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MODEL PRODUCTION SHARING AGREEMENT

BETWEEN

THE GOVERNMENT OF THE UNITED REPUBLIC OF TANZANIA

AND

TANZANIA PETROLEUM DEVELOPMENT CORPORATION

AND

ABC LTD



FOR ANY AREA



TABLE OF CONTENTS

PRODUCTION SHARING AGREEMENT ..................................................................................... 3

PREAMBLE ...................................................................................................................................... 4

ARTICLE 2:

ARTICLE 3:

ARTICLE 4:

ARTICLE 5:

ARTICLE 7:

ARTICLE 8:

ARTICLE 9:

ARTICLE 10:

ARTICLE 11:

ARTICLE 12:

ARTICLE 13:

ARTICLE 14:

ARTICLE 15:

ARTICLE 16:

ARTICLE 17:

ARTICLE 18:

ARTICLE 19:

ARTICLE 20:

ARTICLE 21:

ARTICLE 22:

ARTICLE 23:

ARTICLE 24:

ARTICLE 25:

ARTICLE 26:

ARTICLE 27:

ARTICLE 28:

ARTICLE 29:

ARTICLE 30:

ANNEX “A”:



AGREEMENT..................................................................................................... 10

RESPONSIBILITIES AND GRANT OF RIGHTS ............................................ 11

TERM AND TERMINATION ............................................................................ 14

EXPLORATION PROGRAMME....................................................................... 16

ADVISORY COMMITTEE ................................................................................ 20

DISCOVERY AND DEVELOPMENT .............................................................. 22

JOINT OPERATIONS......................................................................................... 25

ANNUAL CHARGES ......................................................................................... 27

RECOVERY OF COSTS AND EXPENSES AND ............................................ 28

VALUATION OF CRUDE OIL.......................................................................... 32

NATURAL GAS ................................................................................................. 35

TAXATION AND ROYALTY ........................................................................... 36

ADDITIONAL PROFITS TAX .......................................................................... 37

REPORTING, INSPECTION AND CONFIDENTIALITY ............................... 39

LIFTING, MARKETING AND DOMESTIC SUPPLY ..................................... 41

TANZANIAN RESOURCES.............................................................................. 42

EMPLOYMENT, TRAINING AND TRANSFER OF ....................................... 43

TITLE TO ASSETS, INSURANCE, SITE CLEAN UP AND ........................... 44

IMPORT DUTIES ............................................................................................... 47

ACCOUNTING AND AUDIT ............................................................................ 48

HEALTH, SAFETY AND ENVIRONMENT .................................................... 49

FORCE MAJEURE EVENT ............................................................................... 51

ASSIGNMENT AND TRANSFER OF RIGHTS ............................................... 54

CONSULTATION AND ARBITRATION......................................................... 55

APPLICABLE LAW ........................................................................................... 57

THIRD PARTY ACCESS TO PETROLEUM FACILITIES ............................. 58

MODIFICATIONS AND HEADINGS............................................................... 59

NOTICES............................................................................................................. 60

DESCRIPTION OF EXPLORATION LICENCE AREA............................ 62



ANNEX “B”:



MAP OF EXPLORATION LICENCE AREA ............................................ 63



ANNEX “C”:



DRAFT EXPLORATION LICENCE ......................................................... 64



ANNEX “C”•1:



FIRST SCHEDULE ............................................................................. 65



ANNEX “C”•2:



SECOND SCHEDULE ........................................................................ 66



2



PRODUCTION SHARING AGREEMENT

This Production Sharing Agreement (the “Agreement”) is made on the _______ day of

___________________, 2008 and constitutes the agreement between:

The Government of the United Republic of Tanzania (hereinafter referred to as the “Government”)

represented by the Minister for Energy and Minerals;

The Tanzania Petroleum Development Corporation a statutory Corporation established under the

Laws of the United Republic of Tanzania (hereinafter referred to as (“TPDC”), represented by its

Managing Director;

(all hereinafter called collectively “First Party”); and



ABC Ltd, a company existing under the laws of the United Republic of Tanzania, hereinafter

referred to as “ABC” with office and legal representative in the United Republic of Tanzania,

represented by its Chief Executive Officer, hereinafter called ABC or “Contractor” or “Second

Party” which expressions shall, where the context so admits, include its successors-in-title and

assigns. Any entity, which constitutes Contractor, may also hereinafter be referred to as

“Contractor Party”).



3



PREAMBLE

WITNESSETH

WHEREAS, Petroleum in or under any land in, or under the jurisdiction of the United Republic of

Tanzania, or to which the United Republic of Tanzania is entitled under international

law, including Petroleum underlying the area described in Annex “A” hereof, vested

entirely and solely in the United Republic of Tanzania; and

WHEREAS, TPDC has been established by law for the purpose (inter alia) of promoting the

development of the petroleum industry and the production of petroleum; and

WHEREAS, the Petroleum (Exploration and Production), Act 1980 (Cap 328 R.E. 2002) (“the

Act”) makes provision with respect to exploring for and producing petroleum and, for

that purpose subject to certain limitations and conditions, authorizes the Minister to

grant Exploration Licences; and

WHEREAS, TPDC intends to apply for an Exploration Licence over the area described in Annex

“A” and shown on the map in Annex “B” hereof and the Minister intends to grant the

said licence; and

WHEREAS, TPDC with the approval of the Minister, wishes to engage ABC Limited to carry out

on its behalf Petroleum Operations in the area of the said licence and in the area of any

Development Licence(s) granted to TPDC hereunder; and

WHEREAS, ABC is willing on certain terms and conditions to undertake the Petroleum

Operations aforesaid and has for that purpose the necessary financial capacity,

technical competence and professional skill.

NOW, THEREFORE, in consideration of the premises and mutual covenants herein reserved and

contained, it is hereby agreed as follows:



4



ARTICLE 1: DEFINITIONS

The words and terms used in this Agreement shall have the following meanings unless specified

otherwise.

(a)

“Affiliate Company” or “Affiliate” means any company holding directly or indirectly a

majority of shares in any company which is controlled directly or indirectly by any such

aforesaid company.

For the purpose of the foregoing definitions:

(i)

(ii)



a company is directly controlled by another company or companies holding shares

carrying in the aggregate the majority of votes exercised at general meetings;

a particular company is indirectly controlled by a company or companies (thereafter

called “the parent company or companies”) if a series of companies can be

specified, beginning with the parent company, are so related that each company of

the series, except the parent company or companies, is directly controlled by one or

more of the earlier in the series.



(b)



“Agreement” or “the Agreement” means this Production Sharing Agreement executed

among the Government, TPDC and ABC, including its Annexes.



(c)



“Appraisal” means the activity carried out after the discovery of Petroleum to better define

the parameters of the Petroleum and the reservoir to which the discovery relates and

determine its commerciality and includes any activity carried out under an Appraisal

programme. This activity shall include:

(i)

(ii)

(iii)



drilling of Appraisal Wells and running productivity tests;

collecting special geological samples and reservoir fluids; and

conducting supplementary studies and acquisition of geophysical and other

data, as well as the processing of same data.



(d)



“Appraisal Well” means any well drilled following a discovery of Petroleum in the

Contract Area for the purpose of ascertaining the quantity and areal extent of Petroleum in

the petroleum reservoir to which that discovery relates.



(e)



“Barrel” means a unit of measure for liquids corresponding to forty-two (42) United States

gallons of Crude Oil net of basic sediment and water, corrected to a temperature of sixty

degrees Fahrenheit (60˚F) and under one (1) atmospheric pressure.



(f)



“Block”, “Development Area”, “Development Licence”, “Development Operations”,

“Exploration License”, “Exploration Operations”, “In Default”, “Location”, “Minister”,

“Government”, “ Regulations”, “Well” and “Petroleum” shall have the meanings assigned

to them respectively in Section 5 of the Act; “Adjoining Block” and “Discovery Block”

shall have the meanings assigned to them respectively in Section 33 of the Act.



(g)



“Calendar Month” or “Month” means any of the twelve (12) months of the Calendar Year.



(h)



“Calendar Quarter” or “Quarter” means a period of three (3) consecutive months starting

with the first day of January, April, July or October of each Civil Year.

5



(i)



“Calendar Year” or “Year” or “Civil Year” means a period of twelve (12) consecutive

months according to the Gregorian calendar beginning on January 1 and ending on

December 31.



(j)



“Casing head Gas” means Natural Gas which existed or exists in a reservoir in solution

with Crude Oil, or as free gas cap gas, and is or could be produced with Crude Oil from a

well; the predominant production of which is or would be Crude Oil.



(k)



“Contract Area” means on the Effective Date the area described in Annex “A” and shown

on map in Annex “B”, and thereafter, in accordance with Article 3(b) the whole or any part

of such area in respect of which Contractor continues to have rights and obligations under

this Agreement.



(l)



“Contract Expenses” means Exploration Expenses, Development Expenses, Operating

Expenses, Service Costs and General and Administrative Costs, as more fully set forth in

Annex “D”.



(m)



“Contract Year” means the period, and successive periods, of twelve (12) consecutive

months according to the Gregorian calendar beginning on the Effective Date of this

Agreement.



(n)



“Contractor” means Contracting Party (Parties) with Government, as well as any

organizations, establishments, public or private entities or companies to which any interest

may be transferred in application of the provisions of Articles 9 or 27.



(o)



“Crude Oil” means any hydrocarbons which:

(i)

(ii)



is in a liquid state at the well head or gas/oil separator or which is extracted from the

gas or casing head gas in a plant including distillate and condensate, and

except where in Article 16 hereof the context requires otherwise, has been produced

from the Contract Area.



(p)



“Day” is a period of twenty-four (24) hours starting at midnight.



(q)



“Delivery Point” means the point (Freight-On-Board) FOB of the United Republic of

Tanzania loading facility at which Crude Oil/Natural Gas reaches the inlet flange of the

lifting tankship’s intake pipe or such other point which may be agreed between TPDC and

the Contractor.



(r)



“Development Expenses” means those expenses as so categorized in Annex “D”, the

Accounting Procedure.



(s)



“Development Operations,” not withstanding the definitions contained in paragraph (f),

shall include the activity carried out to prepare the Development Plan and the activity

carried out after the grant of the development licence in the respective Development Area.

Such activity shall include, but not be limited to:

(i)

(ii)



reservoir, geological and geophysical studies and surveys;

drilling of producing and injection Wells;

6



(iii)



design, construction, installation, connection and initial testing of equipment,

pipelines, systems, facilities, plants, and related activities necessary to produce

and operate said Wells, to take, save, treat, handle, store, transport and deliver

Petroleum, and to undertake repressuring, recycling and other secondary or tertiary

recovery projects.



(t)



“Development Plan” means the proposals accompanying an application for a

Development Licence pursuant to the Act made by TPDC under this Agreement.



(u)



“Development Well” is any Well intended to produce hydrocarbons from a Field.



(v)



“Effective Date” means the date on which this Agreement is signed by the Government,

TPDC and ABC.



(w)



“Expatriate Employee” means any employee not normally resident in the United Republic

of Tanzania who is engaged under contract which provides for payment of passages to and

from the United Republic of Tanzania.



(x)



“Exploration Expenses” means those expenses as so categorized in Annex “D”, the

Accounting Procedure.



(y)



"Exploration Operations,” not withstanding the definitions contained in paragraph (f)

shall include, but not be limited to, such geological and geophysical surveys and studies,

aerial surveys and others as may be included in Work Programmes and Budgets, and the

drilling of such shot holes, core holes, stratigraphic tests, Exploration Wells, and other

related holes and Wells, and the purchase or acquisition of such supplies, materials and

equipment which may be included in Work Programmes and Budgets.



(z)



“Exploration Period” means a period of exploration referred to in Article 5 (b).



(aa)



“Exploration Well” means a well drilled in the course of Exploration Operations conducted

hereunder but does not include an Appraisal Well, and whose purpose at commencement

of drilling is to explore for an accumulation of petroleum whose existence was at that time

unproven by drilling.



(ab)



“General and Administrative Costs” means those costs as so categorized in Annex “D”, the

Accounting Procedure.



(ac)



“Gross Negligence/ Willful Misconduct” means an intentional and conscious, or reckless

act or failure to act, by any person or entity, which was in reckless disregard of or wanton

indifference to harmful consequences such person knew or should have known such act or

failure to act has or would have caused to the safety or property of any person or entity, but

shall not include any act, omission, error of judgment or mistake made in good faith in the

exercise of any function, authority or discretion arising out of or in connection with the

Petroleum Operations.



(ad)



“Joint Operations” means the Petroleum Operations in respect of which TPDC has

elected to contribute expenses pursuant to Article 9.



(ae)



“Law” means the law in force from time to time in the United Republic of Tanzania.

7



(af)



“LIBOR” is the London Inter Bank Offered Rate for one month deposits of U.S. Dollars

displayed on page ‘LIBOR01’ of the Reuters Money Rates Service (or any other page that

replaces page ‘LIBOR01’ for the purposes of displaying the British Bankers Association

(BBA) interest settlement rates for such deposits of U.S. Dollars in the London Interbank

market) on the date of determination, or in the event the Reuters Money Rates Service , or a

successor thereto, no longer provides such information, such other service as may be agreed

by the Parties that provides the BBA interest statement rates for such deposits of U.S.

Dollars in the London Interbank market and any required information previously provided

on page ‘LIBOR01’.



(ag)



“Licence Area” means the Contract Area or a sub-division thereof as specified in

Annex “A”



(ah)



“Month” means a calendar month pursuant to the Gregorian Calendar.



(ai)



“Natural Gas” or “Gas” means any hydrocarbons produced from the Contract Area which

at a pressure of 1 atmosphere and a temperature of sixty degrees Fahrenheit (60ºF) are in a

gaseous state at the wellhead, and includes both associated as and Non- Associated Natural

Gas, and all of its constituent elements produced from any Well in the Contract Area and

all non-hydrocarbon substances therein. Such term shall include residue gas after the

extraction of liquid hydrocarbons therefrom.



(aj)



“Non-Associated Gas” means Natural Gas other than Casinghead Gas.



(ak)



“Operating Expenses” means those expenses as so categorized in Annex “D”, the

Accounting Procedure.



(al)



“Operator” means the person designated as the Operator under an operating agreement

executed by the persons constituting the Contractor or the operating agreement executed by

TPDC and Contractor pursuant to Article 9.



(am)



“Parties” means TPDC, the Government and Contractor as Parties to this Agreement,

including any permitted successors and assignees.



(an)



“Party” means TPDC, the Government or Contractor as a Party to this Agreement,

including any permitted successors and assignees.



(ao)



Participating Interest means the proportion of production costs each party will bear and

the proportion of production each party will receive, as set out in Article 9(b) (i)



(ap)



“Petroleum Operations” means any and all operations and activities in connection with

Exploration Operations, Appraisal Operations, Development Operations, and Production

Operations, including all abandonment activities as required under Article 19.



(aq)



“Production Operations” shall include, but not be limited to, the running, servicing,

maintenance and repair of completed Wells and of the equipment, pipelines, systems,

facilities and plants completed during Development. It shall also include all activities

related to planning, scheduling, controlling, measuring, testing and carrying out the flow,

gathering, treating, transporting, storing and dispatching of Crude Oil and Gas from the

8



underground Petroleum reservoirs to the Delivery Point, and all other operations necessary

for the production and marketing of Petroleum. Production Operations shall further include

the acquisition of

assets and facilities required for the production of Petroleum

hereunder and oil and gas field abandonment operations.

(ar)



“Recoverable Contract Expenses” shall have the meaning ascribed in Article 11(c) and as

categorized in Annex “D”, The Accounting Procedure.



(as)



“Service Costs” means those costs as so categorized in Annex “D”, the

Procedure.



(at)



“Subcontractor” shall mean any business hired by Contractor to carry out all or a portion of

Petroleum Operations as approved by Contractor under the terms of this Agreement.



(au)



“Work Programme and Budgets” shall have the meaning ascribed in Article 6.



9



Accounting



ARTICLE 2: AGREEMENT

This Agreement constitutes an agreement made under Section 14 of the Act.



10



ARTICLE 3: RESPONSIBILITIES AND GRANT OF RIGHTS

(a)



As soon as possible, but in any event no later than thirty (30) days, after the Effective Date,

TPDC will apply for, and the Government under and in accordance with the Act, will grant

to TPDC an Exploration Licence over the area described in Annex “A” and shown on the

map in Annex “B” hereof. The said licence shall be substantially in the form of the draft set

out in Annex “C” hereof.



(b)



Subject as hereinafter provided in sub-article (g) (ii) of this Article and sub-article (e) of

Article 8, the areas which at any particular time are subject to the said Exploration Licence

or subject to any Development Licence granted to TPDC for which application was made

by TPDC at the request of the Contractor hereunder constitute for the purpose of this

Agreement the Contract Area.



(c)



Save where Joint Operations have been established pursuant to Article 9, the Contractor, on

the terms and conditions set out herein, shall have the exclusive right to conduct, on behalf

of TPDC as licence holder, Petroleum Operations in the Contract Area. Where the

Contractor is constituted by more than one person, ABC shall be the Operator and the

duties and obligations under this Agreement shall be joint and several except where the

parties specifically have agreed otherwise in this Agreement. No change in Operatorship

shall take effect unless it has been approved by the Minister.



