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 PETROLEUM CONTRACT








BETWEEN


CHINA NATIONAL OFFSHORE OIL CORPORATION


AND


PRIMELINE ENERGY CHINA LIMITED


PRIMELINE PETROLEUM CORPORATION


FOR


CONTRACT AREA 33/07


IN


THE EAST CHINA SEA


OF


THE PEOPLE’S REPUBLIC OF CHINA








15 June 2012


 CONTENTS





Preamble...........................................................................................................1


Article 1 Definitions.........................................................................................................2


Article 2 Objective of the Contract..................................................................................8


Article 3 Contract Area....................................................................................................9


Article 4 Contract Term.................................................................................................10


Article 5 Relinquishment........,......................................................................................13


Article 6 Minimum Exploration Work Commitment and Expected Minimum


Exploration Expenditures.................................................................................15


Article 7 Management Organization and Its Function...................................................18


Article 8 Operator..........................................................................................................25


Article 9 Assistance Provided by CNOOC....................................................................33


Article 10 Work Program and Budget.............................................................................34


Article 11 Determination of Commerciality....................................................................37


Article 12 Financing and Cost Recovery.........................................................................41


Article 13 Crude Oil Production and Allocation.............................................................44


Article 14 Quality, Quantity and Price of Crude Oil.......................................................51


Article 15 Preference to the Employment of the Chinese Personnel, Goods and


Services............................................................................................................59


Article 16 Training of Chinese Personnel and Transfer of Technology..........................60


Article 17 Ownership of Assets and Data........................................................................63


Article 18 Associated Natural Gas and Non-associated Natural Gas..............................64


Article 19 Accounting, Auditing and Personnel Costs....................................................71


Article 20 Taxation..........................................................................................................74


Article 21 Insurance................. 75


Article 22 Confidentiality................................................................................................77


Article 23 Assignment.....................................................................................................79


Article 24 Environmental Protection and Safety.............................................................81


Article 25 Force Majeure.................................................................................................81


Article 26 Consultation and Arbitration...........................................................................82


Article 27 Effectiveness, Termination and Cancellation of the Contract........................84


Article 28 The Applicable Law........................................................................................86


Article 29 Language of Contract and Working Language...............................................86


Article 30 Miscellaneous.................................................................................................87


Annex 1 Geographic Location and Co-ordinates of Connecting Points of


Boundary Lines of the Contract Area


Annex II Accounting Procedure


Annex III Personnel Costs


 Preamble





THIS CONTRACT is entered into in Qingdao on this 15th day of June, 2012


BETWEEN:


China National Offshore Oil Corporation (hereafter referred to as “CNOOC”), a company


organized and existing under the laws of the People’s Republic of China, having its


headquarters domiciled in Beijing, as one part; and


Primeline Energy China Limited (hereafter referred to as “PECL”), a company organized


and existing under the laws of Cayman Islands, having its headquarters in Hong Kong;


and


Primeline Petroleum Corporation (hereafter referred to as “PPC”), a company organized


and existing under the laws of British Virgin Islands, having its headquarters in Hong


Kong, as the other part.


PECL and PPC are collectively referred to as the “Foreign Contractor”.








WITNESSETH


WHEREAS, all Petroleum resources under the internal waters, territorial sea, and


continental shelf of the People’s Republic of China and under all sea areas within the


limits of national jurisdiction over the maritime resources of the People’s Republic of


China are owned by the People’s Republic of China;


WHEREAS, CNOOC has the exclusive right to explore for, develop, produce and


market Petroleum of the Contract Area in accordance with the Regulations of the


People’s Republic of China on Exploitation of Offshore Petroleum Resources in


Cooperation with Foreign Enterprises” (hereafter referred to as the Petroleum


Regulations”), promulgated on January 30, 1982 and as amended from time to time by


the State Council of the People’s Republic of China;








1


WHEREAS, the Foreign Contractor desires and agrees to provide funds, and apply its


appropriate and advanced technology and managerial experience to cooperate with


CNOOC for the exploitation of Petroleum resources within the Contract Area and agrees


to be subject to the laws, decrees, and other rules and regulations of the People’s


Republic of China in the implementation of the Contract.


NOW, THEREFORE, IT IS MUTUALLY AGREED as hereafter set forth:


Article 1


Definitions


The following words and terms used in the Contract shall have, unless otherwise


specified herein, the following meanings:


1.1 “Petroleum” means Crude Oil and Natural Gas deposited in the subsurface and


being extracted or already extracted, including any valuable non-hydrocarbon


substances produced in association witli Crude Oil and/or Natural Gas separated


or extracted therefrom.


1.2 “Crude Oil” means solid and liquid hydrocarbons in their natural state, including


any liquid hydrocarbons extracted from Natural Gas except for methane (CH4).


1.3 “Natural Gas” means Non-associated Natural Gas and Associated Natural Gas in


their natural state.


1.4 “Non-associated Natural Gas” means all gaseous hydrocarbons produced from gas


reservoirs, including wet gas, dry gas and residue gas remaining after the


extraction of liquid hydrocarbons from wet gas.


1.5 “Associated Natural Gas” means all gaseous hydrocarbons produced in


association with Crude oil from oil reservoirs, including residue gas remaining


after the extraction of liquid hydrocarbons therefrom.











2


1.6 “Oil Field” means an accumulation of Petroleum within the Contract Area


composed of one or several overlapping oil-bearing zones, within one trap or


within associated traps of the same independent geological structure, which may


or may not be complicated by faulting, and which has commercial value


determined in accordance with the procedures stipulated in Article 11 hereof.


1.7 “Gas Field” means an accumulation of Petroleum within the Contract Area


composed of one or several overlapping gas bearing zones, within one trap or


within associated traps of the same independent geological structure, which may


or may not be complicated by faulting, and which has commercial value


determined in accordance with the procedures stipulated in Article 18 hereof.


1.8 “Petroleum Operations” means the Exploration Operations, the Development


Operations, the Production Operations, and other activities related to these


operations carried out under the Contract.


1.9 “Exploration Operations” means operations carried out for the purpose of


discovering Petroleum-bearing traps by means of geological, geophysical,


geochemical and other methods including exploratory well drilling; all the work


undertaken to determine the commerciality of traps in which Petroleum has been


discovered including Appraisal Wei) drilling; and feasibility studies, formulation


of the Overall Development Program; and activities related to all such operations.


1.10 “Development Operations” means operations carried out for the realization of


Petroleum production from the date of approval of the Overall Development


Program for any Oil Field and/or Gas Field by the competent authorities of the


Chinese Government including design, construction, installation, drilling, and


related research work as well as relevant activities carried out before the Date of


Commencement of Commercial Production for the realization of Petroleum


production.


1.11 “Production Operations” means operations and all activities related thereto carried


out for Petroleum production of an Oil Field and/or Gas Field from the Date of








3


 Commencement of Commercial Production, such as extraction, injection,


stimulation, treatment, storage, transportation, lifting, etc.





1.12 “Basic Block” means a section of the surface of the earth bounded by the


segments of longitude and latitude of equal distance often (10) minutes.





1.13 “Contract Area” means an offshore surface area demarcated with geographic


coordinates for the cooperative exploitation of Petroleum resources, and in the


Contract, means the offshore surface area stipulated in Article 3.1 hereof.


1.14 “Exploration Area” means an offshore surface area within the Contract Area


which has not been relinquished before the expiration of the exploration period


and in which Development Operations and Production Operations have not begun.





1.15 “Development Area” means a portion of the Contract Area covering an Oil Field


and/or Gas Field which has been designated for development and any potential





contiguous extension areas to such Field(s) within the Contract Area. The


Development Area(s) shall be proposed by the Operator, demarcated by the Joint


Management Committee (“JMC”) and delineated as such in the Overall


Development Program approved by the competent authorities of the Chinese


Government. The Development Area shall automatically cease to be in force as of


the date of approval of the Production Area by CNOOC.





1.16 “Production Area” means an offshore surface area within any Development Area


for the purpose of the performance of the Production Operations within the said


Development Area after completion of the Development Operations. The


Production Area proposed by the Operator, demarcated by JMC shall be


submitted to CNOOC for approval before the Date of Commencement of


Commercial Production.





“Date of Commencement of Commercial Production” means the date of


commencement of the production of Crude Oil and/or Natural Gas from any Oil


Field and/or Gas Field determined and announced by JMC in accordance with the


provisions in Article 7.2.5 hereof, after completion of the Development








4





n


Operations as provided in the Overall Development Program for the said Oil Field


and/or Gas Field and having obtained the Operation Permission License of the


Production Installation issued by the competent authorities of the Chinese


Government.


1.18 “Calendar Year” means a period of twelve (12) consecutive Gregorian months


under the Gregorian Calendar beginning on the first day of January and ending on


the following thirty-first day of December in the same year.


1.19 “Contract Year” means a period of twelve (12) consecutive Gregorian months


under the Gregorian Calendar, within the term of the Contract, beginning on the


Date of Commencement of the Implementation of the Contract as mentioned in


Article 1.40 herein or any anniversary thereof.


1.20 “Production Year” means, in respect of each Oil Field and/or Gas Field, a period


of twelve (12) consecutive Gregorian months under the Gregorian Calendar


beginning on the Date of Commencement of Commercial Production of such


Field or anniversary thereof.


1.21 “Calendar Quarter” means a period of three (3) consecutive Gregorian months


under the Gregorian Calendar beginning on the first day of January, the first day


of April, the first day of July, or the first day of October.


1.22 “Exploratory Well” means any Wildcat and/or Appraisal Well drilled within the


exploration period, including dry hole(s) and discovery well(s).


1.23 “Wildcat” means a well drilled on any geological trap for the purpose of searching


for Petroleum accumulations, including wells drilled for the purpose of obtaining


geological and geophysical parameters.


1.24 “Appraisal Well” means an Exploratory Well drilled for the purpose of evaluating


the commerciality of a geological trap in which Petroleum has been discovered.


1.25 “Development Well” means a well drilled after the date of approval of the Overall


Development Program for the purpose of producing Petroleum, increasing








5


production or accelerating extraction of Petroleum, including production wells,


injection wells and dry holes. Any Appraisal Well drilled during the production


period shall be deemed as Development Well.


1.26 “Work Program” means all types of plans formulated for the performance of the


Petroleum Operations, including plans for exploration, development and


production.


1.27 “Overall Development Program” means a plan prepared by the Operator for the


development of an Oil Field and/or Gas Field which has been reviewed and


adopted by JMC, confirmed by CNOOC and approved by the competent


authorities of the Chinese Government and such plan shall include, but shall not


be limited to, recoverable reserves, the development well pattern, master design,


production profile, economic analysis and time schedule of the Development


Operations.


1.28 “Deemed Interest” means interest on the development costs calculated in


accordance with the rate of interest stipulated in Article 12.2.3.2 hereof when the


development costs incurred in each Oil Field and/or Gas Field within the Contract


Area are recovered by the Parties.


1.29 "Oil Field and/or Gas Field Straddling a Boundary” means an Oil Field and/or


Gas Field extending from the Contract Area to one or more other contract areas


and/or areas in respect of which no Petroleum contracts have been signed.


1.30 “Annual Gross Production of Natural Gas” means the total amount of Natural Gas


produced from each Oil Field and/or Gas Field within the Contract Area


considered separately in each Calendar Year, less the amount of Natural Gas used


for Petroleum Operations and the amount of losses, which is saved and measured


by a measuring device at the delivery point specified in Article 14.3.1 hereof.


1.31 “Annual Gross Production of Crude Oil” means the total amount of Crude Oil


produced from each Oil Field within the Contract Area considered separately in


each Calendar Year, less the amount of Crude Oil used for Petroleum Operations





6


and the amount of losses, which is saved and measured by a measuring device at


the delivery point specified in Article 14.3.1 hereof.


1.32 ‘'Contractor” means the Foreign Contractor specified in the Preamble hereto,


including assignee(s) in accordance with Article 23 hereof.


1.33 “Parties” means CNOOC and the Contractor.


1.34 “Operator” means an entity responsible for the performance of the Petroleum


Operations under the Contract.


1.35 “Subcontractor” means an entity which provides the Operator with goods or


services for the purpose of the Contract.


1.36 “Third Party” means any individual or entity except CNOOC, the Contractor and


any of their Affiliates.


1.37 “Chinese Personnel” means any citizen of the People’s Republic of China,


including CNOOC’s personnel and Chinese citizens employed by the Contractor


and/or the Subcontractors), involved in Petroleum Operations under the Contract.


1.38 “Expatriate Employee” means any person employed by the Contractor,


Subcontractor(s) or CNOOC who has not the nationality of the People’s Republic


of China. Overseas Chinese who reside abroad and have the nationality of the


People’s Republic of China and other Chinese abroad, when they are employed by


the Contractor, Subcontractor(s) or CNOOC shall also be deemed as Expatriate


Employees within the scope of the Contract.


1.39 “Affiliate” means in respect of the Contractor:


(a) any entity in which any company comprising the Contractor directly or


indirectly holds fifty percent (50%) or more of the voting rights carried by its


share capital; or











7


 (b) any entity which directly or indirectly holds fifty percent (50%) or more of


the aforesaid voting rights of any company comprising the Contractor; or





(c) any other entity whose aforesaid voting rights are held by an entity mentioned


in (b) above in an amount of fifty percent (50%) or more;


“Affiliate” means, in respect of CNOOC, any subsidiary, branch, or regional


corporation of CNOOC and any entity in which CNOOC directly or indirectly


holds fifty percent (50%) or more of the voting rights carried by its share capital.


1.40 “Date of Commencement of the Implementation of the Contract” means the first


day of the month following the month in which the Contractor has received the


notification from CNOOC of the approval of the Contract by the Ministry of


Commerce of the People’s Republic of China.


1.41 “LS36-1 Production Facility Assets” means all assets, purchased, installed and


constructed by the Parties for the Natural Gas accumulation known as the Lishui 36-1


Gas Field, and including a production platform which will be constructed at the


Lishui 36-1 Gas Field and a Natural Gas processing terminal to be constructed on


land at Niyu Island at Wenzhou, Zhejiang Province together with a subsea


pipeline connecting the platform and terminal and the pipeline connecting the


terminal to the provincial grid.


1.42 “LS36-1 SDA” means the Supplemental Development Agreement entered into


between the Parties on 17lh March 2010 in relation to the Lishui 36-1 Gas Field.








Article 2


Objective of the Contract





2.1 The primary objective of the Contract is to explore for, develop and produce


Petroleum that may exist within the Contract Area.














8


2.2 The Contractor shall apply its appropriate and advanced technology and assign its


competent experts to perform the Petroleum Operations.


2.3 During the performance of the Petroleum Operations, the Contractor shall transfer


its technology to the Chinese Personnel and train them.


2.4 The Contractor shall pay all the exploration costs required for the Exploration


Operations (including the prospecting lease right fees as payable under law). In


the event that any Oil Field and/or Gas Field is discovered within the Contract


Area, the development costs of such Oil Field and/or Gas Field shall be paid by


the Parties in proportion to their participating interests: fifty-one percent (51%) by


CNOOC and forty-nine percent (49%) by the Contractor. In the event that


CNOOC opts to participate at a level less than fifty-one percent (51%) of the


participating interests, or not to participate in the development of the Field, the


Contractor shall pay the remaining development costs necessary for the


development of the Field in accordance with Article 12.1.2 hereof.


2.5 If any Oil Field and/or Gas Field is discovered within the Contract Area, the


Petroleum produced therefrom shall, from the Date of Commencement of


Commercial Production of such Field, be allocated in accordance with Articles 12,


13 and/or 18 hereof.


2.6 Nothing contained in the Contract shall be deemed to confer any right on the


Contractor other than those rights expressly granted hereunder.








Article 3


Contract Area





3.1 The Contract Area as of the date of signature of the Contract covers a total area of


five thousand eight hundred and seventy seven (5,877) square kilometers, as


marked out by the geographic location and the coordinates of the connecting


points of the boundary lines in Annex I attached hereto.








9


The said total area of the Contract Area shall be reduced in accordance with


Articles 4, 5, 11 and 18 hereof.


3.2 Except for the rights as expressly provided by the Contract, no right is granted in


favor of the Contractor to the surface area, subsea, sea-bed, sub-soil or to any


natural resources or aquatic resources other than Petroleum existing therein, and


any things left on the sea-bed within the Contract Area.





Article 4


Contract Term





4.1 The term of the Contract shall include an exploration period, a development


period and a production period.


4.2 The exploration period, beginning on the Date of Commencement of the


Implementation of the Contract, shall be divided into three (3) phases and shall


consist of seven (7) consecutive Contract Years, unless the Contract is sooner


terminated, or the exploration period is extended in accordance with Article 25


hereof and/or Article 4.3 herein. The three (3) phases shall be as follows:


(a) the first phase of three (3) Contract Years (the first Contract Year through the


third Contract Year); and


(b) the second phase of two (2) Contract Years (the fourth Contract Year through


the fifth Contract Year); and


(c) the third phase of two (2) Contract Years (the sixth Contract Year through the


seventh Contract Year).


4.3 Where time is insufficient to complete the appraisal work on a Petroleum


discovery made close to the expiration of the exploration period or where the time


of the appraisal work on a Petroleum discovery in accordance with the appraisal


Work Program approved by JMC as stated in Articles 11 and 18 hereof extends








10


beyond the exploration period, the exploration period as described in Article 4.2


herein shall be extended. The period of extension shall be whatever period


CNOOC regards as a reasonable period of time required to complete the above-


mentioned appraisal work in order to enable JMC to make a decision on the


commerciality of the said Petroleum discovery in accordance with Article 11 or


18 hereof, and until the competent authorities of the Chinese Government


approves or finally rejects the Overall Development Program.


4.4 The development period of any Oil Field and/or Gas Field within the Contract


Area shall begin on the date of approval of the Overall Development Program of


the said Oil Field and/or Gas Field by the competent authorities of the Chinese


Government and end on the date of the entire completion of the Development


Operations set forth in the Overall Development Program, excluding the time for


carrying out additional development projects in the production period in


accordance with Article 11.9 hereof.


4.5 The production period of any Oil Field and/or Gas Field within the Contract Area


shall be a period of fifteen (15) consecutive Production Years beginning on the


Date of Commencement of Commercial Production unless otherwise provided in


Article 4.6 herein and Article 18.2 or 25 hereof. Under such circumstances as


where the construction of an Oil Field and/or Gas Field is to be conducted on a


large scale, and the time span required therefore is long, or where separate


production of each of the multiple oil or gas producing zones of a Field is required,


or under other special circumstances, the production period thereof shall, when it


is necessary, be properly extended with the approval of the competent authorities


of the Chinese Government.


4.6 Suspension or abandonment of production of an Oil Field and/or Gas Field.


4.6.1 In the event that the Parties agree to suspend temporarily production from


an Oil Field and/or Gas Field which has entered into commercial


production, the Production Area covered by that Oil Field and/or Gas Field


may be retained within the Contract Area. In no event shall the period of








II





P

such retention extend beyond the date of the expiration of the production


period of that Oil Field and/or Gas Field except as otherwise provided in


Article 25.4 hereof. The duration of the relevant period of production


suspension and the arrangement for the maintenance operations during the


aforesaid period of suspension shall be proposed by the Operator, and shall


be decided by JMC through discussion. With respect to the aforesaid Oil


Field and/or Gas Field which has been suspended and retained within the


Contract Area, in the event that production is restored during the period of


such retention, the production period of that Oil Field and/or Gas Field


shall be extended correspondingly. In the event that the Parties fail to


reach an agreement on the restoration of production by the expiration of


the production suspension period decided by JMC through discussion, the


party to the Contract who wishes to restore production shall have the right


to restore production solely. The other party to the Contract may later elect


to participate in production but shall have no rights or obligations in


respect of such Field for the solely restored production period.


4.6.2 Abandonment of production from Oil Field and/or Gas Field within the


production period.


4.6.2.1 During the production period, either party to the Contract may


propose to abandon production from any Oil Field and/or Gas


Field within the Contract Area, provided, however, that prior


written notice shall be given to the other party to the Contract.


The other party to the Contract shall make a response in writing


within ninety (90) days from the date on which the said notice is


received. If the other party to the Contract also agrees to abandon


production from the said Oil Field and/or Gas Field, then the


abandonment costs shall be paid by the Parties in proportion to


their participating interests in the development of such Oil Field


and/or Gas Field. From the date on which the other party to the


Contract makes the response in writing that it agrees to








12


abandonment, the production period of such Oil Field and/or Gas


Field shall be terminated and such Oil Field and/or Gas Field


shall be excluded from the Contract Area.


