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REPUBLIC OF KENYA



PRODUCTION SHARING CONTRACT

BETWEEN

THE GOVERNMENT OF THE REPUBLIC OF

KENYA

And

……………………………………….

RELATING TO

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TABLE OF CONTENTS

PART I SCOPE AND INTERPRETATION ........................................................................ 7

1A SCOPE ................................................................................................................................ 7

1B INTERPRETATION ........................................................................................................... 8

PART II TERM, EXPLORATION OBLIGATIONS AND TERMINATION ..................... 16

2. TERM................................................................................................................................... 16

3. SURRENDER..................................................................................................................... 17

4. MINIMUM EXPLORATION WORK AND EXPENDITURE OBLIGATIONS ........ 18

5.SIGNATURE BONUS AND SURFACE FEES .............................................................. 21

PART III RIGHTS AND OBLIGATIONS OF THE CONTRACTOR ............................... 22

7. RIGHTS OF THE CONTRACTOR ................................................................................. 22

8. GENERAL STANDARDS OF CONDUCT .................................................................... 23

9. JOINT LIABILITY AND INDEMNITY ............................................................................. 24

10. WELLS AND SURVEYS ................................................................................................ 25

11. OFFSHORE OPERATIONS .......................................................................................... 27

12. FIXTURES AND INSTALLATIONS ............................................................................. 27

13. LOCAL EMPLOYMENT AND TRAINING .................................................................. 28

14. DATA AND SAMPLES .................................................................................................. 29

15. REPORTS ........................................................................................................................ 30

PART IV RIGHTS AND OBLIGATIONS OF THE GOVERNMENT AND THE

MINISTER ............................................................................................................................... 31

16. RIGHTS OF THE GOVERNMENT ............................................................................... 31

17. OBLIGATIONS OF THE GOVERNMENT .................................................................. 32



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PART V WORK PROGRAMME, DEVELOPMENT AND PRODUCTION ................... 33

18. EXPLORATION WORK PROGRAMME ..................................................................... 33

19. DISCOVERY AND EVALUATION WORK PROGRAMME ..................................... 34

20. DEVELOPMENT PLAN AND DEVELOPMENT WORK PROGRAMME .............. 35

21. UNITISATION .................................................................................................................. 36

22. MARGINAL AND NON-COMMERCIAL DISCOVERIES ......................................... 37

23. NATURAL GAS............................................................................................................... 38

24. PRODUCTION LEVELS AND ANNUAL PRODUCTION PROGRAMME ............ 39

25. MEASUREMENT OF PETROLEUM ........................................................................... 39

26. VALUATION OF CRUDE OIL AND NATURAL GAS............................................... 40

PART VI COST RECOVERY, PRODUCTION SHARING, MARKETING AND

PARTICIPATION ................................................................................................................... 41

27. COST RECOVERY, PRODUCTION SHARING, WINDFALL AND INCOME TAX

.................................................................................................................................................. 41

28. GOVERNMENT PARTICIPATION ............................................................................... 47

29. DOMESTIC CONSUMPTION ....................................................................................... 49

PART VII BOOKS, ACCOUNTS, AUDITS, IMPORTS, EXPORTS AND FOREIGN

EXCHANGE ............................................................................................................................ 51

30. BOOKS, ACCOUNTS AND AUDITS .......................................................................... 51

31. PREFERENCE TO KENYAN GOODS AND SERVICES......................................... 51

32. EXPORTS AND IMPORTS ........................................................................................... 52

33. EXCHANGE AND CURRENCY CONTROLS ............................................................ 54

PART VIII GENERAL ............................................................................................................ 56

34. PAYMENTS ..................................................................................................................... 56

35. ASSIGNMENT ................................................................................................................. 56



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36. MANAGER, ATTORNEY AND JOINT OPERATION AGREEMENT..................... 56

37. CONFIDENTIALITY ........................................................................................................ 57

38. FORCE MAJEURE ......................................................................................................... 58

39. WAIVER ............................................................................................................................ 59

40. GOVERNING LAW ......................................................................................................... 59

41. ARBITRATION ................................................................................................................ 59

42. ABANDONMENT AND DECOMMISSIONING OPERATIONS............................... 60

43. NOTICES .......................................................................................................................... 65

44. HEADING AND AMENDMENTS .................................................................................. 66

APPENDIX “A” ...................................................................................................................... 68

THE CONTRACT AREA ...................................................................................................... 68

APPENDIX "B" ...................................................................................................................... 69

APPENDIX "C" ...................................................................................................................... 83



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CONTRACT AREA BLOCK ….. …………………………………….



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PRODUCTION SHARING CONTRACT

BETWEEN

THE GOVERNMENT OF THE REPUBLIC OF KENYA

AND

……………………………………….

This CONTRACT is made and entered into on the ___________ day of

__________________ 2008 by and between the Government of the

Republic of Kenya (hereinafter referred to as the "Government")

represented for the purpose of this contract by the Minister for the time

being responsible for energy (hereinafter referred to as the "Minister") and

………. incorporated under of the Laws of ………………………..and

having established a place of business at …….. (hereinafter referred as

the "Contractor")

The Government and the Contractor herein are referred to either

individually as "Party" or collectively as "Parties".

WITNESSETH:

WHEREAS the title to all petroleum resources existing in their natural

conditions in Kenya is vested in the Government; and

WHEREAS the Government wishes to promote and encourage the

exploration and the development of petroleum resources in and

throughout the Contract Area, as defined herein; and

WHEREAS the Contractor desires to join and assist the Government in

accelerating the exploration and development of the potential petroleum

resources within the contract area: and

WHEREAS the Contractor has the financial ability, technical competence

and professional skills necessary to carry out the petroleum operations



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hereinafter described; and

WHEREAS in accordance with the Petroleum (Exploration and Production)

Act (Cap 308) laws of Kenya, 1986, enacted by the Parliament of the

Republic of Kenya, agreements, in the form of production sharing

contracts, may be entered between the Government and capital investors;

NOW THEREFORE in consideration of the undertaking and covenants

herein contained, the Parties hereby agree as follows:

PART I SCOPE AND INTERPRETATION

1A SCOPE

This contract is a production-sharing contract, in accordance with the

provisions herein contained.

The Contractor shall (a) Be responsible to the Government for the execution of the

petroleum operations contemplated hereunder in accordance with the

provisions of this contract and is hereby appointed and constituted the

exclusive legal entity to conduct petroleum operations in the contract area

for the term hereof;

(b) Provide all capital, machinery, equipment, technology and

personnel necessary for the conduct of petroleum operations;

(c) Bear the risk of petroleum costs required in carrying out

petroleum operations and shall therefore have an economic interest in the

development of the petroleum deposits in the contract area. Such costs

shall be included in petroleum costs recoverable as provided in clause 27

hereof.

During the term of this contract, the total production achieved in the

conduct of the petroleum operations shall be divided between the parties

hereto in accordance with the provisions of clause 27 hereof.



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1B INTERPRETATION

In this Contract, words in the singular include the plural and vice versa,

and except where the context otherwise requires:

"Acceptable Assignee" means a reputable Person experienced in the

oil industry;

"Accounting Procedure" means the accounting procedures and

requirements set out in Appendix "B" attached hereto and made an integral

part hereof;

"The Act" means the Petroleum (Exploration and Production) Act;

"Affiliate" means a person directly or indirectly controlling or

controlled by or under direct or indirect common control with another

person and "control" means the ownership of at least fifty percent (50%) of

voting rights in that person;

“Appointee” means a body corporate wholly owned or controlled by

the Government of the Republic of Kenya and appointed for the purposes

of this Contract;

“Appraisal Well Plan” means a planned drilling program of one or

more wells to estimate the extent and productive capacity of a Provisional

Commercial Discovery;

“Additional Exploration Period” means all or any of the Exploration

Periods following the Initial Exploration Period as may be extended under

the terms of this Agreement;

"Barrel" means a quantity consisting of 158.987 litres at standard

atmospheric pressure of 1.01325 bars and temperature of fifteen degrees

centigrade (15 C);

"Calendar Quarter" or "quarter" means a period of three (3)



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consecutive months commencing with the first day of January, April, July

and October;

"Calendar Year" means a period of twelve (12) consecutive months

commencing with the first day of January in any year and ending the last

day of December in that year, according to Gregorian calendar;

"Commercial Discovery" means a tested and delineated

accumulation of petroleum in an Exploratory Well which has been duly

evaluated in accordance with the provisions of clause 19, and whose

reserves are certified by a competent 3rd party, appointed in accordance

with Clause 26(e) herein, as Commercial Production according to good

international financial and petroleum industry practice, after the

consideration of all pertinent technical and economic data;

"Commercial Production" means the quantity of petroleum produced

on a regular basis from a Commercial Discovery, not used in Petroleum

Operations, but saved and sold at a value exceeding the combined

exploring, finding, appraising, developing, producing, transporting and

marketing costs of that production;

"Constitution" means the Constitution of the Republic of Kenya;

“Contract” means this agreement upon execution;

"Contract Area" means the geographic area covered by this

Contract, and described in Appendix "A" and any part thereof not

previously surrendered;

"Contract Year" means twelve (12) consecutive calendar months

from the effective date or from the anniversary thereof;

"Contractor" means the non-Government signatory to this Contract,

its successors or any assignee or assignees of any interest of the

signatory under this Contract, provided that the assignment of any such

interest is accomplished pursuant to the provisions of clause 35 hereof;



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“Contractor’s Book Value” means the cumulative un recovered cost

per Barrel of Proven Reserves from Petroleum Operations including both

capital and operating costs to the Point of Sale as carried in the Joint

Account of Contractor for Crude Oil or Crude Oil Equivalent produced,

saved and sold.

"Crude oil" means all hydrocarbons regardless of gravity that are

produced at the wellhead in liquid state at atmospheric pressure, asphalt

ozokerites and the liquid hydrocarbons known as distillates or Natural

Gas liquids obtained from Natural Gas by condensation or extraction;

“Crude Oil Equivalent” means that 6000 standard cubic feet of

Natural Gas at standard temperature and pressure is equivalent to one

Barrel of Crude Oil for the purposes of calculating the profit oil split

percentages between Government and Contractor in clause 27 (3) of this

Contract and its constituent parts.

“Decommissioning Plan” means the plan for the decommissioning,

abandonment, recovery and removal, or if applicable redeployment, of

wells, flow lines, pipelines, facilities, infrastructure and assets related to

Petroleum Operations.

“Delivery Point” means the outlet flange of the final fiscal

meter prior to conveyance of title for Petroleum from Contractor to

another party;

"Development Area" means the area delimited in a Development

Plan adopted under Clause 20 hereof;

“Development Plan” means the Provisional Development Plan

prepared under Clause 20 hereof, by both Contractor and Minister with the

results of an executed Appraisal Well Plan;

“Discount Rate” means the sum of one (1) and the decimal

equivalent of the percentage increase in the United States Consumer Price

Index, as reported for the first time in the monthly publication "International

Finance Statistics" of the International Monetary Fund, between the month

of the effective date and the month when such costs were incurred;



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“Discovery” means the discovery of Petroleum.

“Economic Limit” means that point in the life of field where

expected Revenue to Contractor from Petroleum Operations is

insufficient to cover the operating costs to continue Petroleum

Operations in accordance with the requirements of the Contract. In this

context “Revenue” means the expected revenues derived from the

conveyance and sale of Petroleum at the Delivery Point together with

any firm tariff income earned by the field facilities, if any.

"Effective date" means the date falling ninety days after this Contract

is executed by the Government and the Contractor;

“Evaluation” means the logical cataloguing, interpretation and

assessment of economic and or technical data and information in order to

understand the implications and impact of such data and information on

technical and business decisions with respect to Petroleum Operations

and shall be inclusive of logging, coring and testing an exploratory well, but

exclusive of drilling, reaming, sidetracking or similar activities;

"Execution Date" means the date this contract is signed by the

Government and the Contractor;

“Exploration Period” means the Initial Exploration Period or any

Additional Exploration Periods (as extended), as the case may be, during

which Exploration Operations are undertaken by the Contractor;

"Exploration Operations" include geological, geophysical and

Geochemical surveys and analyses, aerial mapping, investigations of

subsurface geology, stratigraphic tests, drilling Exploratory Wells and work

necessarily connected therewith;

"Exploratory Well" means a well drilled or to be drilled (as the case

may be) in search of petroleum to test a geological feature, which has not

been determined to contain producible petroleum sufficient for Commercial

Production;



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“First Additional Exploration Period” means the additional period of

two (2) Contract Years after the Initial Exploration Period pursuant to

Clause 2 (3).

"Fiscal Year" means a period of twelve (12) consecutive months

corresponding to the year of income as defined in the Income Tax Act of

Kenya;

"Income Tax Act" means the Income Tax Act of Kenya, as from time

to time amended;

“Initial Exploration Period” means the period of three (3) Contract

Years commencing on the Effective Date of the Contract, as defined in

Clause 2 (1).

“Joint Account” means the set of accounts kept by Operator to

record all receipts, expenditures and other operations which, under the

terms of this Contract, shall be shared between the entities constituting

Contractor and Government in proportion to their paying participating

interests.

