Contractor shall be
entitled to use these amortized tangible assets during the whole term of the
Contract free of charge.
2.5. Contractor possesses all and every type of rights on any type of geological
and other information received in relation to the Field Assignment/Delivery
Certificate of the Karakuduk and on any type of geological, geophysical,
technical and other information obtained by the Contractor during the course of
Petroleum Activities.
Contractor, during the term of the Agreement shall give all obtained information
related with the subsurface to the Ministry of Geology and Preservation of
Underground Resources of the Republic of Kazakhstan in accordance with clause
3.37 of the Law of "Subsurface Resources and Raw-Material Operation" subject to
and without prejudice to its right of bearing ownership on this information.
SECTION - 3
DURATION OF THE AGREEMENT AND
TERMINATION
3.1. Duration
3.1.1. Duration of the Agreement is continuous 30 (thirty) years
commencing from the date of the execution of this Agreement and later
on can be extended to a date to be mutually agreed between the Parties
as long as Productive Production of Petroleum and/or Gas is continued
in the Agreement Field.
3.1.2. The information regarding the necessary funding/financing, as
convincing evidence shall be submitted to the Authorized Body prior to
the operations.
3.1.3. Contractor, prior to Field research and operation activities,
shall include the assets in the Field and the geological and
geophysical data related to the Agreement Field to its own balance
sheet in accordance with the issued Assignment/Delivery Certificates.
3.2. Exploration Phase
Exploration activities in the Field shall start within 1 (one) month commencing
from the date of the execution of this Agreement, and/or as indicated in Clause
9.1.5. hereinbelow, to conduct the project studies and field seismic surveys,
7
preparation and operation of temporary production projects, the evaluation of HC
reserves by determining the geological-mining characteristics and the production
capacity of the Field, preparation and completion of the technology and project
documentation needed for the industrial usage of the Field and finally to secure
the necessary permissions and the required funding/financing. The Petroleum
produced (which cannot exceed 100,000 (one hundred thousand) tons during the
full exploration phase) from the exploration and development wells during the
testing of the wells, will belong to the Contractor and will be utilized to
cover the expenditures incurred for the Petroleum Activities. The exploration
phase will be 3 (three) years. The forgoing shall not in any way diminish
Contractor's exclusive right, even after the initial 3 (three) year exploration
phase, to conduct exploration, development, production and other related
activities in all areas within the Agreement Field for the full term of this
Agreement, as provided in Clause 3.1.
3.3. Development and Production Phase
3.3.1. Operation Activities of the Agreement Field shall be started
within 6 (six) months following the approval of Technology and Project
Documentation in the required order. Within the capacity of this
operation, completion of the exploration and the construction as
required for the production wells as indicated in the Project Documents
and the disposal of water and/or the application and realization of
other technologies as necessary to obtain maximum Petroleum, are
included. For the purpose of all permits and licenses required for
development of the Hydrocarbon reserves in the Agreement Field, the
entire Agreement Field shall be considered a single Field for such
purpose, and such permits and licenses shall permit development of any
and all Hydrocarbon reserves within the Agreement Field for the full
term of this Agreement.
3.3.2. Petroleum development, production and sales activities may start
before, but shall start no later than upon the conclusion of the
initial exploration phase and Contractor's obtaining of the permits and
licenses to develop the Agreement Field.
3.4. Termination
3.4.1. Contractor may terminate this Agreement by serving 60 (sixty)
days written notice to the Authorized Body without any cause at any
time. Termination shall not exempt the Contractor from its obligations
which were due but not fulfilled prior to the Contractor's written
notice in this respect. Provided, however, that should at the time such
obligations are due to be performed and Contractor terminates this
Agreement: (i) a reasonable dependable means of export, or authority to
export from applicable government authorities, to export the reasonably
projected production capacity are unavailable to Contractor; or, (ii)
the available means of export become uneconomic; then Contractor shall
be exempt from such obligation.
8
3.4.2. If the Contractor commits a material breach of the Agreement
and/or the License, the Authorized Body shall have the right to demand
that such breach be remedied within a reasonable period of time. If
such breach is not remedied within such period of time reasonably
requested, by the Contractor to remedy such breach, the Authorized Body
shall have the right to notify the Contractor of termination of this
Agreement and such termination shall become effective 90 (ninety) days
after such written notice, unless, Contractor dispute such material
breach, or such remedy of same. If Contractor disputes such material
breach or such remedy of same, then the matter shall be determined by
arbitration in accordance with Clause 11.9.
3.4.3. In case of the termination of the Contract; Contractor can
receive back all of its assets existing in the Agreement Field of which
their cost has not been fully amortized before termination. Amortized
assets are the property of the Authorized Body but nevertheless can be
used by the Contractor during the term of the Agreement. In case of
termination, Contractor shall hand-over and deliver the Agreement Field
to the related State Authorities in the condition as required by the
principles of mining and health, and of the protection of subsurface
resources and natural environment.
SECTION - 4
PRINCIPLE RIGHTS AND OBLIGATIONS
OF THE CONTRACTOR AND THE
INVESTOR
4.1. Rights of the Contractor and the Investor
Contractor has the following rights and authority:
4.1.1. The exclusive right of conducting Petroleum Activities in the
Agreement Field in accordance with the provisions of this Agreement.
4.1.2. Right of entry to the Agreement Field and to the other fields
in order to conduct Petroleum Activities.
4.1.3. Right for the utilization of local and world-wide known most
effective methods and technologies in order to conduct the Petroleum
Activities.
4.1.4. Right for selecting any type of activity form and administrative
organization structure within the boundaries of the purpose defined in
the Agreement.
4.1.5. Right to construct and equip industrial and social facilities
in the Agreement Field and to use public facilities and communication
systems in or outside of the Agreement Field provided that an
agreement is reached with the possessors of such facilities in that
respect in order to maintain the activities under normal and standard
conditions.
9
4.1.6. Right of utilizing the services of local and/or foreign
Sub-Contractors who have required technical facilities and experience,
in case of necessity during the implementation of the Petroleum
Activities.