4.62.2 If the Contractor notifies CNOOC in writing of its decision on


abandoning production from an Oil Field and/or Gas Field, while


CNOOC decides not to abandon production from such Oil Field


and/or Gas Field, then from the date on which the Contractor


receives CNOOC’s written response of its aforesaid decision, all


of the Contractor’s rights and obligations under the Contract in


respect of the said Field, including but not limited to the


responsibilities for payment of abandonment costs in respect of


such Field, shall be terminated automatically, provided that the


Contractor shall not transfer to CNOOC any of the Contractor’s


liabilities and obligations in respect of the said Field. The said


Field shall be excluded from the Contract Area.


4.623 The Parties shall abide by the relevant abandonment regulations issued by the


competent authorities of the Chinese Government


4.7 The term of the Contract shall not go beyond thirty (30) consecutive Contract


Years from the Date of Commencement of the Implementation of the Contract,


unless otherwise stipulated hereunder.








Article 5


Relinquishment


5.1 The Contractor shall relinquish portions of the Contract Area in accordance with


the following provisions:





5.1.1 At the expiration of the first phase of the exploration period, the


Contractor shall relinquish twenty-five percent (25%) of the Contract Area


as of the date of signature of the Contract. /





13


5.1.2 At the expiration of the second phase of the exploration period, the


Contractor shall relinquish twenty-five percent (25%) of the Contract Area


remaining in the second phase after deducting each Development Area


and/or Production Area therefrom.


5.1.3 In any of the following cases, the Contractor shall relinquish the remaining


Contract Area except the areas referred to in Article 5.1.4 herein:


(a) at the expiration of the last phase of the exploration period; or


(b) if the Contractor exercises its option under Article 6.1(b) of the


Contract, at the expiration of the said exploration phase if the


Contractor so selects; or


(c) at the expiration of the extended period, in the event that the


exploration period is extended in accordance with Article 4.3 or 25


hereof.


5.1.4 In the execution of Article 5.1.3 herein, a Development Area, Production


Area or an area corresponding to a trap with a Petroleum discovery which


will be appraised and/or being appraised or included in an Overall


Development Program awaiting approval shall not be regarded as an area


to be relinquished.


5.1.5 At the expiration of the production period specified in Article 4.5 hereof,


any Oil Field and/or Gas Field within the Contract Area shall be excluded


from the Contract Area.


5.2 The areas relinquished pursuant to Articles 5.1.1 and 5.1.2 herein shall be made


up of as few rectangles as possible so as to facilitate further Exploration


Operations.


5.3 Within ninety (90) days prior to the date of each relinquishment, the Contractor


shall submit to CNOOC a report on its completed Exploration Operations on the^








14


 areas to be relinquished, including a map showing the areas to be relinquished


with its coordinates of the connecting points of the boundaries.











Article 6


Minimum Exploration Work Commitment and


Expected Minimum Exploration Expenditures


6.1 The Contractor shall use its reasonable efforts to begin to perforin the offshore


Exploration Operations within six (6) months from the Date of Commencement of


the Implementation of the Contract and to spud the first Wildcat within ten (10)


months from the Date of Commencement of the Implementation of the Contract.


6.2 The Contractor shall fulfil the minimum exploration work commitment for each


phase of the exploration period in accordance with the following provisions.


6.2.1


First phase minimum exploration


obligations and expenditures redacted

















6.2.2


Second phase minimum exploration


obligations and expenditures redacted














6.2.3 Third phase minimum exploration


obligations and expenditures redacted


6.2.4 The Wildcats specified in Articles 6.2.1, 6.2.2 and 6.2.3 herein for each


exploration phase shall not be substituted by Appraisal Wells without the


consent of CNOOC.


6.2.5 With respect to the minimum exploration work commitment for each





phase of the exploration period committed by the Contractor in accordance


with Articles 6.2.1, 6.2.2 and 6.2.3 herein when calculating whether the


minimum exploration work commitment has been fulfilled, the number of


Wildcats drilled and the kilometers of seismic lines actually completed


shall be the basis of such calculation. However, the Wildcats abandoned


for technical reasons without reaching their predetermined geological


objective shall not count as the Wildcats actually fulfilled by the


Contractor thereunder without the consent of CNOOC.


6.3 At the expiration of the first phase or the second phase of the exploration period,


the Contractor has the following options in accordance with the terms of this


Contract:


(a) to enter the next phase and continue exploration; or





(b) to conduct only appraisal operations and/or development operations in the


Petroleum discoveries awaiting appraisal decided by procedures under


Article 11 of the Contract, provided that the minimum obligations of the


selected exploration phase by the Contractor have been fulfilled; and the


areas under Article 5.1.3(b) hereof have been relinquished; or


(c) to terminate the Contract.


6.4 At the expiration of any phase of the exploration period, if the actual exploration


work fulfilled by the Contractor is less than the minimum exploration work


commitment set forth for the said exploration phase and if the Contractor opts to








16








im


 enter the next phase and continue exploration under Article 6.1(a) herein, the


Contractor shall give reasons to CNOOC for the underfulfillment; and, with the


consent of CNOOC, the unfulfilled balance of the said phase shall be added to the


minimum exploration work commitment for the next exploration phase.





At any time within the exploration period if there is any commercial discovery,


JMC shall, at the request of any party to the Contract, discuss the possibility of


increasing the exploration work. Any Wildcats and seismic lines involved in such


increase shall be deducted from the minimum exploration work commitment.


6.5 Where the Contractor has fulfilled ahead of time the minimum exploration work


commitment for any phase of the exploration period, the duration of such


exploration phase stipulated in Article 4.2 hereof shall not be shortened thereby,


and if the exploration work actually fulfilled by the Contractor exceeds the


minimum exploration work commitment for the said exploration phase, the excess


Wildcat shall be deducted from and credited against the minimum exploration


work commitment for the next exploration phase.


6.6 If any addition or deduction is made under Article 6.4 or Article 6.5 herein in


regard to the minimum exploration work commitment for any phase of the


exploration period, the increased or reduced exploration work shall become the


new minimum exploration work commitment for the Contractor to fulfill in the


said phase.


6.7 At the expiration of any phase during the exploration period, if the exploration


work actually fulfilled by the Contractor is less than the minimum exploration


work commitment for such phase or less than the new minimum exploration work


commitment as mentioned in Article 6.6 herein, and if, regardless of whether the


expected minimum exploration expenditures are fulfilled or not fulfilled, the


Contractor opts to terminate the Contract under Article 6.1 (c) herein, or if the said


phase is the last exploration phase, the Contractor shall, within thirty (30) days


from the date of the decision of election to terminate the Contract or within


thirty (30) days from the date of the expiration of the exploration period, pay ^








17


 CNOOC only any unfulfilled balance of the minimum exploration work


commitment (or of the new one) for the phase or phases entered into in U.S.


dollars after it has been converted into a cash equivalent using the method


provided in Annex II - Accounting Procedure hereto. However, if the minimum


exploration work commitment for the exploration period is fulfilled while its


expected corresponding minimum exploration expenditures are not fulfilled, the


unfulfilled part shall be deemed as a saving and shall not be paid to CNOOC.








Article 7


Management Organization and Its Function





7.1 For the purpose of the proper performance of the Petroleum Operations, the


Parties shall establish a JMC within forty-five (45) days from the Date of


Commencement of the Implementation of the Contract.


7.1.1 CNOOC and the Contractor shall each appoint an equal number of


representatives (one to three) to form JMC, and each party to the Contract


shall designate one of its representatives as its chief representative. The


representative of the Operator of the companies comprising the Contractor


shall be the chief representative of the Contractor. All the aforesaid


representatives shall have the right to present their views on the proposals


at meetings held by JMC. When a decision is to be made on any proposal,





the chief representative from each party to the Contract shall be the


spokesman on behalf of the party to the Contract.





The chairman of JMC shall be the chief representative designated by


CNOOC, and the vice chairman shall be the chief representative


designated by the Contractor. The chairman of JMC shall preside over


meetings of JMC. In his absence, one representative present at the meeting


from CNOOC shall be designated to act as the chairman of the meeting. In


the absence of the vice chairman of JMC, one representative present at the


meeting from the Contractor shall be designated to act as the vice \








18


chairman of the meeting. The Parties may, according to need, designate a


reasonable number of advisors, who may attend, but shall not be entitled to


vote at, JMC meetings.


7.1.2 A regular meeting of JMC shall be held at least once a Calendar Quarter,


and other meetings, if necessary, may be held at any time at the request of


any party to the Contract, upon giving reasonable notice to the other party


to the Contract of the date, time and location of the meeting and the items


to be discussed.


7.2 The Parties shall empower JMC to:


7.2.1 Review and agree to the Work Program and budget proposed by the


Operator and the amendment thereof;


7.2.2 Determine the commerciality of each trap on which a Petroleum discovery


has been made in accordance with the Operator’s appraisal report and


report its decision to CNOOC for confirmation;


7.2.3 Review and agree to the Overall Development Program and budget and


any amendments thereto for each Oil Field and/or Gas Field;


7.2.4 Approve or confirm the following items of procurement and expenditures:





(a) approve procurement of any item within the budget with a unit price


exceeding Five Hundred Thousand U.S. dollars (U.S. $500,000) or


any single purchase order of total monetary value exceeding Three


Million U.S. dollars (U.S.$ 3,000,000);


(b) approve a lease of equipment, or an engineering subcontract or a


service contract within the budget worth more than Three Million


U.S. dollars (U.S. $ 3,000,000); and


(c) confirm excess expenditures pursuant to Article 10.2.1 hereof and





the expenditures pursuant to Article 10.2.2 hereof;








19


7.2.5 Determine and announce the Date of Commencement of Commercial


Production of each Oil Field and/or Gas Field within the Contract Area;


7.2.6 Determine the type and scope of information and data provided to any


Third Party and Affiliate in relation to the Petroleum Operations in


accordance with the “Provisions of the Ministry of Petroleum Industry of


the People’s Republic of China for the Control of Data Concerning the


Exploitation of Offshore Petroleum Resources in Cooperation with


Foreign Enterprises” (hereafter referred to as “Provisions for the Control


of Data”) and Article 22.4 hereof;


7.2.7 Demarcate boundaries of the Development Area and the Production Area


of each Oil Field and/or Gas Field;


7.2.8 Review and approve plans for transfer of the Production Operations in


accordance with Article 8.8 hereof;


7.2.9 Review and approve the insurance program proposed by the Operator, and


emergency procedures on safety and environmental protection;


7.2.10 Review and approve personnel training programs;


7.2.11 Discuss, review, decide and approve other matters that have been proposed


by either party to the Contract or submitted by the expert groups or the


Operator; and


7.2.12 Review and examine matters required to be submitted to relevant


authorities of the Chinese Government and/or CNOOC for approval.


7.3 Decisions of JMC shall be made unanimously through consultation. All decisions


made unanimously shall be deemed as formal decisions and shall be equally


binding upon the Parties. When matters upon which agreement can not be reached


arise, the Parties may convene another meeting in an attempt to find a new


solution thereto based on the principle of mutual benefit.











20


7.3.1 In the exploration period, the Parties shall endeavour to reach an


agreement through consultation on exploration programs and annual


exploration Work Program. If the Parties fail to reach agreement through


consultation, the Contractor’s proposal shall prevail, provided that such


proposal is not in conflict with the relevant provisions in Articles 4, 5, and


6 hereof.


7.3.2 If it is considered by the chairman and/or the vice chairmen or their


nominees that a matter requires urgent handling or may be decided without


convening a meeting, JMC may make decisions through facsimile or the


circulation of documents.


7.4 JMC shall establish the following subordinate bodies:


7.4.1 Secretariat


The secretariat shall be a permanent organization consisting of two (2)


secretaries. One secretary shall be appointed by each of the Parties. The


secretaries shall not be members of JMC, but may attend meetings of JMC


as observers. The duties of the secretariat are as follows:


(a) to keep minutes of meetings;


(b) to prepare summaries of and resolutions for JMC meetings;


(c) to draft and transmit notices of meetings; and


(d) to receive and transmit proposals, reports or plans, etc. submitted by


the Operator and/or any party to the Contract, that require discussion,


review or approval by JMC.


7.4.2 Expert Groups


Advisory expert groups shall be established in accordance with the


requirements of the Petroleum Operations in various periods. Each expert











21


 group shall consist of an equal number of Chinese Personnel and the


Contractor’s employees, and, with the agreement of JMC, any other


personnel. JMC shall discuss and decide upon their establishment or


dissolution, size, and the appointment of their leaders in accordance with


the requirements of their work. The expert groups shall have the following


functions:


(a) to discuss and study matters assigned to them by JMC and submitted





by the Operator to JMC for its review and approval and any other


matter assigned to them by JMC, and to make constructive


suggestions to JMC;





(b) to have access to and observe and investigate the Petroleum


Operations conducted by the Operator at its office and operating


sites as work requires and to submit relevant reports to JMC; and


(c) to attend meetings of JMC as observers at the request of JMC.





7.5 When one of the companies comprising the Contractor acts as tjie Operator,


CNOOC shall have the right to assign professional representatives to the


Operator’s administrative and technical departments which are related to the


Petroleum Operations, who may work at length together with the Operator’s staff.


The professional representatives shall have access to the centers of research,


design, and data processing related only to the execution of the Contract and to


the operating sites to observe all the activities and study all the information with


respect to the Petroleum Operations. Such access to the aforesaid centers outside


the People’s Republic of China shall be decided by JMC through discussion and


shall be arranged by the Operator. The Operator shall use all reasonable endeavors


to assist the professional representatives to have access to Third Parties’ sites. The


Operator’s staff shall regularly discuss their work with the professional


representatives of CNOOC.











22





*1?


 The work of professional representatives of CNOOC shall be arranged by


manager(s) of the departments of the Operator in which professional


representatives work. Professional representatives of CNOOC, except for the


professional representatives in charge of procurement who shall undertake their


functions in accordance with Article 7.6 herein, shall not interfere in the decision


making on relevant matters by departmental manager(s) of the Operator. However,


such professional representatives shall have the right to make proposals and


comments to departmental manager(s) of the Operator or to report directly to


CNOOC’s representatives in JMC. When CNOOC acts as the Operator, the


Contractor may also assign professional representatives including professional


representatives in charge of procurement.


7.5.1 On the principle of mutual cooperation and coordination, the Operator


shall provide the professional representatives with necessary facilities and


assistance to perform office work and to observe the operating sites, etc.


7.5.2 The numbers of professional representatives shall be decided by JMC


through consultations.


7.6 When one of the companies comprising the Contractor acts as the Operator, in


respect of the items listed in the procurement plan, the procedures and provisions


hereunder shall be followed:


7.6.1 The procurement department of the Operator shall inform the professional


representatives appointed by CNOOC in charge of procurement of all the


items of procurement.


7.6.2 The Operator shall be subject to Articles 15.1 and 15.3 hereof and reach


agreement through consultation with the professional representatives of


CNOOC in charge of procurement when preparing the procurement plan


in accordance with the Work Program and budget. The professional


representatives of CNOOC in charge of procurement shall work out an


inventory listing the equipment and materials which can be made and











23


provided in China and a list of manufacturers, engineering and


construction companies and enterprises in China which can provide


services and undertake subcontracting work.


7.6.3 Unless otherwise agreed upon by the Parties, the Operator shall, in general,


make procurement by means of calling for bids and shall notify at the


same time manufacturers and enterprises concerned both inside and


outside China, and the work of calling for bids shall be done within the


territory of China.


7.6.4 When any procurement is to be made by means of calling for bids, the


manufacturers and enterprises in China applying for bidding which are


included in a list delivered in advance to the Operator by the professional


representatives of CNOOC in charge of procurement shall be invited. The


professional representatives of CNOOC in charge of procurement shall


have the right to take part in the work of calling for bids, including


examination of the list of bidders to be invited, preparing and issuing


bidding documents, opening bids and evaluation of bids, and shall have the


right to consult with the Operator the determination of award of contracts


and to participate in negotiation for subcontracts and service contracts.


7.6.5 With respect to the items of procurement by means of not calling for bids,


the Operator’s procurement department and the professional


representatives of CNOOC in charge of procurement shall, in accordance


with the provisions specified in Article 7.6.2 herein, define items which


are to be procured in the People’s Republic of China and items are to be


procured abroad.


7.7 All costs and expenses with respect to the staff members of the Parties in the


subordinate bodies of JMC established in accordance with Article 7.4 herein and


those with respect to the professional representatives referred to in Article 7.5


herein and wages and salaries, costs and expenses incurred by the representatives


of JMC referred to in Article 7.1 herein while attending JMC meetings shall be ^








24


 paid by the Operator and charged respectively to the exploration costs,


development costs and operating costs in accordance with Annex II - Accounting


Procedure hereto.


7.8 The specific responsibilities and working procedures within JMC shall be





discussed and determined by JMC in accordance with the relevant provisions


herein.











Article 8


Operator





8.1 The Parties agree that Primeline Energy Operation International Ltd. (PEOIL), a


company organized and existing under the laws of Cayman Islands, having its


headquarters in Hong Kong, established by Primeline Energy China Limited and


Primeline Petroleum Corporation, shall act as the Operator for the Exploration


Operations, Development Operations and Production Operations within the


Contract Area, unless otherwise stipulated in Article 8.8 herein and Article 30.4


hereof.


8.2 For the implementation of the Contract, each company comprising the Contractor


and any entity that becomes the Operator shall register with the State


Administration for Industry and Commerce of the People’s Republic of China in


accordance with the relevant provisions of the said State Administration for


Industry and Commerce and shall obtain in advance the necessary approval from


CNOOC.





The person in charge of the Operator shall have the full right to represent the


Contractor in respect of the performance of the Petroleum Operations. The names,


positions and resumes of the staff and organization chart of the Operator shall be


submitted in advance to CNOOC and the senior staff thereat shall be subject to


the consent of CNOOC,














25


The parent corporation of each company comprising the Contractor which is not


itself a parent corporation shall, at the request of CNOOC, provide CNOOC with


a written performance guarantee with terms acceptable to CNOOC.


8.3 The Operator shall have the following obligations:


8.3.1 To apply the appropriate and advanced technology and business


managerial experience of the Contractor, including each company


comprising the Contractor or its and their Affiliates to perform the


Petroleum Operations reasonably, economically and efficiently in


accordance with sound international practice.


8.3.2 To prepare Work Programs and budgets related to the Petroleum


Operations and to carry out the approved Work Programs and budgets.


8.3.3 To be responsible for procurement of installations, equipment, and


supplies and entering into subcontracts and service contracts related to the


Petroleum Operations, in accordance with the approved Work Programs


and budgets and the applicable provisions of Articles 7.2.4, 7.6 and 10.2


hereof.


8.3.4 To prepare in advance, in accordance with Article 16 hereof, a personnel


training program and budget before the commencement of the


Development Operations and Production Operations respectively, and, in


accordance with the said program and budget, to be responsible for


preparing an annual personnel training program and budget and carrying


out the annual program and budget after approval by JMC.


8.3.5 To establish an insurance program, and to enter into and implement the


insurance contracts in accordance with Article 21 hereof.


8.3.6 To issue cash-call notices to all the parties to the Contract to raise the


required funds based on the approved budgets and in accordance with


Article 12 hereof and Annex II - Accounting Procedure hereto. ^





26


8.3.7 To maintain complete and accurate accounting records of all the costs and


expenditures for the Petroleum Operations in accordance with the


provisions of Annex I) - Accounting Procedure hereto and to keep securely


the accounting books in good order.


8.3.8 To make necessary preparation for regular meetings of JMC, and to submit


in advance to JMC necessary information related to the matters to be


reviewed and approved by JMC.


8.3.9 To inform directly or indirectly all the Subcontractors which render


services for the Petroleum Operations in China and all the Expatriate


Employees of the Operator and of Subcontractors who are engaged in the


Petroleum Operations in China that they shall be subject to the laws,


decrees, and other rules and regulations of the People’s Republic of China.


8.3.10 To report its work to JMC as provided in Article 7.2 hereof.





8.4 hi the course of the performance of the Petroleum Operations, any direct loss


arising out of the gross negligence or wilful misconduct of the Operator or its


employees shall be solely borne by the Operator. The Operator shall make its best


efforts in accordance with the international Petroleum industry practice to include


provisions similar to this Article 8.4 herein in related subcontracts and service


contracts.


8.5 In the course of the performance of the Petroleum Operations, the Operator shall





handle the information, samples or reports in accordance with the following


provisions:


8.5.1 The Operator shall provide CNOOC with various information and data in


accordance with Article 14 and 21 of the “Petroleum Regulations” and the


“Provisions for the Control of Data” and the Operator shall use and handle


such information and data referred to herein in accordance with the said


provisions. The information and data within the scope of the “Provisions


for the Control of Data” shall be reported to CNOOC at the same time >








27


 when the Operator reports them to its parent corporation. Upon receipt by


the Operator of any report from its parent corporation concerning such


information and data, a copy of such report shall be furnished to CNOOC.