(d)



The Contractor shall:

(i)



(ii)



(iii)



(iv)



(v)



(vi)

(vii)



provide particulars of the technical and industrial qualifications of key employees,

particulars of the technical and industrial resources available and particulars of the

kind of financial resources available including capital, credit facilities and

guarantees so available Pursuant to section 20 of the Act;

upon notification from TPDC, procure a performance bond from an insurance

company or financier which will be available to cover the minimum exploration

expenditure commitment for the initial period as set out in Article 5 particulars;

carry out the Petroleum Operations in the Contract Area diligently, with due

regard to good oil field practices and in such manner as to ensure that in respect of

matters which are the responsibility of the Contractor hereunder TPDC is not in

default;

furnish TPDC with such information, reports, records and accounts relating to the

Petroleum Operations in the Contract Area as may be necessary to enable TPDC to

meet its obligations under the Act and, in particular but without prejudice to the

generality of the foregoing, to meet the requirement of First Schedule thereof;

if the Contractor has requested TPDC to apply for any extension of the said

Exploration Licence, select the blocks to be relinquished by TPDC in accordance

with the requirements of this Agreement and the Act;

pay for copying and shipping of geological and geophysical data relating to the

Contract Area;

subject to Article 10, reimburse TPDC within thirty (30) days from the date of

payment thereof, for the annual charges in respect of the said Exploration Licence or

any Development Licence granted to TPDC at the request of the Contractor

hereunder, payable by TPDC pursuant to section 84 of the Act; and



11



(viii) notify TPDC promptly of any change in its circumstances, or those of any Affiliate

upon whom it is dependent for efficient execution of its Petroleum Operations,

which has or is likely to have an adverse impact upon its ability to meet its

obligations under this Agreement.

(e)



TPDC:(i)



will, as licence holder, take such steps as may be necessary from time to time to

ensure that in respect of the Contract Area it is not in default under the Act and will

not in the Contract Area, without the prior consent in writing of the Contractor,

surrender any Block or Blocks, make any request that any Block or Blocks be

declared a Location, or apply for Development Licence; and



(ii)



if the Contractor so requests, will:

(a)

(b)



(c)



(d)

(e)



(f)



apply for such extensions of the said Exploration Licence as the Act may

permit;

when any application is made for an extension of the said Exploration

Licence, relinquish to meet the requirements of the Act only Blocks selected

for that purpose by the Contractor;

pursuant to Section 33 (1) (a) of the Act, request that a Discovery Block

within the Contract Area and such Adjoining Blocks not exceeding eight (8)

selected by the Contractor be declared by the Minister to be a Location;

apply for a Development Licence or Licences over such Block or Blocks

within the Contract Area as the Contractor may specify for that purpose; and

make such other applications, requests, or representations in respect of the

Contract Area which the Act may require or permit to be made by a licence

holder.



The Government:(i)



(ii)



(iii)



(iv)



will take all such actions as may be necessary from time to time to ensure that

TPDC carries out its obligations hereunder and will not without the consent of the

Contractor seek or acquiesce in any waiver by TPDC in respect of the Contract

Area of its rights as licence holder under the Act;

undertakes that, where in the case of discovery of petroleum referred to in Section

29 (1) of the Act, and TPDC makes an application for further extension of the said

Exploration Licence, the Minister will, in respect of any block to which paragraph

(b) of subsection (1) of that Section applies, grant an extension for such period not

exceeding three (3) years as may be required to appraise the discovery;

subject to sub-article (d) (iv) of this Article, will at the Contractor’s expense make

available to the Contractor geological and geophysical data referred to in the said

sub-article (d) (iv) in the possession or under the control of Government resulting

from petroleum exploration by any other company in the Contract Area and the

Contractor shall treat such data as confidential;

subject to any requirement in the laws of the United Republic of Tanzania and

respect by the Contractor for the rights of the others, will permit the Contractor, its

Affiliates, employees and agents to have at all times access to the Contract Area for

12



the purpose of carrying on the Petroleum Operations hereunder and for such purpose

to move freely therein; and



(g)



(i)



The Contractor, on giving to TPDC not less that ninety (90) days notice in

writing:

(a)



(b)



(ii)



may, if its obligations in respect of any Exploration Period have been

fulfilled at any time thereafter during that period, surrender its rights and be

relieved of its obligations in respect of the whole of the Contract Area; and

may, at any time after the grant of the said Exploration Licence, surrender its

rights and be relieved of its obligations in respect of any Block or Blocks

forming part of the Contract Area; provided however that no surrender by the

Contractor of its rights over any part of the Contract Area shall relieve the

Contractor of its obligations to spend the sums and carry out the work

described in Article 5 hereof.



Where pursuant to this sub-paragraph the Contractor has surrendered its rights and

been relieved of its obligations in respect of any Block or Blocks forming part of

the Contract Area not withstanding that the said Block or Blocks continue to be

subject to any Exploration or Development Licence referred to in sub-article (b) of

this Article the said blocks shall not for the purpose of this Agreement constitute

part of the Contract Area.



13



ARTICLE 4: TERM AND TERMINATION

(a)



This Agreement shall continue to be in force in accordance with Section 42 of the Act,

whose provisions regulate the terms of any Development Licence, and in case no

Development Licence is granted, until the end of the last extension of the Exploration

Period.



(b)



This Agreement shall come to an end:

(i)

(ii)



(c)



subject to the Act and this Agreement, on surrender by Contractor of its rights in

respect of the whole of the Contract Area pursuant to Article 3(g);

where the Contractor is In Default the Government may by notice in writing served

on the Contractor terminate this Agreement.



The Government shall not terminate the Agreement on the grounds that the Contractor is in

default unless:

(i)

(ii)

(iii)



it has, by notice in writing served on the Contractor, given not less than thirty (30)

days notice of its intention to so terminate this Agreement;

it has, in the notice, specified a date before which the Contractor may, in writing,

submit any matter which the Contractor wishes the Government to consider; and

it has taken into account any action taken by the Contractor to remove that ground

or to prevent the recurrence of similar grounds; and any matters submitted to it by

the Contractor pursuant to sub-Article (b) of this Article.



(d)



The Government shall not, under sub-article (b) of this Article, terminate this Agreement

on the ground of any default in the payment of any amount payable under this Agreement

if, before the date specified in a notice referred to in sub-article (c) of this Article, the

Contractor pays the amount of money concerned together with any interest payable under

the Act or this Agreement.



(e)



The Government may, by notice in writing served on the Contractor, terminate this

Agreement if an order is made or a resolution is passed winding up the affairs of the

Contractor, unless the winding up is for the purpose of amalgamation and the Government

has consented to the amalgamation, or is for the purpose of reconstruction and the

Government has been given notice of the reconstruction.



(f)



Where two or more persons constitute the Contractor, the Government shall not, under subarticle (e) of this Article, terminate the Agreement on the occurrence, in relation to one or

some only of the persons constituting the Contractor, of an event entitling the Government

to so terminate this Agreement, if any other person or persons constituting the Contractor

satisfies or satisfy the Government that the person or those persons, as the case may be, is

or are willing and would be able to carry out the duties and obligations of the Contractor.



(g)



On the termination of this Agreement, the rights of the Contractor hereunder cease, but the

termination does not affect any liability incurred before the termination and any legal

proceedings that might have been commenced or continued against the former Contractor

may be commenced or continued against it.



14



(h)



In this Article “in default” in relation to the Contractor means in breach of any provision of

this Agreement or the Act or licence granted and includes any act or omission by the

Contractor in respect of matters that are the responsibility of the Contractor hereunder that

would cause TPDC to be in breach of any provision of

the Act or of any condition of

the licence granted hereunder.



(i)



Upon expiration or termination of this Agreement the parties shall have no further

obligations hereunder except for the obligations that arose prior to such expiration or

termination and obligations that are expressly stated to survive such expiration or

termination pursuant to this Agreement.



15



ARTICLE 5: EXPLORATION PROGRAMME

(a)



Subject to the provisions of this Article in discharge of its obligation to carry out

Exploration Operations in the Contract Area the Contractor shall, during the periods into

which Exploration Operations are divided hereunder, carry out the minimum work

described and spend not less than the total minimum expenditure, if any, specified in subarticle (b) of this Article.



(b)



(i)



The Initial Exploration Period



Shall commence on the day on which the Exploration Licence is granted to TPDC pursuant

to Article 3 takes effect and shall terminate on the fourth (4th) anniversary of that date.

Description of minimum work programme:

Contractor shall commence Exploration Operations hereunder within ninety (90) days after

the Effective Date. Such Exploration Operations shall be diligently and continuously

carried out in accordance with the best current Good Oilfield Practices.

During the Initial Exploration Period, which shall be subdivided into two sub-periods, the

Contractor shall carry out the following Minimum Exploration Work Programme:

First 2-year sub-period.

(a) Geological:

Evaluate, integrate and map all data related to the Contract Area.

(b) Geophysical:

(i) Acquire and process to industry standards at least -----------------kilometres of 2D

seismic with shooting to commence within fifteen (15) months after the

Effective Date.

(ii) Evaluate, integrate and map all seismic data related to the Contract Area.

Second 2-Year Sub-period

(c) Drilling:

Drilling of at least --- Exploration Wells, to depths of at least -------- (----)

metres, true vertical depth with spudding of the first such well to be not later

than thirty (30) Months after the Effective Date.

Minimum Expenditure for Initial Period………… United States dollars.



(ii)



The First Extension Period



Shall commence on the day on which a first extension of the licence granted is issued to

TPDC pursuant to Article 3 takes effect and shall terminate on the fourth (4th) anniversary

of that date.

Description of minimum work programme:

• Conduct geological, geochemical and geophysical studies (US$ -------)

• Acquisition of ------- sq. kms of 3D seismic or ----- line kms. of 2D or

commensurate mix of both; (US$ ----------)

16



• Drill at least one (1) well (US$ ---------)

Minimum Expenditure for 1st Extension Period: US$ ………million

(iii)



The Second Extension Period



Shall commence on the day on which a second extension of the licence granted is issued to

TPDC pursuant to Article 3 takes effect and shall terminate on the third (3rd) anniversary of

that date.

Description of minimum work programme:

• Conduct geology, geochemical and geophysical studies (US$ -------)

• Acquisition of ------- sq. kms of 3D seismic or ----- line kms. of 2D or

commensurate mix of both; (US$ ----------)

• Drill at least One (1) well (US$ -------)

Minimum Expenditure for 2nd Extension Period: US$ ………million

(c)



No Exploration Well drilled by the Contractor shall be treated as discharging any obligation

of the Contractor to drill Exploration Wells hereunder unless it has been drilled to the depth

or stratigraphic level agreed with the Minister, or before reaching such depth or

stratigraphic level:

(i)

(ii)



the economic basement is encountered or

insurmountable technical problems are encountered which, in accordance with Good

Oilfield Practices, make further drilling unsafe or impractical; provided that if the

said well is abandoned owing to the said problems before reaching the economic

basement, the Contractor shall drill a substitute Exploration Well in the Contract

Area to the same minimum depth as aforesaid.



For the purpose of this sub-article “economic basement” means any stratum in and below

which the geological structure or physical characteristics of the rock sequence do not have

the properties necessary for the accumulation of petroleum in commercial quantities and

which reflects the maximum depth at which any such accumulation can be reasonably

expected.

(d)



Where in any Exploration Period the Contractor has carried out more than the minimum

technical work obligations specified in sub-article (b) of this Article, for that period the

Contractor shall be permitted to credit such excess work obligation as satisfying work

obligations specified in that sub-article for the next succeeding Exploration Period.



(e)



The Exploration Licence issued to TPDC, pursuant to Article 3 and any extension thereof,

shall be on terms and conditions relating to Work Programmes and Minimum Expenditure

which correspond to the obligation of the Contractor under this Article. Accordingly, it is

understood and agreed that discharge by the Contractor of its obligations under this Article

in respect of any Exploration Period will discharge for that period the obligations of TPDC

relating to the Work Programme and Minimum Expenditure in respect of the licence issued

pursuant to Article 3, and the terms and conditions of the licence aforesaid and any

extension thereof shall be drawn up accordingly.

17



(f)



The minimum expenditure for each period specified in sub-article (b) of this Article shall

not have been satisfied unless the total expenditure attributable to the work described in

sub-article (b) equals or exceeds the same mentioned in the said sub-article; provided that

for this purpose all such attributable actual expenditures shall be adjusted, commencing

from the Effective Date, by multiplying each of them by the following factor I, where:

I = A/B

and where:

A



is the United States Industrial Goods Producer Price Index (USIGPPI) as reported

for the first time in the monthly publication “International Financial Statistics” of

the International Monetary Fund (IMF) in the section “Prices, Production,

Employment” for the Month of the Effective Date.



B



is the USIGPPI as reported for the first time in the aforesaid IMF publication for the

month of the expenditure in question.



(g)



For the purpose of this Article, any expenditure by the Contractor on an appraisal

programme required to discharge the obligations of TPDC under Section 32 (2) of the Act

shall be treated as expenditure for the purpose of satisfying the minimum expenditure

obligations set out in sub-article (b) of this Article.



(h)



No relinquishment shall relieve Contractor of accrued, but unfulfilled obligations under the

Contract. In the event the Contractor desires to relinquish its rights hereunder in the whole

of the Contract Area without having fulfilled all accrued Minimum Work Programme under

this Article, TPDC shall be paid, prior to the date of such proposed total relinquishment, the

sum equal to the remaining amount of the non-discharged guarantees corresponding to such

accrued, but unfulfilled work obligations.



18



ARTICLE 6: ANNUAL WORK PROGRAMMES AND BUDGET

(a)



Within thirty (30) days of the Effective Date, the Contractor shall prepare and submit to

TPDC a detailed Work Programme and Budget setting forth the Exploration Operations

which Contractor proposes to carry out in the Calendar Year in which the Exploration

Licence is first issued to TPDC hereunder and the estimated cost thereof.



(b)



So long as the Exploration Licence issued to TPDC hereunder remains in force and at least

three (3) months prior to the beginning of each subsequent Calendar Year, Contractor shall

prepare and submit to TPDC a detailed Work Programme and Budget setting forth the

Exploration Operations which Contractor propose to carry out in that Calendar Year and

the estimated cost thereof.



(c)



Every Work Programme and Budget submitted to TPDC pursuant to this Article and every

revision or amendment thereof shall be consistent with the requirements set out in Article 5

relating to work and expenditure for the Exploration Period within which the Work

Programme and Budget will fall.



(d)



Every Work Programme and Budget and, as the case may be, the appraisal programme

referred to in Article 8(g) submitted by Contractor to TPDC shall be reviewed by a joint

committee to be established by TPDC and Contractor pursuant to Article 7. Should TPDC

wish to propose a revision of the proposed Work Programme and Budget or appraisal

programme, as the case may be, TPDC shall, within three (3) weeks after receipt thereof, so

notify the Contractor specifying in reasonable detail its reasons. Promptly thereafter, the

parties will meet and endeavor to agree upon the revisions proposed by TPDC following

review by the Advisory Committee, Contractor shall make such revisions as it deems

appropriate and submit the Work Programme and Budget or, without prejudice to Article

8(f), appraisal program, as appropriate, to TPDC.



(e)



Subject to Article 5, upon giving notice to TPDC, Contractor may amend any Work

Programme or Budget or any revised Work Programme or Budget submitted to TPDC, but,

subject to any such amendment, Contractor shall carry out the Exploration Operations set

forth in the Work Programme or revised Work Programme and spend not less than the sum

provided for in the Budget or revised Budget. In the case of an appraisal program, any

amendment thereto proposed to TPDC by Contractor will be subject to section 32(2) of the

Act; where an appraisal programme has been agreed by the Advisory Committee as

referred to in Article 8(f), no amendment shall be made without the approval of the

Advisory Committee. A notice under this sub-article shall state the reasons why, in the

opinion of Contractor, an amendment is necessary or desirable.



(f)



Where Contractor has discharged its obligations under this Article, the Minister will not

suspend or cancel any Exploration Licence granted to TPDC hereunder by reason only that

TPDC has failed to comply strictly with the requirements of paragraph (a) of sub-section

(1) of Section 30 of the Act or has failed to meet the requirements deemed to be included in

an Exploration Licence by reasons of that provision.



19



ARTICLE 7: ADVISORY COMMITTEE

(a)



The Advisory Committee shall be composed of four (4) members, two (2) of whom shall

be appointed by TPDC and the other two (2) by Contractor. The Government shall be

entitled to attend the Advisory Committee meetings in a non-voting capacity – as an

observer. The Advisory Committee meetings cannot take place unless at least three (3) of

its members are present.



(b)



The Advisory Committee shall meet from time to time as may be convened by the

Chairman.



(c)



The Advisory Committee shall perform the following functions:

(i)

approve the annual work programme and budget;

(ii)

approve the appraisal work programme;

(iii)

any other matter as may be directed by the Parties



(d)



The Advisory Committee shall be headed by a Chairperson who shall be appointed by

TPDC from among its representatives and who shall be responsible for the following

functions:

(i)

(ii)



(iii)

(iv)

(v)



(vi)



(vii)



to coordinate all the Advisory Committee's activities;

to chair the meetings and to notify the Contractor and TPDC of the timing and

location of such meetings, it being understood that the Advisory Committee shall

meet at least once every Calendar year or whenever requested by Contractor and/or

TPDC;

to establish the agenda of the meetings, which shall include all matters which the

Parties have asked to be discussed;

to convey to the Parties all decisions of the Advisory Committee, within five (5)

working days after the meetings;

to request from Contractor any information and to make recommendations that have

been requested by any member of the Advisory Committee, as well as to request

from Contractor any advice and studies whose execution has been approved by the

Advisory Committee;

to request from the technical and other committees of the Advisory Committee any

information, recommendations and studies that he has been asked to obtain by any

member of the Advisory Committee; and

to convey to the Parties all information and data provided to him by the Contractor

for the Parties.



(e)



In the case of an impediment to the Chairperson of the Advisory Committee, the work of

any meeting will be chaired by the other member appointed by TPDC.



(f)



At the request of TPDC and/or Contractor, the Advisory Committee shall establish and

approve its internal regulations, which shall comply with the procedures established in this

Agreement.