4.1.7. Right of using own Petroleum Profit and the related products in
the way as desired.
4.1.8. Right of participating in the Petroleum Activities and in any
type of other activities conducted in other fields either within the
lands or outside the lands of the Republic of Kazakhstan and opening
branch offices and liaison offices thereof.
4.1.9. Right to assign and transfer wholly and/or partially its own
rights, priorities and benefits to third parties or to authorize those
by another method provided that practice of such right shall be
compliant with the provisions of the Agreement and shall be notified to
the Authorized Body in written form. Such notification shall contain,
as being completely compliant to this Agreement, all changes,
amendments and additions implemented prior to delivery for the purpose
of identifying assignee and/or authorized party as the case may be.
4.1.10. Right of submitting applications to the Government and/or to
the Authorized Body for the re-negotiation of the License and the
contractual terms and conditions in the case of occurrences outside the
contractual terms and conditions after the execution of the Agreement.
4.1.11. Right of priority in the case of extension of the term of the
existing License and Agreement and/or executing a new agreement in the
Agreement Field.
4.1.12. Right to relinquish a portion of the Field in accordance with
the conducted program studies or relinquishing a portion of the Fields
before completing such studies.
Nevertheless, the relinquished portion of the Field shall be in the
simple geometric shape when it is divided from the Agreement Field by
straight or cracked line.
4.1.13. Right to export, and the right to receive export quotas and
export licenses for the full production capacity of HC from the
Agreement Field. Additionally, the right, but not the obligation, to
negotiate Contractor's own quota with other related countries
authorized bodies and establishments, and to have the Republic of
Kazakhstan recognize and grant export quotas and export licenses in
regard to any such quota.
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4.1.14. Right to use the existing Pipeline for the purpose of
transferring the produced Hydrocarbons to the Baltic Sea, Kainingrad
and Vendspils ports and/or to Black Sea, Novorosiysk Port. And the
right of priority to use all other available means of transportation,
storage, and marine terminals. The transportation fees and tariffs
charged to the Contractor shall be no more than those paid by any other
transporter.
4.1.15. Right to unobstructed use of the surface of the Agreement Field
in conjunction with Petroleum Activities, and the right to water
necessary for Petroleum Activities.
4.1.16. Right to keep hard currency proceeds of HC sales, free of
mandatory currency conversions in accordance with the laws of the
Republic of Kazakhstan.
4.1.17. Right to have a hard currency bank account within the Republic
of Kazakhstan and hard currency bank accounts outside of Republic of
Kazakhstan as Contractor may deem appropriate, in accordance with the
laws of the Republic of Kazakhstan.
4.1.18. Right to import and export same as that provided to Foreign
Contractor and Foreign Contractor's personnel pursuant to Clause 9.2.
4.1.19. Right to defer the work obligations of the Contractor as
mentioned in the License, in case of inability for the exportation of
Hydrocarbons, for the same period.
4.1.20. Investor possesses the following rights:
o Right to Investment Recovery and Investor Profit;
o Right of having been exempted from every type of
Fiscal Obligations on the Investment Recovery;
o Right to export, and the right to receive export
quotas and export licenses for all Crude Oil taken in
kind by the Investor pursuant to this Agreement.
Additionally, the right, but not the obligation, to
negotiate Investor's own quota with other related
countries authorized bodies and establishments and to
have the Republic of Kazakhstan, recognize and grant
export quotas and export licenses in regard to any
such quota;
o Right to use the existing Pipeline for the purpose of
transferring the produced Hydrocarbon to the Baltic
Sea, Kainingrad and Vendspils ports and/or to Black
Sea, Novorosiysk Port. And the right of priority to
use all other available means of transportation,
storage, and marine terminals. The transportation
fees and tariffs charged to the Investor shall be no
more than those paid by any other transporter;
11
o Right to market and sell any, or all, Crude Oil taken
in kind to any purchaser within or without the
Republic of Kazakhstan;
o Right to retain export proceeds outside of Kazakhstan
without any obligation to return same to Kazakhstan
after fulfilling the Fiscal Obligations mentioned in
this Agreement;
o Right to export all Investment Recovery, Investors
Profit and all other amounts due Investor pursuant to
this Agreement;
o Right to keep foreign currency and to exchange
Republic of Kazakhstan currency for hard currency and
the right to exchange hard currency for the Republic
of Kazakhstan currency at the most favorable rate
available in the Republic of Kazakhstan in accordance
with the laws of the Republic of Kazakhstan; and
o Right to import and export same as that provided to
Foreign Contractor and Foreign Contractor's personnel
pursuant to Clause 9.2..
4.2. Obligations of the Contractor
Obligations of the Contractor during the implementation of the Agreement are as
follows:
4.2.1. Using the Agreement Field only for the purposes defined in the
Agreement.
4.2.2. Detailed geological studies and investigations of the subsurface
resources as well as supply of the Markschader service and to guarantee
that all the reports issued about the product and the associated
products are true and correct.
4.2.3. In case of deficiencies in the legislation of the Republic of
Kazakhstan with reference to the Petroleum Activities, for the cases
mentioned herein below, Contractor shall follow and practice the
International Principles:
o Field usage
o Proper implementation of the Petroleum Activities for
the security of personnel and population.
o To protect subsurface resources, air, earth,
forestry, water, zoological animates and other
facilities from harmful effects arising from the
Petroleum Activities. Nevertheless, Contractor shall
have no responsibility for the damages given to the
natural environment prior to the effectively of the
Agreement.
12
o To protect places and areas with historical and
cultural value.
o To indemnify the nature and lands damaged during the
course of the Petroleum Activities at its own cost
for the purpose of future utilization.
4.2.4. To permit all types of activities and studies for the research,
exploration, operation and production of other natural resources,
excluding HC, to be conducted by other persons including giving
permission for the usage and utilization of the communication
facilities and other public facilities provided that such activities
shall not effect and prevent the Petroleum Activities in the Agreement
Field.