8.5.2 The Operator shall furnish CNOOC in a timely manner with reports on


safety, environmental protection and accidents related to the Petroleum


Operations and with financial reports prepared in accordance with the


provisions of Annex II - Accounting Procedure hereto.


8.5.3 The Operator shall provide the non-operator(s) of the Contractor with


copies of the relevant data and reports reasonably required by non*


operator(s) and referred to in Articles 8.5.1 and 8.5.2 herein.


8.5.4 The Operator shall, at the request of any party to the Contract, furnish that


party to the Contract with the following:


8.5.4.1 Procurement plans for purchasing equipment and materials,


inquiries, offers, orders and service contracts, etc.;


8.5.4.2 Manuals, technical specifications, design criteria, design


documents (including design drawings), construction records and


information, consumption statistics, equipment inventory, spare


parts inventory, etc.;


8.5.4.3 Technical investigation and cost analysis reports; and


8.5.4.4 Other information relating to the Petroleum Operations already


acquired by the Operator in the performance of the Contract.


8.6 In the course of performing the Petroleum Operations, the Operator shall abide by


the laws, decrees, and other rules and regulations with respect to environmental


protection and safety of the People’s Republic of China and shall endeavour in


accordance with the international petroleum industry practice to:











28


8.6.1 Minimize the damage and destruction to marine organisms and their Jiving


oceanic environments;


8.6.2 Control blowouts promptly and prevent or avoid waste or loss of


Petroleum discovered in or produced from the Contract Area;


8.6.3 Prevent Petroleum from flowing into low pressure formations or damaging


adjacent Petroleum-bearing formations;


8.6.4 Prevent water from flowing into Petroleum-bearing formations through


dry holes or other wells, except for the purpose of secondary recovery;


8.6.5 Prevent land, forests, crops, buildings and other installations from being


damaged and destroyed; and


8.6.6 Minimize the danger to personnel safety and health.


8.7 Project Management Team


In any Oil Field and/or Gas Field within the Contract Area where CNOOC has the


participating interest in the development of said Field, a project management team


(hereafter referred to as “PMT”) shall be established in the organization of the


Operator at the date of approval of the Overall Development Program for said


Field by the competent authorities of the Chinese Government.


The PMT shall comprise those personnel designated by the Parties and the


number of CNOOC’s personnel shall no less than one third (1/3) of the total


number of personnel within the PMT. The Contractor shall designate the person


acting as the manager of PMT, and CNOOC shall designate the person acting as


the deputy manager of PMT.


The PMT shall be located at the Operator’s office within the Chinese territory.


The working locations) of the members of PMT shall be decided according to the


need of the work.











29


The specific organization, staffing and working system of PMT and


responsibilities and competence of various positions including those of CNOOC’s


personnel assigned to PMT shall be determined by the Parties through


consultation prior to the approval of the Overall Development Program for said


Oil Field and/or Gas Field.


8.8 Transfer and take over of the Production Operations


Before the full recovery of the development costs actually incurred in accordance


with the Overall Development Program of any Oil Field and/or Gas Field within


the Contract Area, CNOOC may, after agreement reached through consultations


of JMC, take over the Production Operations of that Oil Field and/or Gas Field, if


conditions permit. After the full recovery of the development costs actually


incurred in accordance with the Overall Development Program of any Oil Field


and/or Gas Field within the Contract Area, CNOOC shall, at any time, have the


right by giving a written notice to the Contractor to take over the Production


Operations of that Oil Field and/or Gas Field. Both aforesaid cases shall be


effected in accordance with the procedures described hereunder.


8.8.1 The Contractor shall submit a transfer plan of the Production Operations to


CNOOC and JMC respectively within sixty (60) days following the date of


receiving the written notice of CNOOC. Such transfer plan shall include,


but not be limited to, a list of various posts to be taken over by CNOOC, a


schedule of transfer by stages, inventories of the relevant facilities and


equipment and an inventory of all documents, manuals, data and


information necessary for the Production Operations. Where the transfer


of some of the Production Operations involves any Third Party, the


Contractor shall consult with CNOOC in advance and propose a solution


thereto in the transfer plan, however, this situation shall not be taken by


the Contractor as an excuse to delay and hinder the transfer of the


Production Operations.











30


JMC shall, within thirty (30) days from the date of receiving the said plan,


review and approve it.


8.8.2 CNOOC shall, within sixty (60) days from the date of receiving the





transfer plan of the Production Operations approved by JMC, submit to the


Contractor and JMC respectively the lists and resumes of CNOOC’s


personnel who will take over the posts. The personnel named in the lists


shall be persons who have been trained by the Contractor in accordance


with the provisions set forth in Article 16 hereof or personnel who are


considered by CNOOC to be competent. Within one hundred and


eighty (180) days from the date of receiving CNOOC’s lists of the


personnel who will take over the operations, the Contractor shall arrange


for such personnel to undergo step by step practical training for the posts


to be taken over by them and shall assist CNOOC to manage the


qualification test.


8.8.3 Within three hundred and thirty (330) days from the date of receiving the





written notice of CNOOC, the Contractor shall submit to JMC a report on


the completion of preparations for the transfer of the Production


Operations. Such report shall include the results of the qualification test


for CNOOC’s personnel who will take over the Production Operations and


shall be confirmed by JMC within thirty (30) days after the receipt of the


said report. The transfer of the Production Operations shall begin on the


date when JMC makes such confirmation.





8.8.3.1 When the completion of the preparations for the transfer of the


Production Operations is confirmed by JMC, the Contractor shall,


in accordance with the transfer schedule by stages, transfer to


CNOOC’s take-over personnel control of all facilities and


equipment relating to the Production Operations in the Oil Field


and/or Gas Field, and all documents, manuals, data and


information regarding the use and operation of such facilities and











31





fCB


 equipment, so that CNOOC’s personnel are able to manage the


operation of such facilities and equipment.





8.8.3.2 If JMC believes that preparations for the transfer of the


Production Operations have not been completed and sets another


deadline for the completion of preparations for the transfer of the


Production Operations, the preparations for the transfer shall be


completed prior to the deadline and the transfer shall begin


thereafter.


8.8.4 The transfer in respect of the accounting and financial aspects shall be


handled in accordance with Annex 11 - Accounting Procedure hereto.


8.8.5 During the preparation for the transfer of the Production Operations and in


the course of the actual transfer, the Contractor shall perform the functions


provided for in Article 8.3, 8.4, 8.5 and 8.6 herein in respect of an Oil


Field and/or Gas Field undergoing the transfer of the Production


Operations, until the date when CNOOC has completely assumed control


of and taken over the Production Operations of the Oil Field and/or Gas


Field. Thereafter, the functions of the Operator provided for in Article 8.3,


8.4, 8.5 and 8.6 herein shall be by analogy applicable to CNOOC.


8.8.6 After CNOOC has taken over the Production Operations and become the


Operator of an Oil Field and/or Gas Field, the Contractor shall still have


the obligation, pursuant to Article 2 hereof, to provide CNOOC with the


relevant technical and personnel training assistance, and the costs incurred


thereby shall be charged to the operating costs in accordance with the


provisions of Annex II - the Accounting Procedure hereto.


8.8.7 When CNOOC takes over the Production Operations in any Oil Field


and/or Gas Field, the Chinese Personnel employed by the Contractor for


the Production Operations of the said Oil Field and/ov Gas Field shall be


transferred to CNOOC’s employment. If CNOOC needs to retain the ^








32


 services of any of the Expatriate Employees employed by the Contractor


or the Contractor still needs to keep some of the Chinese Personnel in its


employment, an agreement shall be reached through consultation between


the Parties prior to the transfer.


8.8.8 The expenses incurred in the transfer and take-over of the Production


Operations shall be charged to the operating costs.








Article 9


Assistance Provided by CNOOC





9.1 To enable the Contractor to carry out expeditiously and efficiently the Petroleum


Operations, CNOOC shall have the obligation to assist the Contractor at its


request to:


9.1.1 Obtain the approvals or permits needed to open accounts with a state-


owned bank in China;


9.1.2 Go through the formalities of exchanging foreign currencies;





9.1.3 Obtain office space, office supplies, transportation and communication


facilities and make arrangements for accommodation as required;


9.1.4 Go through the formalities of the customs;


9.1.5 Obtain entry and exit visas for the Expatriate Employees who will come to





China for the implementation of the Contract and for their dependants who


will visit them or reside in China for a long period and provide assistance


for their transportation and moving as well as medical services and travel


in China;


9.1.6 Obtain necessary permission to send abroad, if necessary, documents, data





and samples for analysis or processing during the Petroleum Operations;


and








33





/tD


9.1.7 Contact departments engaged in fishing, aquatic products, meteorology,


ocean shipping, civil aviation, railway, transportation, communication and


services for supply bases etc. for relevant matters and otherwise assist the


Contractor in obtaining on a timely basis approvals necessary for the


conduct of the Petroleum Operations under the Contract.


9.2 In accordance with Article 15 hereof, CNOOC shall assist the Contractor with the


recruitment of the Chinese Personnel.


9.3 CNOOC shall, at the request of the Contractor, sell to the Contractor data and


samples concerning the Contract Area other than those produced as a result of


Petroleum Operations hereunder in accordance with any relevant rules and


regulations and CNOOC shall also assist the Contractor to arrange the purchase of


any oceanic environmental, hydrological, meteorological, earthquake and other


data available from the relevant departments in China.


9.4 CNOOC shall, at the request of the Contractor, also assist the Contractor with


matters other than those under Articles 9.1, 9.2 and 9.3 herein if possible.


9.5 All expenses incurred in the assistance provided by CNOOC in accordance with


this Article 9 shall be paid by the Contractor and shall be handled in accordance


with the provisions of Annex II - Accounting Procedure hereto.








Article 10


Work Program and Budget





10.1 Before the fifteenth (15) of September of each Calendar Year after the Date of


Commencement of the Implementation of the Contract, the Operator shall


complete and submit to JMC for its review an annual Work Program and budget,


including estimated schedule of monthly expenditures, for the next Calendar Year.


JMC shall complete the review of the annual Work Program and budget and


submit them to CNOOC for review and approval before the thirty-first (31st) of


October of the Calendar Year in which they are submitted to JMC. Within





34


fifteen (15) days following the receipt of the annual Work Program and budget,


CNOOC shall notify JMC in writing of its approval or any modifications thereto


with its detailed reasons. If CNOOC requests any modifications on the aforesaid


annual Work Program and budget, the Parties shall promptly hold meetings to


make modifications and any modifications agreed upon by the Parties shall be


effected immediately. In case CNOOC fails to notify JMC of its approval within


fifteen (15) days, the annual Work Program and budget proposed by the Operator


shall be deemed to have been approved by CNOOC. The Operator shall make its


best efforts to perform the Petroleum Operations in accordance with the approved


or modified annual Work Program and budget.





As required for reviewing Work Program and budget by JMC, the Operator shall


submit to JMC the supporting data as detailed as possible.


Commercial scale personnel day rates for the Contractor's representatives in JMC


and the PMT (and the Contractor's representatives in the expert groups on an "as


needed basis") including travel costs, shall be submitted by the Contractor to the


JMC. Such costs shall be approved by JMC and included in the Work Program


and budget and amendments thereto. After approval by JMC, such costs incurred


shall be charged to the Joint Account.


10.2 The Operator may, in accordance with the following provisions, incur excess


expenditures or expenditures outside the budget in carrying out the Work Program


and budget, provided that the objectives in the approved Work Program and


budget are not changed:


10.2.1 In carrying out an approved budget for a single item, such as the drilling of





a well, the Operator may, if necessary, incur excess expenditures of no


more than ten percent (10%) of the budgeted amount. The Operator shall


report quarterly the aggregate amount of all such excess expenditures to


JMC for confirmation.





\








35





kB


10.2.2 For the efficient performance of the Petroleum Operations, the Operator


may, without approval, undertake certain individual projects which are not


included in the Work Program and budget, for a maximum expenditure of


One Hundred Thousand U.S. dollars (U.S. $100,000) per project, but the


Operator shall, within ten (10) days after such expenditures are incurred,


report to JMC for confirmation. In case of emergency, the Operator may


incur emergency expenditures for the amount actually needed but shall


report such expenditures to JMC as soon as they are made. However the


said emergency expenditures shall not be subject to Articles 10.2.3 and


10.2.4 herein.


10.2.3 In the event that the aggregate of excess expenditures under Article 10.2.1


herein and expenditures under Article 10.2.2 herein incurred in a Calendar


Year cause the total expenditures of that Calendar Year to exceed the


approved annual budget, such excess shall not exceed five percent (5%) of


the approved annual budget for that Calendar Year. If the aforesaid excess


is expected to be in excess of five percent (5%) of the annual budget, the


Operator shall present its reasons therefor to JMC and obtain its approval


prior to incurring such expenditures.


10.2.4 When JMC confirms the excess expenditures mentioned in Article 10.2.1


herein, and the expenditures mentioned in Article 10.2.2 herein:


(a) if expenditures or excess expenditures are determined to be


reasonable, the Operator may incur such expenditures or excess


expenditures again during the same Calendar Year, subject to


Article 10.2 herein; or


(b) If expenditures or excess expenditures are determined to be


unreasonable, the Operator shall not incur such expenditures or


excess expenditures again during the same Calendar Year and such


unreasonable expenditures or excess expenditures shall be dealt with











36


 in accordance with Article 5.4 of Annex II - Accounting Procedure


hereto.








Article 11


Determination of Commerciality





11.1 If any Petroleum discovery is made within the Contract Area, the Operator shall


promptly report such discovery to JMC.


If JMC or the Contractor makes a decision that a Petroleum discovery is worthy





of appraisal, the Operator shall submit to JMC an appraisal Work Program


including appraisal work and timetable for such Petroleum discovery as soon as


possible. Such an appraisal Work Program shall be worked out no later than


ninety (90) days from the date of the aforesaid decision made by JMC or the


Contractor, The appraisal Work Program shall, in so far as is practicable, be based


on conducting the appraisal work continuously, with a view to commencing


offshore operations within one hundred and eighty (180) days from the date of the


aforesaid decision made by JMC or the Contractor.


11.2 After the approval by JMC of the appraisal Work Program referred to in





Article 11.1 herein, the Operator shall carry out the operations as soon as possible


without unreasonable delay in accordance with the timetable set forth in the


approved appraisal Work Program.


11.3 Within one hundred and eighty (180) days after the completion of the last


Appraisal Well, the Operator shall submit to JMC a detailed report on the


appraisal of the commerciality of the discovered Petroleum-bearing trap. Under


special circumstances, the above mentioned periods may be reasonably extended


upon agreement of the Parties.


The appraisal report shall include the evaluation on geology, development,


engineering and economics, including estimated project costs, and the Overall


Development Program to be approved and the Overall Development Program \








37





t®>


shall include the Maximum Efficient Rate (MER) and the duration of the


production period determined in accordance with the international petroleum


industry practice.


Prior to the submission of the Overall Development Program, the Operator shall:


(a) submit to CNOOC the report of oil and/or gas in place of Oil Field and/or


Gas Field; and


(b) entrust a qualified organization to prepare the Environmental Impact


Statements.


The reports and statements mentioned in (a) and (b) above shall be submitted to


the competent authorities of the Chinese Government through CNOOC for review


and approval unless otherwise required by the Chinese government.


11.4 Within thirty (30) days following the submission of the appraisal report on any


Crude Oil bearing trap, JMC shall convene a meeting to review such report.


When JMC decides unanimously after its review that the said Crude Oil bearing


trap is an Oil Field with commercial value and is to be developed, or the


Contractor considers, in accordance with Article 11.6.2 herein, that a Crude Oil


bearing trap is an Oil Field with commercial value and is to be developed, JMC


shall submit to CNOOC for confirmation the appraisal report and the Overall


Development Program of the said Oil Field to be developed and CNOOC shall


submit the Overall Development Program of the Oil Field to the competent


authorities of the Chinese Government as soon as possible for its review and


approval. The Operator shall perform the Development Operations in accordance


with the Overall Development Program of each Oil Field approved by the


competent authorities of the Chinese Government. If such Development


Operations do not commence within ninety (90) days after the date of approval of


the Overall Development Program of an Oil Field by the competent authorities of


the Chinese Government, or if an intentional delay caused unilaterally by the


Contractor acting as the Operator, results in a suspension or halt of ninety (90)








38


continuous days in the Development Operations of an Oil Field, the Contractor


shall be deemed to have automatically waived all its rights in the said Oil Field.


11.5 If, after the appraisal, JMC determines that a Crude Oil bearing trap is non¬


commercial, such Crude Oil bearing trap may, at the Contractor’s option, be


retained within the Contract Area during the term of the exploration period;


before the expiration of the exploration period, if, because of certain positive


factors, JMC considers unanimously that it is necessary to reappraise the


commerciality of the Crude Oil bearing trap, the Operator shall submit a further


appraisal report on such Crude Oil bearing trap to JMC for its review and


adoption; if the JMC’s determination of non-commerciality of such Crude Oil


bearing trap has not altered by the expiration of the exploration period, the


relevant area of such Crude Oil bearing trap shall be excluded from the Contract


Area.


11.6 If JMC can not reach an agreement on the commerciality of a Crude Oil bearing


trap, the Parties shall make their best efforts to seek another solution thereto.


However, if JMC can not reach an agreement on the commerciality of any Crude


Oil bearing trap within ninety (90) days following the submission of the appraisal


report prepared by the Operator in accordance with Article 11.3 herein or any


further appraisal report prepared by the Operator in accordance with Article 11.5


herein, then such trap shall be dealt with in accordance with the following


procedure:


11.6.1 If the Contractor informs CNOOC by notice that it considers a Crude Oil


bearing trap without commercial value, then the Contractor shall be


deemed to have waived its rights to participate in the development of that


Crude Oil bearing trap. The relevant area covered by that Crude Oil


bearing trap shall, however, be retained within the Contract Area until the


expiration of the exploration period. In case that CNOOC decides, within


the exploration period, to develop solely such Oil Field, then, within the


development period, the Contractor shall be allowed to participate in the











39


development. If the Contractor decides, within the development period of


the said Oil Field, to participate in the development of such Oil Field by


giving a written notice to CNOOC, then, the Contractor shall pay CNOOC


an amount of money, in addition to the forty-nine percent (49%) of the


development costs spent by CNOOC on the said Oil Field with Deemed


Interest thereon up to the date of Contractor’s submission of the written


notice to CNOOC. Such amount shall be equal to three times (300%) the


foregoing payable development costs with Deemed Interest thereon and


such amount of money shall not be recovered after commercial production


of the Oil Field commences. Thereafter, the development costs to be


incurred in such Oil Field shall be provided by the Parties in proportion to


their respective participating interests. In the event that the Contractor still


decides not to participate in the development of the said Oil Field by the


expiration of the development period of such Oil Field, then the said Oil


Field shall be excluded from the Contract Area upon the Date of


Commencement of Commercial Production of the said Oil Field.


11.6.2 If CNOOC considers a Crude Oil bearing trap to have no commercial


value while the Contractor considers that it is a Crude Oil bearing trap


having commercial value, the Contractor may solely provide the entire


development costs and undertake development of the said Oil Field, and


the said Oil Field shall be deemed as an Oil Field in which CNOOC has no


participating interests. The entire risk related to the development costs


spent for the said Oil Field shall be borne solely by the Contractor.


11.6.3 Unless otherwise decided by CNOOC, the Development Operations and


Production Operations of an Oil Field solely financed for the development


by CNOOC shall still be, upon agreement between the Parties through


consultation, performed by the Operator subject to the agreement of terms


and conditions entered into by CNOOC and the Operator.

















40


11.7 In the event of an Oil Field and/or Gas Field Straddling a Boundary, CNOOC


shall arrange for the Contractor and the neighbouring parties involved to work out


a unitized Overall Development Program for such Field and to negotiate the


relevant provisions thereof.


11.8 If a Petroleum-bearing trap without commercial value within the Contract Area


can be most economically developed as a commercial Oil Field and/or Gas Field


by linking it up with facilities located outside the Contract Area, then the


development of such Field shall be dealt with in the same manner as provided in


Article 11.7 herein.


11.9 The procedures specified in this Article 11 shall be applied, by analogy, to


determination of additional development projects in any Oil Field and/or Gas


Field within the Contract Area during the production period, such projects being


designed to increase the level of production and/or total quantity of Petroleum


recoverable from the said Field.