(g)



Each member of the Advisory Committee shall have one (1) vote. The decisions of the

Advisory Committee shall be taken by simple majority of the votes present or represented,

it being understood that any member may be represented by written and duly signed proxy

held by another member. Furthermore, if such majority is not

achieved, the proposal

20



under decision shall be reviewed and re-submitted to the Advisory Committee in no more

than fifteen (15) days.

(h)



Members attending a meeting of the Advisory Committee may be accompanied by advisers

and experts to the extent reasonably necessary to assist with the conduct of such meeting.

Such advisers and experts shall not vote, but may contribute in a non-binding way to

discussions and debates of the Advisory Committee.



(i)



The Contractor shall appoint the Secretary to the Advisory Committee from among its

representatives.



(j)



The responsibilities of the Secretary are to see to it that:

(i)

(ii)

(iii)



the minutes of every meeting of the Advisory Committee are recorded;

the minutes are written in the appropriate record book and signed on behalf of

TPDC and the Contractor; and

the draft of the minutes are prepared, if possible, on the day that the meeting is held

and copies of it are sent to TPDC and the Contractor within the following five (5)

working days, and their approval shall be deemed granted if no objection is raised

within ten (10) working days of the date of receipt of the draft minutes.



21



ARTICLE 8: DISCOVERY AND DEVELOPMENT

(a)



If Petroleum is discovered in the Contract Area, Contractor shall;

(i)

(ii)



(b)



forthwith notify TPDC of such Discovery; and

within thirty (30) days after the date of discovery provide TPDC with all available

information regarding the Discovery, including a preliminary classification of the

Discovery as Crude Oil or Natural Gas as well as its potential commerciality;



If Contractor informs TPDC that, in its opinion, utilizing Good Oilfield Practices, the

discovery is of eventual commercial interest and TPDC agrees with such determination,

then the Minister shall be advised to agree to allow the Contractor to retain the Discovery

Block for the duration of the Exploration Licence and any renewal thereof, provided that:

(i)



(ii)



(iii)



(iv)

(v)



the determination of eventual and/or potential commerciality shall be based on

relevant economic criteria, including but not limited to, potential Petroleum

production rates, Petroleum prices, development costs, operating costs as well as

any other relevant criteria, as established by the Contractor;

Contractor shall reassess the commerciality of Discovery every two (2) years, based

on the same economic criteria as set out in Article 8(b)(i) above; in case of further

discoveries that could be tied and developed together in order to make economies of

scale; the Contractor shall inform TPDC accordingly;

Contractor shall within thirty (30) days after the re-assessment inform TPDC

whether it determines the Discovery still to be of eventual commercial interest.

TPDC shall inform the Minister the re-assessment study results;

if the results of Contractor’s re-assessment determine that the Discovery has become

of potential commercial interest, the provisions of Articles 8(f) and 8(g) shall apply;

if the results of Contractor’s assessment in the first instance in (b) above or reassessment determine that the discovery is or remains only of eventual commercial

interest, but TPDC considers that it is of present commercial interest, at the election

of either Party by notice to the other, the dispute shall be referred for determination

by a sole expert to be appointed by agreement between the Parties. If the Parties fail

to appoint the expert within thirty (30) days after receipt of such notice, the Parties

may apply to The British Energy Institute (formerly British Institute of Petroleum),

for appointment of an expert in accordance with its Rules. In each instance, the sole

expert to whom the matter in dispute is to be referred shall be an authority in the

discipline or disciplines relating to the matter in dispute. The expert shall make his

determination within sixty (60) days of his appointment, or such earlier date that the

Parties may agree, in accordance with the provisions contained herein and on the

basis of the terms of reference agreed by the Parties to the dispute; provided that, if

such Parties are not able to agree on such terms of reference, the expert shall decide

such terms. Representatives of the Parties shall have the right to consult with the

expert and furnish him with data and information, provided the expert may impose

reasonable limitations on this right. The expert shall be free to evaluate the extent to

which any data, information or other evidence is substantiated or pertinent. The

expert’s fees and expenses, and the costs associated with an appointment, if any,

made by the above mentioned chosen institution, shall be borne equally by the

Parties to the dispute. The determination of the expert shall be final and binding;



22



(vi)



if the results of Contractor’s re-assessment determine that the Discovery is no longer

of potential commercial interest, the provisions of Article 8 (c) below shall apply.



(c)



If Contractor informs TPDC that in its opinion the discovery is not of potential commercial

interest then TPDC will have the option to require the Contractor to surrender its rights and

be relieved of its obligations in respect of the Block or Blocks comprising the geological

feature (as outlined by the relevant seismic data) in which the discovery is located.



(d)



The option in sub-articles (c) of this Article will lapse if not exercised by TPDC within

twelve months from the date on which notice was given to TPDC by Contractor pursuant to

sub-article (a) of this Article and during the said period of twelve months, and any

subsequent period if the option lapses without being exercised, the Minister will in respect

of the discovery to which that notice relates exempt TPDC from the requirements of

Section 32 (2) of the Act.



(e)



Where pursuant to sub-article (c) of this Article, Contractor has surrendered its rights and

been relieved of its obligations in respect of any Block or Blocks in which the discovery is

located, notwithstanding that the said Block or Blocks continue to be subject to the

Exploration Licence referred to in sub-article (b) of Article 3, the said Block or Blocks shall

not for the purpose of this Agreement, constitute part of the Contract Area.



(f)



Where Contractor, pursuant to sub-article (a) of this Article, has informed TPDC that, in its

opinion the discovery is of potential commercial interest, Contractor shall, as soon as

practicable thereafter, submit to TPDC, for the consideration of the Advisory Committee,

its proposals for an appraisal programme to meet the requirements of Section 32 (2) of the

Act.



(g)



Subject to Article 13(b) where,

(i)

(ii)



the Advisory Committee has agreed on an appraisal programme submitted by

Contractor as aforesaid or on a revision thereof; and

a Location has been declared;



the Minister may, to the extent necessary, extend the period within which an application

may be made by TPDC for a Development Licence, if TPDC at the request of the

Contractor applies on that behalf, for a period of two (2) years, so as to ensure that the

appraisal programme can be carried out and the results thereof assessed before the said

period expires.

(h)



Where Contractor has requested TPDC to make application for a Development Licence, the

proposals accompanying such application, pursuant to paragraph (a) of Section 36 of the

Act, shall:

(i)

(ii)

(iii)

(iv)



be drawn up by Contractor after consultation with TPDC;

be designed to ensure the recovery of the maximum quantity of Petroleum from the

Development Area which the economics of the development shall justify;

include evidence that Contractor has undertaken an Environmental Impact

Assessment study and obtained the necessary approvals; and

be in compliance with Good Oilfield Practices

23



(i)



Where a Location has been declared, the Minister will not, without the prior agreement

between TPDC and Contractor, give any direction to TPDC, pursuant to Section 34(1) of

the Act, provided however that, if the application is made for a Development Licence in

respect of any Block or Blocks within that Location, nothing in this sub-article shall be

construed as limiting the scope of any notice which the Minister may give to TPDC

pursuant to Section 37(2) of the Act.



(j)



Where the Exploration Licence is due to expire during the above mentioned period allowed

by the Minister for application for a Development Licence under Article 8(g), or, in the

case of Non-Associated Natural Gas, under Article 13(b), then the Minister shall prior to

the expiry of the Exploration Licence grant to TPDC for such period, a new Exploration

Licence on the requisite terms as may be appropriate to enable TPDC to apply, upon

request of Contractor, for a Development Licence related to the Blocks forming the

previous Location as per Article 8(g) or, in the case of Non-Associated Natural Gas, Article

13(b).



(k)



Where TPDC, upon request of Contractor, makes an application for a Development Licence

as per Article 8(j) above, in respect of a Block or Blocks forming the previous Location as

per Article 8(g) or, in the case of Non-Associated Natural Gas, Article 13(b), then the

Minister shall grant, on such conditions as are necessary to give effect to the application for

the Licence, the Development Licence applied for.



24



ARTICLE 9: JOINT OPERATIONS

(a) Save as provided in sub-article (b) and sub-article (c) (iii) of this Article, Contractor shall bear

and pay all Contract Expenses incurred in carrying out Petroleum Operations hereunder, and

Contractor shall recover such expenses only from the Petroleum to which it is entitled as

hereinafter provided in Article 11.

(b)



(i)



Participating Interest by TPDC:

OIL or GAS

TPDC may at any time, by notice in writing to Contractor, elect to contribute in

participating interest of not less than twenty five percent (25%) of Contract Expenses

other than Exploration Expenses (such Exploration Expenses to include expenses in

respect of an Appraisal Programme) incurred in the first and every subsequent

Development Area from the date such notice is rendered.

(ii) Where TPDC does elect to participate in the development of a discovery, TPDC shall

pay its share of Contract Expenses.

(iii) If TPDC fails to pay its share of Contract Expenses and such failure is not rectified

within a period of thirty (30) days after receipt of a written notice of such failure from the

Contractor, the Contractor shall advance by way of loan up to 100% of unpaid amount of

TPDC’s share of Contract Expenses. Such Contract Expenses shall bear interest at a rate

of LIBOR plus two percent (2 %) and will be recovered on a preferential basis from

TPDC’s Share of Profit Oil/Gas.



(c) Joint operations shall be conducted hereunder in accordance with the terms and conditions of

a mutually acceptable form of Operating Agreement to be concluded between TPDC and the

Contractor immediately following the first notice given to Contractor by TPDC, pursuant to

sub-paragraph (i) of this sub-Article. The operating Agreement aforesaid will include

provisions to give effect to the following principles:

(i)



(ii)



(iii)



Contractor shall be the sole Operator of the Joint Operations under properly defined

rights and obligations and will carry out all operations pursuant to work

programmes and budgets approved by a Joint Operating Committee. The parties

may review at any time the Operatorship of the Joint Operations;

A Joint Operating Committee shall be established on which TPDC and Contractor

shall be equally represented. The representatives aforesaid shall have voting rights

proportional to the participating interests of each Contractor entity on the Joint

Operating Committee on all matters. Except as otherwise expressly provided for in

this Agreement, all decisions, approvals and other actions of the Joint Operating

Committee on all proposals coming before it shall be decided by affirmative vote of

two (2) or more non-Affiliated Parties holding an aggregate not less than sixty five

percent (65%) of all Participating Interests (“Pass Mark Vote”); except for decisions

relating to TPDC participation in any exploration and appraisal cash calls as a coventurer as per Article 9(b) and 9(c)(iii). In case of disagreement, a third party

expert, who shall be mutually agreed upon and selected, will resolve the

disagreement and his decision shall be final and binding on the parties to the

disagreement.

TPDC shall be liable to contribute the Participating Interests (as contained in

Article 9(b)(i)) of the Contract Expenses other than Exploration Expenses (such

Exploration Expenses to include expenses in respect of an appraisal programme) of

25



(iv)



(v)



(vi)



Joint Operations in all Development Areas in respect of which TPDC has elected to

participate. The balance of such expenses shall be contributed by the Contractor.

The contributions aforesaid shall be in such major convertible currencies as may be

required from time to time by the Operator for the Joint Operations approved by the

Joint Operating Committee but (if there exist expenditures in Tanzanian Shillings),

TPDC shall have preference for payment in such Tanzanian Shillings and such

amounts will count towards the total contribution which TPDC is obliged to make

in respect of its share in Joint Operations.

Failure by any party to meet calls for funds within the time limits agreed shall result

in liability for interest on the unpaid amounts for the period that such amounts

remain unpaid at LIBOR + 2%.

If, after the election allowed in paragraph 10(b), TPDC fails to pay its share of

Development and/or Production Expenditures and such failure is not rectified within

a period of thirty (30) days after receipt of written notice thereof from the Operator,

TPDC shall be deemed to have elected on the date of receipt of the notice to have

agreed with the Contractor entities that they shall carry TPDC´s share of such

expenditures, and the Contractor entities shall pay any of TPDC´s unpaid

expenditures before the date of the deemed election and also TPDC´s share of any

expenditures incurred after the date of the deemed election recovering such

expenditures in accordance with Article 10(c)(v)(b). Notwithstanding the above

procedure, if, during the above mentioned thirty (30) days period to rectify the

failure to pay, TPDC notifies the Operator that it has provided to rectify such failure

to pay in a period not greater than thirty (30) days from such TPDC's notification to

Operator, then, the carry from Contractor's entities shall not be triggered unless such

notification is not done during this thirty (30) days period. For avoidance of doubt

any amounts not remedied other than by the carry procedure herein established are

subject to paragraph (iv) above from the date of failure to pay until the date such

failure to pay is finally rectified. The Contractor entities shall have the right to

recover such expenditures out of the TPDC’s Cost Oil as defined in Article 12(b) (i).



26



ARTICLE 10:

(a)



ANNUAL CHARGES



The annual charge in respect of which the Contractor is obliged to disburse to TPDC,

pursuant to Article 3(d) (v) hereof in respect of the said Exploration Licence, shall be an

equivalent amount in Tanzania shillings calculated by charging the following amounts for

every square kilometer of the Contract Area retained:

Period



US $/sq km



Initial Exploration Period

First Extension Period

Second Extension Period



4

8

16



The annual charge in respect of a Development Licence granted to TPDC, for which

application was made at the request of the Contractor, shall be US$ 200 per sq. km .

(b)



The sum in United States dollars referred to in paragraph (a) above shall be adjusted

annually by dividing the sum by the following factor I, where:

I = C/D

and where:

C



is the United States Industrial Goods Producer Price Index (USIGPPI) as reported

for the first time in monthly publication “International Financial Statistics” of the

International Monetary Fund (IMF) in the section “Prices, Production,

Employment” for the Month during which the Exploration Licence is first issued to

TPDC hereunder.



D



is the USIGPPI as reported for the first time in the aforesaid IMF publication for

the Month in which the first and any subsequent anniversary of the date on which

the Exploration Licence was first issued falls.



For the purpose of this Article 10, and Articles 5(f) and 18(c), in the event that the

USIGPPI ceases to be published the parties to this agreement shall agree on an appropriate

replacement index.



27



ARTICLE 11:



RECOVERY OF COSTS AND EXPENSES AND

PRODUCTION SHARING



(a)



Where a company has more than one exploration licence within a Contract Area (prior to

any relinquishments) there shall be no “ring fencing” of Exploration or Development

Licences in such Contract Area. Provided that, in respect of Development Area falling

within the Contract Area (prior to any relinquishments), Contract Expenses in other

Licence Area or Block(s) within the Contract Area (prior to any relinquishments) may only

be recoverable from petroleum revenues from such Development area to the extent that

were incurred prior to commencement of Petroleum production from such Development

Area.



(b)



Royalty as provided for in Article 14(c) shall be charged first on total production from the

Contract Area. The Royalty shall be reckoned at the well head before recovery of costs.



(c)



Subject to sub-article (b) and (e) of this Article and sub-article (a) of Article 13, all

Contract Expenses incurred by the Contractor and, where Joint Operations have been

established by TPDC shall be recovered from a volume of Crude Oil“ and/or “Natural Gas”

or “Gas” (hereinafter referred to as “Cost Oil” and/or “Cost Gas”) produced and saved

from the Contract Area and limited in any Calendar Year to an amount not exceeding fifty

per cent (50%) of remaining total Crude Oil /Natural Gas production from the Contract

Area in the onshore/shelf areas



(d)



Contract Expenses which, pursuant to the provision of Annex D, may be recovered from

Cost Oil and/or Cost Gas are hereinafter referred to as “Recoverable Contract Expenses”.

Such expenses may be recovered as from the date they have been incurred. To the extent

that, in any Calendar Year, the Recoverable Contract Expenses exceed the Cost Oil and/or

Cost Gas available under Article 11 (c), the un-recovered excess shall be carried forward

for recovery in the next succeeding Calendar Year and, to the extent not then recovered, in

the subsequent Year or Years.



(e)



Where, additionally, Joint Operations have been established:

(i)



(ii)



(f)



No Contract Expenses incurred by TPDC shall be recovered from the Cost Oil

and/or Cost Gas unless there is production from a Development

Area in respect

of which there are Joint Operations;

The available Cost Oil and/or Cost Gas shall be applied first to recover Operating

Expenses, and the Contractor and TPDC shall be entitled to recover such Expenses

in proportion to their individual cumulative un-recovered Operating Expenses. After

recovery of Operating Expenses any excess Cost Oil and/or Cost Gas available for

distribution shall be applied to recover Exploration Expenses. After recovery of

Operating Expenses and Exploration Expenses any excess Cost Oil and/or Cost Gas

available for distribution shall be applied, and the Contractor and TPDC shall be

entitled to recover such expenses in proportion to their individual cumulative unrecovered Development Expenses. Any un-recovered Contract Expenses shall be

recovered out of the Cost Oil and/or Cost Gas available in the next succeeding

Calendar Year or Years in the same manner as set out herein.



Subject to the limitations set out in sub-article (c) of this Article, the quantity of Cost Oil

and/or Cost Gas which the Contractor and, if Joint Operations have been established, TPDC

28



actually require and shall be entitled to in any Calendar Year will be established on the

basis of the average fair market price per barrel determined in accordance with Article 12

herein.

(g)



(i)(a) Profit Oil: For the purpose of sharing profit oil/gas between the Contractor and

TPDC, the balance of Crude Oil available in any Year after Recoverable Contract

Expenses have been recovered to the extent and in the manner aforesaid (hereinafter

referred to as “Profit Oil /Gas”), total Crude Oil/Natural Gas production from the

Contract Area shall be divided based on the following tranches:

Tranches of daily total production rates (barrels of oil per day, BOPD) in the

Contract Area in the onshore and shelf areas

012,50025,00050,000100,000 and above



12,499

24,999

49,999

99,999



(i)(b) Profit Gas: For the purpose of sharing profit gas between the Contractor and TPDC,

the balance of Natural Gas available in any Year after Recoverable Contract

Expenses have been recovered to the extent and in the manner aforesaid (hereinafter

referred to as “Profit Gas”), total Natural Gas production from the Contract Area

shall be divided based on the following tranches:

Tranches of daily total production rates (million standard cubic feet of gas per day,

MMSCFGPD) in the Contract Area in the onshore and shelf areas

0

20

40

60

80

100



(ii)



(iii)



(h)



(i)



-



19.99

39.99

59.99

79.99

99.99

and above



The tranches of daily total production referred to in this Article 11 and also in

Article 9 herein shall be specified in terms of average daily total production rates.