“Joint Operating Agreement” (JOA) means the participating

agreement between the Parties hold a working interest in Petroleum

Operations that governs their activities, obligations and responsibilities

under this Contract;

"LIBOR" means London Inter-Bank Offered Rate of interest on six

(6) months United States dollars deposit quoted at 11 a.m. by the National

Westminster Bank Plc, or any other bank agreed by the parties on the first

banking day of each month for which interest is due;

“Liquidated Damages” means the damages payable by the

Contractor in any Exploration Period in the event of any default of

obligation or surety by the Contractor, being the balance due to the

government in the Surety Account at the end of any Exploration Period

calculated in accordance with the provisions of clause 4 (7);



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“Lower Thermal Heat Rate” means the Btu content of a fuel by

international Standards used for comparison of thermal value of a

hydrocarbon;

"Maximum Effective Rate" means the rate at which the maximum

ultimate economic petroleum recovery is obtained from a commercial field

without excessive rate of decline in reservoir pressure and consistent with

good international petroleum industry practice;

“Minimum Expenditure” means the minimum expenditure obligations

of the Contractor during each of the Exploration Periods as specified in

Clause 4 herein.

"Minister" means the Minister for the time being responsible for

energy or his designated representative;

"Ministry" means the Ministry for the time being responsible for

energy or its designated representative;

"Natural gas" means hydrocarbons that are in a gaseous phase at

atmospheric conditions of temperature and pressure, including wet mineral

gas, dry mineral gas, casing head gas and residue gas remaining after the

extraction or separation of liquid hydrocarbons from wet gas, and nonhydrocarbon gas produced in association with liquid or gaseous

hydrocarbons;

“Normal Cubic Meter” means the volume of gas that occupies a

cubic meter when this gas is at a temperature of 15 degrees Celsius and

a pressure of 1013.25 millibar;

“Offshore” shall mean any area which lies below the elevation of the

lowest tide level of the shoreline in question for the 10 years preceding this

Contract;

“Participation Agreement” means that the agreement under

Appendix C between the Government and Contractor that governs their

respective activities, obligations and responsibilities upon the election of



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the Government to acquire, hold and execute a fully paying working

interest in one or more Provisional Development Areas under this

Contract;

“Participation Interest or Participating Interest” shall mean, as the

context requires, the fully paying participating interest by either Party in a

Development Area as set out in this Contract;

“Person” means any legal entity, corporeal or otherwise;

"Petroleum" means Crude Oil and Natural Gas;

"Petroleum Costs" means those expenditures made and obligations

incurred by the Contractor and paid into the Joint Account in carrying out

Petroleum Operations hereunder, determined in accordance with this

Contract and the accounting procedure attached hereto in Appendix "B"

and made a part hereof;

"Petroleum Operations" means all or any of the operations,

authorised under this Contract, related to the exploration for, finding,

appraisal, development, extraction, production, separation and treatment,

storage, transportation, and sale or disposal of, Petroleum up to the point of

export or the agreed Delivery Point in Kenya or the point of entry into a

refinery and includes natural gas processing operations but does not

include petroleum refining operations;

“Point of Sale” means Delivery Point unless otherwise specified;

“Proved Reserves” means those quantities of petroleum which, by

analysis of geological and engineering data, can be estimated with

reasonable certainty to be commercially recoverable, from a given date

forward, from known reservoirs and under current economic conditions,

operating methods, and government regulations. Proved reserves can be

categorized as development or undeveloped. If deterministic methods are

used, the term reasonable certainty is intended to express a very high

degree of confidence that the quantities will be recovered. If probabilistic

methods are used, there should be at least a 90% probability that the

quantities actually recovered will equal or exceed the estimate;



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“Provisional Commercial Discovery” means a Commercial Discovery

prior to delineation drilling and evaluation thereof;

“Provisional Development Plan” means the programme for drilling,

testing and completing all wells meant for production or pressure

maintenance, installing a gathering system between wells, and installing

and commissioning any processing and transportation facilities necessary

to deliver production to the point of sale;

“Qualifying Expenditures” means all expenditures as specified in

clause 27 (2) (b) which have been expended or committed as a result of an

approved work program budget.

"Regulations" means the Petroleum (Exploration and Production)

Regulations;

“Sales Value of Crude Oil” shall mean the gross sales price at the

Delivery Point of export, or the agreed delivery point in Kenya or the point

of entry into a refinery, less the Contractor’s Book Value cost;

“Second Additional Exploration Period” means the additional period

of two (2) Contract Years after the First Additional Exploration Period

pursuant to Clause 2 (4),as extended pursuant to Clause 2(5) and/or

Clause 19(4) herein;

"Semester" means a period of six (6) consecutive months

commencing with the first day of January or the first day of July of a

calendar year.

“Stub Year” shall mean that portion of the first contract year between

the Effective Date and the last day of the Calendar Year then in progress;

“Surety Account” means any third party guarantee, escrow or legally

executed service agreement acceptable to all parties of this contract put in

place as liquid damages;



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PART II TERM, EXPLORATION OBLIGATIONS AND TERMINATION

2. TERM

(1) The contractor is authorized to conduct exploration

operations in the contract area during an Initial Exploration Period of

………………contract years from the effective date.

(2) The contractor shall begin exploration operations within

three (3) months of the effective date.

(3) Upon written application by the contractor made not later

than one (1) month prior to the expiry of the initial exploration period, the

Minister shall, if the contractor has fulfilled his work and expenditure

obligations under this contract, grant a First Additional Exploration Period

of two (2) contract years.

(4) Upon written application by the contractor made not later

than one (1) month prior to the expiry of the first additional exploration

period hereof, the Minister shall, if the contractor has fulfilled its work and

expenditure obligations under this contract, grant a Second Additional

Exploration Period of …………..contract years.

(5) In order to enable the contractor to complete the drilling

and testing of an exploratory well actually being drilled or tested at the

end of the second additional exploration period, the Minister shall, on

written application by the contractor made not later than three (3) months

before the expiry of that exploration period, unless another period of

notice is agreed by the Parties, extend the period in which the work is to

be expeditiously completed, which in any event shall not extend such

period by more than four (4) months.

(6) This contract shall expire automatically at the end of the

initial exploration period or of any additional exploration period, except as

to any development area. If the contractor reports, pursuant to sub-clause

19 (6) hereof, that a commercial discovery has been made before the



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expiry of the initial exploration period stipulated in sub-clause 2 (1) hereof

or any additional exploration period thereof, this contract shall not expire in

respect to the relevant development area, but shall continue as to such

development area for a term of twenty five (25) years from the date the

development plan for that development area is adopted under sub-clause

20 (3) hereof.

3. SURRENDER

(1) The contractor shall surrender:

(a) ……………………………… of the original contract area at

or before the end of the initial exploration period; and

(b) …………………………….. of the remaining contract area at

or before the end of the first additional exploration period.

(2) When calculating a surrender under sub-clause 3 (1), a

development area shall be excluded from the original contract area.

(3) Notwithstanding the terms of surrender Set forth under subclause 3(1) herein the contractor may surrender an additional part of the

contract area and such a voluntary surrender shall be credited against the

next surrender obligation of the contractor under sub-clause 3 (1).

(4) The shape and size of an area surrendered shall be

approved by the Minister, which approval shall not be unreasonably

withheld.

(5) The contractor shall give one (1) year's written notice of

surrender in respect of a commercial discovery, which is producing or has

produced petroleum and one (1) month written notice of surrender in

respect of any other part of the contract area. In case of a surrender of the

entire contract area the contract shall terminate.

(6) Asurrender provided for under this clause 3 shall not



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reduce the minimum amount of exploration work and expenditure fixed in

clause 4.

4. MINIMUM EXPLORATION WORK AND EXPENDITURE OBLIGATIONS



(1) The contractor shall carry out the following minimum work

and expenditure obligations (a) During the Initial Exploration Period of ………………………..contract

years –

Work Activities – Initial Exploration Period

Minimum Work Programme

(i) To ……………….in respect of Block ……at a minimum

expenditure of …..

(ii) To ……………. at a Minimum expenditure of USD

…………….

(iii) To ………….at a Minimum expenditure of USD…….

(iv) To drill …….well(S) to a minimum vertical of 3000m at a

minimum expenditure of USD ……..



The total minimum expenditure obligation in respect of the Initial

Exploration Period will be USD………..

(b) During the First Additional Exploration period of ……………………

contract years:

Work Activities – First Additional Exploration Period

Minimum Work Programme

(i) To ……..at a Minimum expenditure of USD ……….

(ii) To drill….. exploratory well(s) to a minimum total vertical depth

of 3000 meters at a Minimum expenditure of

USD ………

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The total minimum financial obligation in respect of the First

Additional Exploration Period shall be USD………..

(c) During the Second Additional Exploration Period of …………………

contract years:

Work Activities – Second Additional Exploration Period

Minimum Work Programme

(i) To ……….. at a Minimum expenditure of

USD……..

(ii) To drill………. exploratory well(s) to a minimum total vertical depth

of 3000 meters at a Minimum expenditure of

USD ………..

The total minimum financial obligation in respect of the Second

Additional Exploration Period shall be USD ………….

(2) The fulfilment of the minimum work obligation in respect

of each exploration period shall relieve the contractor of the

corresponding expenditure obligation thereto.

(3) If the drilling of an exploratory well is discontinued, prior to

reaching the minimum depth herein specified, because that well has

encountered the basement, an impenetrable substance or any condition

which in accordance with the good international petroleum industry

practice would make it unsafe or impractical to continue drilling, the

minimum depth obligation in respect of that well shall be deemed to be

fulfilled.

A well drilled to evaluate a discovery under an evaluation

work programme pursuant to sub-clause 19 (2) and 19 (3) shall not have

to satisfy the requirement to drill an exploratory well, except with the

written consent of the Minister.

(4) The minimum exploration expenditure set forth in sub-



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clause 4 (1) is expressed in U.S. dollars of the year of the effective date. In

any contract year of either the initial exploration period or any additional

exploration period, for the purpose of comparison of the actual costs

incurred and paid by the contractor with the minimum exploration

expenditure, the actual costs incurred and paid by the contractor for

seismic operations and the drilling of exploratory wells during that contract

year shall be converted into U.S. dollars by dividing the costs, by the

number (hereinafter referred to as the "discount rate") which is the sum of

one (1) and the decimal equivalent of the percentage increase in the

United States Consumer Price Index, as reported for the first time in the

monthly publication "International Finance Statistics" of the International

Monetary Fund, between the month of the effective date and the month

when such costs were incurred.

(5) If during either the initial exploration period or the first

additional exploration period, the contractor exceeds the minimum work

obligation or incurs expenditure in accordance with sub-clause 4 (4)

exceeding the minimum expenditure obligations for such exploration

period, then such excess may be credited toward the respective obligation

of the next succeeding additional exploration period or periods.

(6) On or before the commencement of the initial exploration period or of

any additional exploration period the contractor shall provide a security

of …………….., in form of a bank guarantee from a reputable bank to the

Minister, and …………… in form of parent company guarantee

guaranteeing the contractor's minimum work and expenditure obligations

under sub-clause 4 (1) hereof.

(7) If at the end of either the initial exploration period or of any additional

exploration period or upon the date of termination of this contract,

whichever occurs first, the contractor has not fulfilled its minimum work

obligations under sub-clause 4 (1) hereof, and/or its minimum expenditure

obligations under sub-clause 4 (1) and 4 (4) hereof, the contractor shall

pay the Government the minimum monetary obligation in respect of the

work not carried out multiplied by the discount rate, as defined in subclause 4 (4) and calculated on the last month of that exploration period,

and/or the shortfall, if any, between the amount expended, in accordance



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with sub-clause 4 (4) and the minimum monetary obligation for that

exploration period, multiplied by the discount rate, as defined here above.

5.SIGNATURE BONUS AND SURFACE FEES

The contractor shall pay a signature bonus of ……………………………

on the date of this Agreement by means of a banker's cheque drawn on an

accepted bank or in any other manner acceptable to the Ministry and in

accordance with applicable law.

The contractor shall pay, on or before the beginning of the relevant

contract year to the accounting officer of the Ministry, the following surface

fees;

(i) U.S dollars …. per square kilometre per annum during the initial

exploration period

(ii) U.S dollars….. per square kilometre per annum during the first

additional exploration period;

(iii) U.S dollars …..per square kilometre per annum during the second

additional exploration period or any extension thereof; and

(iii) U.S dollars….. per square kilometre per annum during development

and production.

(3) The surface fees shall be calculated on the basis of the surface area of

the contract area on the date those payments are due.

A fee payable under sub-clause 5(2) is not refundable and a late payment

shall attract interest in accordance with sub-clause 34(2).



6. TERMINATION

(1) The Minister may terminate this contract by giving the

contractor written notice, if the contractor (a) Fails to make any payment to the Government or the

Minister required under this contract for a period exceeding one (1) month;



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(b) Is in material breach of any other obligation under this

contract; or

(c) Becomes insolvent, makes a composition with creditors, or

goes into liquidation other than for reconstruction or amalgamation.