4.2.5. To be compliant with the technological schedules, drawings and
projects approved within the scope of the current mining study norms
related to the conduct of Petroleum Activities.
4 2.6. To give priority to the equipment, materials and products
manufactured locally in the Republic of Kazakhstan as long as these are
competitive in terms of quality, price, working capacity and delivery
terms.
4.2.7. To give preference to the services of Kazakh Entities and
Organizations such as airways, railways, hydraulic works, etc.
including the usage and utilization of motor vehicles to be used during
the course of Petroleum Activities, as long as these local services are
competitive in terms of price, effectively, and quality.
4.2.8. To give priority to the work-force of the Republic of Kazakhstan
during the course of the Petroleum Activities by employing required
qualified engineers and technical team and where there is a shortage or
insufficiency, to provide training and education opportunities to these
staff at the account of the Contractor in accordance with the agreed
program.
4.2.9. To submit to the Board of Directors; the program of determined
studies, and every type of information obtained during the
implementation of those of those (geological, industrial, statistical,
etc. account reports in force) in accordance with the standards.
4.2.10. To give permission to the Auditing Organs of the Republic of
Kazakhstan for free entry and visit the work-place, to provide them
with all necessary documentation and appropriate conditions for the
purpose of enabling these units to perform their duties properly.
4.2.11. In case of a necessity, to provide the information obtained
during the course of the Petroleum Activities to the third parties,
provided that a mutual agreement is reached by the Parties in this
respect.
13
4.2 12. To effectuate tax payments and other payments as provided in
the existing legislation of the Republic of Kazakhstan.
4.2.13. In case of a cease the rights on the Agreement Field, or
partial relinquishment in accordance with Clause 4.1.12 hereinabove,
the Contractor, shall rearrange the land by clearing and removing all
mass and garbage occurred as a result of the Petroleum Activities
related with the Agreement at its own cost, in compliance with the
instructions of State Mining, Health, Subsurface Resources and Natural
Environment Protection Organs.
4.2.14. During the term of the Agreement it is expected that the total
financial requirements will reach to an aggregate amount of US $
216,000,000 (two hundred sixteen million US Dollars).
SECTION - 5
ASSISTANCE AND SUPPORT OF THE
AUTHORIZED BODY
5.1. Authorized Body, where necessary, shall provide help and assistance to the
Contractor for the following matters:
o Within and outside the boundaries of the Republic of
Kazakhstan; to obtain all required licenses and permits
necessary for the transportation of products, raw-materials
and consignment.
o The application and usage of the latest techniques, technology
and equipment.
o During the purchase of foreign technology and equipment, to
prepare and issue customs permissions and to provide foreign
currency.
o To provide all required permissions and licenses to open
Foreign Currency Bank Accounts within and outside the
boundaries of the Republic of Kazakhstan.
o To obtain every type of geological, geophysical, etc. data
belonging to entities and/or organizations related or not
related with the Agreement field but can be used for an
efficient Petroleum Activity.
o To apply to obtain the approval of the Cabinet of Ministers of
the Republic of Kazakhstan regarding the exemption of the
export duty for the exportation of the HC.
14
5.2. Authorized Body, by furnishing the Contractor with the authority of
conducting Petroleum Activities within the boundaries of the Agreement Field, is
deemed to be having delivered the authority and duty of auditing the realization
of the Petroleum Activities to the Board of Directors in accordance with Section
6 hereto.
SECTION - 6
BOARD OF DIRECTORS
6.1. In order to realize this Agreement, the Board of Directors of the
Contractor should be established within 30 (thirty) days commencing from the
execution date of this Agreement. Board of Directors shall realize the general
management and control of the Petroleum Activities including the approval of
Working Program, Budget, and Work and Project Documentation.
6.2. Board of Directors shall consist of 8 (eight) members (referred to here as
"Members"), 4 (four) members each assigned by Shareholders Of The Kazakhstan
Side including the Authorized Body and by the Investor. Voting shall be
conducted in accordance with the Articles.
6 3. All other items which are not provided otherwise in this Agreement related
to the rights, obligations and authorities of the Directors or Board of
Directors will be applicable as mentioned in the Articles.
SECTION - 7
OPERATIONAL AND FINANCIAL REQUIREMENTS
AND THE BUDGET
7.1. Exploration
The project related to the research, exploration, seismic operations and trial
production of the wells drilled in the Field shall be prepared in accordance
with the principles and the instructions in force related with and applicable
for geological exploration and petroleum production activities for the
protection of subsurface resources and the population; providing all geological
investigations, natural environment and other operational buildings, facilities
and equipment from the harmful effects of the activities and studies conducted.
The project, as required, shall be confirmed and attested by the authorities of
state mining control, subsurface resources, economical and biological resources
and hygienic and public health control. Geological and geophysical working plans
shall be approved by the Board of Directors, in accordance with the current
practices.
15
The following issues shall be confirmed for the field trial operation project:
o The quantity and the location of the exploration and
production wells.
o Geological, mining, geophysical and laboratory studies and
investigations conducted for the determination of the physical
and hydrodynamic characteristics, of petroleum stratum
particularities and productive stratum and of the production
possibilities in the wells.
o Predictions for Petroleum and Gas production levels and when
necessary predictions for water pumping capacity during the
trial production.
o Evaluation and the confirmation of the ecological payments and
of the activities for the protection of subsurface resources
and natural environment and for the supply of safety and
security during the Petroleum Activities in the Field and the
construction of drainage.
On the basis of the trial study approved by the Board of Directors,
field-arrangement, project-account documentation containing the issues of
Petroleum Gas and Condensate and drainage usage shall be prepared and issued
within the trial production period.
7.2 Development and Production
7.2.1. Preparation of the project documentation and the conduct of the
design works for the Field and to put the Field into the operation, can
only be realized following the trail production by the state reserves
commission at the reserves recognized by the international standards in
accordance with the Petroleum production and the "Principles of
Operating Petroleum and Gas Fields."