The average daily production rates shall be determined for each Calendar Quarter

and shall be calculated by dividing the total quantity of Crude Oil and/or Cost Gas

produced and saved from the Contract Area during any Quarter by the total number

of days during which Crude Oil and/or Cost Gas was produced in such Quarter.

The quantity of Cost Oil and/or Cost Gas required to satisfy Recoverable Contract

Expenses in any Year shall be allocated to each of the applicable tranches of daily

total production in the same proportion as the total production in each tranche of

daily total production bears to total production from the Contract Area.

If there are no Joint Operations, after allocation of Recoverable Contract Expenses

in accordance with sub-article (f) (iii) of this Article, the resulting Profit Oil in each

tranche of daily total production shall be shared as follows:

29



Tranches of daily total Production

(BOPD) rates in the

Contract Area



TPDC Share

of Profit Oil



0-12,499

12,500- 24,999

25,000- 49,999

50,000- 99,999

Above 100,000



70%

75%

80%

85%

90%



(ii)



ABC Share Contractor

of Profit Oil



30%

25%

20%

15%

10%



If there are no Joint Operations, after allocation of Recoverable Contract Expenses

in accordance with sub-article (f) (iii) of this Article, the resulting Profit Gas in each

tranche of daily total production shall be shared as follows:



Tranches of daily total Production

(MMSCFGPD) rates in the Contract Area

0

20

40

60

80

100



-



19.99

39.99

59.99

79.99

99.99

and above



TPDC Share

of Profit Gas

60%

65%

70%

75%

80%

85%



ABC Share Contractor

of Profit Gas

40%

35%

30%

25%

20%

15%



(i)



If there are Joint Operations in all Development Areas, TPDC’s share of Profit Oil/Gas

indicated in sub-article (h) of this Article relative to each tranche of daily total production

shall be increased by the number of percentage points obtained by multiplying TPDC’s

working interest of not less than twenty five (25%) per cent in accordance with Article 9 (b)

by the share of the Contractor’s Profit Oil/Gas indicated in sub-article (h) (i) and (ii)

respectively of this Article relative to such increment of Profit Oil/Gas, and the

Contractor’s share shall be reduced accordingly. However, where TPDC has elected

pursuant to Article 9 (b) not to participate in Joint Operations in all Development Areas, the

increase in TPDC’s share of Profit Oil/Gas shall be the result of the above calculation

multiplied by the ratio of total production from Joint Operations over total production in the

Contract Area during each Year.



(j)



With respect to this Article 11, Cost Oil and/or Cost Gas and Profit Oil and/or Profit Gas

calculations shall be done for each Calendar Quarter and the Crude Oil/Natural Gas

provisionally shared accordingly. To the extent that actual quantities, expenses and prices

are not known, provisional estimates of such data based on the approved Work Program,

budget and any other relevant documentation or information shall be used. Within sixty

(60) days of the end of each Calendar Year a final calculation of Cost Oil and/or Cost Gas

and Profit Oil and/or Profit Gas based on actual Crude Oil/Natural Gas quantities, prices

and recoverable costs and expenses in respect of that Calendar Year shall be prepared and

any necessary adjustments to the Crude Oil/Natural Gas sharing shall be agreed upon

between the Contractor and TPDC and made as soon as is practicable.



30



(k)



Subject to Article 17(d), the Contractor will be free to export any Petroleum received by

Contractor pursuant to Article 11 and 13 of this Agreement and to retain the proceeds of the

sale of such Petroleum outside the United Republic of Tanzania.



31



ARTICLE 12:

(a)



VALUATION OF CRUDE OIL



The parties hereby agree that Tanzanian Crude Oil produced and saved from the Contract

Area shall be sold or otherwise disposed of at competitive international market prices. The

average fair market price of Tanzanian Crude Oil marketed in any Calendar Quarter shall,

for the purpose of giving effect to this Agreement, be determined as follows:

(1)



as soon as possible after the end of each Calendar Quarter in which Crude Oil has

been produced from any Development Area pursuant to this Agreement an average

price (in terms of US$ per barrel FOB the Contractor’s actual loading point for

export from the United Republic of Tanzania) for each separate volume of Crude

Oil of the same gravity, sulphur and metal content, pour point, product yield and

other relevant characteristics (“quality”) shall be determined in respect of

production during that Calendar Quarter. It is understood that production from

different Development Areas may be of differing quality and that separate average

prices may accordingly be appropriate for any Calendar Quarter in respect of

production for each Area, in which event the overall price applicable to production

from the Contract Area shall be determined by taking the arithmetic weighted

average (weighted by volume) of all such prices separately determined;



(2)



the prices aforesaid shall be determined on the basis of international fair market

value as follows:

(i)



(ii)



in the event that 50% or more of the total volume of sales made by the

Contractor during the Calendar Quarter of Crude Oil of a given quality

produced and saved hereunder have been third party arms length sales

transacted in foreign exchange (hereinafter referred to as “Third Party

Sales”), the fair market valuation for all Crude Oil of that quality will be

taken to be the simple arithmetic average price actually realized in such

Third Party Sales. This will be calculated by dividing the total receipts from

all Third Party Sales by the total number of Barrels of Crude Oil sold in such

sales;

subject to sub-paragraph (3) below, in the event that less than 50% of the

total volume of sales made by the Contractor during the Calendar Quarter of

Crude Oil of a given quality produced and saved hereunder have been Third

Party Sales, the fair market valuation for all Crude Oil of that quality will be

determined by the arithmetic weighted average of:

(A) the simple arithmetic average price actually realized in the Third Party

Sales during the Calendar Quarter of such Crude Oil produced and

saved hereunder, if any, calculated by dividing the total receipts from

all Third Party Sales by the total number of Barrels of Crude Oil sold

in such sales;

and

(B) the simple arithmetic average price per Barrel at which a selection of

major competitive crude oils of generally similar quality to that of

Tanzanian Crude Oil produced hereunder and crude of sufficient

liquidity daily traded in sufficient quantities (above 0.1 million barrels

32



a day) which are listed and published in Platt Oilgram) were sold in

international markets during the same period; the prices of the crude

oils used for reference will be adjusted for differences in quality,

quantity, transportation costs, delivery time, payment and other

contract terms.

The selected crude oils will be agreed between the Contractor and

TPDC, in consultation with the Government in advance for each

Calendar year and in making the selection preference will be given to

those crude oils of similar quality to Tanzanian Crude Oil which are

produced in Africa or the Middle East and are regularly sold in the

same markets as Tanzanian Crude Oil is normally sold.

The arithmetic weighted average aforesaid will be determined by the

percentage volume of sales of Tanzanian Crude Oil by Contractor that

are, (A), and that are not, (B) as the case may be, Third Party Sales

during the Calendar Quarter in question.

(iii)

(iv)



(3)



(b)



all such prices will be adjusted to FOB the Contractor’s actual loading point

for export from the United Republic of Tanzania;

for the purposes of this Article, Third Party Sales of Crude Oil made by the

Contractor shall include any third party arms length sales made by the

Contractor on Government’s behalf pursuant to Article 17 herein but shall

exclude:

(A)



Sales, whether direct or indirect through brokers or otherwise, of

any seller to any Affiliate of such seller.



(B)



Crude Oil exchanges, barter deals or restricted or distress

transactions, and more generally any Crude Oil transaction which is

motivated in whole or in part by considerations other than the usual

economic incentives for commercial arms length crude oil sales.



In the event that less than 50% of the total volume of sales by the Contractor during

the Calendar Quarter of Crude Oil/Natural Gas of a given quality produced and

saved hereunder have been Third Party Sales, the Contractor shall promptly notify

Government and TPDC of the applicable percentage and respective volumes and

prices realized. Government and TPDC shall have the right to elect for the fair

market valuation for all Crude Oil/Natural Gas of that quality to be determined for

that Quarter in accordance with sub-article 12 (a) 2 (i) of this Article. If Government

and TPDC so elect, they will notify the Contractor in writing within 14 days of

receipt of the original notification from the Contractor, and the fair market valuation

of the aforesaid Crude Oil shall be determined accordingly. If Government and

TPDC do not so elect then the fair market valuation shall be determined in

accordance with sub-article 12(a) (2) (ii) of this Article.



The Contractor shall be responsible for establishing the relevant average prices for Crude

Oil in accordance with this Article 12, and such prices shall be subject to agreement by

TPDC before they shall be accepted as having been finally determined. The Contractor

shall provide TPDC with all relevant material in order that it can satisfy itself that the

33



average price determined by the Contractor is fair. If the parties fail to agree on the average

price for any Calendar Quarter within thirty (30) days following the end of such Quarter

then the calculation of the relevant average price shall be referred to a sole expert appointed

pursuant to sub-article (d) of this Article. The sole expert’s determination shall be final and

binding.

(c)



During the Calendar year in which production from the Contract Area commences, the

parties will meet in order to establish a provisional selection of the major competitive crude

oils and an appropriate mechanism for the purposes of giving effect to sub-article 12(a)

(2)(ii) (B) of this Article. The selection of crude oils will be reviewed annually and

modified if necessary.



(d)



In the event of any difference or dispute between the Contractor and Government or TPDC

concerning selection of the major competitive crude oils, or more generally about the

manner in which the prices are determined according to the provisions of this Article 12,

the matter or matters in issue shall finally be resolved by a sole expert appointed by

agreement between the parties or, in the absence of such agreement, by the British Energy

Institute (formerly British Institute of Petroleum). The costs of the expert shall be shared

equally between the Contractor on the one hand and the Government and TPDC on the

other hand.



34



ARTICLE 13:

(a)



NATURAL GAS



Where Contractor has informed TPDC that Non-Associated Natural Gas discovered in the

Contract Area is of potential commercial interest, the Contractor shall, as soon as possible

but in any case not exceeding thirty days (30) submit to TPDC, for the consideration of the

Advisory Committee, its proposals for an appraisal programme to meet the requirements of

Section 32 (2) of the Act. After completion by the Contractor of an appraisal program, the

parties shall meet together with a view to reaching an agreement on the development,

production, processing and sale of such gas.

For the purpose of the aforesaid, the parties undertake to negotiate in good faith and in

doing so will seek to give effect to the following principles:

(i)



(ii)



(b)



all Contract Expenses directly attributed to the discovery and production of such gas

shall be recovered from part thereof and the remainder of the gas shared between the

Contractor and TPDC as far as possible in accordance with the scheme for cost

recovery and sharing of Profit Oil/Gas set out in Article 11; and

to the extent that market conditions permit, gas will be valued for cost recovery and

sold for processing or export at prices which will give to the Contractor a fair return

on its investment.



Where:(i)

Non-Associated Natural Gas has been discovered in the Contract Area, and

(ii)

a Location has been declared in respect of a Block or Blocks in which such

discovery is located, and

(iii)

the parties agree that the Non-Associated Gas discovered by the Contractor exists

in the Contract Area in quantities sufficient to justify consideration of an export

scheme,

the Minister will, if TPDC at the request of the Contractor applies in that behalf, extend for

a reasonable time, not to exceed three (3) years, the period within which TPDC may apply

for a Development Licence over a Block or Blocks within that Location.



(c)



Subject to the provisions of the Act, Natural Gas associated with Crude Oil and not used in

Petroleum Operations may be flared only if the use thereof is uneconomic. However, TPDC

may elect to offtake, free of charge, at the wellhead or gas oil separator and use for

domestic requirements such Natural Gas that would otherwise be flared, provided that all

costs associated with TPDC’s utilization of the Natural Gas be borne by TPDC. It is

understood that such offtake should not be detrimental to the prompt conduct of oil field

operations according to Good Oilfield Practices.



.



35



ARTICLE 14:



TAXATION AND ROYALTY



(a)



The Contractor shall be subject to Tanzanian taxes on income derived from Petroleum

Operations hereunder, as provided for under the provisions of the Income Tax Act, 2004.



(b)



In addition to taxes paid in accordance with sub-article (a) above the Contractor or its

shareholders in respect of income derived from Petroleum Operations hereunder or in

respect of any property held or thing done for any purpose authorised or contemplated

hereunder shall be further taxed as follows:

(i)

(ii)



(iii)

(iv)



(c)



subject to the provisions of Article 20, import duties at the rates specified from time

to time in the First Schedule to the East African Customs Union Protocol;

taxes, duties, fees or other imposts for specific services rendered on request or to the

public or commercial enterprises generally and rent due to the Government in

respect of any land rights granted or assigned to the Contractor;

local Government rates or taxes not in excess of those generally applicable in the

United Republic of Tanzania; and

stamp duties, registration fees, licence fees and any other tax, duty, fee or other

impost of a minor nature.



TPDC on behalf of itself and the Contractor shall discharge the obligation to pay Royalty

under Section 81 of the Act in respect of petroleum obtained from the Contract Area, by

delivering to the Government 12.5% of total Crude Oil/Natural Gas production (prior to

Cost Oil and/or Cost Gas recovery) at such location as the Minister may direct and the

Government may require TPDC to dispose of such royalty otherwise to be delivered to the

Government in such manner as the Government may direct.



36



ARTICLE 15:

(a)



ADDITIONAL PROFITS TAX



Contractor shall be subject to an Additional Profits Tax (hereinafter referred to as "APT")

that shall be calculated on a Development Area basis in accordance with the provisions of

this Article 16. APT will be calculated for each Calendar Year and will vary with the real

rate of return earned by Contractor on the net cash flow from the Development Area in

question. If, for any Development Area, either:

(i)



the "first accumulated net cash position" (as calculated in the manner set out

hereafter and a sample calculation methodology shown in Annex "E" and

hereinafter referred to as the "FANCP");



or

(ii)



each of the FANCP and the "second accumulated net cash position" (as calculated

in the manner set out hereafter and a sample hereinafter and referred to as the

"SANCP")



is a positive amount, then the APT from the Development Area in question for any

Calendar Year shall be either, in case (i): twenty five percent (25%) of the FANCP for that

Year, or in case (ii): the aggregate of twenty five percent (25%) of the FANCP for that

Year and thirty five percent (35%) of the SANCP for that Year. If in any Year the FANCP

or the SANCP is a negative amount then no APT shall be due with reference to that

FANCP or SANCP.

(b)



The FANCP on any Development Area for any Calendar Year shall be calculated

according to the following formula:

FANCP = A(100%+B)+C where:

"A"



equals the FANCP denominated in US dollars at the end of the Calendar Year

preceding the Calendar Year for which the calculation is being made



"B"



equals twenty percent (20%) plus the percentage change, for the Calendar Year for

which the calculation is being made, in the annual average level of the United

Stated Industrial Goods Producer Price Index (USIGPPI) as reported for the first

time in the monthly publication "International Financial Statistics" of the

International Monetary Fund (IMF) in the section "Prices, Production,

Employment".



"C"



equals the net cash position denominated in US dollars (which may be a positive or

negative amount) for the Calendar Year for which the calculation is being made,

calculated as follows:



(i)



Contractor's share of Cost Oil and Profit Oil for that Calendar Year valued in

accordance with Article 13 hereof and allocated to the Development Area in

question in accordance with the provisions of Annex " D" to this Agreement



.



37



plus

(ii)



Contractor's share of all credits to the accounts under this Agreement in respect of

the Calendar Year, calculated and allocated to the Development Area in question in

accordance with the provisions of Annex “D" to this Agreement



minus

(iii)



(c)



Contractor's share of all charges to the accounts under this Agreement in respect of

that Calendar Year, calculated and allocated to the Development Area in question in

accordance with the provisions of Annex "D" to this Agreement, except that for this

purpose Contractor's share of charges shall not include any amounts in respect of

interest on loans obtained for the purpose of carrying out Petroleum Operations.



The SANCP on any Development Area for any Calendar Year shall be calculated

according to the same formula given under sub-article (b) above except that:

"A"

"B"



equals the SANCP denominated in US dollars at the end of the Calendar Year

preceding the Calendar Year for which the calculation is being made,

equals thirty percent (30%) plus the percentage change, for the Calendar Year for

which the calculation is being made, in the annual average level the USIGPPI as

reported for the first time in the monthly publication "International Financial

Statistics" of the IMF in the section "Prices, Production, Employment".



To the amount calculated under (iii) in the definition of "C" is sub-article (b) above shall be

added any Additional Profits Tax which would be payable from the Development Area if

reference were made hereunder only to the FANCP.

(d)



If for any Calendar Year the FANCP is positive amount, the FANCP at the end of that

Calendar year shall be deemed to be zero for the purpose of calculating the FANCP for the

subsequent Calendar Year.



(e)



If for any Calendar Year the SANCP is a positive amount, the SANCP at the end of that

Calendar Year shall be deemed to be zero for the purpose of calculating the SANCP for the

subsequent Calendar Year.



(f)



Contractor shall maintain proper records and books of accounts in accordance with the

provisions of Annex "D" enabling the calculations described in this Article 16 to be

performed. From the Effective Date Contractor shall maintain and submit to the

Government annually, or more frequently if so requested, a statement of the FANCP and

SANCP.



(g)



The APT due, if any, shall be paid in cash at such time and in such manner as the

Commissioner of Income Tax may reasonably require.



38



ARTICLE 16:



REPORTING, INSPECTION AND CONFIDENTIALITY



(a)



The Contractor shall prepare and, at all times while this Agreement is in force, maintain

accurate and current records of its operations in the Contract Area.