11.10 If an appraisal trial production or temporary trial production is deemed by the


Parties to be necessary with respect to any trap in which Petroleum is discovered


or any Oil Field and/or Gas Field within the Contract Area, the Parties shall reach


a written agreement through negotiation on terms and conditions of appraisal trial


production or temporary trial production, which shall be attached hereto as a


supplementary document.








Article 12


Financing and Cost Recovery





12.1 Funds required for the Petroleum Operations shall be raised by the Operator in


accordance with Work Programs and budgets determined pursuant to the relevant


provisions of the Contract, the provisions described in Annex II - Accounting


Procedure hereto, and the provisions described hereunder.











41


12.1.1 All the exploration costs required for Exploration Operations shall be


provided solely by the Contractor. However, the exploration costs required


for the fulfillment of the minimum exploration work commitment shall be


deemed the equity capital of the Contractor.


12.1.2 The development costs required for Development Operations in each Oil


Field and/or Gas Field within the Contract Area shall be provided by


CNOOC and the Contractor in proportion to their respective participating


interests: fifty-one percent (51%) by CNOOC and forty-nine percent (49%)


by the Contractor, unless CNOOC applies the provisions in the second


paragraph of this Article 12.1.2 herein.


In the event that CNOOC, at its option, decides not to participate in the


development of an Oil Field and/or Gas Field or decides to participate in


the development of such Field to an extent of less than fifty-one


percent (51%) of the participating interests, CNOOC shall notify the


Contractor in writing of its decision of non-participation or a specific


lesser percentage of its participating interests before the appraisal report is


to be reviewed by JMC pursuant to Article 11.4 or Article 18.2.2 hereof. In


such case, if CNOOC does not participate in the development of such


Field, the development costs therein shall be borne solely by the


Contractor, or in case CNOOC participates in the development of such


Field to an extent of less than fifty-one percent (51%) of the participating


interests, such development costs shall be borne by the Parties in


proportion to their actual respective participating interests.


12.1.3 The operating costs required for the Production Operations in each Oil


Field and/or Gas Field within the Contract Area shall be paid respectively


by CNOOC and the Contractor in proportion to their participating interests


of the development costs of the said Field.


12.1.4 For the purpose of implementation of the Contract, CNOOC shall agree


that the Contractor may, when financing, use the entitlement of its share of ^








42


 production under the Contract as a security for loans, provided that the


Contractor shall apply to CNOOC in advance and the application therefor


shall be examined by CNOOC, and provided further that the right and


interests of CNOOC under the Contract shall not be impaired thereby.





12.2 All the costs incurred in the performance of Petroleum Operations shall be


recovered in accordance with Annex II - Accounting Procedure hereto and the


provisions described as follows:


12.2.1 The operating costs for any given Calendar Year actually incurred by


CNOOC and the Contractor in respect of each Oil Field pursuant to


Article 12.1.3 herein, shall be recovered in kind by the Parties out of the


Crude Oil produced from the said Oil Field during that Calendar Year in


accordance with Annex II ■ Accounting Procedure hereto, after the


operating costs have been converted into a quantity of Crude Oil on the


basis of the Crude Oil price determined in accordance with Article 14


hereof. Unrecovered operating costs shall be carried forward to the


succeeding Calendar Year.


12.2.2 The exploration costs incurred by the Contractor shall be recovered as


follows:





(a) After the Date of Commencement of Commercial Production of an


Oil Field within the Contract Area, the exploration costs incurred by


the Contractor in respect of the Contract Area shall be recovered in


kind out of the Crude Oil produced from any Oil Field within the


Contract Area in accordance with Article 13.2.2.3 hereof, after the


exploration costs have been converted into a quantity of Crude Oil


based on the Crude Oil price determined in accordance with Article 14


hereof. The exploration costs shall be recovered without any interest.


(b) If no Oil Field and/or Gas Field is discovered within the Contract





Area, the exploration costs incurred by the Contractor shall be deemed








43


as its loss. Under no circumstances shall CNOOC reimburse the


Contractor for such loss.


12.2.3 The development costs incurred by CNOOC and the Contractor and


Deemed Interest thereon for each Oil Field shall be recovered as follows:


12.2.3.1 After the Date of Commencement of Commercial Production of


any Oil Field within the Contract Area, the development costs in


respect of such Field incurred by CNOOC and the Contractor and


Deemed Interest thereon calculated in accordance with


Article 12.2.3.2 herein shall be recovered in kind out of the Crude


Oil produced from such Field in accordance with Article 13.2.2.3


hereof, after the development costs have been converted into a


quantity of Crude Oil based on the Crude Oil price determined in


accordance with Article 14 hereof.


12.2.3.2 Deemed Interest on the development costs incurred by CNOOC


and the Contractor for each Oil Field within the Contract Area


shall be calculated with the fixed annual compound rate of nine


percent (9%) from the first day of the month following the month


in which such development costs expended by each party to the


Contract are actually received in the bank account of the joint


account opened by the Operator. The detailed method for such


calculation shall be as provided in Annex II - Accounting


Procedure hereto.


12.3 The provisions in Article 12.2 herein shall apply by analogy to Gas Fields.








Article 13


Crude Oil Production and Allocation


13.1 The Operator shall, in accordance with the production profile, adjusted as the case


may be, set forth in the Overall Development Program for each Oil Field as


approved by the competent authorities of the Chinese Government, work out a


Crude Oil production plan for each Oil Field in each Calendar Year and carry out


Crude Oil production pursuant to such plan.


13.2 The Annual Gross Production of Crude Oil of each Oil Field within the Contract


Area in each Calendar Year within the production period shall be allocated in


accordance with the following sequence and proportions:


13.2.1 Five percent (5%) of the Annual Gross Production of Crude Oil shall be


used for payment of the Value Added Tax and shall be paid in kind to the


competent authorities of the Chinese Government through CNOOC.


13.2.2 Sixty two point five percent (62.5%) of the Annual Gross Production of


Crude Oil shall be used for the payment or recovery in the following


sequence:





13.2.2.1 Resources tax shall be paid in accordance with then existing


relevant laws, decrees rules and regulations with respect to the


resources tax.


13.2.2.2 The Crude Oil less the amount of Crude Oil for payment of


Resources tax in accordance with Article 13.2.2.1 shall be “cost


recovery oil”. Payment in kind for the operating costs actually


incurred but not yet recovered by the Parties shall be made


pursuant to Article 12.2.1 hereof after the price of the said “cost


recovery oil” has been determined in accordance with Article 14


hereof.


13.2.2.3 The remainder of the “cost recovery oil” shall, after payment for


operating costs in accordance with Article 13.2.2.2 herein, be


deemed as “investment recovery oil”. Such “investment recovery


oil” shall be used for the recovery of the exploration costs in


respect of the Contract Area which were incurred and not yet


recovered by the Contractor, and shall be used for the recovery of





45


the development costs in respect of the Oil Field itself which were


incurred and not yet recovered by CNOOC and the Contractor in


accordance with Articles 12.2.2 and 12.2.3 hereof, and Deemed


Interest thereon. The method of recovery and the recovery


sequence are as follows:


(a) Beginning in the Calendar Year during which the production


of any Oil Field within the Contract Area commences, the


“investment recovery oil” referred to in Article 13.2.2.3


herein, based on the price which has been determined in


accordance with Article 14 hereof shall be paid in kind first


to the Contractor for the recovery of the exploration costs


which were incurred in respect of, and have not yet been


recovered from, the Contract Area. The unrecovered


exploration costs shall be carried forward to the succeeding


Calendar Years until fully recovered.


(b) Beginning in the Calendar Year during which the exploration


costs incurred by the Contractor in respect of the Contract


Area have been fully recovered, the remainder of the


“investment recovery oil” of an Oil Field shall be used for the


simultaneous recovery of the development costs incurred and


not yet recovered respectively by CNOOC and the Contractor


and Deemed Interest thereon in respect of such Field in


proportion to their respective participating interests therein


after the price of such remainder of the “investment recovery


oil” has been determined in accordance with Article 14


hereof. The unrecovered development costs and Deemed


Interest thereon shall be carried forward to the succeeding


Calendar Years until fully recovered.














46


(c) During the production period of an Oil Field, costs for an


additional development project incurred pursuant to


Article 11.9 hereof and Deemed Interest thereon shall be


recovered together with the imrecovered development costs


and Deemed Interest thereon. If the development costs and


Deemed Interest thereon in respect of such Oil Field have


been fully recovered, then costs for the said additional


development project and Deemed Interest thereon in respect


of such Oil Field shall be recovered from the “investment


recovery oil” of such Field referred to in Article 13.2.2.3


herein in accordance with the provisions specified in


Article 13.2 herein. The unrecovered costs for the additional


development project and Deemed Interest thereon shall be


carried forward to the succeeding Calendar Years until fully


recovered.


(d) After the recovery of an Oil Field’s development costs and


Deemed Interest thereon and/or costs for the additional


development project and Deemed Interest thereon from the


said Field by the Parties, the remainder of the “investment


recovery oil” shall automatically be regarded as part of the


“remainder oil” referred to in Article 13.2.3 herein. By the


date of expiration of the production period of an Oil Field


pursuant to Article 4.5 hereof, if any development costs and


Deemed Interest thereon and/or costs for the additional


development project incurred in respect of such Field an


Deemed Interest thereon have not yet been fully recovered,


then such unrecovered costs and Deemed Interest thereon


shall be regarded as a loss, and the Parties shall bear the loss


in proportion to their respective participating interests.











47


48


 Calculation of amount of


'allocable remainder oil" redacted

















13.2.4 The “allocable remainder oil” of each Oil Field in each Calendar Year


referred to in Article 13.2.3 herein shall be shared by the Parties in


proportion to their respective participating interests in the development


costs, fifty-one percent (51%) for CNOOC and forty-nine percent (49%)


for the Contractor. In the event that CNOOC does not participate in the


development of an Oil Field within the Contract Area, the Contractor shall


obtain one hundred percent (100%) of the “allocable remainder oil” of that


Field. In the event that CNOOC participates to an extent less than fifty-one


percent (51%) in the development of an Oil Field within the Contract Area,


the “allocable remainder oil” of such Field in that Calendar Year shall be


shared by the Parties in proportion to their actual respective participating


interests in such Oil Field.





13.3 Pursuant to the method of allocation specified in this Article, the Contractor may


obtain an aggregate amount of Crude Oil consisting of the following three


categories:


13.3.1 The total amount of Crude Oil as converted from the actual operating costs


paid by the Contractor in all Oil Fields in proportion to its participating


interests in the development costs stipulated in Article 12.1.3 hereof when


recovering such costs;


13.3.2 The total amount of the “investment recovery oil” from all Oil Fields due


to the Contractor provided for in Article 13.2.2.3 herein; and





13.3.3 The total amount of the “allocable remainder oil” of all Oil Fields due to


the Contractor in accordance with Article 13.2.4 herein.


N





49


13.4 In the event that the Contractor wishes to purchase a portion of all of the total


amount of the Crude Oil obtained by CNOOC from the “investment recovery oil”


in addition to the Crude Oil obtained by the Contractor in accordance with


Article 13.3 herein, the Parties shall negotiate the terms and conditions of


purchasing such Crude Oil and reach an agreement as a supplementary document


hereto.


13.5 CNOOC and each company comprising the Contractor shall, throughout the entire


Contract term, have the right and obligation to, in each Calendar Quarter, lift and


take, and separately dispose of their respective full shares of all Crude Oil


produced and determined pursuant to Articles 13.3 and 13.4 herein.


In the event that the Crude Oil production of any Oil Field is reduced because


CNOOC or any company comprising the Contractor does not lift and take its full


share of Crude Oil or lifts nothing, then such reduction in Crude Oil production


shall not affect the full shares of Crude Oil due to or the shares of Crude Oil


available to be lifted and disposed of by each of the other parties as provided in


Article 13.6(c) herein.


13.6 A Crude Oil lifting procedure shall be agreed upon by the Parties no later than


six (6) months prior to the Date of Commencement of Commercial Production


within the Contract Area and shall include, but not be limited to:


(a) Operator’s notification of Crude Oil production to CNOOC and each


company comprising the Contractor;


(b) notification by CNOOC and each company comprising the Contractor of its


expected offtake to the Operator;


(c) Operator’s notification to CNOOC and each company comprising the


Contractor of the final Crude Oil lifting schedule which shall be binding on


CNOOC and each company comprising the Contractor;











50


(d) limitation and calculation of overlift and underlift of CNOOC and each


company comprising the Contractor; and provisions to ensure timely and


ratable lifting of Crude Oil;


(e) determination of allowable operational tolerance on liftings; and





(f) other terminal procedures as may be required to reflect the particular


circumstances.


13.7 For the purpose of implementing the procedures as described in Article 13.6


herein, CNOOC and each company comprising the Contractor shall jointly set up


a Crude Oil lifting coordination group consisting of representatives one each


appointed by CNOOC and each company comprising the Contractor, with the


representative of CNOOC as the chairman. Such group shall be responsible for


the preparation of Crude Oil lifting plans of Calendar Year, of Calendar Quarter


and of calendar month and shall also be responsible for the reasonable and unified


arrangements and adjustments of the aforesaid Crude Oil lifting plans through


close contact with any operator in charge of the storage and loading facilities.








Article 14


Quality, Quantity and Price of Crude Oil





14.1 In accordance with Article 13.3 hereof, the Contractor may obtain the aggregate


amount of three categories of the Crude Oil referred to in Articles 13.3.1, 13.3.2


and 13.3.3 hereof. In addition, the Contractor may purchase a portion or all of the


total amount of the Crude Oil allocated to CNOOC from the “investment recovery


oil” in all Oil Fields within the Contract Area in accordance with Article 13.4


hereof.


14.2 Quality of the Crude Oil





14.2.1 The quality analysis of Crude Oil produced from each Oil Field within the


Contract Area shall be undertaken on loading such Crude Oil to each rs








51


tankship. Such analysis shall be carried out on a sample taken immediately


prior to or during loading, by the General Administration of Quality


Supervision, Inspection and Quarantine of the People’s Republic of China


(hereafter referred to as the “AQSIQ”) or any representative agency


delegated by the AQSIQ pursuant to standards issued by the State Bureau


of Standardization of the People’s Republic of China or by the competent


authorities of petroleum industry of the Chinese Government.


14.2.2 The Crude Oil quality analysis referred to in Article 14.2.1 above shall


include the following:


(a) density at 20 degrees Centigrade, in grams per cubic centimetre;


(b) sulphur content, in weight percentage;


(c) water content, in weight percentage; and


(d) basic sediment content, in weight percentage.


14.3 Quantity of the Crude Oil


14.3.1 The quantity measurement of the Crude Oil produced from each Oil Field


within the Contract Area, when being lifted, shall be made at a delivery


point and with measuring devices both to be agreed upon by the Parties. A


relevant measuring organization of the Chinese Government or a


representative agency delegated thereby shall, at appropriate regular


intervals, calibrate all the measuring devices, conduct special testing and


issue certificates of confirmation with respect thereto before the measuring


devices are put into use. The quality and quantity of the Crude Oil


delivered shall be authenticated in accordance with the commodity quality


certificate and weight certificate issued by the AQSIQ and such quality


and quantity shall be the basis for the accounting settlement.


14.3.2 If any party to the Contract believes that the Crude Oil measuring devices,


sampling or analysis are inaccurate, or has any objection to the results >








52


 specified in the above-mentioned certificates, onsite investigations,


technical exchanges and discussions may be conducted by the Parties to


resolve the issue in a manner satisfactory to the Parties.





14.4 Determination of the Crude Oil Price


14.4.1 The price of various grades of the Crude Oil shall be expressed as FOB


price at the delivery point in China. Determination of the Crude Oil price


shall be made with reference to the prevailing price in arm’s length


transactions of long-term-contract-sales of similar quality Crude Oil on the


main world oil markets and the adjustment in such price shall be made in


accordance with such determinants as the quality of the Crude Oil, the


terms of delivery, transportation, payment and other terms.


The aforesaid price in arm’s length transactions in this Article refers to a


price at which a seller sells its Crude Oil to a buyer who is independent of


the seller, but not including the prices used by them for government to


government transactions which do not reflect the international oil market


price, Crude Oil exchange, barter or spot transactions.


14.4.2 Where the Crude Oil produced from each Oil Field within the Contract





Area differs in grade, the prices of such Crude Oil with different grades


shall be individually determined.





14.4.3 The price of the Crude Oil produced from all the Oil Fields within the


Contract Area shall be denominated in U.S. dollars per metric ton.


However, if an international currency other than the U.S. dollar prevails on


the main world oil markets as the pricing unit of Crude Oil, the Parties


may also use that international currency therefore upon mutual agreement.


14.4.4 Procedure for the Determination of the Crude Oil Price


14.4.4.1 The Crude Oil price shall be determined each month. In case the


Crude Oil price prevailing on most world oil markets fluctuates,








53





/


CNOOC and the Contractor each shall have the right to propose,


at any time, that a new Crude Oil price shall be negotiated and


determined.


14.4.4.2 The Contractor shall, no later than fifteen (15) days prior to


commencement of any month, notify CNOOC of its proposed


price for Crude Oil to be lifted in such month (for the purpose of


this Article hereafter referred to as the said month).


14.4.4.3 CNOOC shall notify the Contractor of its decided price within


ten (10) days after the receipt of the aforesaid proposed price as


provided by the Contractor. In the absence of a different price


notified by CNOOC to the Contractor within ten (10) days after


the receipt of the aforesaid notification, the proposed price


notified by the Contractor as referred to in Article 14.4.4.2 herein


shall be applied to the Crude Oil to be lifted in the said month.


14.4.4.4 The Contractor shall, within five (5) days following its receipt of


notice of a price decided by CNOOC, state to CNOOC whether


the price is acceptable. If it is acceptable, the said decided price


shall be regarded as the price agreed upon by the Parties for the


said month. If not acceptable, the Parties shall, within ten (10)


days, carry out further negotiation in an amicable manner to


determine the price for the said month.


14.4.4.5 In the event that the Parties still can not reach an agreement on


the Crude Oil price for the said month through further


negotiations by the Parties, the Contractor may lift the Crude Oil


in accordance with the quota specified for the said month in


Article 13.2 hereof, and the Crude Oil price for the preceding


month shall apply provisionally to the Crude Oil of such quota


and/or the payment shall be made accordingly. Then, the Parties


shall negotiate further on the Crude Oil price for the said months








54


taking into account relevant independent and non-proprietary


market data on Third Party long-term-contract-sales of Crude Oil


in substantial quantities on the main world oil markets, adjusted


for quality, transportation and other applicable differentials. The


Parties shall each take into account the information supplied and


discussed and attempt to agree on a Crude Oil price based upon


such information by the end of the said month.


(A) In the event that the Parties still can not reach an agreement


on Crude Oil price by the end of the said month, then the


Crude Oil price shall be the weighted average FOB price of


the Crude Oil of same or similar quality sold by CNOOC


and/or the Contractor to a Third Party or Third Parties and


produced in the said month from the Oil Fields described


hereafter, adjusted for such differences as the quality,


delivery, transportation, payment and other terms, but


excluding the government to government transactions


which do not reflect the international oil market price,


Crude Oil exchange, barter or spot transactions.


The application of the above-mentioned price of Crude Oil


sold to a Third Party or Third Parties shall be in the


following sequence:


(i) Firstly, the price, calculated and determined in


accordance with the above-mentioned stipulations, of


the Crude Oil produced from the relevant Oil Field or


Oil Fields in the Contract Area and sold to a Third


Party or Third Parties shall be applied;


(ii) In the event no sales as referred to in Paragraph (i)


above were made in the said month, the price,


calculated and determined in accordance with the ^








55


above-mentioned stipulations, of the Crude Oil


produced from other oil fields in the Contract Area


and sold to a Third Party or Third Parties shall be


applied; and


(iii) In the event no sales mentioned in Paragraphs (i) and


(ii) above were made in the said month, the price,


calculated and determined in accordance with the


above-mentioned stipulations, of the Crude Oil


produced from the Oil Fields of other Contract Areas


in offshore areas for Chinese-foreign cooperative


exploitation of Petroleum resources and sold to a


Third Party or Third Parties shall be applied.


(B) In the event there are no such Third Party sales of the Crude


Oil during the said month, then the Crude Oil price for the


said month shall be equal to the same Crude Oil price of the


preceding month adjusted by the differences in the


individual arithmetic average of the daily weighted average


of the official government selling price of a basket of three


or more internationally traded Crude Oils in the said month


compared with that of such basket of Crude Oils for the


preceding month. The adjusted price shall be the Crude Oil


price for the said month. The Crude Oils selected for the


basket shall each be similar in quality to that from the


Contract Area and chosen from different countries and shall


reflect the conditions of the main world oil markets and


shall be mutually agreed by the Parties at a reasonable time


prior to the Date of Commencement of the Commercial


Production of Crude Oil.