The project documentation (Field operation technical chart) shall be prepared
and issued in accordance with the provisions of by-laws in force related with
the protection of sub-surface resources, natural environment, health and mining.
The organization of production of Petroleum from the Field as an industrial
product shall be realized in accordance with the project budget that has been
prepared in compliance with the field operations technical chart, approved and
attested by Board of Directors. Project documents related with the Petroleum
Activities shall include the following items;
o Determination of the production targets, method of starting
the operation, selection of the stimulation methods to be
applied to the wells,
o Determination of the production wells,
16
o Production dynamics of the Petroleum, Gas and liquids in the
wells, injection of chemicals,
o Demands and recommendations about the program of the well and
the drilling activities, selection of well location,
o Recommendation for drilling operation, equipment and materials
used on the surface and in the well,
o Recommendation for the production of the wells and the demands
for collection system (including the collection and the usage
of the associated gas and the water), proposals for the motor
vehicles, machinery-equipment and their locations related with
the Petroleum production, storage and transportation,
o Proposals for the supply of materials and equipment for the
usage of production and other services, in order to realize
the principles of the capital investment and the petroleum
production,
o Proposals for the actual period for the field operation
phases, necessary expenditures, evaluation of the capital
investment,
o Determination of the types and the quantities of all
activities and studies needed for the exploration of the Field
and the principles of operating a petroleum and gas field as
well as the determination of the rules and principles for the
protection of the sub-surface and natural environment,
job-safety, health and appropriate fire and security rules.
7.2.2 Production of Associated Gas
The Associated Gas, being produced together with the Petroleum shall be used in
line with the needs of the Contractor (heating, product heating, etc.). The
usage of the Associated Gas shall be made in accordance with the project
technical documentation. In case there is an impossibility for the usage of the
Associated Gas (this will be confirmed on the basis of project and technological
requirements), the Associated Gas shall be flared, with the permission of the
Ministry of Environment.
7.3. Procedures and Approval Method of the Operational Documentation
Project documentation related with the research, exploration, development and
production activities defined in clauses 7.1 and 7.2 shall be prepared and
issued by the Contractor in accordance with the determined and agreed principles
and procedures (or state control shall be applied to those documentation in
terms of being compliant with working conditions, job safety, technology,
17
ecology and health regulations) and shall be submitted to the Board of Directors
for investigation and approval. Such documentation shall receive approval or
disapproval within 30 (thirty) days, commencing from the date of delivery to the
Board. In case of a requirement by the Authorized Body for a change and/or
modification to the project documentation, following the receipt of the
notification by the Parties containing changes and the modifications required to
be conducted by the Contractor, the Board shall meet to discuss such issue
within 15 (fifteen) days commencing from the date of the receipt of such
notification. Changes and modifications agreed by the Parties and incorporated
to the project documentation shall be deemed to be accepted and approved. Any of
the Parties who could not reach an agreement about the project shall present the
case to an industrial specialist (expert) to resolve the disputes. Contractor
not accepting the project is not obliged to finance the studies and the
activities and shall be reimbursed the cost of all Petroleum Activities already
conducted by the Contractor.
Following the acceptance of the project documentation related with the Petroleum
Activities at every stage, Contractor, at the soonest time possible and prior to
the first month of the each calendar year, shall prepare and issue the detailed
plan and budget of the works for the subsequent year and shall submit it to the
Board of Directors for review and approval.
Contractor at any time may submit budget changes and modifications to the Board
of Directors about research, exploration, operation and production. All changes
and modifications shall be prepared and issued in accordance with the principles
and procedures defined in Section-6 hereto.
As a result of the additional information obtained during the course of the
Petroleum Activities, in case the Agreement Field is determined as larger or
smaller than previously considered, then such field shall be expanded or reduced
to the previously considered magnitude of the Agreement Field. Agreement Field
shall be extended as required with the execution of an amendment to the previous
Agreement.
Contractor shall prepare a general plan for the purpose of improving working
conditions for the subsequent calendar year in accordance with the principles of
job-safety and technical safety and security applicable in the Region and
following having those confirmed by the organs of Gosgortehnadzor in line with
the procedural applications shall present to the Board of Directors for
approval.
7.4. Petroleum Activities are conducted in accordance with the Work Program and
the Budget (referred to here as "Budget") approved by the Board of Directors.
The General Manager and the Assistant General Manager of the Contractor shall
jointly prepare and submit the Work Program and the Budget for the subsequent
year, 3 (three) months prior to the start of that program year for the approval
of the Board of Directors. Any changes and/or amendments to be made to the Work
Program and to the Budget within the year shall also be submitted for the
approval of the Board of Directors separately.
18
SECTION - 8
EXPENDITURES AND COMPENSATION
8.1 Payment of Expenditures
Investor shall provide the Investment to the Contractor excluding cash
requirements which cannot be met by the self generated income of the Contractor,
as Contractor may determine pursuant to the Articles, excluding any amounts
Contractor may wish to borrow from third parties. All such amounts provided as
the Investment by the Investor to Contractor, shall be repaid by the Contractor
to the Investor as Investment Recovery.
SECTION - 9
COMMERCIAL AND FINANCIAL TERMS AND
CONDITIONS
9.1 Financial Matters
9.1.1. All calculations to be made between the Parties in relation
with the Agreement shall be made in Tenge and US$.
9.1.2. The price for Hydrocarbons voluntarily marketed by the
Contractor in the local market within the boundaries of the Republic of
Kazakhstan shall be freely decided by the Contractor.
9.1.3. Foreign currency exchange transactions to be carried out by the
Contractor shall be in compliance with the laws and regulation in force
in the Republic of Kazakhstan. Contractor is free to use the foreign
currency obtained out of the Petroleum Activities within or outside the
boundaries of the Republic of Kazakhstan. All foreign currency
transactions related with the Petroleum Activities shall be carried out
in US$ or in any other convertible currency depending upon the mutual
agreement between the Parties.