(b)



The Contractor shall save and keep for a reasonable period of time a representative portion

of each sample of cores, cuttings and fluids taken from drilling wells, to be disposed of or

forwarded to the Government or its representative in a manner directed by TPDC. All

samples acquired by the Contractor for its own purpose shall be considered available for

inspection at any reasonable time by the Government or its representative. Any such

samples which the Contractor has kept for a period of twelve (12) months with the full

knowledge of TPDC without receipt of instruction to forward the same to TPDC,

Government or its representative may be disposed of by the Contractor at is discretion,

provided TPDC has been given prior notice of not less than thirty (30) days of the

Contractor’s intention to do so and given the opportunity to take such samples.



(c )



Notwithstanding sub-article (b) of this Article, the Contractor shall be freely permitted to

export samples for purposes of investigation in laboratories abroad. Originals of records

may be exported provided at least one copy has been submitted to TPDC.



(d)



(i)



(ii)



(iii)



TPDC, through its duly appointed representatives, shall be entitled to monitor the

Petroleum Operations conducted by the Contractor hereunder and at all reasonable

times to inspect all assets, records and data kept by the Contractor relating to such

operations.

The Contractor shall provide TPDC promptly with copies of any and all data

(including, but not limited to geological

and geophysical reports, logs and well

surveys), information and interpretations of such data and information obtained by

the Contractor in the course of carrying out Petroleum Operations hereunder. All

such data, information and interpretations, as well as cores and cuttings taken from

drilling wells, shall be the property of Government and, save as provided in subarticles (b), (c) and (d) of this Article, the same may not be published, reproduced or

otherwise dealt with by the Contractor without the prior written consent of

Government or TPDC, which consent shall not be unreasonably withheld or

delayed.

All data and information and every interpretation thereof provided by the Contractor

to TPDC shall, so long as it relates to an area which is a part of the Contract Area,

be treated as confidential and each of the parties hereto undertakes not to disclose

the same to any other person without the prior written consent of the other parties.

However, such data, information and interpretations may be disclosed to affiliate

companies or contractors carrying out any part of the Petroleum Operations and to

advisers of TPDC and Government who will treat as confidential all that is disclosed

to them and undertake not to disclose the same to any other person without the

written consent of the Contractor and TPDC. Notwithstanding what is provided in

this sub-article (d) (iii) of this Article, the Minister may, using such data,

information and reports supplied by the Contractor, publish summaries of data,

information and reports from geophysical surveys and exploration wells, including

lithological groups, classification boundaries and hydrocarbon zones:

(A)



in the case of discovery wells, five (5) years after completion of drilling;

and

39



(B)



in any other case, at any time.



For purposes of this sub-article, a discovery well means a well in which a substantial

Petroleum accumulation has been encountered.

(e)



The Contractor undertakes not to disclose to third parties any data, information or any

interpretation thereof which relates to an area which has ceased to be part of the Contract

Area for a period of four (4) years from the date on which the area to which such data,

information or any interpretation thereof relates ceased to be part of the Contract Area or

from the date on which this Agreement expires or is terminated, whichever occurs first.

However, where during the aforesaid period the Contractor carries on Petroleum Operations

in the Contract Area, such data, information and interpretations may be disclosed by

Contractor to:

(i)



(ii)



(iii)



(iv)



(f)



Subcontractors, Affiliates, assignees, auditors, financial consultants or legal

advisers, provided that such disclosures are required for effective performances of

the aforementioned recipients’ duties related to Petroleum Operations;

comply with statutory obligation or the requirements of any governmental agency or

the rules of a stock exchange on which a Party’s stock is publicly traded in which

case the disclosing Party will notify the other Parties of any information so disclosed

prior to such disclosure;

financial institutions involved in the provision of finance for the Petroleum

Operations hereunder provided, in all such cases, that the recipients of such data and

information agree in writing to keep such data and the information strictly

confidential; and

a third party for the purpose of negotiating an assignment of interest hereunder

provided such third party executes an undertaking to keep the information disclosed

confidential.



Any public disclosure regarding the interpretation of information acquired in Petroleum

Operations shall not be made without the Government’s consent.



40



ARTICLE 17:



LIFTING, MARKETING AND DOMESTIC SUPPLY

OBLIGATION



(a)



The quantity of production to which TPDC is entitled, pursuant to Article 11 herein, shall

be delivered to TPDC or its nominee at the Delivery Point, at which title in production will

pass to TPDC or its nominee subject to the terms of the agreement referred to in sub-article

(b) of this Article. TPDC shall be responsible for costs associated with its lifting

entitlement after the Delivery Point. The Contractor, and in the event of Joint Operations,

TPDC, shall be responsible for all costs prior to the Delivery Point.



(b)



Within six months after the Minister’s approval of a development plan, the Contractor shall

propose to TPDC an offtake procedure to govern the method whereby the parties will

nominate and lift their respective shares of Crude Oil/Natural Gas. The details of such

procedure shall be discussed and agreed upon between TPDC and the Contractor for the

Minister’s approval. The major principles of such procedure shall include the following:

(i)

(ii)

(iii)



(iv)



lifting by the parties shall be carried out so as to avoid interference with Petroleum

Operations;

lifting rights and schedules will be subject to operations tolerances and constraints

so that each party shall be entitled to lift full cargo loads;

within reasonable limits and subject to future correction of imbalances, each party

may lift more or less than its lifting entitlement so as to allow the lifting of full

cargo loads; and

in general, priority for lifting shall be given to the party having the greatest unlifted

lifting entitlement.



(c)



The Contractor shall, if requested by the Minister with at least three (3) months advance

notice, market abroad on competitive terms all or part of TPDC’s lifting entitlement subject

to payment by TPDC of direct costs normally borne by a seller in such transactions as may

be agreed by TPDC but excluding any commission or marketing fee in respect of such

service.



(d)



TPDC shall use its share of production from all Crude Oil/Natural Gas production in the

United Republic of Tanzania to meet the requirements of the domestic market of the United

Republic of Tanzania. If there is domestic demand in excess of TPDC’s total entitlement,

then the Contractor may be required to sell Crude Oil/Natural Gas in the United Republic

of Tanzania on a pro rata basis with other producers in the United Republic of Tanzania

(except TPDC) according to the quantity of Crude Oil/Natural Gas of each producer. TPDC

shall give the Contractor at least three (3) months notice in advance of said requirements

and the term of the supply will be on an annual basis. The volume of Crude Oil/Natural

Gas which TPDC may require Contractor to sell to meet the requirements of the domestic

market shall not exceed Contractor’s share of Profit Oil /Gas.



(e)



Crude Oil/Natural Gas sold pursuant to sub-article (d) above shall be paid for in foreign

exchange at a price determined in accordance with Article 12 of this Agreement.



41



ARTICLE 18:



TANZANIAN RESOURCES



The Contractor shall:

(a)



give preference to the purchase of Tanzanian goods, services and materials provided such

goods and materials are of an acceptable quality and are available on a timely basis in the

quantity required at competitive prices and terms;



(b)



make maximum use of Tanzanian service companies, where services of comparable

standards with those obtained elsewhere are available from such contractors at competitive

prices and on competitive terms;



(c)



establish with TPDC the appropriate tender procedures governed by Tanzanian laws to give

effect to this Article 17;



(d)



ensure that provisions in terms of sub-articles (a) to (c) of this Article are contained in

contracts between Contractor and its subcontractors.



(e)



Contractor shall maximize to the satisfaction of Minister the level of usage of local goods

and services, businesses, financing and the employment of nationals of the United Republic

of Tanzania.



(f)



Contractor shall ensure that sub-contracts are scoped, as far as it is economically feasible

and practical to match the capability (time, finance and manpower) of Local Enterprises

and shall manage the risk to allow their participation.



(g)



Contractor shall provide to TPDC together with the annual work programme and budgets

required under Articles 5 and 6 a list of all projects to be undertaken as well as all goods

and services that are required for the conduct of Petroleum Operations. TPDC and

Contractor shall agree on a list of those projects and goods and services which shall be

published in at least two local newspapers and on the TPDC’s website.



(h)



Contractor shall give equal treatment to Local Enterprises by ensuring access to all tender

invitations and by including high weighting on local value added in the tender evaluation

criteria.



42



ARTICLE 19:



EMPLOYMENT, TRAINING AND TRANSFER OF

TECHNOLOGY



(a)



Subject to the requirement of any law relating to immigration, the Government shall

provide the necessary work permits and other approvals required for the employment of

expatriate personnel by the Contractor in the United Republic of Tanzania for the purposes

of this Agreement. TPDC shall assist the Contractor in that regard.



(b)



Without prejudice to Article 17, in the conduct of the Petroleum Operations, the Contractor

shall employ Tanzanian citizens having appropriate qualifications to the maximum extent

possible. In this connection the Contractor shall, in consultation with Government and

TPDC, propose and carry out an effective training and employment program for Tanzanian

employees in each phase and level of operations, taking into account the requirements and

need to maintain reasonable international standards of efficiency in the conduct of the

Petroleum Operations. Such employees may be trained in the United Republic of Tanzania

or abroad as required by the training programmes prepared by the Contractor.



(c)



During each year of the term of the Exploration Licence or any renewal thereof the

Contractor shall spend a minimum sum of one hundred and fifty thousand United States

dollars (US$ 150,000) adjusted by dividing by the factor I as defined in Article 5 (e) herein,

for one or more of the following purposes:

(i)



(ii)



(iii)

(iv)



to provide a mutually agreed number of Government and TPDC personnel with onthe-job training in the Contractor operations in the United Republic of Tanzania and

overseas, and/or practical training at institutions abroad, particularly in the areas of

natural earth sciences, engineering, technology, petroleum accounting and

economics, economic analysis, contract administration and law as related to the

fields of oil and gas exploration and production;

to send suitable Tanzanian personnel selected by the Government and by TPDC on

courses at universities, colleges or other training institutions mutually selected by

the Contractor, the Government and TPDC;

to send Tanzanian personnel selected by the Government and by TPDC to

conferences workshops and seminars related to the petroleum industry; and

to purchase for the Government and TPDC advanced technical books, professional

publications, scientific instruments or other equipment required by the Government

and TPDC.



(d)



Not later than six (6) months after the grant of a Development Licence, the Contractor

shall, in consultation with TPDC, implement the programme proposed in the development

plan as approved by the Government for training and employment of Tanzanian nationals

in each phase and level of Petroleum Operations and for the transfer of management and

technical skills for the safe and efficient conduct of Petroleum Operations. In any case the

Contractor shall ensure the transfer of management and operation functions to Tanzanian

nationals within a period not exceeding five (5) years from the commencement of

commercial operations.



(e)



The provisions of the Vocational Education and Training Act 1994 (Cap 82) shall apply to

the employment of any expatriate employee of the Contractor, including any expatriate

employee of any non-resident contractor, during the several periods into which Exploration

Operations hereunder are divided.

43



ARTICLE 20:



(a)



TITLE TO ASSETS, INSURANCE, SITE CLEAN UP AND

ABANDONMENT



All fixed assets, owned by Contractor in connection with the Petroleum Operations carried

out by Contractor hereunder shall become the property of TPDC at the option of TPDC

after this agreement expires or is terminated or at the time the portion of the full costs of the

acquisition of the asset in question have been recovered by Contractor out of Cost Oil

and/or Cost Gas, whichever occurs first. TPDC’s aforesaid option shall be exercised by

written notice to the Contractor:

(i)

(ii)

(iii)



in the case of expiry of this Agreement, of not less than 30 days prior to such expiry;

in the case of termination of this Agreement of not more than 30 days after such

termination; and

in the case of full recovery of costs of the acquisition of the assets in question not

later than 30 days after such cost recovery. Such fixed assets shall include but not be

limited to buildings, piers, harbors, pipelines, wellheads, separators, compressors,

pumps, power lines, telephone lines etc.



(b)



Subject to this Article, all movable assets in connection with the Petroleum Operations

carried out by the Contractor shall remain TPDC’s property on expiration or termination of

this Agreement.



(c)



The Contractor shall retain ownership of all assets mentioned in (a) and (b) above if it

either renews an expired agreement or enters into another agreement in the United Republic

of Tanzania, provided that such renewal or agreement takes place not later than ninety (90)

days from the date of expiration of the original Agreement.



(d)



If TPDC elects to participate in Joint Operations, then title to any assets acquired pursuant

to a development plan shall be held jointly by the Contractor and TPDC according to their

respective interest in Joint Operations. Any such asset shall become completely owned by

TPDC as soon as this Agreement expires or is terminated or, at the time, the Contractor’s

portion of the full costs of the acquisition of the asset in question has been recovered by the

Contractor out of Cost Oil and/or Cost Gas, whichever occurs first. TPDC’s aforesaid

option shall be exercised by written notice to the Contractor:

(i)

(ii)

(iii)



(e)



in the case of expiry of this Agreement, of not less than 30 days prior to such

expiry;

in the case of termination of this Agreement of not more than 30 days after such

termination; and

in the case of full recovery of the Contractor’s portion of the costs of the acquisition

of assets in question not later than 30 days after such cost recovery.



So long as this Agreement remains in force, Contractor shall have, free of any charge, for

the purpose of carrying on Petroleum Operations hereunder, the exclusive use of assets

which have become the property of TPDC, pursuant to sub-articles (a), (b) or (d) above.

Contractor shall keep the assets in reasonably good repair and working order, fair wear and

tear excepted, and any maintenance expenses shall be recovered in accordance with the

terms hereof.



44



(f)



Subject to the provisions of Article 19 (a) and (b) above, Contractor shall give TPDC the

opportunity to buy, upon such commercially reasonable terms as may be mutually agreed

upon, any item imported duty free under Article 20(a) which Contractor intends to dispose

of or sell.



(g)



Contractor shall effect and, at all times during the terms of this Agreement, maintain for

Petroleum Operations hereunder insurance of such type and in such amount as is customary

in accordance with Good Oilfield Practices. The said insurance shall, without prejudice to

the generality of the foregoing, cover:

(i)

(ii)

(iii)



(iv)

(v)



any loss or damage to all assets used in Petroleum Operations;

pollution caused in the course of Petroleum Operations for which Contractor or the

Operator may be held responsible;

property loss or damage or bodily injury suffered by any third party in the course

of Petroleum Operations for which Contractor, Operator, Government or TPDC

may be liable or Contractor may be liable to indemnify the Government and

TPDC;

the cost of removing wrecks and cleaning up operations following an accident in the

course of petroleum Operations; and

Contractor’s and/or Operator’s liability to its employees engaged in the Petroleum

Operations.



(h)



Contractor shall require its sub-contractors to carry insurance of such type and in such

amount as is customary applicable in accordance with Good Oilfield Practices.



(i)



Prior to relinquishment of any area, Contractor shall perform all necessary abandonment

activities to restore the area as nearly as possible, to the condition in which it existed on the

Effective Date including removal of such facilities, equipment or installations as Minister

may instruct, and shall take action necessary to prevent hazards to human life, property and

the environment which may be caused by its facilities, equipment or installations.. In

carrying such abandonment activities the Contractor shall observe Good Oilfield Practices.



(j)



In order to discharge its obligations for site cleaning and abandonment, the Contractor,

Government and TPDC shall, within two (2) years of the commencement of commercial

production, enter into an agreement to establish an Abandonment Cost Reserve Fund. Such

agreement shall address the administration and utilization of funds deducted from Cost Oil

and/or Cost Gas in accordance with the

following:

(i)



(ii)



(iii)



TPDC and Contractor shall estimate the cost for site cleaning and abandonment in

good faith, on the basis of industry average costs in accordance with generally

acceptable petroleum industry practice.

The payments deposited into the fund shall be placed in a U.S. Dollar, long term,

interest bearing account in a commercial bank located within the United Republic

of Tanzania to be designated by TPDC and Contractor. The bank so designated shall

have a long term rating of not less than “AA” by Standard and Poor’s Corporation

or “P-1” by Moody’s Investor Service or a comparable rating by another mutually

agreed rating service.

If, upon expiration or other termination of this Agreement, TPDC determines to

conduct the site cleanup and abandonment operations, such funds, plus all accrued

45



(iv)



(v)



interest, shall be paid to TPDC whereupon Contractor shall be released from any

further obligation and liability with respect to such site cleanup and abandonment.

If, within sixty (60) days prior to the expiration or other termination of this

Agreement, TPDC has failed to advise Contractor of TPDC’s determination to

conduct the site cleanup and abandonment operations, such funds, plus all accrued

interest, shall be paid to Contractor and Contractor shall thereupon conduct all such

operations in accordance with generally accepted petroleum industry practices.

If the reserve fund in (iii) and (iv) above is insufficient to pay the costs of cleanup

and abandonment, such shortfall shall be paid by Contractor. Where the reserve

fund exceeds the costs incurred such excess shall revert back to TPDC.



46



ARTICLE 21:



IMPORT DUTIES



(a)



The Contractor and its sub-contractors engaged in Petroleum Operations hereunder and

TPDC in respect of Joint Operations established pursuant to Article 9 shall be permitted,

subject to the limitations and conditions set out in East African Community Customs

Management Act, 2004, the Excise (Management and Tariff) Act, Cap.147, the Value

Added Tax Act, Cap. 148 to import, free of duty or other taxes on imports, machinery,

equipment, vehicles, materials, supplies, consumable items (other than foodstuffs and

alcoholic beverages) and moveable property, where imports in any of the said categories

have been certified by a responsible representative of TPDC to be for use solely in carrying

out operations under this Agreement.



(b)



Subject to sub-article (a) above, any of the items imported into the United Republic of

Tanzania may, if no longer required for the operations hereunder, be freely exported at any

time by the importing party without the payment of any export duty provided however that,

on the sale or transfer by the importer of any such items to any person in the United

Republic of Tanzania, import duty shall be payable by the importer on the value thereof at

the date of such sale or transfer.