56


(C) If the Parties are unable to agree on a Crude Oil price for a


month in which Crude Oil is first produced and delivered


from or the production of Crude Oil is restored in a Field in


the Contract Area, then the Crude Oil for the month shall be


priced and/or paid in accordance with the arithmetic


average price of the prices finally proposed by the Parties in


the month. Based on the Crude Oil price agreed upon by the


Parties for the succeeding month, the Crude Oil price for


the month shall be determined by adjusting retroactively by


the difference between the arithmetic average prices of the


basket of the Crude Oils for the month and the succeeding


month in accordance with the calculation method referred to


in Paragraph 14.4.4.5(B) herein.


14.4.4.6 If, due to the delayed announcement of Crude Oil prices by the


main world oil-producing countries or the main world oil markets,


or if, as agreed by CNOOC and the Contractor, an unstable main


world oil market exists, then, the period for the determination of


the price referred to in Article 14.4.4.2 herein may be extended to


the end of the said month in question.


14.4.4.7 If the Crude Oil prices are adjusted retroactively by the main


world oil-producing countries, then the Crude Oil price may be


retroactively adjusted by the Parties after consultation, provided


that the period for such retroactive adjustment shall not exceed


the current month.


14.4.5 The Crude Oil for each month due to CNOOC pursuant to Article 13


hereof shall be converted into an amount of money in the currency utilized


pursuant to Article 14.4.3 herein based on the Crude Oil price for that


month finally determined in accordance with the aforesaid provisions


\


A








57


specified in Article 14.4 herein and such amount of money shall be entered


into the joint account as of the date on which such Crude Oil is lifted.


14.4.6 The Crude Oil for each month due to the Contractor pursuant to Article 13





hereof shall be converted into an amount of money in the currency utilized


pursuant to Article 14.4.3 herein based on the Crude Oil price for that


month finally determined in accordance with the aforesaid provisions


specified in Article 14.4 herein and such amount of money shall be entered


into the joint account as of the date on which the Crude Oil is lifted.


14.5 Terms of Payment for the Purchased Crude Oil pursuant to Article 13.4.





14.5.1 Before the Crude Oil price is determined, the time limit for payment shall


be agreed upon by the Parties through consultation in accordance with the


practice then prevailing on the main world oil markets.


14.5.2 In case the Contractor is in default of such payment, the Contractor shall


pay interest on arrears of the payment, starting from the first day of such


default. The interest rate shall be the London Interbank Offered Rate


(LIBOR) for U.S. dollars as defined in article 2.6 of Annex-II Accounting


Procedure plus five percent (5%).





14.6 Destination of Crude Oil


14.6.1 The destination of Contractor's Crude Oil obtained under the Contract


shall be at the discretion of the Contractor, except as stipulated in


Article 14.6.2 herein.


14.6.2 The Contractor agrees that it shall not deliver any Crude Oil obtained


hereunder to any destination which is prohibited by the laws, regulations


or official requirements of the Government of the People’s Republic of


China. CNOOC shall notify the Contractor of all such officially prohibited


destinations in writing on a timely basis.


v








58


 Article 15


Preference to the Employment of the Chinese Personnel, Goods and Services





15.1 The Operator, in carrying out the Petroleum Operations, under the conditions of


such factors as quality, price, delivery time and services are competitive, shall


give preference to the goods, equipment and service provided within the territory


of People’s Republic of China.


15.2 The Contractor, in carrying out the Petroleum Operations, shall give preference to





the employment of qualified Chinese Personnel. For this purpose, the Contractor


shall submit in advance to CNOOC and JMC respectively a plan for the


employment of Chinese Personnel listing the posts and number of the persons


involved, indicating those Chinese Personnel to be employed directly and those


required to be furnished by CNOOC. CNOOC shall, in accordance with the plan,


and if so requested by the Contractor, provide or assist in recruiting Chinese


employee candidates for such employment. For the performance of Petroleum


Operations, the Contractor shall have the obligation to employ competent Chinese


Personnel and to employ those who have become qualified after being trained in


accordance with the training program. The Contractor shall be given preference in


employing the Chinese Personnel who have participated in the training program


provided by the Contractor.


15.3 In accordance with Article 19 of the “Petroleum Regulations”, the engineering





design corporations under CNOOC shall have the right to participate in the master


designs and engineering designs made by the Contractor for the purpose of the


implementation of the Contract. Engineering design companies within the


territory of the People’s Republic of China shall be given preference in entering


into the subcontracts for the aforesaid master designs and engineering designs


provided that their technical level, price and delivery time are competitive.





15.4 After the Contractor signs equipment leasing contracts, service contracts or


subcontracts with CNOOC or its Affiliates in accordance with Article 15.1 herein,


the Contractor shall endeavor to provide technical assistance to CNOOC or its N








59





f®>


 Affiliates, at the request of CNOOC, so as to enable them to meet the needs of


operations to be undertaken. The expenses so incurred shall be borne by CNOOC


or its Affiliates.








Article 16


Training of Chinese Personnel and Transfer of Technology





16.1 In the implementation of the Contract, the Contractor or its Affiliates including


each company comprising the Contractor shall, apply in the Petroleum Operations


their appropriate and advanced technology and managerial experience, including


their proprietary technology e.g. patent, know-how or other confidential


technology, etc. At the same time, the Contractor shall have the obligation to


transfer its technology and managerial experience, including their proprietary


technology e.g. patented technology, know-how or other confidential technology,


etc. At the same time, the companies comprising the Contractor shall have the


obligation to transfer their technology and experience and the necessary data


and/or information for mastering that technology and experience, to CNOOC and


its Affiliates. Provided however, such technology to be transferred shall be


proprietary to the Contractor and if the transfer of any of such technology is


restricted in any way during the term of the Contract, the Contractor shall, to the


extent reasonably possible, endeavour to obtain permission for the transfer to such


restricted technology.


16.2 Within ninety (90) days following the approval of the Overall Development





Program of the first Oil Field and/or Gas Field within the Contract Area by the


responsible authorities of the Chinese Government, the Contractor shall, after the


consultation with CNOOC, complete and submit a training and technology


transfer program for the Chinese Personnel in the development period and the


corresponding budget to JMC for review and approval, and upon approval by


JMC, put it into practice. The Contractor shall, after consultation with CNOOC


complete and submit training and technology transfer programs and








60








corresponding budgets for the Chinese Personnel in the production period to JMC


for its review and approval before the Date of Commencement of Commercial


Production, and upon approval by JMC, put them into practice in time so as to


have ample time in advance for such training and technology transfer.


In accordance with the provisions in Article 8.8 hereof and in order to facilitate


the transfer of the Operatorship to CNOOC as early as possible, the Operator shall,


through the training of the Chinese Personnel, gradually increase the percentage


of the Chinese Personnel including the key personnel while the percentage of the


Expatriate Employees shall be reduced accordingly. By the end of the fifth year of


the production, the total number of the Chinese Personnel shall be no less than


ninety percent (90%) of the total number of personnel. The total number of the


Chinese Personnel mentioned above shall not include those personnel rendering


living services of any Third Party.


16.3 The purpose, requirement, fields of specialization, scope of personnel, specified


job categories, type, method and etc. of the training of Chinese Personnel and


technology transfer shall be determined through consultation by the Parties.


16.4 The expenses and costs incurred for performing the training and technology


transfer program stipulated in this Article shall be charged to the development


costs if such costs are incurred after the date of approval of the Overall


Development Program of the first Oil Field and/or Gas Field and before the Date


of Commencement of Commercial Production of the first Oil Field and/or Gas


Field, or shall be charged to the operating costs if such costs are incurred after the


Date of Commencement of Commercial Production of the first Oil Field and/or


Gas Field.


16.5 In the course of the implementation of the Contract, the Parties shall have


scientific and technical cooperation and exchange in connection with the


Petroleum Operations. The relevant provisions concerning the plan, participating


personnel and type shall be determined by the Parties to the Contract through


consultation. The expenses required by the scientific and technical cooperation








61


and exchange shall be included in the budget specified in Article 16.2 herein and


charged to the joint account. In the scientific and technical cooperation, all


inventions, experiments or research results shall be shared by and belong to the


Parties who, subject to the provisions of Article 22 hereof, shall not disclose them


to any Third Party.


16.5.1 In the course of the implementation of the Contract, those scientific


research projects which are required by the Petroleum Operations but not


carried out by the Parties, with the approval of JMC, may be


commissioned to, and carried out by, any Third Party, and the Parties shall


enter into subcontracts or service contracts with relevant scientific research


departments within the territory of the People’s Republic of China,


provided that they are competitive. The aforesaid required expenses shall


be included in the budget specified in Article 16.2 herein and charged to


the joint account. All inventions and experimental or research results


developed from the aforesaid research projects carried out by a Third Party


delegated by the Operator shall also be shared by and belong to the Parties


who, subject to the provisions of Article 22 hereof, shall not disclose any


of them to any other Third Parties. The Operator shall endeavour to


incorporate the provisions herein in the subcontracts or service contracts


signed with a Third Party.


16.6 The advanced technology and managerial experience, including proprietary


technology, e.g. patent, knowhow or other confidential technology and data or


information that the Contractor shall transfer to CNOOC or its Affiliates, shall


remain the exclusive property of the Contractor and also be subject to the


confidentiality restrictions of Article 22 hereof.























62


 Article 17


Ownership of Assets and Data





17.1 All assets purchased, installed and constructed under the Work Program and


budget for each Oil Field and/or Gas Field within the Contract Area shall be


owned by CNOOC from the date on which all the development costs actually


incurred by the Contractor in the development period of each Oil Field and/or Gas


Field have been fully recovered or from the date on which the production period


expires, even though the aforesaid costs have not been fully recovered. Before the





dates referred to in the above paragraph all assets mentioned above shall be jointly


owned by the Parties. The Operator shall be responsible for the acceptance


inspection or testing of the said assets and CNOOC may, as it deems necessary,


send its experts to participate in such acceptance inspection or testing. In the


production period, the Operator can use these aforesaid CNOOC-owned assets


free of charge for performing the Petroleum Operations. Such assets shall not be


used in any operations other than the Petroleum Operations or in any operations


by Third Parties without the written consent of the Parties.


17.2 Equipment and facilities which are owned by a Third Party and are either leased





by the Operator or temporarily brought into the territory of the People’s Republic


of China for the performance of the Petroleum Operations shall not be deemed as


assets owned by CNOOC. Such equipment and facilities may be exported from


the People’s Republic of China, but export formalities shall be handled by


CNOOC.








17.3 The ownership of all of the data, records, samples, vouchers, and other original


data obtained in the course of performing the Petroleum Operations shall vest in


CNOOC.





17.4 Each of the Parties shall have the continuing right to use the LS36-1 Production


Facility Assets free of charge (subject to the payment of the proportion of the


operational costs due in accordance with Clause 8.4 of the LS36-1 SDA), in


respect of any additional gas resources discovered within the Contract Area and


IS








63


 which can be conveniently transported and processed using the LS36-1


Production FaciJity Assets. Further, it is agreed that, provided that the Parties’


joint interests are preserved so that the LS36-1 Production Facility Assets will be


available for any additional gas resources discovered in the Contract Area, then, if


there is spare capacity in the LS36-1 Production Facility Assets, CNOOC has the


right to use the Production Facility Assets for any CNOOC wholly self-financed


discovery in the nearby area which can be conveniently transported and processed


using the LS36-1 Production Facility Assets. Such use shall be free of charge


(subject to the payment of such proportion of the operational costs as is due in


accordance with Clause 8.4 of the LS36-1 SDA) if all development costs incurred


in relation to the LS36-1 Production Facility Assets have been recovered prior to


the date of commencement of such use, but if full development cost recovery has


not been effected prior to the date of commencement of such use then, in addition


to a proportion of the operational costs, CNOOC shall also pay such reasonable


proportion of the development costs on such terms as is agreed by the Parties.














Article 18


Associated Natural Gas and Noii-associated Natural Gas





18.1 Associated Natural Gas


18.1.1 The Associated Natural Gas produced from any Oil Field within the


Contract Area shall be primarily used for purposes related to the


operations of production and production enhancement of Oil Fields such


as gas injection, gas lifting and power generation.


18.1.2 Based on the principle of full utilization of the Associated Natural Gas and


with no impediment to normal production of the Crude Oil, the Overall


Development Program of each Oil Field shall include a plan of utilization


of the Associated Natural Gas. If there is any excess Associated Natural








64


Gas in any Oil Field after utilization pursuant to Article 18.1.1 herein


(hereafter referred to as “excess Associated Natural Gas”), the Operator


shall carry out a feasibility study regarding the utilization of such excess


Associated Natural Gas of such Oil Field. Such feasibility study, if carried


out before the Development Operations of an Oil Field, shall be included


as part of the feasibility study on the development of the Oil Field. With


respect to any Oil Field already under commercial production, if a further


feasibility study on the utilization of its excess Associated Natural Gas is


required, such study shall be carried out by the Operator and a report


thereon shall be submitted to JMC for review and discussion. If the Parties


decide to utilize the excess Associated Natural Gas of any Oil Field, the


construction of facilities for such utilization and the production of the


excess Associated Natural Gas shall be carried out at the same time as the


Oil Field construction and production.





18.1.2.1 If the Parties agree that the excess Associated Natural Gas of an


Oil Field has no commercial value, then such gas shall be


disposed of by the Operator, provided that there is no


impediment to normal production of the Crude Oil.


18.1.2.2 If any party to the Contract considers unilaterally that the excess


Associated Natural Gas of an Oil Field has commercial value,


such gas may be utilized by that party to the Contract at its own


expense without affecting the amount of “cost recovery oil” and


“allocable remainder oil” due to the other party to the Contract


which does not invest in such utilization.





18.1.2.3 If the Parties agree that excess Associated Natural Gas of an Oil


Field has commercial value, they shall make further investment


in its utilization in proportion to their respective participating


interests in the development of the Oil Field. If the Parties


disagree on the commercial utilization of such excess











65


 Associated Natural Gas of that Oil Field, they shall, guided by


the principle of mutual benefit, carry out further negotiations to


find a new solution to the utilization of the said excess


Associated Natural Gas and reach an agreement in writing. If


the Parties fail to reach an agreement through such negotiations,


CNOOC shall reserve the right to dispose of such excess


Associated Natural Gas unilaterally.





18.1.3 Expenses incurred in the utilization of the Associated Natural Gas of any


Oil Field as stipulated in Article 18.1.1 herein, and those incurred in


carrying out a feasibility study on the utilization of the excess Associated


Natural Gas after commencement of commercial production of the Oil


Field referred to in Article 18.1.2 herein shall be charged to the


development costs of the Oil Field.


18.2 Non-associated Natural Gas





18.2.1 When any Non-associated Natural Gas Field (hereinafter referred to as the


“Gas Field”) is discovered within the Contract Area, the Parties shall carry


out friendly negotiations regarding the development and production of the


Gas Field and marketing said Non-associated Natural Gas in the domestic


and international markets with a view to reaching an agreement of





principle, which shall form a supplementary document to the Contract, and


shall include the following principles:





18.2.1.1 The price of the Natural Gas produced from the Contract Area


shall be determined based on general pricing principles


prevailing internationally taking into consideration such factors


as the market, the grade, quality and quantity of the Natural Gas,


etc.


18.2.1.2 The Contract term for the Gas Field within the Contract Area





shall be separately determined according to the conditions for








66


development and production of such Field and marketing of the


Natural Gas; and


18.2.1.3 The allocation of the Natural Gas shall be in conformity with


general principles of allocation for the Crude Oil stipulated in


Article 13 hereof. However, the percentages of the allocation


shall be adjusted by the Parties through negotiations in the light


of actual conditions in the Gas Field so that the Contractor shall


be able to obtain a reasonable economic benefit. Following the


signature of the agreement of principle herein, the Operator shall


work out an evaluation Work Program for the discovered Gas


Field in accordance with the terms and conditions in the said


agreement of principle and submit it to JMC for its review and


approval. Upon approval by JMC, the Operator shall carry out


the evaluation Work Program. The expenses incurred by the


Operator in carrying out the said evaluation Work Program shall


be charged to the exploration costs of the Contract Area.


18.2.2 After completion of evaluation of a Gas Field, the Operator shall submit a


report thereon to JMC for review and discussion.


18.2.2.1 If JMC decides unanimously that a gas reservoir is non¬


commercial, the corresponding area covered by the gas reservoir


may be retained in the Contract Area during the exploration


period. But if, at the expiration of the exploration period, JMC


still considers the said gas reservoir to be non-commercial, the


area covered by the gas reservoir shall be excluded from the


Contract Area. For a Gas Field which has potential commercial


value but which has not been developed due to a lack of market


or a shortage of consuming facilities, the period for which the


Gas Field is retained in the Contract Area may be extended at


the request of any party to the Contract. Such extended period,








67


 however, shall not exceed three (3) consecutive Contract Years


after the date of expiration of the exploration period hereunder.





In case the time needed for the market to develop or for the


consuming facilities to be constructed for the Gas Field exceeds





such extended period, a further extended period shall be subject


to the approval of the competent authorities of the Chinese


Government. Prior to the expiration of the exploration period, if


JMC considers that a gas reservoir which has been determined


to be non-commercial needs to be reappraised because of some


favourable factors, the Operator shall work out a new evaluation


report on that gas reservoir and submit it to JMC for review and


approval.





18.2.2.2 If the Contractor considers any gas reservoir to be non¬


commercial, the Contractor shall he deemed to have waived its


rights of participating in the development of that gas reservoir.


18.2.2.3 Where the Parties consider a gas reservoir to be commercial, the


Parties shall negotiate to reach an agreement on the





development of the said gas reservoir, based on the terms and


conditions provided in the agreement of principle referred to in


Article 18.2.1 herein. The agreement concerning the


development shall be a supplementary document and an integral


part hereof. If the Parties fail to reach such agreement through


negotiations within three (3) years after the date of


commencement of such negotiations, CNOOC shall have the


right unilaterally to put up the gas reservoir for bidding. In such


case, the Contractor shall still be entitled to participate in the


bidding.





18.3 Natural Gas Production and Allocation














68


18.3.1 The Operator shall, in accordance with the production profile, adjusted as


the case may be, set forth in the Overall Development Program for each


Gas Field as approved by the competent authorities of the Chinese


Government and in accordance with the daily delivery quantity, delivery


pressure and quality specifications specified in the "Natural Gas sales


contract(s), carry out Natural Gas production.


18.3.2 The provisions of Articles 13.1, 13.2.1, 13.2.2, 13.2.4 and 13.3 shall apply


by analogy to Gas Fields.


The provisions of sub Article 13.2.3 shall also apply by analogy to Gas


Fields subject to the following:


The remainder of the Annual Gross Production of Natural Gas after the


allocation referred to in Articles 13.2.1 and 13.2.2 herein shall be deemed


as “remainder gas”. Such “remainder gas” shall be divided into “share















































69


18.4 Notwithstanding the provisions in Article 18.2 hereof, in order to encourage the


exploration for and development of Natural Gas, CNOOC is willing to act as a


buyer and to purchase the Natural Gas produced from the Contract Area provided


that the total volume of the Natural Gas purchased by CNOOC from one or more


Contractors plus the shares of Natural Gas due to CNOOC shall be sufficient to


supply three point five (3.5) billion cubic meters per annum of Natural Gas supply


and in accordance with the following provisions:


18.4.1 CNOOC shall make investment required for laying the pipelines for


landing the Natural Gas in domestic market, and shall organize the


Contractors to consult the possibility of joint development of the Gas


Fields.


18.4.2 The purchase of the Non-associated Natural Gas and hydrocarbon (such as


condensate) associated therefrom and the Associated Natural Gas of


commercial value produced from the Contract Area shall be at the


wellhead.


18.4.3 The Parties shall determine through consultation the wellhead price of the


Non-associated Natural Gas, and in principle, the wellhead price shall be


linked to the equivalent thermal value of the international oil price and the


substitute energy price in domestic market.


18.4.4 The purchase of the Non-associated Natural Gas and hydrocarbon


associated therefrom shall be paid in U.S. dollars.


18.4.5 The price of Associated Natural Gas shall be separately determined


through consultation by the Parties.


18.4.6 If the intention expressed in writing by the Contractor of selling its share


of the Non-associated Natural Gas in accordance with the provisions


n>


70


 mentioned above is accepted by CNOOC, the acreage containing the


structure in relation to said Non-associated Natural Gas shall be


automatically retained in the Contract Area. At the expiration of the





exploration period, in case the volume of Natural Gas to be purchased by


CNOOC has not yet achieved the target of supplying Natural Gas of three


point five (3.5) billion cubic meters or the said target has been achieved


but the Parties have not yet reached agreement on the terms and conditions


for purchasing said Non-associated Natural Gas, said acreage shall be


retained in the Contract Area until the Gas Field is to be developed, but


such retention shall no longer than ten (10) consecutive Contract Years as


of the date of expiration of the exploration period.