(2) The period of notice in respect of sub-clause 6 (1) (a)

hereof shall be one (1) month, and in any other case three (3) months, but

if the contractor remedies the breach within the period of notice, the

Minister shall withdraw the notice. Where the Minister reasonably believes

the contractor is using its best efforts to remedy the default, the Minister

may extend the notice, accordingly.

(3) When this contract is terminated or expires in whole or in part, the

contractor shall conclude the petroleum operations in the area as to which

this contract has terminated or expired in an orderly manner minimising

harm to the Government and third parties.

(4) Where control over one of the entities constituting the contractor is

changed, the continuation of the contract shall be subject to the consent of

the Minister, which shall not be unreasonably withheld, and for the purpose

of this sub-clause 6 (4) the term "control" shall have the same meaning as

set forth in the definition of an affiliate in clause 1B.

PART III RIGHTS AND OBLIGATIONS OF THE CONTRACTOR

7. RIGHTS OF THE CONTRACTOR

(1) The contractor shall have the right to carry out the

petroleum operations within the contract area, subject to the provisions of

this contract for the term hereof.

(2) The contractor is granted the right to enter upon the

contract area and conduct petroleum operations there, but permission may

be granted by the Government to other persons to search for and mine

minerals, other than petroleum, so long as they do not unreasonably

interfere with the petroleum operations, and easements and rights of way

may be granted to other persons for the benefit of land adjacent to the



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contract area.

(3) The Minister shall facilitate on behalf of the contractor any

permit necessary to enable the contractor to use the water in the contract

area for the purpose of the petroleum operations but the contractor shall

not unreasonably deprive the users of land, domestic settlement or cattle

watering place of the water supply to which they are accustomed.

(4) The contractor may, for the purpose of the petroleum

operations, use gravel, sand, clay and stone in the contract area but not

in (a) Trust land without a licence granted under section 37 of the

Trust Land Act;

(b) Other private land without the consent of the owner; and

(c) A beach, foreshore or reef without the consent of the

Minister.

(5) Subject to the provisions of section 10 of the Act and of

regulation 6 of the Regulations made there under, and subject to the

provisions of sections 115 and 118 of the Constitution and Part IV of the

Trust Land Act, the contractor may exercise all rights granted to him by this

contract.

8. GENERAL STANDARDS OF CONDUCT

(1) The contractor shall carry out the petroleum operations

diligently and in accordance with good international petroleum industry

practice.

(2) In particular, the contractor shall (a) ensure that all machinery, plant, equipment and

installations used by the contractor in connection with the petroleum

operations are of proper and accepted construction and are kept in good

repair;



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(b) Use the resources of the contract area as productively as

possible and ensure that petroleum discovered and produced, or mud or

any other fluids or substances do not escape or waste;

(c) prevent damage to adjacent strata which bear petroleum or

water, and prevent water entering through wells into strata bearing

petroleum, except where water injection methods are used for secondary

recovery operations;

(d) properly confine petroleum in receptacles constructed for

that purpose, and not place crude oil in an earthen reservoir except

temporarily in an emergency; and

(e) Dispose of waste oil, salt water and refuse in accordance

with good international petroleum industry practice, avoiding pollution.

9. JOINT LIABILITY AND INDEMNITY

(1) Where a contractor consists of more than one person their

liability shall be joint and several.

(2) The contractor shall cause as little damage as possible to

the surface of a contract area and to trees, crops, buildings and other

property thereon, shall forthwith repair any damage caused, and shall pay

reasonable compensation for any loss suffered, as determined by an

independent expert appointed by the parties under clause 26(1)(b).

(3) The Minister may, if he has reasonable cause to believe

that the petroleum operations may endanger persons or property, cause

pollution, harm marine life or interfere with navigation and fishing, order the

contractor to take reasonable remedial measures or order the contractor to

discontinue the relevant petroleum operations until such measures, or

mutually agreed alternatives thereto, are implemented.

(4) The contractor shall maintain appropriate and adequate

third party liability insurance and workmen's compensation insurance and

shall provide the Minister with evidence of those insurances before the



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petroleum operations begin.

(5) The contractor shall indemnify, defend and render the

Government harmless from all claims and damage which, but for the

conduct of petroleum operations by the contractor or sub-contractor, would

not have arisen or occurred.

10. WELLS AND SURVEYS

(1) Unless such a notice is waived, the contractor shall not drill

a well or borehole or recommence drilling after a six (6) months' cessation

without thirty (30) days' prior notification to the Minister which notice shall

set forth the contractor's reasons for undertaking such well and shall

contain a copy of the drilling programme.

(2) The design of a well or borehole and the conduct of drilling

shall be in accordance with good international petroleum industry practice.

(3) No borehole or well shall be drilled so that any part thereof

is less than five hundred (500) metres from a boundary of the contract

area, without the consent in writing of the Minister, which consent shall not

be unreasonably withheld.

(4) The contractor shall not, except where there is danger or a

risk of significant economic loss (a) abandon a well or remove any permanent form of casing

there from, without giving forty-eight (48) hours prior notification to the

Minister, and an abandoned well shall be securely plugged to prevent

pollution, sub-sea damage, or water entering or escaping from the strata

penetrated; or

(b) Commence drilling, re-enter or plug a well unless a

representative of the Minister has been given a reasonable opportunity to

be present.

(5) The contractor shall state, in its application to abandon a

well on land, whether that well is capable of providing a water supply.



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(6) The contractor shall, within two (2) months of termination or

expiry of this contract or the surrender of part of the contract area, deliver

up all productive wells, in said surrendered area, in good repair and

working order together with all casings and installations which cannot be

moved without damaging the well, but the Minister may require the

contractor to plug the well at the contractor's expense by notifying the

contractor within thirty (30) days after such termination or expiry is effected

or at least three (3) months prior to surrender of a development area.

(7) Where the contractor applies to permanently abandon an

exploratory well in which petroleum of potentially commercial significance

has not been found, the Minister may request the contractor to deepen or

sidetrack that well and to test the formations penetrated as a result of such

operations, or to drill another exploration well within the same prospect

area, subject to the following provisions;

(a) Any such additional petroleum operations shall be at the

sole cost, risk and expense of the Minister and shall be paid for in

accordance with the accounting procedure. The Government shall

advance to the contractor the funds necessary to conduct the operations.

(b) The contractor shall not undertake such additional work if

it will interfere with the conduct of the contractor's petroleum operations

or if it is not technically or operationally feasible.

(c) In the event that the petroleum operations undertaken

under this sub-clause 10 (7) result in a discovery which the contractor

elects to evaluate and/or develop as a commercial field, the contractor

shall reimburse the Government ………………………. of the costs and

expenses incurred by the Government for the conduct of the operations

and such sum shall be paid within thirty (30) days of the notification made

by the contractor. If the contractor does not make such election, the

Government shall have the right to continue the petroleum operations on

this discovery at the sole cost, risk and expense of the Government.

(8) The contractor shall give the Minister thirty (30) days; notice

of any proposed geophysical survey of the contract area, which notice

shall contain complete details of the programme to be conducted. At the



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request of the contractor, the Minister may waive the notice period.

11. OFFSHORE OPERATIONS

(1) The contractor shall ensure that works and installations

erected offshore in Kenya's territorial waters and exclusive economic zone

shall be (a) Constructed, placed, marked, buoyed, equipped and

maintained so that there are safe and convenient channels for shipping;

(b) Fitted with navigational aids approved by the Minister;

(c) Illuminated between sunset and sunrise in a manner

approved by the managing director, Kenya Ports Authority; and

(d) Kept in good repair and working order.

(2) The contractor shall pay compensation for any interference

in fishing rights caused by the petroleum operations.

12. FIXTURES AND INSTALLATIONS

(1) With the written consent of the Minister, which consent

shall not be unreasonably withheld, the contractor shall have the right to

construct roads, drill water wells and to place fixtures and installations

necessary to conduct the petroleum operations, including but not limited to

storage tanks, shipment installations, pipelines, cables or similar lines,

located inside or outside the contract area. The consent of the Minister

may be conditional on the use by other producers of the excess capacity, if

any, of those facilities. Where the Minister and contractor agree that a

mutual economic benefit can be achieved by constructing and operating

common facilities, the contractor shall use its best efforts to reach

agreement with other producers on the construction and operation of such

common facilities.

(2) Other producers may only use the facilities of the contractor

where there exists excess capacity and on payment of a reasonable



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compensation which includes a reasonable return on investment to the

contractor as determined by an independent expert appointed by the

parties and provided the use does not unreasonably interfere with the

contractor's petroleum operations.

(3) The Minister may, in consultation with the Contractor,

consent to the laying of pipelines, cables and similar lines in the contract

area by other persons, but those lines shall not unreasonably interfere with

the petroleum operations of the contractor.

(4) On termination or expiration of this contract or surrender of

part of the contract area, the contractor shall remove the above-ground

plant, appliances and installations from the contract area or the part

surrendered other than those that are situated in or related to a

development area or, at the option of the Minister, the contractor shall

transfer them, at no cost, to the Government, in the condition that they are

then in.

(5) When the rights of the contractor in respect of a

development area terminate, expire or are surrendered, the contractor

shall transfer to the Government, at no cost, the plant, appliances and

installations that are situated in the development area or that are related

thereto, unless such plant, appliances and installations are or may be

utilised by the contractor in petroleum operations under this contract, but

the Government may require the contractor to remove the surface

installations at the cost of the contractor.

13. LOCAL EMPLOYMENT AND TRAINING

(1) The contractor, its contractors and sub-contractors shall,

where possible, employ Kenya citizens in the petroleum operations, and

until expiry or termination of this contract, shall train those citizens. The

training programme shall be established in consultation with the Minister.

(2) In addition to the obligation under sub-clause 13 (1) and

commencing on the effective date, the contractor shall for the purposes of

section 11 of the Act contribute or hold to the order of the Ministry a



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minimum of ………… U.S dollars(USD………….)per year during the Initial

Exploration Period for the Ministry training fund established under section

11 (1) of the Act. The contractor's obligation hereunder shall be a minimum

of ………… U.S Dollars (USD …….. ) per year during the First Additional

Exploration Period and increased to a minimum of…….. U.S Dollars (USD

…..) per year during the Second Additional Exploration Period. The

contractor's obligation hereunder shall be further increased to a minimum

of ……..U.S. dollars (USD ……..) per year commencing with the adoption

of the first development plan under sub-clause 20 (3).

14. DATA AND SAMPLES

(1) The contractor shall keep logs and records of the drilling,

deepening, plugging or abandonment of boreholes and wells, in

accordance with good international petroleum industry practice and

containing particulars of (a) The strata and sub-soil through which the borehole or well

was drilled;

(b) The casing, tubing and down-hole equipment and

alterations thereof, inserted in a borehole or well;

(c) Petroleum, water, workable mineral or mine workings

encountered; and

(d) Any other matter reasonably required by the Minister.

(2) The contractor shall record, in an original or reproducible

form of good quality, and on seismic tapes where relevant, all geological

and geophysical information and data relating to the contract area obtained

by the contractor and shall deliver a copy of that information and data, the

interpretations thereof and the logs and records of boreholes and wells, to

the Minister, in a reproducible form, as soon as practicable after that

information, those interpretations and those logs and records come into the

possession of the contractor.

(3) The contractor may remove, for the purpose of laboratory

examination or analysis, petrological specimens or samples of petroleum

or water encountered in a borehole or well and, as soon as practicable



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shall, without charge, give the Minister a representative part of each

specimen and sample removed, but no specimen or sample shall be

exported from Kenya without prior notification to the Minister.

(4) The contractor shall keep records of any supply information

concerning the petroleum operations, reasonably requested by the

Minister, if the data or information necessary to comply with the request

are readily available.

15. REPORTS

(1) The contractor shall supply to the Minister daily reports on

drilling operations and production operations, and weekly reports on

geophysical operations.

(2) The contractor shall report in writing to the Minister the

progress of the petroleum operations according to the following schedule (a) Within one (1) month of the last day of March, June,

September and December, covering the previous three (3) months;

(b) Within three (3) months of the last day of December,

covering the previous year;

(c) Within three (3) months of the date of expiry or termination

of this contract.

(3) A report under sub-clause 15 (2) shall contain, in respect of

the period which it covers (a) Details of the petroleum operations carried out and the

factual information obtained;

(b) A description of the area in which the contractor has

operated;

(c) An account of the expenditure on petroleum operations in

accordance with the accounting procedure;



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(d) A map indicating all boreholes, wells and other petroleum

operations;

(e) On expiry or termination of this agreement details of the

petroleum operations including all the matters described in paragraphs (a)

to (d); and

(f) All information required by clause 14 not hitherto supplied.

PART IV RIGHTS AND OBLIGATIONS OF THE GOVERNMENT AND

THE MINISTER

16. RIGHTS OF THE GOVERNMENT

(1) The Government may acquire a part of the contract area for

a public purpose other than searching for or extracting petroleum but not to

the extent that will prevent the carrying out of petroleum operations within

the contract area, and the Government shall not, without good cause,

acquire a part of the contract area on which petroleum operations are in

progress.

The contractor shall not carry out petroleum operations on

such an acquired part but may:(a) Enter upon that part but not materially interfere with the

public purpose;

(b) Carry out directional drilling from an adjacent part.