47



ARTICLE 22:



ACCOUNTING AND AUDIT



(a)



The Contractor shall maintain at its business office in the United Republic of Tanzania

accounting records relating to Petroleum Operations under this Agreement in accordance

with the Accounting Procedure set out in Annex “D” of this Agreement.



(b)



TPDC shall have the right to audit Contractor’s accounting records in accordance with

Annex “D”, the Accounting Procedure.



(c)



Nothing in this Article shall be construed as limiting the right of the Government pursuant

to any statutory power to audit or cause to be audited the books of accounts of the

Contractor.



48



ARTICLE 23:

(a)



HEALTH, SAFETY AND ENVIRONMENT



In furtherance of the Regulations made under the Act or as the Government may otherwise

require from time to time, the Contractor shall take necessary and adequate steps to:

(i)



(ii)



(iii)



(iv)

(v)



conduct its Petroleum Operations in a manner that will protect the natural resources,

including the living resources of the land, sea and lakes of the United Republic of

Tanzania and the environment;

employ the best available techniques in accordance with Good Oilfield Practice for

the prevention of environmental damage to which its Petroleum Operations might

contribute and for the minimization of the effect of such operations on adjoining or

neighbouring lands, sea and lakes;

implement its Development Plan regarding the prevention of pollution, the treatment

of wastes, the safeguarding of natural resources and the progressive reclamation and

rehabilitation of lands disturbed by Petroleum Operations;

prevent pollution; and

ensure prompt, fair and adequate compensation for injury to persons or damage to

property caused by the effects of Petroleum Operations.



(b)



If Contractor’s failure to comply with the provisions of sub-article (a) (i) of this Article and

the Regulations results in pollution or damage to the environment or marine life or

otherwise, the Contractor shall take all necessary measures to remedy the failure and effects

thereof. If such pollution or damage is the result of gross negligence or willful misconduct

of the Contractor, the cost of the remedy shall not be a Recoverable Contract Expense for

the purpose of Article 11 and Annex “D”.



(c)



The Contractor shall notify the Minister and TPDC forthwith in the event of any

emergency or accident affecting the environment and shall take such action as may be

prudent and necessary in accordance with good international petroleum industry practice in

such circumstances. The costs of such action shall be recoverable costs provided that if

such emergency or accident is the result of Gross Negligence or Willful Misconduct of

Contractor, the cost of the action shall not be a Recoverable Contract Expense for the

purpose of Article 11 and Annex “D”.



(d)



If the Contractor does not act promptly so as to control or clean up any

pollution

or

make good any damage caused, TPDC may, after giving the Contractor reasonable notice

in the circumstances, take any actions which are necessary in accordance with good

international petroleum industry practice, and the reasonable costs and expenses of such

actions shall be borne by the Contractor.



(e)



The Contractor should undertake at its expense (but as a legitimate recoverable cost) one or

more comprehensive Environmental Impact Assessment studies prior to, during and after

any major Petroleum Operations. This requirement is mandatory, and the first study shall

be before the start of drilling the first well in the Contract Area. However, in areas of

particular environmental sensitivity, an Environmental Impact Assessment must also be

undertaken prior to seismic acquisition.



(f)



The Contractor shall prepare an Emergency Response Plan to deal with such emergencies

including but not limited to blowouts, fire, storms, oil spills, floods and lightning.

49



(g)



The Contractor shall put in place programmes to deal with HIV/AIDS awareness and

control, malaria control and epidemic outbreaks.



50



ARTICLE 24:

(a)



FORCE MAJEURE EVENT



A “Force Majeure Event” shall mean any event or circumstance or combination of events

or circumstances beyond the reasonable control of a Party occurring on or after the

Effective Date that materially and adversely affects the performance by such affected Party

of its obligations under or pursuant to this Agreement; provided, however, that such

material and adverse effect could not have been prevented, overcome or remedied by the

affected Party through the exercise of diligence and reasonable care. “Force Majeure

Events” shall include the following events and circumstances, but only to the extent that

they satisfy the above requirements: a Government Action or Inaction that is the proximate

cause of non-performance or delay in performance of any obligation or the exercise of any

right under this Agreement by any Party other than Government; a Parastatal Action or

Inaction that is the proximate cause of non-performance or delay in performance of any

obligation or the exercise of any right under this Agreement by any Party other than the

Government; any act of war (whether declared or undeclared), invasion, armed conflict or

act of foreign enemy, blockade, embargo, revolution, riot, insurrection, civil commotion, or

act of terrorism;

(i) lightning, earthquake, tsunami, flood, storm, cyclone, typhoon, or tornado; epidemic or

plague; explosion, fire, blowout or chemical contamination; mechanical failure; down

hole blockage; and

(ii) strikes, works-to-rule, go-slows or other labour disputes, unless such strikes, works-torule, go-slows or labour disputes were provoked by the unreasonable action of the

management of the affected Party or were, in the reasonable judgment of the affected

Party, capable of being resolved in a manner not contrary to such Party’s commercial

interests.



(b)



Force Majeure Events shall expressly not include the following conditions, except and to

the extent that they result directly from force majeure: a delay in the performance of any

contractor, including late delivery of machinery or materials; and normal wear and tear.



(c)



Notification Obligations

If by reason of a Force Majeure Event a Party is wholly or partially unable to carry out its

obligations under this Agreement, then the affected Party shall:

(i)



give the other Parties notice of the Force Majeure Event(s) as soon as practicable,

but in any event, not later than the later of 48 hours after the affected Party becomes

aware of the Force Majeure Event(s) or six hours after the resumption of any means

of providing notice; and



(ii)



give the other Parties a second notice, describing the Force Majeure Event(s) in

reasonable detail and, to the extent that such information can reasonably be

determined at the time of the second notice, providing a preliminary evaluation of

the obligations affected and a preliminary estimate of the period of time that the

affected Party will be unable to perform such obligations and other relevant matters

as soon as practicable, but in any event, not later than seven days after the initial

notice of the occurrence of the Force Majeure Event(s) is given by the affected

Party. When appropriate or when reasonably requested to do so by another Party,

the affected Party shall provide further notices to such other Party more fully

51



describing the Force Majeure Event(s) and the cause(s) therefore and providing or

updating information relating to the efforts of the affected Party to avoid and/or to

mitigate the effect(s) thereof and estimates, to the extent practicable, of the time that

the affected Party reasonably expects it will be unable to carry out any of its

affected obligations due to the Force Majeure Event(s).

(d)



The affected Party shall provide notice to the other Parties as soon as possible, but not later

than seven days following:

(i)



the cessation of the Force Majeure Event; or



(ii)



its ability to recommence performance of its obligations under this

Agreement by reason of the cessation of the Force Majeure Event.



(e)



Failure by the affected Party to give written notice of a Force Majeure Event to the other

Parties within the 48-hour or six-hour period required by Article 27 shall not prevent the

affected Party from giving such notice at a later time; provided, however, that in such case

the affected Party shall not be excused pursuant to this Article 27 for any failure or delay in

complying with its obligations under or pursuant to this Agreement until such notice has

been given. If such notice is given within the 48-hour or six-hour period required by this

Article 27, the affected Party shall be excused for such failure or delay pursuant to this

Article 27 from the date of commencement of the relevant Force Majeure Event.



(f)



Duty to Mitigate

The affected Party shall use all reasonable efforts to mitigate the effects of a Force

Majeure Event, including the payment of reasonable sums of money, in light of the

likely efficacy of the mitigation measures; provided, however, that the affected Party

shall not be required to settle any labour dispute or litigation on terms that, in the

reasonable judgment of the affected Party, are contrary to its commercial interests.



(g)



Delay Caused by Force Majeure

So long as the affected Party has at all times since the occurrence of the Force Majeure

Event complied with the obligations of this Article and continues to so comply then: (i)

the affected Party shall not be liable for any failure or delay in performing its

obligations (other than the obligation to make any payment otherwise due hereunder)

under or pursuant to this Agreement for so long as and to the extent that the

performance of such obligations are affected by the Force Majeure Event; and (ii) any

performance deadline that the affected Party is obligated to meet under this Agreement

shall be extended; provided, however, that no relief, including the extension of

performance deadlines, shall be granted to the affected Party pursuant to this Article to

the extent that such failure or delay would have nevertheless been experienced by the

affected Party had the Force Majeure Event not occurred. A Party shall not bear any

liability for any Loss suffered by the affected Party as a result of a Force Majeure

Event.



52



(h)



Contract Termination Due to a Force Majeure Event

Contractor may terminate this Contract upon a three (3) month written notice to Minister if

the fulfillment of the obligation of either Party under this Contract is affected by a Force

Majeure Event during the Exploration Period or any extension thereof for a continuous

period exceeding two (2) years without further obligation and liabilities of any kind.



53



ARTICLE 25:



ASSIGNMENT AND TRANSFER OF RIGHTS



(a)



The Contractor may not assign or transfer to a non-Affiliated person, firm or Corporation

not a party hereto, in whole or in part, any of its rights, privileges, duties or obligations

under this Agreement without the prior written consent of the Government; provided,

however, the Contractor shall be free at any time, to assign or transfer its rights, privileges,

duties and obligations under this Agreement to an Affiliate Company, provided the

Government and TPDC are notified in writing in advance and provided the assignment or

transfer will not adversely affect the performance of the obligations under this Agreement.



(b)



In the event that the Contractor wishes to assign in whole or in part any of its rights,

privileges, duties or obligations hereunder as aforesaid, the written consent thereto of the

Government, if required under this Article, shall not be unreasonably withheld or delayed.



(c)



Any assignment made pursuant to this Article to a non-Affiliated person, firm or company

shall bind the assignee to all the terms and conditions hereof, and, as a condition to any

assignment, the Contractor shall provide an unconditional undertaking by the assignee to

assume all obligations by the Contractor under the Agreement.



(d)



In case of an assignment, the Contractor will provide the Government with a Deed of

Assignment in which the main conditions and liabilities assumed by the assignee are set

out.



(e)



Where the Contractor is more than one person the Government will be provided with

copies of all assignments and agreements made between them with respect to Petroleum

Operations and will be classified as confidential.



(f)



Where the Contractor is more than one person the Contractor shall provide Government

with the following information regarding each agreement executed between them, with

respect to Petroleum Operations and as required in the Petroleum Act:

(i).

details of the technical and industrial qualifications of the companies and their

employees;

(ii).

details of the technical and industrial resources available to the Companies; and

(iii). details of the kinds of financial resources available to the companies, including

capital, credit facilities and guarantees available.



54



ARTICLE 26:



CONSULTATION AND ARBITRATION



(a)



TPDC and the Contractor shall periodically meet to discuss the conduct of the operations

envisaged under this Agreement and shall make every effort to settle amicably any problem

arising therefrom.



(b)



If any dispute or difference in relation to or in connection with or arising out of any of the

terms and conditions of this Agreement should arise, the same shall be resolved by

negotiations between the parties. In the event of no agreement being reached, either party

shall, except in the case of a dispute or difference as provided in sub-article 8(b) (v), 12(b)

and 12(d), have the right to have such dispute or difference settled through arbitration as

provided for herein below.



(c)



If, after completion of the above procedure, disagreement remains between the Parties, the

dispute shall be settled by arbitration in accordance with the provisions of this Article.

Nevertheless, for differences of a technical nature and prior to the arbitration procedure, the

Parties may resort to the opinion of a mutually agreed expert. This expert shall notify his

opinion to the Parties within thirty (30) Days following the date on which he was

designated by the Parties.



(d)



If, particularly following completion of the procedure set forth in this Article 25(c), any

disputes still exist between the Parties in connection with the application of the provisions

of this Agreement or regarding the obligations resulting therefrom, such disputes shall be

resolved in accordance with the International Chamber of Commerce Rules of Conciliation

and Arbitration, subject to the specific provisions set out below.

The arbitration procedure shall be commenced by request addressed by the applicant Party

to the Secretariat of the Court of Arbitration. The starting point of proceedings shall be

the date of receipt of that request by the Secretariat of the Court of Arbitration.

In the context of the procedure set out in this Article 25(c), the arbitration procedure shall

commence within sixty (60) Days following expiry of the thirty (30) Day period defined in

Article 25(c) plus, if applicable, any additional time provided in the same paragraph.

Each Party shall designate its arbitrator and notify the other Party and the Court of

Arbitration of that designation within thirty (30) Days after the start of the arbitration

proceedings as defined above. If the applicant Party has not designated its arbitrator within

that thirty (30) Day period, it shall be deemed to have abandoned its application. If the

defending Party has not designated its arbitrator within thirty (30) Days following receipt

of notice in accordance with this paragraph, the other Party may directly inform the

International Chamber of Commerce Court of Arbitration and request that it makes such

designation within the shortest possible time.

The arbitrators shall not be of the same nationality as either of the Parties.

Within forty-five (45) Days after the date of designation of the last of them, the arbitrators

thus designated shall select, by mutual agreement, a third arbitrator, who shall become the

President of the Court of Arbitration. Failing agreement, the International Chamber of

Commerce Court of Arbitration shall be requested by the most diligent Party to designate

this third arbitrator within the shortest possible time.

55



The arbitrators are free to choose the procedure they intend to apply. The decision of the

arbitrators is final; it is binding on the Parties and will be enforceable under the United

Republic of Tanzania laws.

(e)



The place of arbitration shall be Dar es Salaam, in the United Republic of Tanzania. The

Language used shall be English, the applicable law shall be the law of the United Republic

of Tanzania and the provisions of this Agreement shall be interpreted in accordance with

that law.



(f)



The Parties will bear the expenses and fees of Arbitration equally. These costs are not cost

recoverable.



(g)



The arbitration procedure shall not cause the performance of the Parties’

obligations to be suspended during the progress of the arbitration.



56



contractual



ARTICLE 27:



APPLICABLE LAW



This Agreement shall be governed by, interpreted and construed in accordance with the Laws of

the United Republic of Tanzania.



57



ARTICLE 28:



THIRD PARTY ACCESS TO PETROLEUM FACILITIES



The Contractor shall, to the extent that capacity is available in any petroleum facility such as

pipelines, jetties, roads, airports, port facilities, treatment plants and such others that are used in

petroleum exploration and production beyond that required by the Contractor shall make such

access services available to third parties.

The Contractor in qualifying applications for access to facilities shall have regard to the

following:

(i)



the financial and commercial viability,



(ii)



acceptable contractual commitments of the applicants with respect to the

required service; and



(iii)



availability of the service.



58



ARTICLE 29:



MODIFICATIONS AND HEADINGS



(a)



This Agreement shall not be amended or modified in any respect except by the

consent in writing of the parties hereto.



(b)



The Headings of this Agreement are for convenience only and shall not be taken into

account in interpreting the terms of this Agreement.



59



mutual



ARTICLE 30:



NOTICES



Any notices required or given by any party to any other party shall be deemed to have been

delivered when properly acknowledged for receipt by the receiving party. All such notices shall be

addressed to:

If to the Government:

The Permanent Secretary

Ministry of Energy and Minerals

P.O. Box 2000

Dar es Salaam

Telephone: 255-22-211-7156-9

Fax:

255-22-2116719

E-mail: ------------------------(to be provided)

If to TPDC:

The Managing Director

Tanzania Petroleum Development Corporation

P.O. Box 2774

Dar es Salaam

Telephone: 255-22-211-8535/6

Fax:

255-22-212-9663

Email: tpdcmd@tpdc-tz.com

If to: ABC LTD, TANZANIA

The Director,

ABC Ltd, Tanzania

DAR ES SALAAM

TANZANIA

Tel:+255

Fax:+255

E mail:



60



IN WITNESS whereof this Agreement has been duly executed by the parties, the day and year first

hereinbefore written.



Signed for and on behalf

of the Government of the

United Republic of Tanzania



By: _____________________________

Name:

Title: Minister for Energy and Minerals



_____________________________

Witnessed by



Signed for and on behalf

of the Tanzania Petroleum

Development Corporation



By: __________________________

Name:

Title: Managing Director



_____________________________

Witnessed by



Signed for and on behalf

of ABC Limited



By: ___________________________

Name:

Title: ABC Chief Executive Officer



____________________________

Witnessed by



61



ANNEX “A”: DESCRIPTION OF EXPLORATION LICENCE AREA

The application area is described as ----------- totaling ----------- square kilometers as per the TPDC

Map in Annex B.

Point



Longitudes



Latitudes



Remarks



A

B



Due (west, east, south north) B



62



ANNEX “B”: MAP OF EXPLORATION LICENCE AREA

Total Number of Blocks = [ ]



Total area amounts to [ ] sq. km.



63



ANNEX “C”: DRAFT EXPLORATION LICENCE

WHEREAS, pursuant to Article 3(a) of the Agreement TPDC has applied for an Exploration

Licence in respect of the area described in Annex “A” to the Agreement and shown on the map in

Annex “B” thereof respectively:

I, ________________________________Minister for Energy and Minerals pursuant to the powers

conferred upon me by Section 21 of the Petroleum (Exploration and Production) Act, 1980 hereby

grant TPDC for a period of four (4) years from the date hereof this Exploration Licence over the

exploration area described in the First Schedule hereto conferring on TPDC the exclusive right to

explore in the said exploration area for petroleum and to carry out such operations and execute

such works as are necessary for that purpose.

The Exploration Licence is granted subject to the following conditions:

1. (a)



During the period of four (4) years commencing from the date hereof and terminating on

the fourth anniversary of the date, TPDC shall in the said exploration area:

i. Reprocess existing seismic data.

ii. Acquire minimum ---km of 2D and or--- sq km of 3D seismic data

iii. Drill at least [---] exploration wells; and carry out geological and geophysical

surveys and related actives in the area; and

iv. spend a sum which, when adjusted in accordance with the formula set out in subarticle (e) of Article 5 of the Agreement, equals or exceeds [---] million United

States dollars



(b)



2.