9.1.4. Re-exportation of the foreign currency brought into the Republic
of Kazakhstan by the foreign sub-contractors for the implementation of
the Petroleum Activities shall be realized in accordance with the laws
and regulations of the Republic of Kazakhstan.
9.1.5. Financing of the Petroleum Activities has to start within 6
(six) months following the secure of the License for the Land defined
in this Agreement (Land allocated for the Petroleum Activities).
19
9.2. Customs
9.2.1. In case of a requirement for the services of a foreign
Contractor in order to fulfill the obligations and terms and conditions
of this Agreement, the foreign SubContractor can import all equipment,
machinery, vehicle, work-shop, material, spare parts related with the
Petroleum Activities and its own goods into the Republic of Kazakhstan
free of custom duties and funds without any prohibition. The above
mentioned consignment includes, without any limitation, mobile dwelling
units, equipment, raw-materials, sub-materials, convenient products,
mobile offices, office equipment and stationary, furniture, audio and
video equipment, communication equipment (including satellite
communication), medical and educational equipment, hobby and sports
facilities and every type of educational and information containing
press and books provided that these are not prohibited by the laws of
the Republic of Kazakhstan. The machinery and equipment to be brought
shall be fully compliant to the laws and regulations of the Republic of
Kazakhstan in terms of technical security and safety, health and
hygiene norms, protection of subsurface and natural environment.
9.2.2. The personnel of the Foreign Sub-Contractors dealing with the
Petroleum Activities can import into the Republic of Kazakhstan their
own private property and goods as well as house-hold goods with the
exemption of taxes in order to meet with their own and family needs,
provided that it is not against the laws and regulations of the
Republic of Kazakhstan.
9.2.3. Any goods and property imported to the Republic of Kazakhstan in
accordance with clauses 9.2.1 and 9.2.2 is exempted from custom duties
and taxes during exportation.
9.3. Taxes and Payments
9.3.1. Fiscal Obligations:
Contractor and Investor shall have the obligation to pay the Fiscal
Obligations, as mentioned in this Clause 9.3.1. Any other Fiscal
Obligation applicable to Contractor shall be subject to tax
stabilization as mentioned in Clause 9.3.1(H) hereinbelow.
A) Contractor shall pay the following nation wide taxes in
accordance with the existing tax law:
o Income Tax at the rate of 30% (thirty percent);
20
o Dividend tax deductions: The shareholders of the
Contractor shall be subject to a 15% (fifteen percent)
Dividend tax on the distributed dividends of the
shareholders. The Contractor shall be obliged to
withhold such tax on distributions to Investor
(Investors Profit) or to Shareholders of Kazakhstan
Side (Shareholders of Kazakhstan Side Profit);
o Value Added Tax at the rate of 20% (twenty percent)
applied to expenditures made locally in the territory
of the Republic of Kazakhstan as mentioned in the
existing tax law. In case of sales of Hydrocarbons
through exportation, if the paid Value Added Tax is
more than the collected Value Added Tax during any
period, then the Contractor shall be entitled to be
reimbursed either by payment by the Republic of
Kazakhstan or by crediting the amount against its
Fiscal Obligations. In case of no reimbursement through
direct payment or crediting against Fiscal obligations
within 10 (ten) days following the application of the
Contractor then the Contractor will be entitled to
receive interest on the late reimbursement in
accordance with the tax laws of the Republic of
Kazakhstan; and
o If applicable, tax on securities transactions
accordance with the existing laws of the Republic of
Kazakhstan. No income or gain shall be recognized by
the Contractor on the creation of or transfer of an
interest in the Agreement.
B) Contractor shall pay the following special taxes and payments as
mineral resources user:
o An Excess Profits Tax may be required to be paid by the
Contractor on the basis of the Real Internal Rate of
Return (hereinafter referred to as "RIRR") of the
Contractor, calculated at the end of each calendar year
staring from the effective date of this Agreement. The
RIRR shall be determined after discounting the
Contractor's annual net cash flow (hereinafter referred
to as "NCFs") for inflation on a compound basis from
the effective date of this Agreement. NCF shall be
calculated after reducing Royalty, operating expenses,
other payments, amortized amount of the capital
expenditures and Fiscal Obligations, from the gross
revenues of the Contractor. The inflation rate used for
this purpose shall be the World Consumer Price Index
set out in "Interna- tional Financial Statistics"
published by the International Monetary Fund for each
applicable year. If any such calculation at the end of
any calendar year (excluding Excess Profit Tax for such
calendar year but including Excess Profit Tax paid in
all prior years) produces an RIRR in excess of 23%
(twenty three percent), the Contractor shall pay an
Excess Profit Tax on the Contractor's NCF for that
calendar year as follows:
21
(i) an Excess Profit Tax of 10% (ten percent) shall
be applied to that portion of the difference between
the NCF corresponding an original RIRR in excess of
23% (twenty three percent) but less than 25% (twenty
five percent) and the NCF corresponding the
recalculated RIRR of 23% (twenty three percent).
(ii) if the original RIRR is greater than 25% (twenty
five percent), then the RIRR shall be recalculated
after subtracting the Excess Profit Tax from the NCF
as calculated pursuant to (i) above. If after such
recalculation the RIRR continues to be greater than
25% (twenty five percent), then in addition to (i)
above, an Excess Profit Tax of 20% (twenty percent)
shall be applied to that portion of the difference
between such NCF corresponding an original RIRR in
excess of 25% (twenty five percent) but less than or
equal to 30% (thirty percent) and the NCF
corresponding the recalculated RIRR of 25% (twenty
five percent).
(iii) if the original RIRR is greater than 30%
(thirty percent), then the RIRR shall be recalculated
after subtracting the Excess Profit Tax from the NCF
as calculated pursuant to (ii) above. If after such
recalculation the RIRR continues to be greater than
30% (thirty percent), then in addition to (ii) above,
an Excess Profit Tax of 30% (thirty percent) shall be
applied to that portion of the difference between
such NCF corresponding an original RIRR in excess of
30% (thirty percent) but less than or equal to 35%
(thirty five percent) and the NCF corresponding the
recalculated RIRR of 30% (thirty percent).