(2) The Minister, or a person authorized by him in writing, may

at all reasonable times inspect any petroleum operations, and any records

of the contractor relating thereto, and the contractor shall provide, where

available, facilities similar to those applicable to its own or to subcontractors' staff for transport to the petroleum operations, subsistence and

accommodation and pay all reasonable expenses directly connected with

the inspection.



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(3) The Minister may require the contractor to perform any

obligation under this contract by giving reasonable written notice, and if the

contractor fails to comply with the notice, the Minister may execute any

necessary works for which the contractor shall pay forthwith. The Minister

may give notice to execute works at any time but not later than three (3)

months after the termination or expiry of this contract or the surrender of a

part of the contract area.

17. OBLIGATIONS OF THE GOVERNMENT

(1) The Government may at the request of the contractor,

make available to the contractor such land as the contractor may

reasonably require for the conduct of petroleum operations and (a) Where the land is Trust Land, the Government may,

subject to sub-clause 17 (2) set apart such Trust Land in the contract area

in accordance with the Trust Land Act and Chapter IX of the Constitution;

(b) Where the land is private land, the Government may,

subject to section 10 of the Act, acquire the land in accordance with the

applicable laws;

(c) The contractor shall pay or reimburse the Government any

reasonable compensation that may be required for the setting apart, use or

acquisition of any land for the petroleum operations.

(2) Where the contractor has occupied Trust Land for the

purpose of the petroleum operations before that land has been set apart,

the contractor shall notify the Minister in writing of the need to set apart

such land before the end of the two-year period referred to in section 115

of the Constitution.

(3) The Government shall grant or cause to be granted to the

contractor, its contractors and sub-contractors such way-leaves,

easements, temporary occupation or other permissions within and

without the contract area as are necessary to conduct the petroleum

operations and in particular for the purpose of laying, operating and



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maintaining pipelines and cables, and passage between the contract

area and the point of delivery of petroleum.

(4) The Government shall at all times give the contractor the

right of ingress to and egress from the contract area and the facilities

wherever located for the conduct of petroleum operations.

(5) Subject to the usual national security requirements and

the Immigration Act and Regulations of Kenya in particular, the

Government shall not unreasonably refuse to issue and/or renew entry

permits for technicians and managers employed in the petroleum

operations by the contractor or its sub-contractors and their dependants.

PART V WORK PROGRAMME, DEVELOPMENT AND PRODUCTION

18. EXPLORATION WORK PROGRAMME

(1) The contractor shall submit and orally present to the

Minister one (1) month after the effective date, a detailed statement of the

exploration work programme and budget for the first contract year.

(2) The contractor shall submit and orally present to the

Minister three (3) months before the end of each contract year, a detailed

statement of the exploration work programme and budget for the next

contract year.

(3) The Minister may submit to the contractor, within thirty (30)

days of the receipt of the annual exploration work programme and budget,

suggested modifications and revisions thereof. The contractor shall

consider the inclusion of such suggested modifications and revisions in

light of good international petroleum industry practice and shall provide the

Minister with the exploration work programme and budget which the

contractor has adopted.

(4) After the adoption of the annual exploration work

programme and budget, the contractor may make changes to that annual

exploration work programme and budget if those changes do not materially

affect the original objectives of that exploration work programme and



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budget, and shall state the reasons for those changes to the Minister.

19. DISCOVERY AND EVALUATION WORK PROGRAMME

(1) The contractor shall in accordance with section 9 (b) of the

Act, notify the Minister of a discovery of petroleum and shall report to

the Minister all relevant information.

(2) If the contractor considers that the discovery merits

evaluation, it shall submit and orally present to the Minister a detailed

statement of the evaluation work programme and budget which shall

provide for the expeditious evaluation of the discovery and the provisions

of sub-clauses 18 (3) and 18 (4) shall apply to the evaluation work

programme and budget.

(3) After the evaluation work programme and budget have

been adopted, the contractor shall diligently evaluate the discovery without

undue interruption.

(4) In the event of a discovery in the last year of the second

additional exploration period, the Minister shall, at the request of the

contractor, extend the term of the second additional exploration period in

respect to the prospective area of the discovery and for the period of time

reasonably required to expeditiously complete the adopted evaluation work

programme and budget with respect to such discovery and to determine

whether or not the discovery is commercial but in any event, such

extension to the second additional exploration period shall not exceed

twelve months.

(5) The contractor shall, not more than three (3) months after

the evaluation is completed, report to the Minister the commercial

prospects of the discovery, including all relevant technical and economic

data.

(6) If the contractor reports under sub-clause 19 (5) that the

discovery is a commercial discovery, a development plan shall be

submitted to the Minister within six (6) months of the completion of the

evaluation work programme unless otherwise agreed, and upon written



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application of the contractor, the term of this contract shall be extended by

the Minister, if necessary, in respect of the area of that commercial

discovery, provisionally established in accordance with the adaptation of a

development plan.

20. DEVELOPMENT PLAN AND DEVELOPMENT WORK

PROGRAMME

(1) The contractor shall prepare, in consultation with the

Minister, the development plan based on sound engineering and economic

principles and in accordance with good international petroleum industry

practice and considering the maximum efficient rate of production

appropriate to the commercial discovery.

(2) The development plan submitted by the contractor to the

Minister shall contain (a) Details of the proposed development area, relating to the

commercial discovery which shall correspond as closely as possible to the

extension of the discovered accumulation in the contract area, as

determined by the analysis of all the relevant available information;

(b) Proposals relating to the spacing, drilling and completion of

the wells and the facilities and installations required for the production,

storage and transportation of petroleum;

(c) A production forecast and an estimate of the investment

and expenses involved; and

(d) An estimate of the time required to complete each phase of

the development plan.

(3) The Minister and the contractor shall jointly consider the

development plan within sixty (60) days of submission thereof and the

Minister may within that period, unless otherwise agreed, submit

suggested modifications and revisions thereof. The contractor shall

consider the inclusion of such suggested modifications and revisions in the

light of good international petroleum industry practice, and the

development plan shall be adopted sixty (60) days after receipt by the



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contractor of those suggested modifications and revisions, unless another

development plan is adopted by mutual agreement before that period has

elapsed.

Where the Minister proposes no modifications and revisions,

the development plan of the contractor shall be adopted sixty (60) days

after its submission unless it is adopted by mutual agreement of the

Parties before that period has elapsed.

(4) After a development plan has been adopted, the contractor

shall use its best efforts to proceed, promptly and without undue

interruption, to implement the development plan in accordance with good

international petroleum industry practice. Development work shall

commence six (6) months from the date of adoption of the development

plan.

In connection therewith, the contractor shall submit and orally

present to the Minister, prior to the first day of October of each year

following the adoption of the development plan, a detailed statement of the

annual development work programme and budget for the next calendar

year and the provisions of sub-clauses 18 (3) and 18 (4) shall apply to the

development plan and to the annual development work programme and

budget.

(5) Where the development operations result in an extension to

the area to which the commercial discovery relates within the contract

area, the Minister shall adjust the relevant development area to include

that extension as determined by the analysis of all the relevant available

information.

21. UNITISATION

(1) Where the recoverable reserves of a commercial discovery

extend into an area adjacent to the contract area, the Minister may require

the contractor to produce petroleum therefore in co-operation with the

contractor of the adjacent area. Where non-commercial deposits of

petroleum in the contract area if exploited with deposits in an area adjacent

to the contract area, would be commercial, the Minister may make a similar



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requirement to the contractor of that adjacent area.

(2) If the Minister so requires, the contractor shall in cooperation with the contractor of the adjacent area, submit within six (6)

months, unless otherwise agreed by the Parties, a proposal for the joint

exploitation of the deposits, for the approval of the Minister.

(3) If the proposal is not submitted or approved, the Minister

may prepare his own proposal, in accordance with good international

petroleum industry practice, for the joint exploitation of the recoverable

reserves. The Minister's proposal unless another proposal is mutually

agreed, shall be adopted by the contractor, subject to sub-clause 21 (4),

and subject to the adjacent contractor's acceptance of the same proposal.

The reasonable costs of preparing the proposal shall be divided equally

between the contractor and the adjacent contractor.

(4) The provisions of the proposal for joint exploitation shall

prevail over this contract, where those provisions do not reduce the

financial benefits to the parties under this contract.

22. MARGINAL AND NON-COMMERCIAL DISCOVERIES

(1) Where a contractor determines that a discovery is marginal

or non-commercial, the contractor may propose a modification to this

contract, based on an alternative economic evaluation and after

consideration the Minister may accept or reject the proposed modification.

(2) Unless otherwise agreed, if the contractor fails to

commence the evaluation of a discovery within one year following the

notice of discovery, or if within one year following the completion of an

evaluation work programme the contractor considers the discovery does

not merit development, the Minister may request the contractor to

surrender the area corresponding to such discovery and the contractor

shall forfeit any rights relating to any production there from. The area

subject to such surrender shall not exceed the extension of the discovered

accumulation as determined by the structural closure of the prospective

horizon and all other relevant available information. Any such surrender by



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the contractor shall be credited in accordance with sub-clause 3 (3) hereof.

23. NATURAL GAS

(1) Where natural gas is discovered and the contractor and the

Minister agree that it may be economically processed and utilised other

than in secondary recovery operations, that processing and utilisation shall

follow a development plan approved in accordance with clause 20.

(2) The contractor shall return associated natural gas, not

required for use in petroleum operations or sold, to the subsurface

structure, but if such natural gas cannot be economically used or sold or

returned to the subsurface structure, the contractor shall, after expiry of

sixty (60) days' notice to the Minister giving reasons why such natural gas

cannot be economically used or sold or returned to the subsurface

structure, be entitled to flare such associated natural gas in accordance to

good international petroleum industry practice. Notwithstanding anything in

this clause to the contrary, associated natural gas may be flared at any

time if necessary for the conducting of well and production tests and during

any emergency.

(3) Where the contractor does not consider that it is

economical to process and utilise associated natural gas and where that

natural gas is not required for use in petroleum operations, the Minister

may at the field separator, process and utilise that natural gas without

compensation but the Government shall pay for all costs and expenses

related thereto which shall include, but not be limited to, any engineering

studies, new fixtures, equipment and installations required for the

gathering, transport, processing and utilisation thereof and the operation

and maintenance of same shall be at the sole risk, cost and expense of the

Government.

(4) Where the contractor considers that it is economical to

produce natural gas, the contractor agrees to sell all or part of its share of

natural gas to the Government, provided that the parties agree upon the

price (to be determined in accordance with sub-clause 26(3)), volume and

terms of sale.



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24. PRODUCTION LEVELS AND ANNUAL PRODUCTION

PROGRAMME

(1) The contractor shall produce petroleum at the maximum

efficient rate in accordance with good international petroleum industry

practice.

(2) Prior to the first day of October of each year following the

commencement of commercial production, the contractor shall submit and

orally present to the Minister, a detailed statement of the annual production

programme and budget for the next calendar year, and the provisions of

sub-clause 18 (3) and (4) shall apply to the annual production programme

and budget.

(3) The contractor shall endeavour to produce in each calendar

year the forecast quantity estimated in the annual production programme.

(4) The crude oil shall be run to storage (constructed,

maintained and operated by the contractor) and petroleum shall be

metered or otherwise measured as required to meet the purpose of this

contract in accordance with clause 25.

25. MEASUREMENT OF PETROLEUM

(1) The volume and quality of petroleum produced and saved

from the contract area shall be measured by methods and appliances

customarily used in good international petroleum industry practice and

approved by the Minister.

(2) The Minister may inspect the appliances used for

measuring the volume and determining the quality of petroleum and may

appoint an inspector to supervise the measurement of volume and

determination of quality.

(3) Where the method of measurement, or appliances used

therefore, have caused an overstatement or understatement of a share of



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the production, the error shall be presumed to have existed since the date

of the last calibration of the measurement devices, unless the contrary is

shown, and an appropriate adjustment shall be made for the period of

error.

(4) The Minister and the contractor shall determine the

measurement point at which production shall be measured and the

respective shares of petroleum allocated.

26. VALUATION OF CRUDE OIL AND NATURAL GAS

(1) The value of crude oil, for all purposes under this contract,

shall be denominated in United States dollars and shall be calculated each

calendar quarter as follows (a) if there have been sales of crude oil produced from the

contract area to third parties at arm's length during that calendar quarter,

the value shall be the weighted average per unit price actually paid in

those sales, at the F.O.B. point of export or at the point that title and risk

pass to the buyer, adjusted for grade, gravity and quality of such crude oil

as well as for transportation costs and other appropriate adjustments for

grade, gravity, and quality of such crude oil transaction where the seller

and the buyer are independent of one another and do not have, directly or

indirectly, any common interest;

(b) if there have been no sales of crude oil produced from the

contract area to third parties at arm's length during that calendar quarter,

the value shall be the "fair market value" determined as the average per

unit prevailing market price, actually paid during that calendar quarter in

arm's length sales for export under term contracts of at least ninety (90)

days between unrelated purchasers and sellers, for crude oil produced in

Kenya and in the major crude oil producing countries, and adjusted for

grade, gravity and quality of such crude oil as well as for transportation

costs and any other appropriate adjustments.