Subject to any amendment or revision thereof made pursuant to Article 6 of the

Agreement, TPDC shall conduct exploration operations under this licence during the year

ending 31 December, 20…. in accordance with the detailed Work Programme and

Budget set out in the Second Schedule hereto and will spend the sum specified in the said

budget.

Where during any period covered by the Licence the obligations of TPDC under this

Licence have been suspended by reason of Force Majeure pursuant to Article 23 of the

Agreement, the period for which this Licence has been granted

shall be extended for

a period equal to the period during which the obligations of TPDC were so suspended.

In this licence “the Agreement” means the Agreement made on -----------day of -------between the Government of the United Republic of Tanzania, the Tanzania Petroleum

Development Corporation and ABC Limited.

Unless the context otherwise requires words and phrases in this Licence shall have the

same meaning as those used in the Petroleum (Exploration and Production) Act, 1980.



IN WITNESS WHEREOF, I have granted the Licence aforesaid and set out my hand and seal

this ___________day of ______________ 20….

Minister for Energy and Minerals

__________________________

64



ANNEX “C”•1:



FIRST SCHEDULE



Coordinates of the corner-points of Exploration Licence Area



Point



Longitudes Latitudes



65



Remarks



ANNEX “C”•2:



SECOND SCHEDULE



[Set out here for the Calendar Year in which this License is first issued the detailed Work Program

and Budget submitted by ABC to TPDC pursuant to Article 6(a) of the Agreement].



66



ANNEX “D”: ACCOUNTING PROCEDURE

This Annex is made a part of the Production Sharing Agreement (hereinafter referred to as the

“Agreement”) between the Government of the United Republic of Tanzania and Tanzania

Petroleum Development Corporation and ABC Limited made on the ..........day of ….. , 20…....

SECTION 1: GENERAL PROVISIONS

1.1



Definitions

For the purpose of this Accounting Procedure the terms used herein which are defined in

the Agreement shall have the same meaning when used in this Accounting Procedure.



1.2



Purpose

The purpose of this Accounting Procedure is to set out principles and procedures of

accounting which will enable the Government to monitor the costs, expenditures,

production and receipts so that both TPDC’s entitlement to Profit Oil/Gas and

Government’s revenues can be accurately determined on the basis of the Agreement.



1.3



Documentation Required to be Submitted by Contractor

(a) Within thirty (30) days of the Effective Date, the Contractor shall submit to and discuss

with the Minister and TPDC a proposed outline of charts of accounts, operating records

and reports, which outline shall reflect each of the categories and sub-categories of

costs and expenditures specified in Sections 2 and 3 below and shall be in accordance

with generally accepted and recognized accounting systems and consistent with normal

practice for joint venture operations of the international petroleum industry. Within

ninety (90) days of receiving the above submission the Minister in consultation with

TPDC shall either indicate approval of the proposal or request revisions to the proposal.

Within one hundred and eighty (180) days after the Effective Date of the Agreement,

the Contractor and the Minister in consultation with TPDC shall agree on the outline of

charts of accounts, operating records and reports which shall describe the basis of the

accounting system and procedures to be developed and used under the Agreement.

Following such agreement the Contractor shall expeditiously prepare and provide the

Minister and TPDC with formal copies of the comprehensive charts of accounts related

to the accounting, recording and reporting functions, and allows the Minister and TPDC

to examine the manuals and to review procedures which are, and shall be, observed

under the Agreement.

(b) Notwithstanding the generality of the foregoing, the Contractor shall make regular

Statements to the Minister and TPDC relating to the Petroleum Operations. These

Statements are:

(i) Production Statement (see Section 5 of this Annex).

(ii) Value of Production, Pricing and Royalty payable Statement

(see Section 6 of this Annex).

(iii) Statement of Receipts and Expenditures (see Section 7 of this

Annex).

67



(iv) Cost Recovery Statement (see Section 8 of this Annex).

(v) End-of-Year-Statement (see Section 9 of this Annex).

(vi) Budget Statement (see Section 10 of this Annex).

(c) All reports and Statements shall be prepared in accordance with the Agreement, the

laws of the United Republic of Tanzania and, where there are no relevant provisions in

either of these, in accordance with the normal practice of the international petroleum

industry.

1.4



Language, Units of Account and Exchange Rates

(a)



The Contractor shall maintain accounts in Tanzanian shillings and United States

dollars; however, the United States dollar accounts will prevail in case of conflict.

Metric units and barrels shall be employed for measurements required under the

Agreement and this Annex. The language employed shall be English. [Where

necessary for clarification the Contractor may also maintain accounts and records in

other units of measurement and currencies].



(b)



It is the intent of this Accounting Procedure that neither the Government, TPDC nor

the Contractor should experience an exchange gain or loss at the expense of, or to

any of the benefit of, any of the other parties. However, should there be any gain or

loss from exchange of currency, it will be credited or charged to the accounts under

the Agreement.



(c)



(i) Amounts received and costs and expenditures made in Tanzanian shillings or in

United States dollars shall be converted from Tanzanian shillings into United

States dollars or from United States dollars into Tanzanian shillings on the basis

of the monthly average of the mean of the daily official buying and selling

exchange rates between the currencies in question as published by the Bank of

Tanzania or failing such publication, any other publication as agreed by the

parties for the Month in which the relevant transaction occurred.

(ii) Notwithstanding the general policy described in the preceding sub-paragraph, all

transactions in excess of the equivalent of two hundred and fifty thousand United

States dollars (US$ 250,000) shall be converted at the mean of the buying and

selling exchange rates published by the Bank of Tanzania on the day the

transaction occurred.

(iii) Amounts received and expenditures made in currencies other than United States

dollars and Tanzanian shillings shall be converted into United States dollars or

Tanzanian shillings on the basis of the monthly average of the mean of the daily

buying and selling exchange rates between the currencies in question as published

by the Bank of Tanzania or, failing such publication, as published in the Financial

Times (London edition) for the Month in which the relevant transaction occurred.

(iv) The average monthly exchange rate calculated in accordance with sub-section 1.4

(c) (i) above and, where relevant, the exchange rates employed pursuant to sub68



sections 1.4 (c) (ii) and (iii) above, shall be identified in the relevant Statements

required under sub-section 1.3 (b) of this Annex.

1.5



1.6



Payments

(a)



Subject to Article 9 (c) (iii) of the Agreement, all payments between the parties

shall, unless otherwise agreed, be in United States dollars and through a bank

designated by each receiving party no later than the 1st day of each Quarter for

which development costs have been budgeted.



(b)



Discharge of the Contractor’s obligation with respect to TPDC’s share of Profit

Oil/Gas shall be made in accordance with the Agreement.



(c)



All sums due from one party to the other under the Agreement during any Calendar

`quarter shall, for each day such sums are overdue during such quarter, bear interest

compounded daily at an annual rate equal to the average London Interbank Offer

Rate (LIBOR) for six (6) months US dollars as quoted at 11.00 a.m. London time

on the first business day of such Quarter by the London office of National

Westminster Bank, or such other bank as the parties may agree, plus two (2)

percentage points.



Audit and Inspection Rights of Government

(a)



Without prejudice to statutory rights, TPDC shall have the right to cause to audit to

each Calendar year within two (2), years (or such longer period as may be required

in exceptional circumstances) from the end of each such year. Notice of any

exception to the accounts for any Calendar Year shall be submitted to the

Contractor within ninety (90) days of

receipt by TPDC of the report of its

auditors. For purposes of auditing, TPDC may examine and verify, at reasonable

times, all charges and credits relating to the Contractor’s activities under the

Agreement and all books of account, accounting entries, material records and

inventories, vouchers, payrolls, invoices and any other documents, correspondence

and records necessary to audit and verify the charges and credits. Furthermore, the

auditors shall have the right in connection with such audit to visit and inspect at

reasonable times all sites, plants, facilities, warehouses and offices of the Contractor

directly or indirectly serving its activities under the Agreement and to visit and

inquire from personnel associated with those activities. Where TPDC requires

verification of charges made by an Affiliate Company it shall have the right to

obtain an audit certificate from a recognized firm of public accountants acceptable

to both TPDC and the Contractor.



(b)



The Contractor shall answer any notice of exception under subsection 1.6.



(c)



Within sixty (60) days of its receipt of such notice. Where the Contractor has after

the said sixty days’ period failed to answer a notice of exception made by TPDC,

TPDC’s exception shall be deemed as accepted by Contractor and the accounts

shall be adjusted accordingly.



69



SECTION 2: CLASSIFICATION, DEFINITION AND ALLOCATION OF COSTS AND

EXPENDITURES

Expenditures shall be segregated in accordance with the objectives for which such expenditure was

made. The objectives which shall qualify are those which have been approved and included in the

approved Work Program and Budget for the Year in which the expenditure is made and other

items which have been agreed by the parties from time to time. All expenditures allowable under

Section 3 relating to Petroleum Operations shall be classified, defined and allocated as set out

herein below. In the event of a discovery, expenditure records shall be maintained in expenditures

to each Development Area.

2.1



2.2



Exploration Expenses are all direct and allocated indirect expenditures incurred in the

search for Petroleum in an area which is or was, at the time when such expenses were

incurred, part of the Contract Area including:

(a)



aerial, geophysical, geochemical, palaeontological, geological, topographical and

seismic surveys and studies and their interpretation;



(b)



core hole drilling and water well drilling;



(c)



labor, materials and services used in drilling wells with the object of finding new

Petroleum Reservoirs, or for the purposes of appraising the extent of Petroleum

provided such wells are not completed as producing wells;



(d)



facilities used solely in support of the purposes described (a), (b)



(e)



above including access roads, fixed assets and purchased geological and

geophysical, all identified separately;



(f)



any General and Administrative Costs and Service Costs directly incurred on

Exploration Operations and identifiable as such; and a portion of the remaining

General and Administrative Costs and Service Costs allocated to the Exploration

Operations, determined by the proportionate share of total Contract Expenses

(excluding unallocated General and Administrative Costs and Service Costs)

represented by all other Exploration Expenses;



(g)



any other Contract Expenses specifically incurred in the search for Petroleum after

the Effective Date and not covered under sub-section 2.2, 2.3, 2.4 and 2.5.



and



Development Expenses shall consist of all expenditures incurred in:

(a)



studies of the subsurface for the purpose of determining the best manner of

recovering hydrocarbons, which include 2D and 3D geophysical surveys,

production geology, modeling and simulation of deposits as an integral part of

economic reservoir exploitation and conservation;



(b)



drilling wells which are completed as producing wells and drilling wells for

purposes of producing from a Petroleum Reservoir already discovered whether

these wells are dry or producing, and drilling wells for the injection of water or gas

to enhance recovery of Petroleum;

70



(c)



completing wells by way of installation of casing or equipment or otherwise, after a

well has been drilled for the purpose of bringing the well into use as a producing

well, or as a well for the injection of water or gas to enhance recovery

of

Petroleum;



(d)



the cost of petroleum production, storage and transport facilities such as

pipelines, flow lines, production and treatment units, wellhead equipment,

subsurface equipment, enhanced recovery systems, offshore platforms,

petroleum storage facilities and access roads for production activities;



(e)



the costs of engineering and design studies for facilities referred to in subsection

2.2. (d);



(f)



any General and Administrative Costs and Service Costs directly incurred on

development activities and identifiable as such; and a portion of the remaining

General and Administrative Costs and Service Costs allocated

to development

activities, determined by the proportionate share of total Contract Expenses

(excluding unallocated General and Administrative Costs and Service Costs)

represented by all other Development Expenses.



2.3



Operating Expenses are all expenditures incurred in the Petroleum Operations after the

start of commercial production which are other than Exploration Expenses, Development

Expenses, General and Administrative Costs and

Service Costs directly

incurred

on operating activities and identifiable as such, as well as the balance of General and

Administrative Costs and Service Costs. General and Administrative Costs and Service

Costs not allocated to Exploration Expenses or Development Expenses shall

be

allocated to Operating Expenses.



2.4



Service Costs are direct and indirect expenditures in support of the Petroleum Operations

including warehouses, export terminals, harbors, piers, marine vessels, vehicles, motorized

rolling equipment, aircraft, fire and security stations, workshops, water and sewage plants,

power plants, housing, community and recreational facilities

and furniture, tools and

equipment used in these activities. Service Costs in any Calendar Year shall include costs

incurred in such Year to purchase and/or construct said facilities as well as the annual costs

to maintain and operate the same, each to be identified separately. All Service Costs shall

be regularly allocated as specified in sub-sections 2.1(e), 2.2(e) and 2.3 to Exploration

Expenses, Development Expenses and Operating Expenses and shall be separately shown

under each of these categories.



2.5



General and Administrative Costs are:

(a)



all main office, field office and general administrative expenses in the United

Republic of Tanzania including but not limited to supervisory, accounting and

employee relations services, but excluding commissions paid to intermediaries by

the Contractor;



(b)



an annual overhead charge for services rendered outside the United Republic of

Tanzania and not otherwise charged under this Accounting Procedure, for

managing the Petroleum Operations and for staff advice and assistance including

71



financial, legal, accounting and employee relations services. For the period from

the Effective Date until the date on which the first Development License under the

Agreement is granted by the Minister this annual charge shall be the verifiable

costs but in no event greater that one percent (1%) of the Contract Expenses;

including those covered in sub-section 2.5(a) incurred during the Calendar Year.

From the date of grant of the Development License the charge shall be at an

amount or rate to be agreed between the parties and stated in the Development Plan

approved with the grant of the said License. The annual overhead charge shall be

separately identified in all reports to the Government and TPDC;

(c)



all General and Administrative Costs will be regularly allocated as specified in subsections 2.1(e), 2.2.(e) and 2.3. to Exploration Expenses, Development Expenses

and Operating Expenses and shall be separately shown under each of these

categories.



72



SECTION 3: COSTS, EXPENSES, EXPENDITURES AND CREDITS OF

THE CONTRACTOR

3.1



Costs Recoverable without Further Approval of TPDC

Subject to the provisions of the Agreement, the Contractor shall bear and pay all costs and

expenses in respect of Petroleum Operations. These costs and expenses will be classified

under the headings referred to in Section 2. The following costs and expenses are

recoverable out of Cost Oil and/or Cost Gas by the Contractor under the Agreement:

(a)



Surface Rights



This covers all direct costs attributable to the acquisition, renewal, or relinquishment of

surface rights acquired and maintained in force for the purposes of this Agreement.

(b)



Labour and Associated Costs

(i)



Gross salaries and wages including bonuses of the Contractor’s employees

directly and necessarily engaged in the Petroleum Operations, irrespective

of the location of such employees, it being understood that in case of those

personnel only a portion of whose time is wholly dedicated to Petroleum

Operations, only that pro-rata portion of applicable wages and salaries will

be charged. For purposes of cost recovery, gross salaries and wages for the

Contractor’s employees shall not exceed US$15,000.00.



(ii)



Cost to the Contractor of established plans for employees’ group life

insurance, hospitalization, company pension, retirement and other benefits

of a like nature customarily granted to the employees and the costs

regarding holiday, vacation, sickness and disability payments applicable to

the salaries and wages chargeable under subsection (i)

above shall be

allowed at actual cost, provided however that such total costs shall not

exceed twenty-five per centum (25%) of the total labor costs under

subsection (i) above.



(iii)



Expenses or contributions made pursuant to assessments or obligations

imposed under the laws of the United Republic of Tanzania which are

applicable to the cost of salaries and wages chargeable under (i) above.



(iv)



Reasonable travel and personal expenses of employees of the Contractor

including those made for travel and relocation of the expatriate employees

assigned to the United Republic of Tanzania all of which shall be in

accordance with the normal practice.



(v)



Any personal income taxes of the United Republic of Tanzania incurred by

employees of the Contractor and paid or reimbursed by the Contractor.



73



(c)



Transportation

The cost of transportation of employees, equipment, materials and supplies

necessary for the conduct of the Petroleum Operations and not provided for

elsewhere.



(d)



Charges for Services

(i)



Third Party Contracts

The actual costs of contracts, for technical and other services entered into by

the Contractor for Petroleum Operations, made with third parties other than

Affiliate Companies are recoverable; provided that the costs paid by the

Contractor are no higher than those generally charged by other international

or domestic suppliers for comparable work and services.



(ii)



Affiliate Companies

Without prejudice to the charges to be made in accordance with sub-section

2.5, in the case of general services, advice and assistance rendered to the

Petroleum Operations by an d Company, the charges will be based on actual

costs without profits and will be competitive. The charges will be no higher

than the most favorable prices charged by the Affiliate Company to third

parties for comparable services under similar terms and conditions

elsewhere. The Contractor will, if requested by TPDC, specify the amount

of charges which constitutes an allocated proportion of the general material,

management, technical and other costs of the Affiliate Company, and the

amount which is the direct cost of providing the services concerned. If

necessary, certified evidence regarding the basis of prices charged may be

obtained from the recognized auditors of the Affiliate Company.



(iii)



(e)



In the event that the prices and charges referred to in sub-paragraphs (i) and

(ii) above are shown to be uncompetitive then TPDC will have the right to

disallow that portion as it deems fit for cost recovery purposes.



Exclusively Owned Property

For services rendered to Petroleum Operations through the use of property

exclusively owned by the Contractor, the accounts shall be charged at rates, not

exceeding those prevailing in the region, which reflect the cost of ownership and

operation of such property, or at rates to be agreed.



(f)



Material and Equipment

(i)



General

So far as is practicable and consistent with efficient economical operation,

only such material shall be purchased or furnished by the Contractor for use

in the Petroleum Operations as may be required for use in the reasonably

foreseeable future and the accumulation of surplus stocks shall be avoided.

74



(ii)



Warranty of Material

The Contractor does not warrant material beyond the supplier’s or

manufacturer’s guarantee and, in case of defective material or equipment,

any adjustment received by Contractor from the suppliers/manufacturers or

their agents will be credited to the accounts under the Agreement.