18.5 If CNOOC utilizes unilaterally the excess Associated Natural Gas of an Oil Field


or develops solely a Gas Field and requires to apply thereto the Contractor’s


appropriate and advanced technology and managerial experience, the Parties shall


negotiate terms and conditions related thereto and the Contractor shall carry out


the operations after an agreement has been reached on such terms and conditions.








Article 19


Accounting, Auditing and Personnel Costs





19.1 Accounting


Annex II - Accounting Procedure hereto contains the guidelines for the Operator


to keep accounting books and records and make financial settlements. The


Operator shall keep and settle the accounts for all the financial activities in respect


of the Contract Area and maintain all the accounting books and records in


accordance with Annex II - Accounting Procedure hereto in order to accurately


reflect the exploration costs, development costs with Deemed Interest thereon and


operating costs, incurred in the performance of the Petroleum Operations in


respect of the Contract Area, as well as quantity and monetary value of the


production and allocation of Crude Oil and Natural Gas. The Operator shall





71


 submit detailed statements and relevant written reports to JMC and the


departments concerned.





19.2 Auditing





19.2.1 Any non-Operator party to the Contract shall have the right to audit all the


Operator’s joint account accounting books and records after the end of


each Calendar Year and give the Operator a written notice of the auditing


results. The auditing shall be completed within twenty-four (24) months


after the end of each Calendar Year. In the absence of any written notice of


the exception to the auditing results given by the non-Operator party


within such period or if the annual joint account accounting books and


records of the Operator are not audited by the non-Operator party within


such period, the Operator’s joint account accounting books and records


shall be deemed correct. A special auditing of the Operator’s joint account


accounting books and records may be made due to some special


requirements during a Calendar Year.


19.2.2 If the auditing referred to in Article 19.2.1 herein is conducted, the





Operator shall be given thirty (30) days notice prior to the date of


commencement of such auditing. There shall be no impediment to normal


Petroleum Operations during any audit.


19.2.3 The auditors shall be entitled to access to all relevant joint account records,


files and other information and may inspect such sites and facilities as


necessary.





19.2.4 Upon receipt of a notice of the non-Operator party audit reports or


exceptions to the auditing results, the Operator shall separately give


response in writing and resolve these matters in due time (no later than


sixty (60) days thereafter).














72


19.3 Personnel Costs





19.3.1 The personnel costs mean the remuneration and other related charges


concerned paid on the basis of the working time spent by personnel who


are engaged in administration, management, accounting, finance, tax,


employee relations, procurement, legal affairs, computer services,


engineering, geology, geophysics, drilling and Production Operations as


well as all other work for the implementation of the Contract.


19.3.1.1 The salaries or wages of personnel in various subordinate bodies


of JMC and of all employees engaged in the performance of the


Petroleum Operations shall be included in the personnel costs as


provided in Article 19.3.1 herein.


19.3.1.2 Personnel costs which are classified as the overhead of the





superior management organization pursuant to Article 5.2.18 of


Annex II - Accounting Procedure hereto shall not be included in


the personnel costs mentioned herein.





19.3.2 After the effective date of the Contract, the Operator shall work out a


staffing plan and a personnel costs plan with respect thereto (including


salary or wage standards of each personnel and its breakdown content,


such as basic salary or wage, overseas allowance, area allowance,


insurance, various benefits and subsidies and the extra portion of


individual income tax paid by the Contractor’s employees in China


exceeding the individual income tax payable by them in their home


countries etc.) before the beginning of each Calendar Year.


During the exploration period, the Operator shall submit a staffing plan for





its organization and a personnel costs plan with the annual Work Program


and budget to JMC for review and examination.


In the development period and production period, the Operator shall


submit a staffing plan for its organization and a personnel costs plan with


\


 the annual Work Program and budget to JMC for review and examination


and the Contractor shall provide to CNOOC with an itemized plan of


personnel costs of the Expatriate Employees, CNOOC shall bear the


obligation of confidentiality to such information provided by the


Contractor.


The Operator shall charge the personnel costs of the Contractor’s


personnel actually incurred to the joint account.


CNOOC shall have the right to audit the personnel costs charged to the


joint account.





19.3.3 The level of the salaries and wages paid to the personnel appointed by


CNOOC in accordance with the provisions of Article 1.2 of Annex III


Personnel Costs hereto shall be determined pursuant to the provisions of


Annex III Personnel Costs hereto.


The salaries and wages of the Chinese Personnel employed by the


Operator in accordance with Article 2 of Annex III Personnel Costs hereto


shall be determined through consultation and specified in employment


contracts. The settlement of accounts for the salaries and wages of the


personnel of CNOOC shall be made by CNOOC to the Operator. The


Operator shall not be liable for any individual income tax of such Chinese


Personnel.








Article 20


Taxation





20.1 The Contractor shall pay taxes to the Government of the People’s Republic of


China subject to the tax laws and regulations of the People’s Republic of China.


20.2 The Operator shall advise the Subcontractors who render services for the Contract


that they and their employees shall pay taxes to the Government of the People’s





74


 Republic of China subject to the tax laws and regulations of the People’s Republic


of China.








Article 21


Insurance





21.1 The Operator shall work out an insurance program for the Exploration Operations


and submit it to JMC for review and approval within one hundred and


twenty (120) days after the Date of Commencement of the Implementation of the


Contract. The Operator shall, on behalf of the Parties, obtain the insurance


contracts in accordance with such program as approved by JMC before


commencement of offshore operations within the Contract Area.


Notwithstanding this Article 21.1 either Party, at its sole discretion, may obtain


insurance in excess of the limits approved by the JMC with respect to that Party's


participating interest. The costs of the insurance in excess of the limit approved


by the JMC shall not be charged to the joint account


Similar provisions shall apply in respect of Development Operations and


Production Operations.


21.2 All of the insurance items as approved in the insurance program shall be insured


with an insurance company or companies organized under the laws of the


People’s Republic of China (hereinafter “Chinese Insurance Companies”).


21.3 The insurance programs worked out by the Operator shall include, but not be


limited to, the following insurance covering:


(a) damages and expenses to all drilling installations and equipment, including


damages and expenses to the properties used in work-sites and supply bases


for the Petroleum Operations, while the equipment and properties owned by


Third Party rendering services to the Operator shall be handled in accordance


with Article 21.5 herein;








75


(b) damages and expenses to any of the equipment or installations for production,


storage and transportation, and buildings in the course of construction and


installation both onshore and offshore;


(c) damages and expenses to the Crude Oil and/or Natural Gas production


installations, facilities, equipment and pipelines, both onshore and offshore;


(d) liability to Third Parties;


(e) liability for pollution and expenses for cleaning up in the course of drilling


and the Production Operations;


(f) expenses for killing blowouts:


(g) liability incurred by the Operator who takes the responsibility in chartering


drilling vessels, supply boats or other boats, ships and aircraft serving the


Petroleum Operations;


(h) liability for removal of wrecks; and


(i) losses and expenses incurred during the transportation and storage in transit


of goods shipped from different parts of the world to work-sites.


21.4 In the insurance contracts, the deductibles borne by the Operator alone shall be


determined by the Parties through consultation, and losses within the deductible


limits shall be borne by the Parties.


21.5 When signing subcontracts or lease contracts, the Operator shall endeavour to


compel Subcontractors and lessors to insure their risks under the relevant


subcontracts with Chinese Insurance Companies and ask these -Subcontractors or


lessors to contact Chinese Insurance Companies for arrangement of the necessary


insurance.


21.6 In the course of the Petroleum Operations, the Parties shall cover separately


personal accidental death and injury insurance with respect to personnel assigned











76


by them respectively. The premiums in respect thereof shall be dealt with in the


following way: the premiums for personnel accidental death and injury insurance


with respect to personnel whose costs are charged to the joint account pursuant to


the provisions of the Contract shall be charged to the joint account, and those with


respect to other personnel shall be borne respectively by the Parties by which they


are assigned.


21.7 Insurance companies owned by or affiliated with any party to the Contract, or the


Parties themselves, may approach the Chinese Insurance Companies for


reinsurance if they are interested in covering any part of the insurance program


hereof.


21.8 The premiums of insurance in the exploration period and the development period


shall be charged respectively to the exploration costs and development costs while


those in the production period shall be charged to the operating costs.


21.9 Any claim under the insurance of the agreed insurance program charged to the


joint account shall be handled by the Operator and any recovery made from


insurers shall be credited to the joint account.


Article 22


Confidentiality


22.1 CNOOC shall, in conformity with applicable laws and regulations of the


Government of the People’s Republic of China on confidentiality and by taking


into account the international practice, determine the confidentiality periods for


which the Contract and all documents, information, data and reports related to the


Petroleum Operations within the Contract Area shall be kept confidential.


22.2 Without the written consent of CNOOC, no company comprising the Contractor


or any assignee shall disclose documents, information, data and reports referred to


in Article 22.1 herein or any other information regarded by JMC as confidential to


any Third Party except the Third Parties in Article 22.4 herein and to any Affiliate ■s





77


 not directly connected with the implementation of the Contract, and no party to


the Contract shall otherwise transfer, present, sell or publish them in any way


within the confidentiality periods. Within the confidentiality period, CNOOC


shall bear the obligations for confidentiality for the aforesaid contract, document,


information, data and reports. However, CNOOC has the right to furnish the


following original information and data or interpretation thereof with respect to


the Contract Area to the relevant Third Parties:


(a) original information and data held by CNOOC for over two (2) years; and


(b) interpretation as of original information and data, which has been held by





CNOOC for over five (5) years.


CNOOC shall require relevant Third Parties to undertake to keep confidential the


aforesaid data, information, and interpretation thereof furnished to them by


CNOOC.





22.3 During the term of the Contract and after termination or cancellation of the


Contract, CNOOC shall not disclose to any Third Party any patent, know-how or


proprietary technology transferred to CNOOC by the Contractor without the


written consent of the Contractor except for any patent technology of which has


expired and any proprietary and confidential technology which have entered the


public domain.


22.4 For the implementation of the Contract, CNOOC and each company comprising


the Contractor may, after review by JMC and CNOOC, furnish the necessary


documents, information, data and reports to Third Parties and Affiliates related to


the Petroleum Operations. The Third Parties and Affiliates include:


22.4.1 banks or other credit institutions from which finance is sought by or other


financial institutions which provide or propose to provide financing to any


party to the Contract for the implementation of the Contract;











78


22.4.2 Third Parties and Affiliates which provide services for the Petroleum


Operations, including Subcontractors and other service contractors; and


22.4.3 an assignee or assignees to whom rights and obligations under the Contract


are intended to be assigned.


22.5 Necessary information, documents, data and reports may be furnished by the


Contractor in accordance with the laws of its home country to the government and


stock exchanges provided that the Contractor reports to JMC in advance.


22.6 CNOOC and each company comprising the Contractor when furnishing the


documents, information, data and reports to Third Parties and Affiliates as


mentioned in Article 22.4 herein shall require them to assume the confidentiality


obligations as set forth herein, or shall bear full responsibility for any violation


thereof.


22.7 No Party may issue a press release relating to the Contract Area or Petroleum


Operations without the prior written consent of the other Party; provided that this


limitation shall not prevent the Operator from issuing a press release in the event


of an emergency.








Article 23


Assignment





23.1 The Contractor may assign part or all of its rights and/or obligations under the


Contract to its Affiliate with the prior consent of CNOOC and in accordance with


the following provisions:


(a) the Contractor shall submit to CNOOC copies of a written agreement on the


corresponding part of its rights and/or obligations to be assigned;


(b) the Contractor shall guarantee in writing to CNOOC the performance of the


assigned obligations; f\








79


(c) no such assignment shall interfere with the performance of the Petroleum


Operations or affect the organizational structure.


23.2 The Contractor may assign part or all of its rights and/or obligations under the


Contract to any Third Party, provided that such assignment shall be approved by


CNOOC in advance. However, CNOOC shall have the right of first refusal in


respect of such assignment provided that the conditions offered by CNOOC are


comparable; provided that if CNOOC elects to exercise its right of first refusal, it


shall make this election within ninety (90) days of receiving notice from the


Contractor of its intent to assign to a Third Party.


The written agreement of assignment mentioned above and the consent or


approval of CNOOC to the assignment shall be submitted in time to the original


authority approving the Contract for its record through CNOOC.


23.3 Except for the retention of CNOOC's management functions stipulated in the


Contract, CNOOC shall without the prior consent of the Contractor, assign all of


its rights and obligations under the Contract to one of its Affiliates (it is


understood by the Parties that such Affiliate shall be CNOOC China Limited),


however CNOOC shall submit to the Contractor copies of a written agreement for


the assignment of all of its rights and obligations. CNOOC shall guarantee the


performance of the assigned obligations and such assignment shall not interfere


with the performance of the Petroleum Operations.


23.4 CNOOC may assign part of its rights and/or obligations hereunder to a Chinese


Government controlled Third Party, provided that prior written consent of the


Government of the People’s Republic of China shall be obtained. CNOOC shall


guarantee the performance of the assigned obligations and such assignment shall


not interfere with the performance of the Petroleum Operations.




















80


 Article 24


Environmental Protection and Safety





24.1 In the performance of the Petroleum Operations, the Operator shall be strictly


subject to the laws, decrees and regulations on environmental protection and


safety promulgated by the Chinese Government and make its best efforts to


prevent pollution and damage to the atmosphere, oceans, rivers, lakes, harbours


and land, and secure the safety and health of the operating personnel. The


Operator shall use all reasonable endeavors to eliminate promptly any pollution


occurring in the performance of the Petroleum Operations and minimize its


consequences. Economic losses caused by any pollution shall be charged to the


joint account, unless otherwise provided in Article 8.4 hereof.


24.2 When competent authorities under the Chinese Government assign any person to


inspect environmental protection and safety within the scope of the Petroleum


Operations according to the laws, decrees, rules and regulations, the Operator


shall provide all necessary facilities and assistance to enable the inspectors to


carry out such inspection smoothly.


24.3 In the performance of the Petroleum Operations in any fixed fishing net casting


area and/or aquatic breeding area, the Operator shall make prior contact with the


appropriate authorities of the Chinese Government.








Article 25


Force Majenre





25.1 No party to the Contract shall be considered in default of the performance of any


of its obligations hereunder, if any failure to perform or any delay in performing


its obligations is in conformity with all the events described as follows:





The performance of any obligations hereunder is prevented, hindered or delayed


because of any event or combination of events which could not be foreseen and/or


which is beyond the control of such party;





81


Any such event or combination of events is the direct cause of preventing,


hindering or delaying of such party’s performance of its obligations hereunder;


and


When any such event or combination of events has occurred, such party has taken


all reasonable actions to overcome any cause that prevents, hinders or delays


performance of its obligations and in so far as is practicable continued to perform


its obligations hereunder.


25.2 Notice of any event of force majeure and the conclusion thereof shall forthwith be


given to the other party by the party claiming force majeure.


25.3 In the event of force majeure, the Parties shall immediately consult in order to


find an equitable solution thereto and shall use all reasonable endeavors to


minimize the consequences of such force majeure.


25.4 If the Petroleum Operations in the Contract Area are partially or entirely


suspended as a result of the force majeure referred to in Article 25.1 herein, the


period of the Petroleum Operations may be extended by a period not exceeding


the corresponding period of such suspension. Within fifteen (15) days following


the end of each Calendar Year, the Operator shall report to JMC in writing on the


suspension of the Petroleum Operations caused by force majeure, if any, during


the preceding Calendar Year.








Article 26


Consultation and Arbitration





26.1 The Parties shall make their best efforts to settle amicably through consultation


any dispute arising in connection with the performance or interpretation of any


provision hereof.


26.2 Any dispute mentioned in Article 26.1 herein that has not been settled through


such consultation within ninety (90) days after the dispute arises may be referred








82


to arbitration at the request of and by either party to the Contract. The arbitration


shall be conducted in accordance with the following provisions:





26.2.1 If agreed upon by the Parties, such dispute shall be referred to arbitration


conducted by the China International Economic and Trade Arbitration


Commission in accordance with the arbitration rules thereof.


26.2.2 If the Parties fail to reach an agreement on the arbitration arrangement


mentioned in Article 26.2.1 herein, the Parties shall establish an ad hoc


arbitration tribunal to conduct arbitration in accordance with the following


provisions:


26.2.2.1 The ad hoc arbitration tribunal shall consist of three (3) arbitrators.


The Parties shall each appoint an arbitrator and the two arbitrators


so appointed shall designate a third arbitrator. If one of the Parties


does not appoint its arbitrator within sixty (60) days after the first


appointment, or if the two arbitrators once appointed fail to


appoint the third within sixty (60) days after the appointment of


the second arbitrator, the relevant appointment shall be made by


the Arbitration Institute of the Stockholm Chamber of Commerce,


Sweden.


26.2.2.2 The third arbitrator shall be a citizen of a country which has


formal diplomatic relations with both the People's Republic of


China and any home country of the companies comprising the


Contractor, and shall not have any economic interests or


relationship with the Parties.


26.2.2.3 The place of arbitration shall be determined by the Parties


through consultation or, failing the agreement of the Parties, by


the majority of arbitrators of the ad hoc arbitration tribunal.


26.2.2.4 The ad hoc arbitration tribunal shall conduct the arbitration in


accordance with the arbitration rules of United Nations








83


 Commission on International Trade Law, (“UNCITRAL”) of


1976. However, if the above-mentioned arbitration rules are in


conflict with the provisions of this Article 26 including the


provisions concerning appointment of arbitrators, the provisions


of this Article 26 shall prevail.





26.3 Both the Chinese and English languages shall be official languages used in the


arbitral proceedings. All hearing materials, statements of claim or defense, award


and the reasons supporting them shall be written in both Chinese and English.


26.4 Any award of the arbitration shall be final and binding upon the Parties.


26.5 The right to arbitrate disputes under the Contract shall survive the termination or


cancellation of the Contract.


Article 27


Effectiveness, Termination and Cancellation of the Contract


27.1 After the Contract is signed, it shall be approved by the Ministry of Commerce of


the People’s Republic of China. The date of such shall be the effective date of the


Contract. The above mentioned approval shall be notified by CNOOC to the


Contractor as soon as possible.


27.2 All annexes to the Contract shall be regarded as integral parts of the Contract. If


there is any inconsistency between the provisions of the annexes and the main


body of the Contract, the main body of the Contract shall prevail. All references


to the “Contract” hereof refer to the main body of the Contract.


27.3 If, in the course of implementation of the Contract, the Parties decide through


consultation to make amendment of or supplement to any part of the Contract, a


written agreement signed by the authorized representatives of the Parties shall be


required. Significant modifications shall require a written approval from the











84


 Ministry of Commerce of the People’s Republic of China. Such agreement shall


be regarded as an integral part of the Contract.





27.4 The Contract shall terminate under any of the following circumstances:


27.4.1 exercise of the Contractor’s election to terminate the Contract under


Article 6.1(c) hereof;


27.4.2 failure to discover any commercial oil or gas reservoir within the Contract


Area prior to the expiration of the exploration period or the extended


exploration period granted under Article 4.3 or 18.2.2.1 hereof;


27.4.3 if there is only one (1) commercial Oil Field or Gas Field in production in


the Contract Area, on termination of the production period of such Field;


27.4.4 if there are two (2) or more commercial Oil Fields or Gas Fields in


production in the Contract Area, on termination of the production period


of the Field with the latest termination date; or


27.4.5 at the end of the last day of the thirtieth (30th) Contract Year from the


Date of Commencement of the Implementation of the Contract, unless the


production period is extended by approval of the responsible authorities of


the Chinese Government under Article 4.5 hereof or unless otherwise


stipulated in Article 4.6.1, 18.2.1.2 or 25.4 hereof.


27.5 Before the expiration of the first phase of the exploration period as specified in


Article 4.2 hereof, the Contractor shall not propose termination of the Contract


unless the Contractor has fulfilled the minimum exploration work commitment for


the first phase of the exploration period ahead of time.


27.6 If either party to the Contract commits a material breach of the Contract, the other


party to the Contract shall have the right to demand that such breach be remedied


within a reasonably specified period of time. If such breach is not remedied within


such period of time, the complaining party shall have the right to cancel the


Contract by giving ninety (90) days’ written notice to the defaulting party.





85


 However, such material breach of the Contract and unremedied material breach


shall have been judged by the final award of arbitration in accordance with


Article 26 hereof.