If necessary, a value of crude oil shall be determined

separately for each crude oil or crude oil mix and for each point of delivery.



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The value of crude oil shall be mutually agreed at the end of

each calendar quarter and applied to all transactions that took place

during the quarter.

If the Minister and the contractor cannot reach agreement on

the value of crude oil within thirty (30) days of the end of any calendar

quarter, such determination shall be made by an internationally recognized

expert appointed by the contractor and the Minister, but if they fail to agree

within thirty (30) days on the appointment of such expert, then by the

International Chamber of Commerce. The expert shall report his

determination within twenty (20) days of his appointment and his

determination shall be final and binding upon the Government and the

contractor.

(2) Pending the determination of the value of crude oil for a

calendar quarter, the value of crude oil determined for the preceding

calendar quarter will be provisionally applied to make calculation and

payment during such calendar quarter until the applicable value for that

calendar quarter is finally determined pursuant to sub-clause 26 (1). Any

adjustment to provisional calculation and payment, if necessary, will be

made within thirty (30) days after such applicable value is finally

determined.

(3) Natural gas shall be valued based on the actual proceeds

received for sales, provided that, for sales of natural gas between the

contractor and any affiliate, the value of such natural gas shall not be less

than the then prevailing fair market value for such sales of natural gas

taking into consideration, to the extent possible, such factors as the

markets, the quality and quantity of natural gas and other relevant factors

reflected in natural gas pricing.

PART VI COST RECOVERY, PRODUCTION SHARING, MARKETING

AND PARTICIPATION

27. COST RECOVERY, PRODUCTION SHARING, WINDFALL AND



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INCOME TAX

(1) Subject to the auditing provisions under clause 30, the

contractor shall recover the petroleum costs, in respect of all petroleum

operations, incurred and paid by the contractor pursuant to the provisions

of this contract and duly entered in the contractor's books of account, by

taking and separately disposing of an amount equal in value to a maximum

of ….. percent (%) of all crude oil produced and saved from the contract

area during that fiscal year and not used in petroleum operations. Such

cost recovery crude oil is hereinafter referred to as "cost oil".

(2) Petroleum costs may be recovered from cost oil in the

following manner:

(a) petroleum costs, with the exception of capital expenditures,

incurred in respect of the contract area, shall be recoverable either in the

fiscal year in which these costs are incurred and paid or the fiscal year in

which commercial production occurs, whichever is the later; and

(b) capital expenditure incurred in respect of each

development area shall be recoverable at a rate of twenty percent (20%)

per annum based on amortization at that rate starting either in the fiscal

year in which such capital expenditure are incurred and paid or the fiscal

year in which commercial production from that development area

commences, whichever is the later.

For the purpose of this clause, "capital expenditure" shall

mean the qualifying expenditure, other than "intangible drilling costs", that

is expenditure that has no salvage value, including expenditure on labour,

fuel, repairs, maintenance, hauling, mobilization and supplies and

materials, other than supplies and materials for well casings or other well

fixtures, which is for or incidental to drilling, cleaning, deepening,

completing or abandoning wells and is incurred in respect of –

(i) The determination of well locations, geological and

geophysical studies, and topographical and geographical surveys

preparatory to drilling;

(ii) The drilling, shooting, testing, and cleaning of wells; and

(iii) The clearing, draining and levelling of land, road-building

and laying of foundations.



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(c) To the extent that, in a fiscal year, the petroleum costs

recoverable according to sub-clauses 27 (2) (a) and 27 (2) (b) exceed the

value of all cost oil for such fiscal year, the excess shall be carried forward

for recovery by the contractor in the next succeeding fiscal year or fiscal

years until fully recovered, but in no case after the termination of this

contract.

(d) To the extent that, in a fiscal year, the petroleum costs

recoverable according to sub-clauses 27 (2) and 27 (2) (b) are less than

the maximum value of the Cost Oil as specified in sub-clause 27 (1), the

excess shall become part of, and be included in the profit oil as provided

for in sub-clause 27 (3) hereafter.

(e) For the purpose of valuation of cost oil, the provisions of

clause 26 hereof shall apply.

(3) (a) The total crude oil produced and saved from the

contract area and not used in petroleum operations less the cost oil as

specified in sub-clauses 27 (1) and 27 (2), shall be referred to as the profit

oil and shall be shared, taken and disposed of separately by the

Government and contractor according to increments of profit oil as follows:



Daily Production

(bopd)

0- 20,000 bopd

20,001-30,000 bopd

30,001-50,000 bopd

50,001-100,000 bopd

Over 100,000 bopd



Government

Share



Contractor

Share



For the purpose of this sub-clause, increments of profit oil shall be

calculated by considering the total crude oil produced and saved from the



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contract area less the quantity of cost oil required to satisfy recoverable

costs, expenses and expenditures according to sub-clauses 27 (1) and 27

(2).

(b) Where two or more reservoirs are sufficiently close so that they

utilize the same surface installation, they shall be considered, for the

purposes of sub-clause 27(3) (a), as being one development area. When

making a proposal for the delineation of a development area and its

associated development plan, the contractor shall consider in priority the

option which is the most favourable for the Government in terms of profit

oil split.

(c) Windfall Profits : When the value of Crude Oil for any calendar

quarter calculated in accordance with clause 26 exceeds US$ 50 per bbl

FOB Mombasa(hereinafter referred to as the “Threshold Price”) then a

Second Tier Amount is payable by the Contractor to the Government.

The Second Tier Amount will be calculated in respect of each calendar

quarter according to the following formula:

R = CSPO x 26% x (V – Threshold Price)

Where;

R is the Second Tier Amount in US Dollars;

V is the value of crude oil in U.S. dollars for that calendar

quarter calculated in accordance with Clause 26 and expressed in

US$/bbl, provided that V exceeds the Threshold Price; and

CSPO is the Contractor Share of Profit Oil for that calendar

quarter in bbl calculated pursuant to clause 27 (3) (a).

(d) The Second Tier Amount will be payable within thirty (30) days

following the end of the calendar quarter for which it is due. For the

purposes of this Contract the Second Tier Amount will be treated as an

adjustment to Profit Oil.



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(e) The Threshold Price set forth in this sub-clause 27(3)(c) is US$

50/bbl F.O.B Mombasa at the…….day of……………… in any calendar

quarter the Threshold Price during that calendar quarter shall be derived

by multiplying the Threshold Price, by the number (hereinafter referred to

as the "price index") which is the sum of one (1) and the decimal

equivalent of the percentage increase in the United States Consumer

Price Index, as reported for the first time in the monthly publication

"International Finance Statistics" of the International Monetary Fund,

between the month of November 2007 and the month when such

valuation is calculated.

(4) With respect to sub-clauses 27 (1), 27 (2) and 27 (3), cost

oil and profit oil calculations shall be done quarterly on an accumulative

basis. To the extent that actual quantities, costs and expenses are not

known, provisional estimates of such data based on the adopted annual

production work programme and budget under clause 24 shall be used.

Within sixty (60) days of the end of each fiscal year, a final calculation of

cost oil and profit oil based on actual crude oil production in respect of that

fiscal year and recoverable petroleum costs shall be prepared and any

necessary adjustments shall be made.

(5) The contractor shall be subject to and shall comply with the

requirements of the income tax laws in force in Kenya, which impose taxes

on or are measured by income or profits.

The portion of the crude oil which the Government is entitled to

take and receive under sub-clause 27 (3) shall be inclusive of all taxes

based on income or profits, including specifically tax payable under the

Income Tax Act, and dividend tax imposed by Kenya on any distribution of

income or profits by the contractor, but shall exclude the tax paid by the

contractor on behalf of petroleum service sub-contractors.

The Government agrees to pay and discharge as and when

due such taxes for account of the contractor and the Minister agrees to

furnish the contractor with proper receipts from the Government evidencing

the payment of all such taxes on contractor's behalf for each fiscal year.

The contractor shall prepare and file a Kenya income tax return for each



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fiscal year within four (4) months after the close of each fiscal year. The

receipts furnished by the Minister evidencing payment of such taxes shall

correspond to the amount of taxes payable on behalf of the contractor by

the Government. The receipts shall be issued by the duly constituted

authority for the collection of Kenya income taxes and shall be furnished

within three (3) months after the date the contractor files its Kenya income

tax return for the fiscal year.

All taxes paid by the Government in the name and on behalf of

the contractor shall be considered income to the contractor for the fiscal

year to which the tax payments relate.

(6) If so directed by the Minister, the contractor shall be

obligated to lift and market part or the entire Government share of profit oil.

When the Minister elects not to take and receive in kind any

part of the Government share of profit oil, the Minister shall notify the

contractor three (3) months before the commencement of each semester

of a calendar year, specifying the quantity of production and such notice

shall be effective for the ensuing semester. Any sale by the contractor of

the Government share of profit oil shall not be for a term of more than one

(1) year without the Minister's consent.

The price paid by the contractor for the Government share of

profit oil shall be the price established according to clause 26. The

contractor shall pay the Government on a monthly basis, such payments to

be made within thirty (30) days after the end of the month in which the

production occurred.

(7) At a reasonable time prior to the scheduled date of

commencement of commercial production, the parties shall agree to

procedures covering the scheduling, storage and lifting of petroleum

produced from the agreed upon point of export or delivery.

(8) In the event that the contractor elects to produce a natural

gas discovery, the petroleum costs incurred by the contractor and directly

attributable to the discovery and production of such natural gas shall be

recovered from part thereof. The parties agree that the Government and



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the contractor shall share the natural gas produced and saved and not

used in petroleum operations in accordance and on an equivalent basis

with the percentage allocations provided for cost recovery and production

sharing of crude oil under this clause. For this purpose, six thousand

(6000) cubic feet of natural gas at a temperature of 15 degrees centigrade

and pressure of one atmosphere shall be deemed to be equivalent to one

(1) barrel of crude oil.

28. GOVERNMENT PARTICIPATION

(1) The Government’s Participation Interest during the exploration phase

will be …….. percent (%) and will be carried and paid for in full by the

Parties comprising the Contractor in proportion to their respective

Participation Interests until such time as the Government elects to convert

its carried Participation Interest into a full working Participation Interest in

accordance with this Contract. From that point on, the Government shall

be responsible for all its costs in respect of the area covered by the

approved Development and Production Plan. For the avoidance of doubt,

the Government’s Participation Interest in respect of the remainder of the

Contract Area shall continue to be carried and paid for by the Parties

comprising the Contractor in proportion to their respective Participation

Interests until such time as the Government elects to convert its carried

interest into a full working interest.

(2) The Government may elect to participate in the petroleum

operations in any development area and acquire an interest of up to …….

percent (%) (Hereinafter referred to as "Participating Interest") of the total

interest in that development area. The Government may participate either

directly or through an appointee.

"Appointee" means a body corporate wholly owned or

controlled by the Government, and appointed for the purposes of this

contract.

(3) The Government shall exercise the right to participate by

giving notice to the contractor within six (6) months from the date the

development plan for a development area is adopted under sub-clause 20



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(3). Such notice shall specify the Participating Interest that the Government

has elected in that development area. If the Government exercises its

option to participate, the contractor (or each entity constituting the

contractor pro-rata) shall transfer to the Government that percentage

interest specified by the Government.

The Government's participation shall be effective from the date

the development plan hereof is adopted.

(4) If the Government exercises its right to participate in a

development area, the Government and the contractor shall execute the

Participation Agreement, attached hereto as Appendix "C" and made a

part thereof, within three (3) months after notice to the contractor under

sub-clause 28 (3).

(5) The Government shall, in exercise of its right to participate

in a development area –

(a) Have a right to a vote in proportion to its participating

interest with respect to all decisions taken under the participation

agreement;

(b) Own and separately take and dispose of its share in the

petroleum produced and saved to which the contractor is entitled under

this contract, corresponding to its participating interest in that development

area. The Contractor shall not be obliged to market the Government's

share of petroleum corresponding to the Government's participating

interest in that development area;

(c) Assume its share of costs, expenses and obligations

incurred in respect of that development area, from the effective date of its

participation as defined in sub-clause 28 (3), pro-rata to its participating

interest;

(d) Own a participating interest share in all assets acquired for

petroleum operations in or related to the development area;



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(e) reimburse the contractor, without interest, pro-rata to the

Government participating interest, its share of all costs, expenses and

expenditure incurred in respect of the development area from the date the

development plan for that development area has been adopted to the date

the Government exercises its right to participate in that development area.

This reimbursement shall be made within three (3) months

after the Government exercises its right to participate.

29. DOMESTIC CONSUMPTION

(1) The contractor shall have the obligation to supply in priority

crude oil for domestic consumption in Kenya and shall sell to the

Government that portion of the contractor's share of production, which is

necessary to satisfy the domestic supply requirements in accordance with

the following provisions.

(2) In each calendar year, the Minister shall notify the

contractor not less than three (3) months prior to the beginning of that

calendar year, of the domestic supply requirement. The maximum amount

of crude oil that the Minister may require from the contractor's share of

production shall be calculated each calendar quarter, and shall be equal to

the excess of total crude oil domestic consumption in Kenya multiplied by a

fraction, the numerator of which is the average crude oil production from

the contract area and the denominator of which is the total crude oil

production from all producers in Kenya, over the amount of crude oil

available to the Government from the contract area as in the form of

Government share production under clause 27 and in the form of

Government participation share under clause 28.