(iv) if the original RIRR is greater than 35% (thirty
five percent), then the RIRR shall be recalculated
after subtracting the Excess Profit Tax from the NCF
as calculated pursuant to (iii) above. If after such
recalculation the RIRR continues to be greater than
35% (thirty five percent), then in addition to (iii)
above, an Excess Profit Tax of 40% (forty percent)
shall be applied to that portion of the difference
between such NCF corresponding an original RIRR in
excess of 35% (thirty five percent) but less than or
equal to 40% (forty percent) and the NCF
corresponding the recalculated RIRR of 35% (thirty
five percent).
(v) if the original RIRR is greater than 40% (forty
percent), then the RIRR shall be recalculated after
subtracting the Excess Profit Tax from the NCF as
calculated pursuant to (iv) above. If after such
22
recalculation the RIRR continues to be greater than 40%
(forty percent), then in addition to (iv) above, an
Excess Profit Tax of 50% (fifty percent) shall be
applied to that portion of the difference between such
NCF corresponding an original RIRR in excess of 40%
(forty percent) and the NCF corresponding the
recalculated RIRR of 40% (forty percent).
o Royalty. The Contractor will give 8% (eight percent) of
the gross production as Royalty. The authorized
authorities may elect to take Royalty either in cash or
in kind; and
o Bonuses. Contractor shall pay US $513,000 (five hundred
thirteen thousand US Dollars) within 7 (seven) months
in equal monthly installments starting from the end of
the 5th (fifth) month following the registration of
this Agreement with the Ministry of Geology and
Preservation of Underground Resources, as an
unrecoverable signature bonus; and
Contractor will pay US $500,000 (five hundred US
dollars) when the cumulative production reaches to
10,000,000 (ten million) barrels and US $1,200,000 (one
million two hundred US Dollars) when the cumulative
production reaches to 50,000,000 (fifty million)
barrels as one time production bonus.
The Royalty and Production Bonuses will be considered as tax
deductible expenditures for the calculation of the income tax
and the excess profit tax.
C) Contractor shall pay the following local taxes and fees:
o Rental for the Agreement Field as agreed with the local
authorities, in accordance with the existing
legislation of the Republic of Kazakhstan. The
calculation of the Rental shall be same as applied to
other petroleum companies working in Mangistau Region;
o Property Tax at the rate of 0,5% (half percent) applied
to depreciated value of the capital goods and non
productive assets (non material assets excluded) every
year;
o Vehicle tax according to the existing legislation;
o Fee for the registration of the Contractor according to
applicable legislation;
23
o Fee for the licenses for certain activities according
to the applicable legislation; and
o Fee on auction sales if applicable according to the
existing applicable legislation.
D) Contractor will be obliged to make the following payments and
deductions:
o The contractor is obliged to withhold the income tax for the
local and foreign personnel working for the Contractor in
accordance with the existing tax law. The foreign personnel
of the Contractor will be subject to 0,1% (zero point one
percent) property tax on the properties they own in the
Republic of Kazakhstan;
o Deduction of 2% (two percent) for Employment Development
Fund from the Kazakhstan national personnel salaries;
o Local taxes for the usage of water and the forestry
resources as mentioned in the legislation and the payments
for the protection of the environment in accordance with the
provisions of the existing legislation;
o Payment for the additional and special services rendered by
the authorized governmental organizations in the Republic of
Kazakhstan, if applicable to all other citizens and
enterprises of the Republic of Kazakhstan; and
o Deductions for the state social insurance in regard to the
Contractor personnel salaries.
E) Transfer Pricing
If the Contractor applies in its commercial or financial
transactions with a related party prices which differ from prices
applied between independent enterprises, the Tax Service shall
adjust the taxpayer's income by the price difference for taxation
purposes, if one of the parties non-resident of the Republic of
Kazakhstan, or enterprise entitled to tax preferences. The tax
service, when effecting such actions, may redefine the given
transactions for the purpose of determining their actual nature
and imposing sanctions.
24
F) General Tax Liability
The activities of the Contractor which are not related to the
Petroleum Activities will be taxed according to the existing
legislation.
G) Sub-Contractors and affiliates of the Contractor
The Contractor is obliged to inform its Sub-Contractors and
affiliates for their tax liabilities according to the existing
legislation.
H) Tax Stabilization
The Parties hereto agree that this Contract has been
negotiated and agreed upon, based upon the tax structure set
forth herein and the laws of the Republic of Kazakhstan as the
date of the execution hereof. The Government of Republic of
Kazakhstan expressly agrees that any changes to tax laws of
the Republic of Kazakhstan occurring after the date of this
Agreement shall not affect the tax obligations of the
Contractor or the Investor, save and except where such change
is in the nature of a substitution for a tax identified herein
and does not cause an increase in the rate for that tax as of
the date of this Agreement. In case of any deterioration in
the position of either Party, or the Investor, resulting from
a change in legislation or any superseding international
treaty which occurs subsequent to the execution date of this
Agreement, the Parties shall meet promptly and shall agree on
such amendments to this Agreement as are necessary to restore
the economic balance of the Parties, or the Investor, as
applicable.
I) Payment
The Royalty, bonuses and excess profit tax will be paid by the
Contractor to an account notified by the chief tax inspector
of the Ministry of Finance. All other taxes and fees will be
paid to the authorities shown in the laws and the state budget
of the Republic of Kazakhstan. The fines and penalties,
incurred because of the delayed payments and wrong calculation
of the taxable income will be paid in accordance with the
existing state budget and tax laws.
J) Audit right of the tax authorities
The tax authorities are entitled to audit the accounts,
foreign banks inclusive, all bank accounts and the Contractor
agreed to provide to the tax authorities, all related
information and documentation.
25
9.4 Compensation
9.4.1 Contractor and Investor may take and freely export its own share
of the HC produced in accordance with the terms and conditions of this
Agreement.