Article 28


The Applicable Law


28.1 The validity, interpretation and implementation of the Contract shall be governed


by the laws of the People’s Republic of China. Failing the relevant provisions of


the laws of the People’s Republic of China for the interpretation or


implementation of the Contract, the principles of the applicable laws widely used


in petroleum resources countries acceptable to the Parties shall be applicable.


28.2 If a material change occurs to the Contractor’s economic benefits after the


effective date of the Contract due to the promulgation of new laws, decrees, rules


and regulations or any amendment to the applicable laws, decrees, rules and


regulations made by the Government of the People’s Republic of China, the


Parties shall consult promptly and make necessary revisions and adjustments to


the relevant provisions of the Contract in order to maintain the Contractor’s


normal economic benefits hereunder.








Article 29


Language of Contract and Working Language





29.1 The text of the Contract, annexes and supplementary documents attached hereto


shall be written in both Chinese and English languages, and both versions shall


have equal force and effect.





29.2 The Parties agree that both Chinese and English shall be used as working


languages. After the effective date of the Contract, technical documents and


information concerning the Petroleum Operations hereunder shall, in general, be








86


 written in English except for technical documents and information available


previously and from Third Parties.





Unless otherwise agreed by CNOOC, documents and information in respect of


administration shall be written in both Chinese and English. Forms for production


and other reports and records shall be printed with headings in both Chinese and


English and may be filled out in either Chinese or English.











Article 30


Miscellaneous





30.1 All notices and documents required hereunder shall be deemed to have been


properly given and delivered to either party to the Contract only when received.





30.2 Notices and documents shall he delivered by hand or sent by mail, registered


airmail or telex or facsimile transmission to the address hereunder specified:

































































87


 Address of CNOOC Address of the representative


of the Contractor





China National Offshore Oil Corporation Priineline Energy China Limited


No 25, Chaoyangmenbei Hong Kong Parkview


Dajie,Dongcheng District, 88 Tai Tam Reservoir Road


Beijing, China Hong Kong, China


Postal Code: 100010 Tel:+852 2810 5511


P.O. Box 4705, Beijing, China Fax: +852 2810 0667


Tel: 8610-84521 178 For the attention of: Mr. Victor Hwang





Fax: 8610-84523879 The representative appointed by PECL


For the attention of: Mr. Zhao Liguo Primeline Petroleum Corporation


The representative Hong Kong Parkview


appointed by CNOOC 88 Tai Tam Reservoir Road


Hong Kong, China


Tel:+852 2810 5511


Fax: +852 2810 0667


For the attention of: Mr. Victor Hwang


The representative appointed by PPC





30.3 Each party to the Contract may change its address or representative by a written


notice to the other party to the Contract.


30.4 Companies comprising the Contractor have the following percentages of


participating interests as of the effective date of the Contract.





(1) Primeline Energy China Limited - seventy five percent (75%)





(II) Primeline Petroleum Corporation ---twenty five percent (25%)





Subject to Article 30.6 herein, the rights and obligations of each company


comprising the Contractor hereunder may, as between themselves, be varied by


the operating agreement between such companies and the Contractor shall advise


CNOOC in writing of any expected variation and thereafter, of the actual





variation. ^


/ >








88


 If such variation leads to the transfer of the Operatorship or the companies


comprising the Contractor have made a decision to change the Operator, the


Operator referred to in Article 8.1 hereof may be replaced after obtaining a written





consent from CNOOC.





payment of fee redacted
































30.6 Companies comprising the Contractor signing the Contract with CNOOC agree to


undertake the obligations of the Contractor under the Contract jointly and


severally.






























































A





89











THIS CONTRACT is signed on this 15th day of June, 2012 in Qingdao by the


authorized representatives of the Parties hereunder:


China National Offshore Oil Corporation





By:_


Name: Zhao Liguo


Title: General Counsel


Primeline Energy China Limited Primeline Petroleum Corporation








By: By:





Name: Victor Hwang Name: Victor Hwang





Title: Chairman Title: Chairman























90


W>


THIS CONTRACT is signed on this 15th day of June, 2012 in Qingdao by the


authorized representatives of the Parties hereunder:


China National Offshore Oil Corporation

































































90


ANNEX 1











Geographic Location and Co-ordinates of Connection Points


Of Boundary Lines of the Contract Area














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AREA: 5877krrf








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122° (XI' (X)" 27° 47' 20" 14 121° 401 00" 27° 20' 00"


2 122° 23' 00" 27° 47' 30" 15 121° 40' 00" 27° 30' 00"


3 122° 23' (X)" 27° 33' 00" IK 121° 45' 00" 27° 30' (X)"


4 122° 20' 00" 27° 25' 00" 17 121° 45' (X)" 27’ 35' 00"


0 122° 20' (X)” 27° 25' 00" 18 121° 30’ 00" 27° 35' 00"


ft 122° 20' (X)1' 27° 25' 00" 19 J2J ° SO' 00" 27° 40' 00"


7 122° 20' 00" 27° 10' 00" 20 121° SB' 00" 27° 40' 00"


8 122° 20' 00" 27' 10' 00" 21 121° SB' 00" 27" 45' 00"


9 122” 20' 00" 27” or 00" 22 122° 00' 00" 27" •15' 00"


10 121' 24' 00" 27° 04' 00" 23 121° SI' 10" 27° 1 ’ 40"


11 121° 24' 00" 27° 07' oo"-- 24 121 ° 55' 20" 27" 11' 40"


12 121" 28' 00" 27° 07' 00" 25 121° 55' 20" 27” 05' 00"


13 121° 28' 00” 27” 20' 00" 26 121° sr 10" 27° 05' 00"




















120'f» IM'pO


ANNEX II



























































ACCOUNTING PROCEDURE


CONTENTS





Article l General Provisions


Article 2 Definitions


Article 3 Cash Calls


Article 4 Accounting and Management of Material


Article 5 Expense Accounting


Article 6 Recovery of Costs, Expenses and Deemed Interest


Article 7 Accounting Reports


Article 8 Audit


Article 9 The Transfer Procedure for the Joint Account


 Article 1


General Provisions





1.1 This Accounting Procedure is an integral part of the Contract. The definitions set


forth in Article I of the Contract are equally applicable to this Accounting


Procedure. The definitions and provisions in this Accounting Procedure have the


same force and effect as those in the Contract. If the provisions in this Accounting


Procedure are in conflict with those in the Contract, the provisions in the Contract


shall prevail.


1.2 Purpose:


The purpose of this Accounting Procedure is to establish equitable control





methods for determining charges and credits applicable to the Petroleum


Operations according to the relevant provisions of the “Petroleum Regulations”


and of the Contract, including guidelines for accounting settlements in respect of


managing funds and materials, financing, Accounting Records, and for compiling


accounting statements.


The Operator shall neither gain nor lose in relation to the other parties by means


of the fact that it acts as the Operator.





1.3 Accounting Methods: The double-entry method of accounting shall be used in this


Accounting Procedure.


1.4 Working Language: Pursuant to the provisions of Article 29 of the Contract,


Chinese or English shall be used as the working languages for the Accounting


Records and analyses of financial conditions in respect of the Joint Account, at


the Operator’s option.

















1





fa?


1.5 Currency for accounting:





The U.S. dollars shall be the unit of currency for accounting in the Joint Account


and shall be the currency for the investments and reimbursements under the


Contract. In case currencies other than U.S. dollars are used to carry out business


activities, the relevant bank accounts and other current asset and current liability


accounts shall be kept both in U.S. dollars and in the currencies used.


1.6 Currency translation:


For the purpose of accounting, currency translation entered into the Joint Account


shall be made in accordance with the following guidelines:


The rate of exchange to be used for the conversion into U.S. dollars of cash calls


received in Renminbi shall be the arithmetic average of buying and selling rates of


exchange applicable to any individual or commercial entity quoted by the Bank of


China at 11:00 a.m. on the date of receipt of such cash call. If the relevant date is


a non-business day of the Bank of China, the rate quoted on the- previous


working day by the Bank of China shall apply.


All other transactions recorded in the Joint Account which are made in Renminbi


shall be translated into and recorded in U.S. dollars at the rate of exchange as


quoted above on the last working day of the previous month, while those


transactions which are made in currencies other than Renminbi and U.S. dollars


shall be recorded in U.S. dollars at the actual cost in U.S. dollars of effecting the


transaction.


Neither CNOOC nor the companies comprising the Contractor shall experience an


exchange gain or loss, at the expense or benefit of the other party.


The Operator shall make its best efforts to minimize any exchange loss.


All gains or losses from currency conversion or translation shall be recorded in


the Joint Account.











2


1.7 Accounting Records and statements:





1.7.1 All Accounting Records related to the Petroleum Operations shall be


established and maintained by the Operator within the territory of the


People’s Republic of China.


1.7.2 All vouchers, accounts, books and statements shall be prepared in


accordance with the Petroleum Operations Accounting System established


by CNOOC.


1.7.3 Annual accounting statements and important accounting books, including


asset records, cash or bank journals, general and subsidiary ledgers,


balance sheets, and gross oil production allocation statements shall be


maintained for the term of the Contract as per Article 4.7 of the Contract,


or for any further period if required by the laws and regulations of the


People’s Republic of China. Other accounting vouchers and books shall be


kept for fifteen (15) years. Quarterly and monthly statements shall be


maintained for five (5) years.


Upon the expiration of the custody period, a list shall be made of the





accounting files to be disposed of. Disposal shall only be made after the


approval of CNOOC. The list of the accounting files disposed of shall be


maintained with the annual accounting statements.








Article 2


Definitions





The terms used in this Accounting Procedure shall have the definitions ascribed to them


as follows:


2.1 “Accounting Records” means all accounting books, source documents, original


vouchers, approved documents, analytical data, work papers and accounting


statements maintained for the Petroleum Operations.








3





IKT>


2.2 “Accounting System” means the Petroleum Operations Accounting System


prepared by CNOOC, specifying the accounting titles to be used by the Operator


and instructions for implementation, forms and contents of various accounting


statements and their preparation methods, including a material classification


section, a definition of Controllable Material, standards for itemizing assets and


the provisions for fixed asset accounting. If the contents of the Accounting


System are in conflict with the provisions of the Accounting Procedure, the


provisions of the Accounting Procedure shall prevail.





2.3 “Material” means materials, tools, facilities, equipment and consumables procured,


leased or otherwise acquired and held for Petroleum Operations.


2.4 “Joint Account” means accounts established by the Operator for the


implementation of the Contract to record all debits and credits related to the


Petroleum Operations.


2.5 “Controllable Material” means the Material referred to in the Accounting System


described in Article 2.2 of this Accounting Procedure.





2.6 "LIBOR" means the six (6) month term London Inter-Bank Offered Rate of US


Dollars which appears on Telerate Page 3750 at 11:00 a.m. Greenwich Mean


Time on the first business day of the relevant period.


2.7 “Investing Party” means any of the Parties that are contributing the funds for the


Petroleum Operations in accordance with their participating interest determined


pursuant to the relevant provisions of the Contract.








Article 3


Cash Calls





3.1 Except as otherwise provided in the Contract, the Contractor shall provide all the


exploration costs for the Exploration Operations according to the provision of


Article 12.1.1 of the Contract; and all the Investing Parties shall provide the n


r





4


development costs for the Development Operations in proportion to their


respective participating interests as provided in Article 12.1.2 of the Contract. In


accordance with each approved annual budget, the Operator shall issue monthly


cash call notices to each Investing Party to provide the Operator with funds to


cover the planned expenditure of the next month. Whether or not the cash call


notices for the exploration costs are to be issued shall be at the option of the


Operator.


3.2 Development Operations cash call and default:





3.2.1 According to the needs of the Petroleum Operations, the Operator shall


regularly issue monthly cash call notices within the amount of approved


annual budget to request each Investing Party to respectively make


advances as specified by the Operator. The Operator shall, before


twenty (20) days prior to the commencement of each month, issue cash


call notices for the development costs and each Investing Party shall


provide its percentage share of funds according to the requirement and


within the time limit specified in the cash call notice, but no sooner than


the first day of the month for which cash is called. Each Investing Party


shall transfer its percentage share of funds to the Operator’s bank


account(s) established particularly for the Joint Account. Such bank


account(s) will in all cases be interest bearing account(s).





Any excessive or deficient advances made by each Investing Party for any


month shall be adjusted in the next cash call.





In case that the Operator, owing to the needs of the Petroleum Operations,


has to incur expenditures which are unforeseen in the cash call for any


month, written notices shall be issued to all the Investing Parties who shall


finance their own shares for additional amount within ten (10) days


following the receipt of the written notice.














5





Pt>


3.2.2 Interest shall be paid by CNOOC or the companies comprising the


Contractor failing to pay its share of funds on the due date specified in the


cash call at LIBOR on delinquent date plus 5% on the delinquency of less


than one(l) month and thereafter at the average seven (7) LIBOR rate


ruling throughout each subsequent month plus 5%, such interest being


compounded on a monthly basis throughout the period of the delinquency.


The non-defaulters shall make up the delinquent portion on behalf of the


defaulters. When the defaulters advance cash to meet both their delinquent


portion and accrued interest thereon, the Operator shall reimburse the non¬


defaulters who made up the delinquent portion.


All amount advanced by the non-defaulting parties plus accrued interest


not reimbursed by the defaulting party shall constitute a debt due from the


defaulting party to the non-defaulting parties who shall be entitled to all


remedies at law and equity. The Operator on behalf of the non-defaulting


parties is entitled to take the defaulting party’s share of the Annual Gross


Production of Crude Oil and apply the proceeds of the sale of such Crude


Oil against all sums due and payable by the defaulting party including


accrued interest. Any excess funds remaining from such proceeds after


deduction of all amounts due including interest and the costs, charges and


expenses incurred by the Operator in connection with such sale, shall be


paid over to the defaulting party. Any deficiency remaining due, after


deducting the proceeds of sale shall remain an obligation of the defaulting


party and may be collected as any other debt.


3.3 Each monthly cash call notice shall clearly indicate the following information:


3.3.1 Annual development costs to be shared by each Investing Party as shown


in the approved annual budget.


3.3.2 Amount of funds advanced by each Investing Party at the end of the month


prior to the month in which the call is prepared and the actual expenditures


recorded and actual balance (i.e. funds unused) in the Joint Account, ^


/V





6


accompanied by the bank statements related to the Joint Account for the


previous month.


3.3.3 The estimated expenditure which will be charged to the Joint Account in


the month of the cash call (the estimate expenditure shall be itemized in


accordance of the annual budget).


3.3.4 Amount of funds to be called from each Investing Party and the estimated


amounts of funds to be called in the following two (2) months.


3.3.5 The clear indication of requirement for the date when funds are to be


provided, the amount of funds, currency account number, name of the


account, the recipient bank and its address.


3.4 On the Date of Commencement of Commercial Production of an Oil Field and/or


Gas Field, any development investment for the Oil Field and/or Gas Field


advanced by the Investing Party not expended or not to be expended shall be


returned to each of the Investing Parties in proportion to its share.


3.5 In accordance with Article 12.1.3 of the Contract, the cash for the Production


Operations undertaken by the Parties jointly and approved by the JMC shall be


provided by all the Investing Parties to the Contract in proportion to their


respective participating interests in the development costs and shall bear no


Deemed Interest. Based on the needs of the Production Operations, the Operator


may make timely adjustments of the amount of cash to be provided by all the


Investing Parties to the Contract. The Operator shall issue cash call notices


quarterly to call for cash for the Production Operations. In proportion to its share,


each Investing Party shall respectively provide advances on a monthly basis in


accordance with requirements and within the time limit specified in the cash call


notice of the current month.


In case that the Operator, owing to the needs of the Petroleum Operations, has to


incur expenditures which are unforeseen in the cash call for any month, written


notices shall be issued to all the Investing Parties who shall finance their own ^





1


shares for additional amount within ten (10) days following their receipt of such


written notices.


3.6 According to the requirement of the Petroleum Operations, the Operator shall


indicate in any cash call notices the U.S. dollar equivalent of the total cash called.


The Operator shall also specify the amounts of Renminbi and U.S. dollars


required as estimated to make payment. CNOOC shall provide the advance of its


own share either in Renminbi or in Renminbi and U.S. dollars with respect to the


amount called for by the Operator, but CNOOC’s funding in Renminbi shall not


exceed the total amount of Renminbi called for by the Operator in any cash call


notice. The Contractor shall provide the advance of its own share in U.S. dollars.


3.7 Provisions for recording the sources of funds:


3.7.1 Funds for exploration costs, development costs and operating costs, when


received, pursuant to each cash call shall be credited against the relevant


accounts of the Investing Parties in the Joint Account.


3.7.2 In case either party to the Contract decides to develop an Oil Field and/or


Gas Field for its sole account pursuant to Article 11.6 and/or Article 18.2.2


of the Contract, or undertakes any other operation for its sole account, the


funds required shall be financed and accounted for separately.


3.7.3 The Contractor shall, within twenty (20) days after the date of submission


to CNOOC of a written notice expressing its decision to participate in the


development of an Oil Field developed solely by CNOOC, pay CNOOC in


cash the amounts stimulated in Article 11.6.1 of the Contract.


3.7.4 In accordance with Article 6.3 of the Contract, if the Contractor opts to


terminate the Contract as provided in Article 6.1(c) of the Contract or if


the phase is the last exploration phase, the Contractor shall, within


thirty (30) days from the date of its decision to terminate the Contract or


thirty (30) days from the date of the expiration of the exploration period,


pay CNOOC in U.S. dollars the unfulfilled balance of the minimum^








8


exploration work commitment (or of the new commitment) for the


exploration phase, converted into cash. The detailed method by which the


unfulfilled balance of the minimum exploration work commitment is


converted into U.S. dollars is that the actual average unit cost, excluding


the abnormal drilling costs such as those of the sidetrack, fishing, severe


loss of mud circulation etc. (i.e. U.S. $/kilometre of seismic line; U.S.


$/meter of drilling footage), of the last portion of a seismic line shot under


the Contract or of the last well drilled is multiplied by the unfulfilled


amount of the minimum exploration work commitment. The formula for


such calculation is as follows:


1 = Ac x Pu





in which:


1 = converted cash amount of the unfulfilled balance of the


minimum exploration work commitment;


Ac = actual average unit cost of the last portion of a seismic line shot


or of the last well drilled; and


Pu = the unfulfilled amount of the minimum exploration work


commitment, the unfulfilled amount in respect of seismic line is the


difference between the kilometers specified in Article 6.2 of the Contract


and actual kilometers of the seismic line. The unfulfilled footage of a


Wildcat is footage or aggregate of well or wells which has or have to be


fulfilled but not yet been fulfilled as specified in Article 6.2 of the


Contract.























9


 Article 4


Accounting and Management of Material


4.1 Procurement of Material:


The procurement of Material shall be implemented in accordance with the


procedure specified in Articles 15.1 and 7.6 of the Contract. In order to prevent


overstocking of Material, the Operator shall use all reasonable best efforts to


ensure that the procurement of Material shall be made in accordance with the


Material procurement plans and that the quality of Material conforms to


specifications and prices are fair and reasonable. The Operator does not warrant


the Material furnished beyond, or back of, the supplier’s or manufacturer’s


guarantee.


4.2 Costs of procuring Material:


The costs of Material purchased shall be the invoice prices less discounts plus


related transportation and other expenses, including expenses for freight to the


port of destination, insurance premiums proportion to with the Material covered,


fees of forwarding agents, duties, fees, handling expenses from shipside to and


within any water terminal warehouse or yard, and any other reasonable expenses


actually paid and expenses of inland transportation.


4.3 The following provisions shall be applied for pricing Material furnished from the


stocks of the Parties and/or their Affiliates for use in the Petroleum Operations:


(1) New Material:


New Material shall be priced on the basis of current market value plus


expenses in moving such Material directly to the job-site where Material is


used.








\








10


 (2) Used Material:





(A) Material which is in sound and serviceable condition and is suitable for


reuse without reconditioning shall be priced by the Parties, and the


ceiling price shall not exceed seventy-five percent (75%) of the current


value of new Material.


(B) Material which, after being reconditioned, will be further serviceable


for its original function shall be priced by the Parties, and the ceiling


price shall not exceed fifty percent (50%) of the current value of new


Material.


(C) Used Material which can not be classified as (A) or (B) above shall be





priced by the Parties through discussions at a value commensurate with


its use.


(D) If the Operator wishes to use a method other than the above for pricing


used Material, such other method shall be agreed upon in advance by


the Parties through consultations,





4.4 Price determination and leasing expense calculation method for properties


purchased or leased from other contract areas:


The Operator may lease equipment and facilities and purchase Material and fuel


from other contract areas. The Operator shall charge the leasing expenses or


purchase price as agreed upon by the Operator and its suppliers. Such leasing


expenses or purchase prices shall not exceed those currently prevailing in similar


contract areas.