For the purpose of this sub-clause, "domestic consumption"

does not include crude oil refined in Kenya for export.

(3) When the contractor is obligated to supply crude oil for domestic

consumption in Kenya, the price paid by the Government shall be

calculated in accordance with clause 26. Such sales to the Government



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shall be invoiced monthly and shall be paid within sixty (60) days of receipt

of the invoice, unless other terms and conditions are mutually agreed.

(4) With the written consent of the Minister the contractor may

comply with this clause by importing crude oil and exporting the same

amount, but appropriate adjustments shall be made in price and volume to

reflect transportation costs, differences in quality, gravity and terms of sale.

(5) In this clause, "Government" includes an Appointee as

defined in sub-clause 28 (1) and "contractor" does not include the

Government where the Government has participated under clause 28.



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PART VII BOOKS, ACCOUNTS, AUDITS, IMPORTS, EXPORTS AND

FOREIGN EXCHANGE

30. BOOKS, ACCOUNTS AND AUDITS

(1) The contractor shall keep books and accounts in

accordance with the accounting procedure and shall submit to the Minister

a statement of those accounts, not more than three (3) months after the

end of each calendar year.

(2) At the request of the Minister, the contractor shall appoint

an independent auditor of international standing, approved by the

Government to audit annually the books and accounts of the contractor

and report thereon; and the cost of such audit shall be at the charge of the

contractor.

(3) The Government may audit the books and accounts within

two (2) calendar years of the period to which they relate, and shall

complete that audit within one (1) calendar year.

(4) In the absence of an audit within two (2) calendar years or

in the absence of notice to the contractor of a discrepancy in the books

and accounts within three (3) calendar years of the period to which the

audit relates the contractor's books and accounts shall be deemed correct.

31. PREFERENCE TO KENYAN GOODS AND SERVICES

(1) The contractor, its contractors and sub-contractors shall

give preference to Kenyan materials and supplies for use in petroleum

operations as long as their prices, quantities and timeliness of delivery are

comparable with the prices, quality, quantities and timeliness of delivery of

non-Kenyan materials and supplies.

(2) The contractor, its contractors and sub-contractors shall

give preference to Kenyan contractors for services connected with

petroleum operations as long as their prices, performance and timeliness

are comparable with the prices, performance and timeliness of non-



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Kenyan service contractors.

(3) The contractor, its contractors and sub-contractors shall

provide supplies and services from bases in Kenya where practicable.

(4) The contractor shall (a) on or before the beginning of each calendar year to which it

applies, submit to the Minister a tentative schedule of the contemplated

service and supply contracts with an estimated value exceeding the

equivalent of five hundred thousand United States dollars per contract, to

be let during the forthcoming calendar year, showing the anticipated tender

date and approximate value and the goods and services to be provided;

(b) for contracts with an estimated value exceeding the

equivalent of five hundred thousand United States dollars per contract,

undertake to select its contractors and sub-contractors from adequately

qualified companies by means of competitive bidding or by another

appropriate method in accordance with good international petroleum

industry practice;

(c) as soon as practicable after their execution, provide to the Minister a

copy of each contract, requiring a payment in a currency other than Kenya

Shillings and a brief description of the efforts made to find a Kenyan

supplier or service contractor;

(d) the minimum amount specified under this sub-clause 31 (4)

may be changed from time to time by mutual agreement.

32. EXPORTS AND IMPORTS

(1) Except as to the petroleum to be delivered to the

Government pursuant to the terms of this contract, the contractor shall own

and receive its share of petroleum produced from the contract area and

shall be entitled to export such petroleum without restriction and free of

taxes, charges, fees, duties or levies of any kind or to otherwise freely

dispose of the same.

(2) The contractor and its contractors and sub-contractors



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engaged in carrying out petroleum operations under this contract shall be

permitted to import into Kenya all the materials, equipment and supplies

including but not limited to machinery, vehicles, consumable items,

movable property and any other articles, to be used solely in carrying out

petroleum operations under this contract.

Such materials, equipment and supplies shall be exempt from

all customs duties, the contractor and its contractors and sub-contractors

shall give preference to Kenyan goods and services in accordance with

clause 31 hereof.

(3) In relation to materials, equipment and supplies imported or

to be imported pursuant to sub-clause 32 (2), when a responsible

representative of the Ministry has certified that they are to be used solely in

carrying out petroleum operations under this contractor, the contractor and

its contractors and sub-contractors shall be entitled to make such imports

without(a) any approval of import licence, provided, however, that an

application has been duly made;

(b) Any exchange control approval, subject to the provision of

clause 33 hereof; or.

(c) Any inspection outside of Kenya by general superintendence or

other inspecting body, acting for the time being, appointed by the

government.

(4) The actual costs of contracts for technical and other

services entered into by the contractor for petroleum operations and for

materials purchased by the contractor for use in petroleum operations shall

be recoverable, provided that those services and materials are reasonably

required for petroleum operations and provided further that the prices paid

by the contractor are no higher than those currently prevailing in normal

arm's length transactions of the open market for comparable services and

materials.

(5) Each expatriate employee of the contractor, its contractors

and sub-contractors shall be permitted to import and shall be exempt from



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all customs duties with respect to the reasonable importation of household

goods and personal effects, including one (1) automobile provided

however that such properties are imported within three (3) months of their

arrival or such longer period as the Government may in writing determine.

(6) The contractor and its contractor and sub-contractors and

their expatriate employees may sell in Kenya all imported items which are

no longer needed for petroleum operations. However, if such imports were

exempt from customs duties, the seller shall fulfil all formalities required in

connection with the payment of duties, taxes, fees and charges imposed

on such sales.

(7) Subject to sub-clauses 12 (4) and 12 (5), contractor and its

contractors and sub-contractors and their expatriate employees may

export from Kenya, exempt of all export duties, taxes, fees and charges, all

previously imported items which are no longer required for the conduct of

petroleum operations under this contract.

(8) "Custom duties", as that term is used herein, shall include all

duties, taxes on imports (except those charges paid to the Government for

actual services rendered), which are payable as a result of the importation

of the item or items under consideration.

33. EXCHANGE AND CURRENCY CONTROLS

Clauses 33(1), 33(2) and 33(3)(c) were deleted following the repealing of

the Exchange Control Act Chapter 113 of the laws of Kenya however

clauses 33 (3) ( a), 33 (3) (b) and 33 (4) have been retained as they are

still applicable.

(3) Subject to the obligation to give preference to Kenyan goods and

services as stipulated under clause 31, the contractor shall have the right

to enter all contracts and sub-contracts necessary to carry out petroleum

operations, without prior approval by the Central Bank of Kenya or any

other Government agency. The Government reserves the right to inspect

the records or documentation related to such contracts and subcontracts and, in accordance with clause 30, to appoint independent



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auditors to examine the accounts of the contractor, and the contractor

shall provide a copy of such contracts within thirty (30) days after their

execution, provided however that where the Government disputes

anything in the contracts, the value in dispute shall not be included, until,

the dispute has been resolved, in

(a) the qualifying expenditure under the Income Tax Act;

(b) the Certificate of Approved Enterprise; and

(4) The Government shall grant to the contractor a certificate of

Approved Enterprise

in accordance with the Foreign Investments Protection Act, Chapter

518 of the Law

of Kenya. The amount recognized by the certificate as having been

invested shall be

the actual amount for the time being invested by the contractor as set

forth in its

books of account maintained and audited in accordance with this

contract, provided

however that the contractor shall not repatriate any proceeds of sale of

an asset

forming part of either –

(a) qualifying expenditure under the Income Tax Act;

(b) any asset subject to a Certificate of Approved Enterprise;

without written approval and the necessary amendments to the relevant

certificate. Proceeds arising from any other source may repatriate after a

senior Officer of the Ministry, duly authorized in that behalf, has certified

that such repatriation is in order.



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PART VIII GENERAL

34. PAYMENTS

(1) All sums due to the Government or the contractor shall be

paid in United States dollars or other currency agreed to by the

Government and the contractor.

(2) Any late payment shall attract interest at Libor plus zero

per cent (0%) per annum.

35. ASSIGNMENT

(1) After notice to the Minister the contractor may assign part

or all of its rights and obligations under this contract to an affiliate or to an

acceptable assignee without the prior approval of the Minister, provided

such assignment shall result in the assignor and the assignee being jointly

and severally liable for all of the assignor's obligations hereunder.

(2) The contractor may only assign to a person other than an

affiliate or an acceptable assignee part or all of its rights and obligations

under this contract with the consent of the Minister, which shall not be

unreasonably withheld and which shall be granted or refused within thirty

(30) days of receipt by the Minister of the notice from the contractor that it

intends to make such an assignment but the Minister may require such an

assignee to provide a guarantee for the performance of the obligations of

the contractor.

(3) The contractor shall report to the Minister any material

changes in the corporate structure, ownership and financial position of the

contractor and its parent company.

36. MANAGER, ATTORNEY AND JOINT OPERATION AGREEMENT

(1) The contractor shall notify the Minister, before the

petroleum operations begin, of the name and address of the person

resident in Kenya who will supervise the petroleum operations, and prior

notice of any subsequent change shall be given to the Minister.



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(2) The contractor shall appoint an advocate resident in Kenya

with the power of representation in all matters relating to this contract, of

which appointment the Minister shall be notified before the petroleum

operations begin, and prior notice of any subsequent change shall be

given to the Minister.

(3) Where the contractor consists of more than one person, the

contractor shall deliver to the Minister a copy of the joint Operating

agreement between those persons, as soon as it is available.

37. CONFIDENTIALITY

(1) All the information which the contractor may supply to the

Government under this contract shall be supplied at the expense of the

contractor and the Government shall keep that information confidential,

and shall not disclose it other than to a person employed by or on behalf of

the Government, except with the consent of the contractor which consent

shall not unreasonably withheld.

(2) Notwithstanding sub-clause 37 (1), the Minister may use

any information supplied, for the purpose of preparing and publishing

reports and returns required by law, and for the purpose of preparing and

publishing reports and surveys of a general nature.

(3) The Minister may publish any information, which relates to

a surrendered area at any time after the surrender, and in any other case,

three (3) years after the information was received unless the Minister

determines, after representations by the contractor, that a longer period

shall apply.

(4) The Government shall not disclose, without the written

consent of the contractor, to any person, other than a person employed by

or on behalf of the Government, know-how and proprietary technology

which the contractor may supply to the Minister.



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38. FORCE MAJEURE

1. In this clause, “Force Majeure” shall include Acts of God, unavoidable

accidents, acts of war or conditions attributable to or arising out of war

(declared or undeclared), laws, rules, regulations, and orders by any

government or governmental agency strikes, lockouts, or other labour or

political disturbances, insurrections, riots, and other civil disturbances,

hostile acts of hostile forces constituting direct and serious threat to life

and property, and all other matters or events of a like or comparable

nature beyond the control of the Party concerned, other than rig

availability.

2. In this clause, “Force Majeure” means an occurrence beyond the

reasonable control of the Minister or the Government or the contractor

which prevents any of them from performing their obligation under this

contract

3. Where the Minister, the Government or the Contractor is prevented

from complying with this contract by force majeure, the person affected

shall promptly give written notice to the other and the obligations of the

affected person shall be suspended, provided that the person shall do all

things reasonably within its power to remove such cause of force

majeure. Upon cessation of the force majeure event, the person no

longer affected shall notify the other person.

4. Where the person not affected disputes the existence of force majeure,

that dispute shall be referred to arbitration in accordance with clause 41.

5. Where an obligation is suspended by force majeure for more than one

(1) year, the parties may agree to terminate this contract by notice in

writing without further obligations.

6. Subject to sub-clause 38 (4), the term of the contract shall be

automatically extended for the period of the force majeure.



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39. WAIVER

A waiver of an obligation of the contractor shall be in writing, signed

by the Minister, and no waiver shall be implied if the Minister does not

exercise a remedy under this contract.

40. GOVERNING LAW

(1) This contract shall be governed by, interpreted and

construed in accordance with the Laws of Kenya.

(2) The contractor agrees that it will obey and abide by all laws

and regulations in force in Kenya.

(3) If after the effective date of this contract the economic

benefits of a party are substantially affected by the promulgation of new

laws and regulations, or of any amendments to the applicable laws and

regulations of Kenya, the parties shall agree to make the necessary

adjustments to the relevant provisions of this contract, observing the

principle of the mutual economic benefits of the parties.

41. ARBITRATION

(1) Except as otherwise provided in this contract, any question

or dispute arising out of or in relation to or in connection with this contract

shall, as far as possible, be settled amicably. Where no settlement is

reached within thirty (30) days from the date of the dispute or such a

period as may be agreed upon by the parties, the dispute shall be referred

to arbitration in accordance with the UNCITRAL arbitration rules adopted

by the United Nations Commission on International Trade Law.

(2) The number of arbitrators shall be three (3) and shall be

appointed as follows (a) each party shall appoint one (1) arbitrator and so notify the

other party of such appointment and those two (2) arbitrators shall appoint

the third arbitrator.