9.4.2 The Shareholders of the Kazakhstan Side may elect to take
Shareholders of the Kazakhstan Side Profit in kind. The Authorized Body
may elect to take Royalty in kind. Investor may elect to take Investors
Profit and Investment Recovery in kind. For the valuation of
Hydrocarbons for the purpose of calculating amounts of Hydrocarbons
taken in kind and for all purposes pursuant to this Agreement, the
price applicable shall be determined by a separate agreement of the
Parties, taking into account Hydrocarbon quality and prevailing market
prices in effect during the period in question at the locations where
the Contractor has been making Hydrocarbon sales, as well as applicable
transportation and marketing costs at the market prices in effect
during the period in question.
9.5 Accounting Procedures and Auditing
9.5.1 The Board of Directors shall approve an accounting procedure to
be applicable to this Agreement and to the Contractor. The expenditures
of the Contractor will be calculated in US Dollars during the whole
term of the Contract in order to calculate the Investment Recovery and
the Contractors Profit. Such accounting procedure shall:
o provide for accounting in US dollars for all purposes and
calculations pursuant to this Agreement and also a Tenge
account for the purpose of the inspection of the tax
auditors;
o provide for accounting in accordance with internationally
accepted and recognized accounting systems and consistent
with the standard practice of the international petroleum
industry as well as the provisions of the Agreement, the
Articles and the Standard Oil and Gas Accounting Systems of
the Republic of Kazakhstan;
o provide for depreciation schedules and for the option of
expensing capital expenditures;
o provide for the entire Agreement Field to be considered as a
single area for the purposes of the calculation of Fiscal
Obligations; and
o provide for Contractor income subject to Income Tax and to
be calculated by deducting from gross revenues from the
Agreement Field all Royalties, all other Fiscal Obligations
which the Contractor is subject to in accordance with this
Agreement, contributions to the reserve fund, and all direct
and indirect costs reasonably necessary for conduct of
Contractor's business.
26
9.5.2. Auditing of the Contractor's financial activities shall be
conducted by the related authorized State Organ. In case it is needed,
Contractor may invite any Organization as Auditor.
9.5.3. Status of the accounting records, correct filing of the
financial results, effectuation of the payment transferred to the
budget shall be made completely and on time, and other issues related
with the taxation shall be followed by the State Tax Office of the
Republic of Kazakhstan.
SECTION - 10
PROTECTION OF SUBSURFACE RESOURCES,
NATURAL ENVIRONMENT AND LABOR
AND POPULATION SAFETY
Field research, exploration and development activities shall be conducted in
accordance with the laws and regulations of the Republic of Kazakhstan, with
technical principles, and the principles for the protection of job safety and
natural environment and finally in accordance with the precautions for the
protection of all subsurface, earth, hydraulic resources, atmosphere, zoological
and vegetal life, historical and cultural properties, and with the precautions
for security and health protection in the Agreement field. Contractor shall
conduct the following activities during the design and construction studies of
the auxiliary buildings:
. Using advanced local and international techniques and technologies for
the purpose of preventing any waste and to obtain the maximum
production in order to obtain the maximum benefit.
. To minimize the harmful effects given to the natural environment and
to prevent the destruction and uninhabitance of the lands including
technical and biological recultivation.
. To protect subsurface and earth hydraulic resources from pollution and
loss.
. To protect air from every type of harmful substances including
facilitated (such as heating rooms, deposed petroleum production
points containing Hydrocar- bon, Gas and etc.) and unfacilitated (such
as diesel units of the drainage equipment, vehicles, tractors, etc.)
pollution resources.
. To protect the zoological and vegetal life and historical and cultural
properties covered by the RED BOOK of the Republic of Kazakhstan.
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. To provide safe and healthy working conditions, to organize the
control of job safety status and to convey the information on these
issues to the employees on time.
During the implementation of the Petroleum Activities, continuous official and
industrial ecological control for the protection of natural environment,
ecological monitoring shall be supplied in the Agreement Field. During the trial
production project stage, ecological investigations of the wells, well
surroundings in the Agreement Field shall be made and the areas needs to be paid
exclusive attention shall be determined. In addition, possibility of potential
accident cases shall be analyzed and plans containing these studies to be
applied and the programs for the normalization of the region for ecological
purposes shall be prepared.
Funds allocated for the Contractor's activities to inspect and analyze the
ecological status of the lands, to organize and realize environment protection
activities shall be deposited in the account of nature protection payments.
SECTION - 11
OTHER LEGAL ISSUES
11.1. Transfer and Assignment of the Rights
11.1.1. Contractor may transfer and/or assign its rights, liabilities,
obligations or shares related with the Agreement wholly or partially to
the third parties.
11.1.2. In case of any transfer and/or assignment of rights partially,
the Contractor shall be jointly and severally liable along with the
assignee in connection with the Agreement.
11.2. Payment Related with Field Allocation and Usage Right
In case of an allocation of a land belonging to any other real and/or juridical
body for the realization of the Petroleum Activities, Contractor shall make
payment to the landlord or to the person who possesses the usage right on the
land, since the usage of such land is limited because of the Petroleum
Activities.
11.3. Insurance
Contractor is obliged to insure its assets in compliance with the legislation of
the Republic of Kazakhstan and in accordance with the recognized world
standards, norms and customer practices.
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11.4. Legal Adjustments In Relation With Working Conditions
Employment, redundancy, resignation, salary, work and leave status, social
indemnity and social security of the citizens of the Republic of Kazakhstan
employed by the Contractor shall be dealt with in accordance with the
legislation and communiques in force in the Republic of Kazakhstan and with
recognized world norms and standards. Unless otherwise indicated by the
international treaty signed between the Republic of Kazakhstan and the country
of the foreign subcontractor, for the foreign personnel employed by the
Contractor; laws and regulations of the Republic of Kazakhstan is applicable.
11.5. Force-Majeure
11.5.1. In case one of the Parties do not fulfill its obligations due
to any Force-Majeure condition, then such Party shall notify the other
Party in written form about the commencement date of such Force-Majeure
condition within a reasonable time period.