4.5 For certain Material which is in short supply in the world markets and difficult to


procure at published market prices and the lack of which will hinder normal


operations, the Operator may, after the approval of JMC, purchase such Material


urgently needed by the Petroleum Operations and charge actual purchase costs to


the Joint Account.








11


4.6 Disposal of equipment and Material:





The Operator shall not dispose or sell Material with bock value exceeding Ten


Thousand U.S. dollars (U.S. $10,000) without the prior consent ofthe Parties. The


Operator shall use all reasonable endeavors to minimize losses in the disposal of


or sales of such Material.


Sales of properties to Third Parties shall be recorded in accordance with actual


sales income. No guaranty or warranty for Material sold or disposed of under this


Article shall be given by the Operator to any purchaser.


4.7 Accounting for Material:


The costs of Material which is procured by the Operator and is directly used at the


job-site shall be charged to the respective accounts of exploration costs,


development costs or operating costs at actual purchase prices (as defined in


Article 4.2 herein) and on the basis of the intended use of Material. Should such


Material subsequently be used other than as intended, the relevant charges shall be


transferred from the original cost accounts to the appropriate cost accounts.


Material for general use which is first stored in warehouses or which is first stored


on supply boats used as warehouses shall be subject to inventory control


procedures.


The quantities, unit prices and total value shall be recorded for Material in


inventory using perpetual inventory methods. Material in stock shall be priced at


purchase costs and the Operator, upon the commencement of or during the


Contract period, has the freedom to choose one of the following pricing methods


such as FIFO, weighted average method and moving average method etc. for


Material to be transferred out of the stock. Accounts for inventory Material shall


be regarded as exploration cost, development cost or operating cost and shall be


recovered in accordance with Article 12.2 of the Contract.














12


 At the request of any non-Operator, the Operator shall furnish to the non-Operator


a detailed statement of Controllable Material.





The Operator shall conduct physical inventory of Material in warehouses and


supply boats used as warehouses prior to the annual final accounts or whenever


depending upon the actual situation. The Operator shall give a written notice to


the JMC sixty (60) days before the date of proposed physical inventory in order to


enable the non-Operator for participation and failure to participate by any non-


Operator in the physical inventory shall be regarded as approval of the physical


inventory conducted by the Operator.


If any gain or loss is found as a result of the physical inventory, the Operator shall


compile a detailed statement of the gain or loss and attach to it an explanation for


the gain or loss, which shall be submitted to the JMC for examination and


approval.


4.8 In accordance with Article 17.1 of the Contract, the Operator shall exercise strict


control over the fixed assets of the Petroleum Operations and set up accounts and


record cards, and shall conduct physical inventory of the fixed assets at year-end


or whenever depending upon the actual situation to make sure that the book


records, card records and physical fixed assets are in conformity. In case that any


damage and loss arises to the fixed assets, the Operator shall determine the


reasons and submit them to the JMC for examination and approval.








Article 5


Expense Accounting





5.1 Rules for Accounting


5.1.1 According to the provisions of Articles 12.1.1, 12.1.2 and 12.1.3 of the


Contract, all development costs and operating costs of the Parties as well


as the Contractor’s exploration costs shall be recorded in the Joint Account


separately. s








13


 The Operator shall establish and maintain three separate accounts, namely:





5.1.1.1 exploration costs account


5.1.1.2 development costs account and


5.1.1.3 operating costs account


in which shall be reflected all charges and costs as classified


pursuant to Articles 5.2 and 5.3 of this Accounting Procedure.


5.1.2 If either CNOOC or the Contractor, in accordance with Article 11.6.1,


11.6.2 or 18 of the Contract, makes the decision to develop an Oil Field


and/or Gas Field for its sole account or to undertake any other operation


for its own account, the relevant costs shall be accounted for separately.


5.1.3 All items related to the Petroleum Operations such as discounts,


deductions, allowances, interest income, gains from various services,


indemnities from insurance and other miscellaneous income by the


Operator, shall be credited to the relevant expense accounts.


5.1.4 All direct services or research work (including personnel) provided by the


superior organizations or Affiliates of CNOOC or of the Contractor and by


the Third Parties for the Petroleum Operations shall be subject to the form


of work order procedures in advance and shall be charged to the Joint


Account after verification of the relevant invoices.


Work Order Procedure shall be established through consultations at JMC


meetings by both Parties within three (3) months as of the Date of


Commencement of the Implementation of the Contract. The rates charged


for direct services or research work (including personnel cost) provided by


the superior organizations or Affiliates of CNOOC or of the Contractor


shall be on the basis of actual costs incurred and more competitive when


compared with the rates of similar services furnished by the Third Parties.


The Operator shall, in accordance with Article 15 of the Contract, give


O


14


 priority to use direct services or research work (including personnel)


provided by CNOOC.





5.2 Cost items:


The following items shall be chargeable to the Joint Account by Operator's net


cost.


5.2.1 Subcontractor charges:





The charges paid to Subcontractors in accordance with contracts signed


between the Operator and Subcontractors.


5.2.2 Personnel expenses:


The contents and control of personnel expenses shall be as stipulated in


Article 19.3 of the Contract.


5.2.3 Travel and living expenses:


Travel and living expenses paid according to Article 19 of the Contract to


the personnel involved in the Petroleum Operations.


5.2.4 Material expenses:


Expenses paid in accordance with Article 4 of this Accounting Procedure


to purchase Material for use in the Petroleum Operations.


5.2.5 Relocation and transportation expenses:


Relocation and transportation expenses for personnel involved in the


Petroleum Operations to be relocated into or out of the People’s Republic


of China and transferred from job-site to job-site within the People's


Republic of China.








1





15


5.2.6 Maintenance, repair and leasing expenses:


Expenses for maintenance, repair or replacement of the properties used in


the Petroleum Operations and leasing expenses paid for leased properties


and equipment.


5.2.7 Insurance premiums:


Necessary net payment made for the insurance of Petroleum Operations


and related costs and expenses.


5.2.8 Legal expenses:


In order to protect the interests of the Parties, all costs or expenses paid for


attorney’s fees, litigation or investigation, including expenses in securing


evidence, mediation and settlements. The expenses for handling legal


matters incurred for the interests of any party to the Contract shall be


borne solely by such party.


5.2.9 Taxes:


All taxes paid according to the tax laws of the People’s Republic of China,


except for those which do not belong to the scope of expenditures in the


Joint Account the income taxes, Value Added Tax and Resources tax to be


paid by the companies comprising the Contractor or CNOOC and


individual income tax to be paid by employees and other related costs.


5.2.10 Energy expenses:


All costs in respect of fuel, electricity, heat, water or other energy used and


consumed for the Petroleum Operations.


The costs of Crude Oil and/or Natural Gas produced and used in any Oil


Field and/or Gas Field (provided the Parties have the same interests in


such Fields) within the Contract Area by the Operator for the performance








16


of the Development Operations and Production Operations or for well


stimulation or for maintaining the reservoir pressure shall not be charged.


However, the costs of transporting such Crude Oil and/or Natural Gas to


their points of use shall be charged under this item.


5.2.11 Field office facility charges:


The costs and expenses of establishing, maintaining and operating any


offices, camps or housing facilities necessary for the performance of job-


site operations, including the costs of any office used by staff directing


such operations (calculated by apportioning office costs and expenses on


the basis of space occupied by such staff)-


5.2.12 Communication charges:


The costs of acquiring, leasing, installing, operating, repairing and


maintaining communication systems, including radio and microwave


facilities between the Contract Area and the base facilities.


5.2.13 Ecological and environmental protection charges:


All charges for any measures undertaken for the Petroleum Operations


within the Contract Area as required by relevant statutory regulations or


pursuant to programs agreed by the Parties.


5.2.14 Service charges


5.2.14.1 Technical service charges:





The charges paid for services such as rock specimen analysis,


oil quality tests, geological evaluation, data processing, design


and engineering, well site geology, drilling supervision and


special research programs and other technical services.














17


5.2.14.2 General service charges:





General service charges refer to professional consultant


charges incurred for the common interests of both Parties and


charges for other services to obtain original data needed for


Petroleum Operations from outside sources, except legal


service.





5.2.14.3 CNOOC’s assistance charges:





(A) The charges for the assistance provided by CNOOC for


the Contractor to carry out the Petroleum Operations in


accordance with Article 9 of the Contract. The charges


for services provided by CNOOC according to


Article 9.1.5 of the Contract in respect of services not


chargeable to the Joint Account shall not be charged to


the Joint Account.


(B) For all assistance to be provided by the head office





organization of CNOOC in Beijing to the Contractor in


the course of the Development Operations and the


Production Operations before CNOOC takes over the


said Production Operations, CNOOC shall charge an


administrative fee of Three Hundred Thousand U.S.


dollars (U.S.$ 300,000) for each Calendar Year. If the


whole process of the Development Operations conducted


for any Oil Field in any Calendar Year is less than


twelve (12) calendar months, the administrative fee for


such Calendar Year shall be calculated in proportion to


the actual calendar month(s) spent thereon (if the actual


time spent thereon in any calendar month is less than


thirty (30) days, the calculation shall be made based on a


full calendar month. The aforesaid administrative fee








IS


 shall be paid respectively on June 1 and Dec. 1 each


Calendar Year, with One Hundred Fifty Thousand U.S.


dollars (U.S.$ 150,000) for each time.





5.2.15 Damages and losses to the assets:


All costs and expenses necessary for the repair, replacement or supplement


of assets resulting from damages or losses incurred by fire, flood, storm,


theft or any other force majeure causes, excluding the losses specified in


Article 8.4 of the Contract, which shall be borne by the Operator alone.


5.2.16 Personnel training costs:


Costs incurred for personnel training pursuant to Article 16 of the Contract.


5.2.17 Miscellaneous expenses:


Any reasonable miscellaneous expenses needed for the Petroleum


Operations excluded in the above items of expenses, such as bank charges,


books, stationery and conference expenses as well as other reasonable


expenses.


5.2.18 Overhead:


Overhead refers to the costs for the managerial and operational services


provided by the Operator’s superior management organizations for the


Petroleum Operations, including management, administration, accounting,


treasury, intercompany audit, tax, legal matters, employee relations,


financing, the collection of electronic data and costs which not chargeable


under Article 5.1.4 of this Accounting Procedure for general consultation


such procurement, planning, design, research and operational activities etc.


The overhead shall be calculated in accordance with the following tiers


and based on the sum of the total actual costs from Article 5.2.1 through


Article 5.2.17 and Article 5.2.19 of this Accounting Procedure, but not








19


including CNOOC’s assistance charges under Article 5.2.14.3 of this





Accounting Procedure.


The Overhead Rates for the Exploration Operatioxis








Direct Costs for Exploration Percentage Rate


US. $./Year1 %


First Tier Oto 5,000,000 5%





Second Tier 5.000. 001 to 3%


15.000. 000


Third Tier 15,000,001 to 2%





25,000,000


Fourth Tier over 25,000,000 1%








The Overhead Rates for the Development Operations





Direct Costs for Development Percentage Rate


(US. $./Year) %


First Tier 0 to 5,000,000 2.5%





Second Tier 5,000,001 to 1.5%


10,000,000


Third Tier 10,000,001 to 1.0%





20,000,000


Fourth Tier 20,000,001 to 0.5%


30,000,000





Fifth Tier Over 30,000,000 0.25%





The overhead rate for the Production Operations shall be of one point eight





percent (1.8%) of the total amount of the direct costs for the Production


Operations in each Calendar Year and shall be calculated in accordance


with the calculation method referred to in the provisions of the last


paragraph of Article 5.2.18 herein.














20


The costs and expenses for offices established by the Operator within the


Chinese territory which are not specifically dedicated to the Petroleum


Operations shall be allocated by the Operator to the Petroleum Operations


within the Contract Area or to other beneficiary Parties, including the


Contractor, on the basis of actual service time recorded, or may be


allocated by other methods agreed upon by the Parties. The amount of


allocation charged to the Petroleum Operations within the Contract Area


shall be included in the cost item of Article 5.2.19 of this Accounting


Procedure. The costs and expenses incurred by the offices established by


the Operator and its superior organizations outside the Chinese territory


(excluding costs and expenses chargeable under Article 5.1.4 of this


Accounting Procedure) has been included in the overhead and shall not be


again charged to the Joint Account.


On the last working day of each month, the Operator shall make provision


into the Joint Account for the overhead fees for the current month,


calculated on the basis of cumulative actual expenditure for the Calendar


Year to that date and payment shall be made from the Joint Account on the


last working day of the following month. The final adjustment of the


overhead shall be made at the end of the Calendar Year in respect to any


difference between the actual payment by the Joint Account and the total


overhead for that Calendar Year calculated on the annual cumulative


actual investment expenditure at the end of such year. Any excess shall be


refunded and deficiencies made good.


5.2.19 General and administrative expenses:


General and administrative expenses refer to the administrative expenses


incurred for any offices established by the Operator within the Chinese


territory and for the JMC and its subordinate bodies for the performance of


the Petroleum Operations.











21


5.3 Except as otherwise provided in this Accounting Procedure the allocation of


common costs and expenses for each item of operations shall be charged in


proportion to the exploration costs, development costs and operating costs


actually incurred in each month.


5.4 With respect to the expenditures or excess expenditures as mentioned in


Article 10.2.4(b) of the Contract which are determined by the JMC to be


unreasonable, the JMC will form an expert group for further investigation to


determine whether they shall be charged to the Joint Account or shall be borne by


the Operator alone before the year-end final closing of accounts.








Article 6


Recovery of Costs, Expenses and Deemed Interest





6.1 According to the provisions of Article 12.2.2 of the Contract, exploration costs


shall bear no interest.


6.2 The calculation of Deemed Interest on the development costs:


Deemed Interest on the development costs shall be calculated at the specified rate





from the first day after the end of the month in which the development funds of


any of the Investing Parties have been received in the Operator’s bank account for


the Joint Account in accordance with the provisions of Article 12.2.3 of the


Contract.





There are three hundred and sixty-five (365) days in each Calendar Year for the


interest calculation and the interest shall be compounded once each Calendar Year


on December 31 based on the actual number of days eligible for the interest.


Worked Example:


Development Costs_ US $100 received on tenth of March





\








22


 US $100 received on twentieth of March





The aggregate amount received in March is US $ 200.


Deemed Interest shall be calculated from the first of April through the end of such


Calendar Year with a total number of two hundred and seventy-five (275) days.


Formula: Interest = US $200 x 9% x 3^5


At the end of the year interest is added to the capital and interest runs thereon until


cost recovery is fully achieved, i.e. interest is compounded at year end.


6.3 Recovery of exploration costs, development costs with Deemed Interest thereon


and operating costs.


6.3.1 In accordance with the provisions of Article 12.2.2 of the Contract, the


exploration costs shall be recovered from the Oil Fields and/or Gas Fields


within the Contract Area which have been developed and are producing


and the Contractor has participated in the development of said Oil Fields


and/or Gas Fields.


6.3.2 In accordance with the provisions of Articles 12.2.1, 12.2.3.1 and 12.3 of


the Contract, the principal of development costs and Deemed Interest


thereon and operating costs, respectively, of each Oil Field and/or Gas


Field shall be recovered only form the production of each respective Oil


Field and/or Gas Field.


6.3.3 As at the date of completing each lifting of Crude Oil, the Operator shall


make the separate records into the Joint Account for the appropriate


reimbursements of the principal of exploration costs, development costs


with Deemed Interest thereon and operating costs respectively in


accordance with Article 12.2 of the Contract. Written notices shall be sent


by the Operator to CNOOC and the Investing Parties at the same time.








23


6.4 In accordance with provisions of Article 19.1 of the Contract, the Operator shall


establish complete books for recording the volume and value of Crude Oil and/or


Natural Gas, precisely reflecting the production and the disposal of the Crude Oil


and/or Natural Gas within the Contract Area.





6.5 Crude oil production in each Calendar Year for each Oil Field within the


production period shall be accounted according to the allocation proportions


specified in Article 13 of the Contract and at the Crude Oil price determined


pursuant to Article 14.4 of the Contract. The amount of the Non-associated


Natural Gas in each Calendar Year within the production period shall be


accounted for in accordance with the provisions specified in Article 18 of the


Contract.








Article 7


Accounting Reports





7.1 The Operator shall provide relevant accounting reports and statements based on


the Accounting System to CNOOC and each company comprising the Contractor.


Monthly reports shall be submitted within thirty (30) days after the end of each


month, quarterly reports within forty-five (45) days after the end of each Calendar


Quarter and annual reports within forty-five (45) days after the end of each


Calendar Year. Monthly, quarterly and annual reports shall be submitted in


accordance with the requirements and formats specified in the Accounting System.


7.2 Any Investing Party to the Contract may require the Operator to allow its staff to


have access to the Joint Account Accounting Records relating to the application


of expenses in the stipulated custody period, upon giving thirty (30) days notice


but such access shall not unduly hinder Operator’s normal operations.

















24


 Article 8


Audit





8.1 Audits shall be carried out in accordance with Article 19.2 of the Contract.


8.2 The expenses of audits for any non-Operators shall be borne by any non-Operator





which conducts the audit. Expenses for any joint audit conducted by the non¬


operator shall be allocated in proportion to their respective participating interests


in the development costs.








Article 9


The Transfer Procedure for the Joint Account


9.1 When the Exploration operations are successful and the Contract Area enters the


development period, the Operator shall conduct an inventory and check of all


properties and accounts for CNOOC. When each Oil Field and/or Gas Field


within the Contract Area goes from development into production, when the


Contractor terminates the Contract, an inventory and check of all properties and


accounts shall be conducted.


If the Contract Area is entered into the development period or the production


period, the Operator (after taking an inventory of all properties by all Investing


Parties) shall make a proposal to JMC, and the JMC shall approve the remaining


equipment and materials needed for the Petroleum Operations of the following


period, and shall be carried forward to the next period in book values in Joint


Account, but, the Operator shall be responsible for handling the equipment and


materials not needed for Petroleum Operations, the gains or losses derived from


such disposal shall be adjusted against the original accounts in accordance with its


own share of the Investing Party in proportion to the overall investment amount of


all Investing Parties.


If the Contract terminates, the method of an inventory to all of the remaining


equipment and materials as mentioned above, the gains and losses derived from^








25


such disposal shall be adjusted against the accounts of the original Investing Party


in accordance with the above mentioned methods.


9.2 In accordance with the provisions of Article 8.7 of the Contract, when CNOOC


becomes the Operator of all the Oil Fields and/or Gas Fields within the Contract


Area, the former Operator shall transfer to CNOOC all the Accounting Records


relating to the Joint Account.


9.3 In accordance with the provisions of Article 8.7 of the Contract, when CNOOC


becomes the Operator of a single Oil Field and/or Gas Field, the former Operator


shall transfer to CNOOC the Accounting Records relating to the development and


operating costs of that Field as contained in the Joint Account. The Accounting


Records relating to the exploration costs of the Contract Area shall be retained by


the Operator until the total exploration costs of the Contract Area have been


recovered. Copies shall be provided by the Operator to CNOOC if required by


CNOOC.


9.4 Upon the termination of the Contract, the Operator shall transfer all the relevant


vouchers, books and statements over to CNOOC for custody.


9.5 In conducting the transfer of the accounting books and inventory and check of all


the properties in accordance with the provisions of this Accounting Procedure, the


implementation procedure for the transfer and verification, the accounting files to


be transferred and accounting matters to be settled as well as other details shall be


negotiated and agreed in advance between the Operator and CNOOC. The transfer


procedure shall be completed within the time period agreed upon by the Parties.


Thereafter, owing to the needs of any Investing Party to the Contract, CNOOC


shall allow that party’s staff access to the Accounting Records within the relevant


Accounting Records custody period and provide them with duplicates, if


necessary.














26


ANNEX III



































specifics of obligations regarding


employment and payment of


personnel redacted


CONTENTS





” specifics of obligations regarding





'employment and payment of personnel


_ redacted _ _J


specifics of obligations regarding employment


and payment of personnel redacted |


 Specifics of obligations regarding


employment and payment of personnel redacted


















































































































































2


Specifics of obligations regarding


employment and payment of personnel


redacted












































































































































3


 Specifics of obligations regarding


employment and payment of personnel redacted



































































































































A











4


 Specifics of obligations regarding


employment and payment of personnel redacted


Specifics of obligations regarding


employment and payment of personnel


redacted















































































































































6


 Specifics of obligations regarding


employment and payment of personnel redacted






























































































































































7