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(b) if any of the arbitrators shall not have been appointed within

thirty (30) days, either party may request in writing the Secretary-General

of the International Centre for Settlement of Investment Disputes to appoint

the arbitrator or arbitrators not yet appointed and to designate an arbitrator

to be the Chairman of the arbitral tribunal. The Secretary-General shall

forthwith send a copy of that request to the other party.

The Secretary-General shall comply with the request within

thirty (30) days from the receipt thereof or such longer period as the parties

may agree.

The Secretary-General shall promptly notify the parties of any

appointment or designation made by him pursuant to the aforesaid

request.

(c) Arbitrators shall be chosen from countries other than those

of which the parties are nationals.

(d) If an arbitrator fails or is unable to act, his successor will be

appointed in the same manner as the arbitrator whom he succeeds.

(3) The arbitration shall take place in Nairobi, Kenya and shall

be in English.

(4) The decision of the majority of the arbitrators shall be final

and binding on the parties.

(5) Any judgement upon the award of the arbitrators shall be

enforceable in any court of competent jurisdiction,

42. ABANDONMENT AND DECOMMISSIONING OPERATIONS

42(1) Decommissioning Costs

(a) The Decommissioning Plan is to form part of the development plan,

and shall include a schedule for the amortization of costs and cost

recovery of costs, which are estimated to be incurred when the



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development is decommissioned.

“Decommissioning Plan” means the plan for the decommissioning,

abandonment, recovery and removal, or if applicable re-deployment, of

wells, flow lines, pipelines, facilities, infrastructure and assets related to

Petroleum Operations.

(b) The Contractor shall exercise its good faith judgment to book sufficient

accruals for future abandonment and decommissioning operations to cover

the expenses which are expected to be incurred under the

Decommissioning Plan. Contractor shall examine on an annual basis, the

estimated costs of abandonment and decommissioning operations and, if

appropriate, revise them.

(c) The Contractor shall commence booking accruals for abandonment

and decommissioning costs in the first calendar quarter in which the ratio

of cumulative production to overall recoverable reserves reaches 60%,

unless otherwise agreed in the development plan.

(d) All abandonment and decommissioning costs shall be recovered as

Petroleum Costs at the time that the accrual is entered in the books.

(e) Contractor shall book an accrual on a calendar quarter basis for the

amount of future abandonment and decommissioning costs according to

the following formula:

FTA = (ECA – AFB) X CPP/PRR

Where:

FTA is the amount to be accrued for future abandonment and

decommissioning costs in respect of the relevant calendar quarter.

ECA is the total estimated cost of abandonment and decommissioning

operations established pursuant to this Abandonment and

Decommissioning Clause.

CPP is the volume of Petroleum produced during the calendar quarter in

which the abandonment and decommissioning accrual was booked.

PRR is the Contractor’s estimated remaining recoverable reserves at the



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end of the calendar quarter in which the abandonment and

decommissioning accrual was booked; as such estimates may be

revised by Contractor from time to time.

AFB is the accrued abandonment and decommissioning cost balance at

the end of the previous calendar quarter.

42(2) Commencements of Abandonment and Decommissioning

Operations

(a) Abandonment and decommissioning will be scheduled to occur after a

discovery reaches its Economic Limit. “Economic Limit” shall mean that

point in the life of field where expected Revenue to Contractor from

Petroleum Operations is insufficient to cover the operating costs to

continue Petroleum Operations in accordance with the requirements of

the Contract. In addition, “Revenue” means the expected revenues

derived from the sale of Petroleum together with any firm tariff income

earned by the field facilities, if any.

(b) On or before the start of the 720 calendar day period prior to the

expected date of abandonment and decommissioning, the Minister shall

notify Contractor which of the facilities and assets identified in the

development and production program shall not be abandoned and

decommissioned, but which shall revert to the ownership of the

Government in accordance with Clause 12 of this Contract. No further

funds to cover abandonment and decommissioning costs shall be

reserved or accrued for the facilities and assets so identified and a

corresponding adjustment shall be made, if necessary, by Contractor.

(c) If, the Minister decides not to use the said assets, he shall have the

right to require the Contractor to remove them at the latter's expense in

accordance with the said Decommissioning Plan, it being understood that

the abandonment and decommissioning operations shall be carried out by

the Contractor in accordance with good international petroleum industry

practice, this Contract and in accordance with the time schedule and

conditions defined in the Decommissioning Plan which shall have been

approved.



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42 (3) Abandonment and Decommissioning upon Termination of

Development Area

(a) If Contractor recommends abandonment and or decommissioning of

facilities assets or wells belonging to it in connection with a termination of

an Development Area, pursuant to Clause 3(5) of the Contract, the

Government may elect to take ownership of and continue using such

facilities, assets and wells by giving Contractor written notice of such

decision within sixty (60) calendar days of the Government's receipt of

Contractor's notice of relinquishment. Upon so notifying Contractor,

which notification is effective as of the effective date of Contractor’s

relinquishment, the Government shall take ownership of, and be

responsible for, abandonment and decommissioning such facilities,

assets and wells.

If Government does not elect to continue using such facilities, assets or

wells, Contractor shall be responsible for their abandonment and

decommissioning upon termination of the Contract or of the

Development Area within the corresponding Development area, if earlier.

Contractor may in consultation with Government defer the abandonment

and decommissioning operations for a reasonable length of time if this

would result in operational efficiencies, which minimize the cost for all

parties.

42 (4) Facilities, Assets and Wells, Which the Government Continues to

Use

With respect to any facilities, assets or wells which the Government

elects to own pursuant to this Contract or pursuant to these

Abandonment and Decommissioning provisions:

(a)The Government shall conduct such continued use and/or abandon or

decommission in accordance with generally accepted international

petroleum industry practice and in such a manner that does not interfere

with continuing Petroleum Operations; and

(b)The Government may abandon and decommission such facilities,

assets and wells as and when the Government decides.



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42 (5) Disbursements of Funds for Abandonment and Decommissioning

Costs

(a) The Contractor will advise the Government on an annual basis its

best estimate of the projected date of abandonment and

decommissioning of the discovery based on the then current estimate of

when the Economic Limit will be reached according to the then current

production forecast and realized oil prices.

(b) As and when the Contractor commences booking accruals pursuant

to these provisions, the Contractor will cause the accrued costs of

abandonment and decommissioning operations to be set aside in a

separate US$ interest bearing escrow account in the joint names of the

Contractor and the Government, established at a mutually acceptable

financial institution in London, England to be used solely for paying the

decommissioning costs. The account is to be funded on a quarterly basis

by each entity constituting the Contractor and the Government in

proportion to each such entity’s then current participating equity interests

in the Contract out of its share of ongoing cost oil and profit oil

attributable to the Contractor and the Government entities, or by cash

payment if production is insufficient. A final reconciliation shall be

submitted to all Contractor parties and the Government following

completion of all abandonment and decommissioning operations and

adjustments made in accordance with the Clause below.

42 (6) Adjustments to Accruals for Abandonment and Decommissioning

Costs

(a) If excess accruals which were booked for abandonment and

decommissioning costs remain following completion of all abandonment

and decommissioning operations, then such excess funds shall be

distributed to Contractor and Government in the same proportion as the

cumulative profit oil distribution to Government and Contractor under

Clause 27 of the Contract during the years that the accruals for

abandonment and decommissioning costs were booked by Contractor.

(b)



Any abandonment and decommissioning cost accruals which have



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been booked for purposes of removing facilities or assets that the

Government decides should not be removed shall be paid by Contractor

to Government concurrently with the transfer of ownership of such

facility, asset or well to the Government. The Government represents

that the transferred funds shall only be used in conjunction with its

abandonment and decommissioning operations.

If amounts accrued for abandonment and decommissioning costs

are insufficient to complete abandonment and decommissioning

activities, additional funds for such activities shall be provided from a

portion of Crude Oil which Contractor is entitled to receive under the

Contract from any development area, or if no production is available, by

cash payment by the entities constituting Contractor and the Government

in the same ratio as would be applicable for distribution of excess

amounts under Clause (a) of this Clause 27.

43. NOTICES

(1) Any notice and other communication under this contract shall be

in writing and shall be delivered by hand, sent by registered post, or by

telegram or telex to the following address of the other.

To the Government:

Ministry of Energy: FAO Hon. Minister of Energy

Nyayo House

Kenyatta Avenue

P O Box 30582.00100

Nairobi, Kenya

Tel 00254 20 310 112

Fax 00254 20 228 314

To the Contractor:

FAO ………..

……………………

…………………….

………………………



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(2) A notice shall be effective on receipt.

(3) Any notice given by telex or telegram shall be promptly

confirmed by letter signed by the party giving the notice.

The Government and the contractor may at any time and from time to

time change its authorized representative or its address herein on giving

the other ten (10) days notice in writing to such effect.

44. HEADING AND AMENDMENTS

(1) Headings are inserted in this contract for convenience only and shall

not affect the construction or interpretation hereof.

(2) This contract shall not be amended, modified or supplemented except

by an instrument in writing signed by the parties.

Signed on the day and year first before written:

For the Government

The Minister

Signature

Name

Title

In the Presence of:

Witness

Signature………………………………………………..

Name



..............................................................................



Title …………………………………………………..

For the Contractor:

Signature:……………………………………………….



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Name

Title …………………………………………………

In the Presence of:

Witness

Signature

Name



...................................................................



Title …………………………………………………..

Note: Appendices to each petroleum agreement relates will

Identify the block to which the petroleum agreement related (Appendix

“A”)

Provide for the accounting procedures to be followed by the contractor

(appendix “B”) ; and

Specify the terms and conditions of participation (Appendix“C”)



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APPENDIX “A”

THE CONTRACT AREA

(The Area to which the Petroleum Agreement relates)

Coordinates



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APPENDIX "B"

ACCOUNTING PROCEDURE

TABLE OF CONTENTS

PART I - GENERAL PROVISIONS

1.1 - Interpretation.

1.2 - Accounting obligations of the contractor.

1.3 - Language and units of accounts.

1.4 - Audits.

1.5 - Revision of accounting procedure.

PART II - COSTS, EXPENSES, EXPENDITURE AND CREDITS OF

THE CONTRACTOR

2.1 - Surface rights.

2.2 - Labour and related costs.

2.3 - Materials.

2.4 - Transportation and employee relocation costs.

2.5 - Services.

2.6 - Damage and losses to joint property.

2.7 - Insurance.

2.8 - Legal expense.

2.9 - Duties and taxes.

2.10 - Offices, camps and miscellaneous facilities.

2.11 - General and administrative expenses.

2.12 - Other expenditure.

2.13 - Credits under the Contract.

2.14 - No duplication of charges and credits.



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PART III - FINANCIAL REPORTS TO THE MINISTER

PART I - GENERAL PROVISIONS

The purpose of this accounting procedure is to establish

methods and rules of accounting for petroleum operations and the

principles set forth herein shall apply to petroleum operations pursuant to

the production sharing contract (hereinafter referred to as the "Contract"),

to which this Appendix is attached.

1.1 - INTERPRETATION

1.1.1 - DEFINITIONS

"Joint account" means the set of accounts maintained by the

operator to record all expenditure and other transactions under the

provisions of the contract. Such accounts will distinguish between

exploration, evaluation, development and production costs. After adoption

of a development plan a separate joint account shall be maintained for

each development area.

"Joint property" means all property acquired and held in

connection with petroleum operations under the contract;

"material" means personal property, including supplies and

equipment, acquired and held for use in petroleum operations;

"Controllable material" means material which the operator

subjects to record control and inventory. A list of types of such material

shall be furnished to the Government and non-operator(s);

"Operator" means the party designated to conduct the

petroleum operations;



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"Non-operator" means the entities constituting the contractor

other than the operator, and the Government when it participates.

Words not defined herein, but which are defined in the

contract, shall have the meanings ascribed to them therein.

1.1.2 - PRECEDENCE OF DOCUMENT

In the event of conflict between the provisions of this

accounting procedure and the provisions of the contract, the provisions of

the contract shall prevail.

1.2 - ACCOUNTING OBLIGATIONS OF THE CONTRACTOR

1.2.1. The contractor shall maintain financial accounts

necessary to record in reasonable detail the transactions relating to

petroleum operations which shall be prepared in accordance with generally

accepted standards of the international petroleum industry, as more

particularly, but not exclusively set out in this accounting procedure.

1.2.2. The contractor shall provide the Government with a

description of its accounting classifications and the contractor shall use

such classifications when preparing its accounts.

1.2.3. The contractor shall provide details of the financial

accounts in the form of monthly statements which shall (a) Reflect all charges and credits related to petroleum

operations;

(b) Be prepared on accrual basis so that expenditure is recorded as incurred when title to goods passes or when work is executed;

and

(c) Present the total accounts for the contract area and each

development area and the share of each non-operator.

1.3. - LANGUAGE AND UNITS OF ACCOUNTS

1.3.1. All books of account shall be maintained in the English

language and in United States dollars. Where necessary for clarification,

the contractor may also maintain accounts and records in other language

and currencies.