11.5.2. Within the defined time period, the obligations of the Party
directly effected by loss shall be frozen during the existence of the
Force-Majeure conditions.
11.5.3. Term of the Agreement, shall be extended automatically as long
as the Force-Majeure case lasts in equal time period including the time
for the repair of equipment and technology.
11.5.4. Force-Majeure conditions are not accepted as valid excuses for
the Parties not to fulfill their financial liabilities and
obligations.
11.6. Local Consumption
11.6.1. In case of a declaration of an extra-ordinary status by the
Government and/or a decision that the Petroleum need in the local
market is not met during the term of the Agreement, then, Authorized
Body can demand the HC share of the Contractor for the local market.
Such demand shall be notified to the Contractor in written form 100
(hundred) days before and a separate agreement shall be executed in
that respect.
11.6.2. Maximum amount of HC given by the Contractor to meet with the
requirement of the local market in accordance with Clause 11.6.1 herein
above shall be equal to the shortage in the local market and to the
shares given by other contractors equipped with production rights by
the Republic of Kazakhstan.
11.6.3. In case the Contractor delivers its own share in accordance
with Clause 11.6.1 herein above to meet with the requirements of the
local market, the payment to be made to the Contractor, shall not be
less than the prices agreed between the Contractor and the buyers and
shall also include the penalty and the termination fee payable by the
Contractor for its failure in meeting its commitments as a practical
result of the Clause 11.6.
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11.6.4. When Contractor markets its own HC share in the world market,
then Authorized Body shall not intercept to such HC share to meet with
the requirements of the local market. However, in case of such
interception, Authorized Body shall pay to the Contractor on the basis
of world market prices in foreign currency for its HC share and the
penalty and termination fee Contractor shall be liable to pay as a
result of its failure in meeting with its commitments to the buyers.
11.6.5. In case the payment for the delivery made by the Contractor in
accordance with Clause 11.6 herein above is not effectuated within 30
(thirty) days commencing from the date of loading, then Contractor, as
being compliant to this Agreement, shall have the right of receiving
back and market the Crude Oil to be delivered to the Authorized Body in
the amount which enables the Contractor to fulfill its commitments and
liabilities.
11.7. Amendments to the Terms and Conditions of the Agreement
11.7.1. All terms and conditions stated in the Agreement can only be
amended with the mutual agreement of the Parties. In case of an
amendment to this Agreement, it shall be effective with the execution
of a written protocol or an agreement.
11.7.2. Clause 3.4 herein above shall be applicable for the
termination of this Agreement.
11.8 Confidentiality
11.8.1. Except the conditions stated herein below, any type of
information obtained and/or purchased by the Parties related with the
Agreement and needed for the fulfillment of the terms and conditions of
the Agreement shall be kept confidential.
11.8.2. As an exception to the rule referred in clause 11.8.1. herein
above, the Parties can use every type of information for the
preparation of the reports and documentation required by law.
11.8.3. Parties, jointly or severally can publish every type of
scientific and geological information related or unrelated with the
Agreement Field but directly related with the Petroleum Activities,
provided that such information shall not create any negative effect on
the Petroleum Activities.
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11.8.4. Contractor can not disclose any information obtained out of the
Agreement to the third parties without the permission of the Board of
Directors. In the following cases, Contractor can disclose such
information and data:
a) to judicial organ according to the laws and regulations
applicable to the Contractor,
b) to any financial organ and/or authority, its own branches
and technical consultants and to the potential assignee of
the Agreement for the purpose of enabling the Contractor to
fulfill its commitments and obligations arising out of the
Agreement,
c) to the Sub-Contractors and to the third parties for the
implementation of the Petroleum Activities, and
d) in the cases of exchange of information.
11.8.5. The terms and conditions referred in Clause 11.8 herein above
shall be in force and effect after the termination of the Contract as
well.
11.9. Settlement of Disputes
In case of any disagreement involving this Agreement and License that cannot be
settled, such disagreement shall be resolved by an arbitration to be established
on the basis of the arbitral rules of the International Chamber of Commerce
(ICC) at Zurich, Switzerland. Any procedural issues not determined under such
arbitral rules shall be determined in accordance with the laws and legislation
of Switzerland, other than any such law which would refer the matter to another
jurisdiction. The governing law for the interpretation of this Agreement shall
be the law of Switzerland, and the arbitration should be conducted in English
language. The decision of the arbitration shall be final and binding. The
English version of this Agreement shall control in the event of any discrepancy
between the English version and any other language version. This Agreement shall
control in the event of any discrepancy between this Agreement and the Articles.
Investor is a third party beneficiary of this Agreement and Contractor agrees to
act on behalf of Investor in regard to any dispute Investor may have regarding
the implementation of this Agreement.
11.10. Waiver
To be effective, any waiver must be in writing and signed by the Party to be
charged.
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11.11. Correspondences
11.11.1. Any type of communication, demand, request etc. delivered
and/or transmitted via courier, post, telegraph, telex or facsimile in
written form appropriate for the terms and conditions of the Agreement
to the below mentioned address shall be deemed to be delivered.
a) Authorized Body
480091; Almaty
Bogenbay Batyra Str.142
Ministry of Oil and Gas Industries
Phone: 3272 - 62 60 80
Fax : 8 3272 - 69405
Telex: 251238 KURS SU
b) Contractor
426200 Aktau
4 Mikrorayan Building No. 10 Block A
Phone: 51 46 62
Fax : 8 37922 514639
11.11.2. Any Party may change its address by a written notice to the
other Party.
11.12. Headings
The headings of the Clauses used in this Agreement are only for the purpose of
the references and will not effect the interpretation of the provisions.
This Agreement is prepared and executed in 3 (three) copies each both in English
and Russian language with the same power and effect.
AUTHORIZED BODY CONTRACTOR
Republic of Kazakhstan Karakuduk-Munay Inc.
Ministry of Oil and Gas
Industry
- ------------------------------ ----------------------------------
N.U.Balgim U.B.Hairoy
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