(iii)



Value of Material Charged to the Accounts under the

Agreement

(a)



Except as otherwise provided in (b) below, material purchased by the

Contractor for use in Petroleum Operations shall be valued to

include invoice price less trade and cash discounts (if any), purchase

and procurement fees plus freight and forwarding charges between

point of supply and point of shipment, freight to port of destination,

insurance, taxes, custom

duties consular fees, other items

chargeable against imported material and, where applicable, handing

and transportation expenses from point of importation to warehouse

or operating site, and its costs shall not exceed those currently

prevailing in normal arms length transactions on the open market.



(b)



Material purchased from or sold to Affiliate Companies or

transferred to or from activities of the Contractor, other

than

Petroleum Operations under this Agreement, shall be

priced and charged or credited at the prices specified in (1) and (2)

below:



(1)



New Material (Condition “A”) shall be valued the current

international price which shall not exceed price prevailing in normal

arms length transactions on the open market.



(2)



Used Material (Conditions “B” and “C”)

(i)



Material which is in sound and serviceable condition and is

suitable for re-use without reconditioning shall be classified

as Condition “B” and priced at not more than seventy-five

percent (75%) of the current price of new materials defined

in (1) above.



(ii)



Material which cannot be classified as Condition “B” but

which:

(a)

after reconditioning will be further serviceable for

original function as good second hand material

Condition ’B”, or

(b)



is serviceable for original function but substantially

not suitable for reconditioning, shall classified as

Condition “C” and priced at not more than fifty

percent (50%) of the current price of new material

75



(Condition “A”) as defined in (1) above. The cost of

reconditioning shall be charged to reconditioned

material provided that the Condition “C” material

value plus the cost or reconditioning does not exceed

the value of Condition “B” material.



(g)



(iii)



Material which cannot be classified as Condition “B” or

Condition “C” shall be priced at a value to be agreed between

TPDC and the Contractor.



(iv)



Material involving erection costs shall be charged at

applicable condition percentage of the current

knocked-down price of new material as defined in

(1) above.



(v)



When the use of material is temporary and its service to

Petroleum Operations does not justify the reduction in prices

as provided for in sub-paragraph (2) (ii) above,

such

material shall be priced on a basis that will result in a net

charge to the accounts under the Agreement consistent with

the value of the service rendered.



Rentals, Duties and Other Assessments

All rentals, taxes (other than income tax, withholding tax, and Additional Profits

Tax), levies, charges, fees, contributions and any other assessments and charges

levied by the Government in connection with Petroleum Operations and paid

directly by the Contractor.



(h)



Insurance and Loses

Insurance premiums and costs incurred for insurance pursuant to Article 20,

provided that if such insurance is wholly or partly placed with an Affiliate

Company such premiums and costs shall be recoverable only to the extent generally

charged by competitive insurance companies other than an Affiliate Company.

Costs and losses incurred as a consequence of events which are, and in so far as, not

made good by insurance are recoverable unless costs have resulted solely from an

act of willful misconduct or sole gross negligence of the Contractor.



(i)



Legal Expenses

All reasonable costs and expenses of litigation and legal or related services

necessary or expedient for the procuring, perfecting, retention and protection of the

Contract Area, and in defending or prosecuting lawsuits involving the Area or any

third party claim arising out of activities under the Agreement, or sums paid in

respect of legal services necessary or expedient for the protection of the joint

interest of Government, TPDC and the Contractor are recoverable. Where legal

services are rendered in such matters by salaried or regularly retained lawyers of the

Contractor or an Affiliate Company, such compensation shall be included instead

under sub-section 3.1(b) or 3.1(d) above as applicable.

76



(j)



Training Costs

All costs and expenses incurred by the Contractor in training of Tanzanian

employees engaged in Petroleum Operations and such other training as is required

under Article 18 of the Agreement.



(k)



General and Administrative Costs

The costs described in sub-section 2.5(a) and the charge

described in sub-section 2.5(b).



3.2



Costs not Recoverable under the Agreement

The following costs shall not be recoverable for the purposes of Profit Oil/Gas sharing:

(a)



all costs incurred before the Effective Date other than charges incurred by

Contractor for copying and shipping of data relating to the Contract Area;



(b)



petroleum marketing or transportation costs of Petroleum beyond the Delivery

Point;



(c)



the costs of any bank guarantee or letter of guarantee required under the

agreement (and any other amounts spent on indemnities with regard to

non-fulfillment of contractual obligations);



(d)



costs of arbitration and the sole expert in respect of any dispute under the

Agreement;



(e)



fines and penalties imposed by courts of law in the United Republic of Tanzania;



(f)



costs incurred as a result of willful misconduct or negligence of the Contractor;



(g)



donations and contributions made by the Contractor;



(h)



any costs which, by reference to general oil industry practices, can be shown to be

excessive;



(i)



expenditure on fundamental research into development of new equipment, materials

and techniques for use in search for, developing and producing petroleum except to

the extent that such research and development is directly carried out in support of

Petroleum Operations in the United Republic of Tanzania whereby such a research is

conducted in collaboration with TPDC;



(j)



interest and financial charges paid to the creditors of the Contractor, provided that the

same are at competitive commercial rates, provided that the debts or loans to which

they refer are required by Petroleum Operations and correspond to the financing

needed for these operations.



77



3.3



Other costs and Expenses

Any other costs and expenses not covered or dealt with in the foregoing provisions of this

Section 3 and which are incurred by Contractor for the necessary and proper conduct of

Petroleum Operations are recoverable only with the prior approval in writing of TPDC.



3.4



Credits under the Agreement

The net proceeds received from Petroleum Operations (other than the proceeds from the

sale of Crude Oil and Natural Gas), including but not limited to the transactions listed

below, will be credited to the accounts under the Agreement. For Profit Oil/Gas sharing

purposes such credits shall be offset against Recoverable Contract Expenses:



3.5



(a)



the net proceeds of any insurance or claim in connection with Petroleum Operations

or any assets charged to the accounts under the Agreement when such operations or

assets were insured and the premiums charged to the accounts under the Agreement;



(b)



legal expenses charged to the accounts under Section 3.1 (i) and

subsequently recovered by the Contractor;



(c)



revenue received from third parties including Affiliate Companies for the use of

property or assets charged to the accounts under the Agreement;



(d)



any adjustment received by the Contractor from the suppliers manufacturers or their

agents in connection with defective material, the cost of which was previously

charged by the Contractor to the accounts under the Agreement;



(e)



rentals, refunds or other credits received by the Contractor which apply to any

charge which has been made to the accounts under the Agreement but excluding

any award granted to the Contractor under arbitration or sole expert proceedings;



(f)



the net proceeds for material originally charged to the accounts under the

Agreement and subsequently exported from the United Republic of Tanzania

without being used in Petroleum Operations;



(g)



the net proceeds from the sale or exchange by the Contractor of materials,

equipment, plant or facilities, the acquisition costs of which have been charged to

the accounts under the Agreement;



(h)



the proceeds from the sale of any petroleum information which relates to the

Contract Area provided that the acquisition costs of such rights and information

have been charged to the accounts under the Agreement;



(i)



the proceeds derived from the sale or license of any intellectual property the

development costs of which were incurred under this Agreement.



Duplication of Charges and Credits

Notwithstanding any provision to the contrary in this Accounting procedure, it is agreed

that there shall be no duplication of charges or credits to the accounts under the Agreement.

78



SECTION 4: RECORDS AND VALUATION OF ASSETS

The Contractor shall maintain detailed records of property and assets in use for Petroleum

Operations in accordance with normal practice in exploration and production activities of the

international petroleum industry. At six (6) monthly intervals the Contractor shall notify TPDC in

writing of all assets acquired during the preceding six (6) months indicating the quantities, costs

and location of each asset. At reasonable intervals but at least once a year with respect to movable

assets and once every four (4) years with respect to immovable assets, inventories of the property

and assets under the Agreement shall be taken by the Contractor. The Contractor shall give TPDC

at least thirty (30) days written notice of its intention to take such inventory is taken. The

Contractor will clearly state the principles upon which valuation of the inventory has been based.

When an assignment of rights under the Agreement takes place a special inventory may be taken

by the Contractor at the request of the assignee provided that the costs of such inventory are borne

by the assignee.



79



SECTION 5: PRODUCTION STATEMENT

5.1



Upon commencement of production from the Contract Area, the Contractor shall submit a

monthly Production Statement to TPDC showing the following information for each

Development Area and for the Contract Area:

(a)



the quantity and quality of Crude Oil/Natural Gas produced and saved;



(b)



the quantity and composition of Natural Gas produced and saved;



(c)



the quantities of Petroleum used for the purposes of carrying on drilling

and production operations and pumping to field storage as well as quantities

injected into the formation;



(d)



the quantities of Petroleum unavoidably lost;



(e)



the size of Petroleum stocks held at the beginning of the Month in question;



(f)



the size of petroleum stocks held at the end of the Month in question;



(g)



the number of days in the Month during which Petroleum was produced

from each Development Area within the Contract Area;



5.2



At the end of each Calendar Quarter aggregated statements in respect of the three Months

comprising that Quarter shall be submitted for each of the items (a) to (g) in sub-section 5.1

above. Additionally, the average daily production rate for the Quarter shall be calculated in

accordance with Article 11 of the Agreement.



5.3



The Production Statement for each Month or quarter shall be submitted Government and

TPDC not later than seven (7) days after the end of such Month or quarter.



80



SECTION 6: VALUE OF PRODUCTION, PRICING, ROYALTY AND

ABANDONMENT COST RESERVE FUND STATEMENT

6.1



The Contractor shall, for the purposes of Article 12 and 13 of the Agreement, prepare a

Statement providing calculations of the value of Crude Oil/Natural Gas produced and saved

during each Calendar Quarter. This Statement, which shall be prepared for each Quality of

Tanzanian Crude Oil /Natural Gas produced and saved from the Contract Area, shall

contain the following information:

(a)



the quantities, prices and receipts realized therefore by the Contractor in Third Party

Sales of Tanzanian Crude Oil/Natural Gas during the Calendar

Quarter

in

question;



(b)



the quantities, prices and receipts realized therefore by the Contractor in sales of

Tanzanian Crude Oil/Natural Gas during the Calendar Quarter in question, other

than in Third Party Sales;



(c)



the value of stocks of Crude Oil/Natural Gas held at the beginning of the Calendar

Quarter in question;



(d)



the value of stocks of Crude Oil/Natural Gas held at the end of the Calendar Quarter

in question;



(e)



the percentage volume of total sales of Tanzanian Crude Oil/Natural Gas made by

the Contractor during the Calendar Quarter that are the Third Party Sales;



(f)



all information available to the Contractor, if relevant for the purposes of

Article 12 of the Agreement, concerning the prices of the selection of major

competitive crude oils/gas, including contract prices, discounts and premiums, and

prices obtained on the spot markets;



(g)



the statement of Royalty payable.



6.2



The Value of Production and Pricing Statement for each Calendar Quarter shall be

submitted to Government and TPDC not later than twenty (20) days after the end of such

Calendar Quarter.



6.3



Two years after commencement of production, the Contractor shall provide quarterly

accounts of the proceeds of the Abandonment Cost Reserve Fund pursuant to Article 19.



81



SECTION 7: STATEMENT OF RECEIPTS AND EXPENDITURE

7.1



7.2



7.3



The Contractor shall prepare with respect to each Calendar Month a Statement of Receipts

and Expenditure under the Agreement. The Statement will distinguish between Exploration

Expenses, Development Expenses and Operating Expenses and will separately identify all

significant items of expenditures within these categories. If TPDC is not satisfied with the

degree of desegregation within the categories it shall be entitled to ask for a more detailed

breakdown. The statement will show the following:

(a)



actual receipts and expenditure (including all credits pursuant to Section

3.4 of this Accounting Procedure) for the Month in question showing variances

from the budget and explanations thereof;



(b)



cumulative receipts and expenditure (including all credits pursuant to Section 3.4 of

this Accounting Procedure) for the budget year in question;



(c)



latest forecast of cumulative expenditure at the Year end; and



(d)



variations between budget forecast and latest forecast, with explanation thereof.



At the end of each Calendar Quarter aggregated Statements in respect of the three Months

comprising that Quarter shall be submitted for each of the items (a) to (d) in sub-section 7.1

above.

The Statement of receipts and expenditure for each Calendar Month or Quarter

shall be

submitted to Government and TPDC not later than twenty-one (21) days after the end of

such Month or Quarter.



82



SECTION 8: COST RECOVERY STATEMENT

8.1



The Contractor shall prepare with respect to each Calendar Quarter a Cost Recovery

Statement containing the following information:

(a)



Recoverable Contract Expenses carried forward from the previous Quarter, if any;



(b)



Recoverable Contract Expenses for the Quarter in question;



(c)



total Recoverable Contract Expenses for the Quarter in question (sub-section 8.1(a)

plus sub-section 8.1(b);



(d)



quantity and value of Cost Oil and/or Cost Gas taken and disposed of by the

Contractor for the Quarter in question;



(e)



Contract Expenses recovered for the Quarter in question;



(f)



total cumulative amount of Contract Expenses recovered up to the end of

the Quarter in question;



(g)



amount of Recoverable Contract Expenses to be carried forward into the

next Quarter.



8.2



The cost recovery information required pursuant to sub-section 8.1 above shall

be

presented in sufficient detail so as to enable Government and TPDC to identify how the

cost of assets are being recovered for the purposes of Article 19 of the Agreement.



8.3



The Cost Recovery Statement for each Quarter shall be submitted to Government and

TPDC not later than twenty one (21) days after the end of such Quarter.



83



SECTION 9: END-OF-YEAR STATEMENT

The Contractor shall prepare a definitive End-of-Year Statement. The Statement will contain

aggregated information for the Year in the same format as required in the Value of Production,

Pricing Statement, Royalty payable Statement, Abandonment Cost Reserve Fund Statement, Cost

Recovery Statement and Statement of Receipts and Expenditure to be based on the actual

quantities of Petroleum produced and the costs and expenses incurred. The End-of-Year Statement

for each Calendar Year shall be submitted to Government and TPDC within sixty (60) days of the

end of such Calendar Year.



84



SECTION 10: BUDGET STATEMENT

10.1



10.2



The Contractor shall prepare an Annual Budget Statement. This Statement shall set

separately Exploration Expenses, Development Expenses and Operating Expenses

shall show the following:



out

and



(a)



forecast expenditure and receipts for the budget year under the Agreement;



(b)



cumulative expenditures and receipts to the end of the said budget year; and



(c)



a schedule showing the most important and individual items of Development

Expenses for the said budget year;



The Budget Statement shall be submitted to Government and TPDC with respect to each

budget year no less than ninety (90) days before the start of the year except in the case of

the year in which the Effective Date falls, when the Budget Statement shall be submitted

within thirty (30) days of the Effective Date.



85



SECTION 11: REVISION OF ACCOUNTING PROCEDURE

11.1



The provisions of this Accounting Procedure may be amended by agreement between the

Contractor, the Government and TPDC The amendments shall be made in writing and shall

state the date upon which the amendments shall become effective.



11.2



In the event, and at the time, that TPDC elects to participate in Joint Operations as

defined in Article 9 of this Agreement the parties shall modify this Accounting

Procedure to reflect TPDC’s status as a party to the Operating Agreement.



11.3



Following any second discovery in the Contract Area the parties will meet in order to

establish specific principles and procedures for identifying all costs, expenditures and

credits, and for allocating Cost Oil and/or Cost Gas and Profit Oil and/or Profit Gas, on a

Development Area basis, it being understood that costs, expenditures and credits which do

not uniquely arise in respect of any one Development Area shall be apportioned between

Development Areas in a reasonable, equitable and consistent manner.



86



SECTION 12: CONFLICT WITH THE AGREEMENT

In the event of any conflict between the provisions of this Accounting Procedure and the

Agreement the provisions of the Agreement shall prevail.



87



ANNEX "E" :



APT SAMPLE CALCULATION METHODOLOGY



Hard data input per Petroleum Agreement

1. First Account

2. Second Account Tax Rate

3. First Account Real Rate of Return

4. First Account APT Taxes are Deductible when

calculating Second Account Balances



Percent 25.00%

Percent 40.00%

Percent 35.00%



Assumptions



1. Assumed Annual Change in USIGPPI = Two (2) Percent (Added to Account Rates of

Return to reflect the "Real" nature of these ROR's).



2. Cash Flow is for Illustrative Purposes Only; data entirely assumed.

Calculation Methodology



Year



Assumed

Pretax

Cash

Flow

US$MM



FANCP

First

Account

Balance

US$MM



First

Account

APT

Payable

US$MM



SANCP

Second

Account

Balance

US$MM



Second

Account

APT

Payable

US$MM



Total

APT

Payable

US$MM



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15



-3.00

-10.00

-40.00

10.00

40.00

80.00

100.00

100.00

60.00

20.00

-20.00

10.00

20.00

30.00

20.00



-3.00

-13.81

-57.54

-63.08

-40.11

29.06

100.00

100.00

60.00

20.00

-20.00

-15.00

0.44

30.00

20.00



0.00

0.00

0.00

0.00

0.00

7.27

25.00

25.00

15.00

5.00

0.00

0.00

0.11

7.50

5.00



-3.00

-14.11

-59.33

-71.28

-57.65

-6.25

66.44

75.00

45.00

15.00

-20.00

-17.40

-3.95

17.09

15.00



0.00

0.00

0.00

0.00

0.00

0.00

26.58

30.00

18.00

6.00

0.00

0.00

0.00

6.84

6.00



0.00

0.00

0.00

0.00

0.00

7.27

51.58

55.00

33.00

11.00

0.00

0.00

0.11

14.34

11.00



88