1.3.2. It is the intent of this accounting procedure that neither



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the Government nor the contractor should experience an exchange gain or

loss at the expense of, or to the benefit of, the other. However, should

there be any gain or loss from exchange of currency, it will be credited or

charged to the accounts under the contract.

1.4. - AUDITS AND INSPECTION RIGHTS OF THE GOVERNMENT

1.4.1. The Government, upon at least thirty (30) days' advance

written notice to the contractor, shall have the right at its sole expense to

audit the joint account and related records for any calendar year or portion

thereof within the twenty-four (24) month period following the end of such

year. Notice of any exception to the contractor's accounts of any calendar

year must be submitted to the contractor within three (3) years from the

end of such year.

1.4.2. For the purposes of auditing, the Government may

examine and verify, at reasonable times, all charges and credits relating to

the petroleum operations such as books of account, accounting entries,

material records and inventories, vouchers, payrolls, invoices and any

other documents, correspondence and records necessary to audit and

verify the charges and credits. Furthermore, the auditors shall have the

right in connection with such audit, to visit and inspect at reasonable times,

all sites, plants, facilities, warehouses and offices of the contractor directly

or indirectly serving the petroleum operations including visiting personnel

associated with those operations.

1.4.3. All adjustments resulting from an audit agreed shall be

rectified promptly in the contractor's accounts. Any unresolved dispute

arising in connection with an audit shall be referred to arbitration in

accordance with clause 41 of the contract.

1.4.4. At the request of the Minister, the contractor shall

appoint an independent auditor of international standing approved by the

Minister to audit annually the accounts and records of the petroleum

operations and report thereon, and the cost of such audit and report shall

be chargeable to the joint account.

1.5. - REVISION OF ACCOUNTING PROCEDURE

1.5.1. By mutual agreement between the Government and the

contractor, this accounting procedure may be revised from time to time by



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an instrument in writing signed by the parties.

1.5.2. The parties agree that if any procedure established

herein proves unfair or inequitable to any party, the parties shall meet and

in good faith endeavour to agree on the changes necessary to correct that

unfairness or inequity.

PART II - COSTS, EXPENSES, EXPENDITURE AND CREDITS OF

THE CONTRACTOR

Subject to the provisions of the contract, the contractor shall

bear and pay the following cost and expenses necessary to conduct

petroleum operations. Such petroleum costs are recoverable by the

contractor in accordance with the provisions of the contract.

2.1. - SURFACE RIGHTS

2.1.1. All direct costs necessary to acquire and to maintain

surface right to the contract area when such costs are paid by the

contractor according to the provisions of the contract.

2.2. - LABOUR AND RELATED COST

2.2.1. Salaries and wages of employees of the operate and its

affiliate(s) for portion of their time spent performing management,

administrative, legal, accounting, treasury, tax, employee relations,

computer services, engineering, geological, and all other functions for the

benefit of petroleum operations, whether temporarily or permanently

assigned to the contract area, as well as the cost of employee benefits,

customary allowances and personal expenses incurred under the usual

practice of the operator and its affiliate(s) and amount imposed by

governmental authorities, which are applicable to such employees.

2.3. - MATERIAL

2.3.1. Value of material charged to the accounts contract. The

cost of material, equipment and supplies purchased or furnished by the

operator for use in petroleum operations shall be charged to the joint

account on the basis set forth below. So far as it is reasonably practical

and consistent with efficient and economical operations, only such material



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shall be purchased for or transferred to the joint property as may be

required for immediate use and /or for approved work programmes and the

accumulation of surplus stock shall be avoided.

2.3.1.1. Except as otherwise provided in sub-part 2.3.1.2

below, material purchased, leased or rented shall be charged at the actual

net cost incurred by the operator. "Net cost" shall include, but shall not be

limited to, such items as vendor's invoice price, transportation, duties, fees

and applicable taxes less all discounts actually received.

2.3.1.2. Material purchased or transferred from the contractor

or its affiliate(s) shall be charged at the prices specified here below:

(a) New material (condition "A") shall be valued at the current

international net cost which shall not exceed the price prevailing in normal

arm's length transactions on the open market.

(b) Used material (conditions "B", "C" and "D").

(i) Material which is in sound serviceable condition and is

suitable for reuse without reconditioning shall be classified as condition "B"

and priced at seventy-five percent (75%) of the current price of new

material defined in (a) above.

(ii) Material which cannot be classified as condition "B"

but which after reconditioning will be further serviceable for its original

function shall be classified as condition "C" and priced at fifty per cent

(50%) of the current price of new material as defined in (a), above. The

cost of reconditioning shall be charged to the reconditioned material

provided that the value of condition "C" material plus the cost of

reconditioning do not exceed the value of condition "B" material.

(iii) Material which cannot be classified as condition "B"

or condition "C" shall be classified as condition "D" and priced at a value

commensurate with its use.

2.3.2. - INVENTORIES

2.3.1.1. At reasonable intervals, inventories shall be taken by

the operator of all controllable material. The operator shall give ninety (90)



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days' written notice of intention to take such inventories to allow the

Minister and non-operator(s) to be represented when any inventory is

taken. Failure of any party to be represented after due notice given shall

bind such party to accept the inventory taken by the operator.

2.3.2.2. The operator shall clearly state the principles upon

which valuation of the inventory has been based.

2.3.2.3. Whenever there is a sale or change of interest in the

joint property, a special inventory may be taken by the operator, provided

the seller and/or purchaser of such interest to bear all of the expense

thereof. In such cases, both the seller and the purchaser shall be entitled

to be represented and shall be governed by the inventory so taken.

2.4. - TRANSPORTATION AND EMPLOYEE RELOCATION COSTS

2.4.1. Transportation of material and other related costs such

as origin services, expediting, crating, dock charges, forwarder's charges,

surface and air freight, and customs clearance and other destination

services.

2.4.2. Transportation of employees as required in the conduct

of petroleum operations, including employees of the operator’s affiliate(s)

whose salaries and wages chargeable under subparts 2.2.1 and 2.5.2.

2.4.3. Relocation costs of the contract area vicinity of

employees permanently or temporarily assigned to petroleum operations.

Relocation costs from the contact area vicinity, except when an employee

is reassigned to another location classified as a foreign location by the

operator. Such costs include transportation of employee' families and their

personal and household effects and all other relocation cost in accordance

with the usual practice of the operator and its affiliate(s).

2.5. - SERVICES

2.5.1. The actual cost of contract services, professional

consultants, and other services performed by third parties other service

provided by the contractor or its affiliate(s), but the prices paid by the

contractor shall not be higher than those generally charged for comparable

services.



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2.5.2. Costs of technical services, such as but not limited to,

engineering, and related data processing, performed by the contractor and

its affiliate(s) for the direct benefit of petroleum operations, engineering,

and related data processing, performed by the contractor provided such

cost shall not exceed those currently prevailing if performed by third parties

in normal arm's length transaction for like services.

2.5.3. Costs of use of equipment and facilities for the direct

benefit of the petroleum operations, furnished by contractor or its affiliate(s)

at rate commensurate with the costs of ownership, or rental, and the cost

of operation thereof, but such rates shall not exceed those currently

prevailing in the general vicinity of the contract area in normal arm's length

transactions on the open market for like services and equipment.

2.6. - DAMAGES AND LOSSES TO JOINT PROPERTY

2.6.1. All costs or expenses necessary for the repair or

replacement of joint property resulting from damages or losses incurred by

fire, flood, storm, theft, accident, or any other cause, except insofar as

those costs and expenses are caused by the wilful misconduct of the

operator. The operator shall furnish the Government and non-operator(s)

written notice of damages or losses for each damages or loss in excess of

fifty thousand U.S. dollars (U.S. $50,000) as soon as after the loss as

practicable.

2.7. - INSURANCE

2.7.1. Premium for insurance required under the contract,

provided that a party not participating in such insurance shall not share in

the cost unless such insurance is compulsory under the laws of Kenya

and provided further that if such insurance is wholly or partly paced with an

affiliate of the contractor such premium shall be recoverable only to the

extent generally charged by competitive insurance companies other than

an affiliate of the contractor.

2.7.2. Actual expenditure incurred in the settlement of all

losses, claims, damages, judgments, and other expenses for the benefit of

the petroleum operations.

2.8. - LEGAL EXPENSES

2.8.1. All costs or expenses of litigation or legal service

otherwise necessary or expedient for the protection of the joint property or

other interest in the contract area, including but not limited to legal



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counsel's salaries and fees, court costs, cost of investigation or procuring

evidence and amounts paid in settlement or satisfaction of any such

litigation or claims. These services may be performed by the operator's

legal staff or an outside firm as necessary.

2.9. - DUTIES AND TAXES

2.9.1. All duties, taxes (except taxes based on income), fees,

and governmental assessments of very kind and nature which have been

paid by the operator with respect to the contract.

2.10. - OFFICE, CAMPS AND ADMINISTRATIVE EXPENSES

2.10.1. Cost of establishing, maintaining and operating any

offices, sub offices, camps, warehouse, housing and other facilities directly

serving petroleum operations. The cost shall be allocated to the operations

served on an equitable basic.

2.11. - GENERAL AND ADMINISTRATIVE EXPENSES

2.11.1. These charges shall be made monthly for services of

all personnel and offices of the operator and its affiliate(s) outside Kenya

and those not otherwise provided herein. It shall include service and

related office cost of personnel performing management, administrative,

legal, accounting, treasury, tax, employee relations, computer service,

purchasing, engineering, geological, geophysical, and all other functions

for the direct benefit of petroleum operations. The charge shall be made

as follows:

This charge will be at the provisional rate of …………of total

costs per month during any period in which exploration operations are

being conducted. For the period commencing on the date that the

contractor reports a commercial discovery to the Government as required

in clause 19(5) of the contract until the contract is terminated the

provisional rate shall …………………….. of total costs per month.

The provisional charges for such costs are based upon

operator's cost experience and estimates of cost to be incurred in conduct

of the petroleum operations, and are subject to quarterly adjustment as

operator’s costs indicate are necessary and equitable. Within ninety (90)

days following the end of each quarter, the operator shall determine the

actual cost incurred in performing such services, and shall charge or credit

the joint account for the difference between the actual cost incurred for



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the quarter and the provisional rate charge during the quarter.

On request of the Government or a non-operator, the operator shall

make available at its home offices all supporting documents used for the

determination of the charges. Such documents shall include but shall not

be limited to time allocation reports prepared by employees providing

services described in subpart 2.11.1., cash vouchers supporting cash

expenses included in overhead pool, inter-company billing supporting

charges for services provided by operator's affiliates (e.g. building rentals,

telecommunications paid by the operator's parent company), summary or

impersonalized computer run supporting salaries, wages and employee

benefits and other such documents as may be mutually agreed.

2.12. - OTHER EXPENDITURE

2.12.1. Other reasonable expenditure not covered or dealt with

in the forgoing provisions, which are incurred by the operator and its

affiliate(s) for the necessary, proper, economical and efficient conduct of

petroleum operations.

2.12.2. Interest incurred on loans raised by the contractor for

capital expenditure in petroleum operations under the contract at rate not

exceeding prevailing commercial rates may be recoverable as petroleum

costs.

2.13. - CREDITS UNDER THE CONTRACT

The net proceeds of the following transaction will be credited to

the account under the contract (a) The net proceeds of any insurance or claim in connection

with the petroleum operations or any assets charged to the accounts under

the contract;

(b) Revenue received from outsiders for the use of property or

assets charged to the accounts under the contract;

(c) Any adjustment received by the contractor from the

suppliers/manufactures or their agents in connection with defective

equipment or material the cost of which was previously charged by the

contactor under the contract;



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(d) Rentals, refunds or other credits received by the contractor

which apply to any charge which has been made to the accounts under the

contract;

(e) Proceeds from all sales of surplus material or assets

charged to the account under the contract; and

(f) The prices originally charged to the accounts under the

contract for inventory materials subsequently exported from Kenya.

2.14. - NO DUPLICATION OF CHARGES AND CREDITS

Notwithstanding any provision to the contrary in this

accounting procedure, it is the intention that there shall be no duplication of

charges or credits in the accounts under the contract.

PART III - FINANCIAL REPORTS TO THE MINISTER

3.1. The reporting obligations provided for in this Part shall,

unless the country is stated, apply to the operator.

3.2. The operator shall submit annually to the Minister the

following:

3.2.1. The annual work programme and budget three(3)

months before the beginning of the year to which they apply and the

budget shall be analyzed by item within the exploration programme,

evaluation programme, development programme and production

programme and show for each major budget item, with reasonable detail,

the following:(a) Latest forecast cumulative costs anticipated at the start of

the budget year;

(b) Cumulative expenditure anticipated at the end of each

quarter of the budget year; and

(c) Expenditure anticipated in future years to complete the

budget item.

3.2.2. A schedule of the service and supply contracts, to be let



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during the forthcoming year which require payment in foreign currency

exceeding the equivalent of five hundred thousand U.S. dollars (U.S.

$500,000.00) per contract, showing the anticipated tender date and

approximate value and the goods or services to be provided;

3.2.3. The audit report required by sub-part 1.4.4. of this

accounting procedure, stating whether in the opinion of the auditors of the

contract(a) The last annual expenditure report records the expenditure

of the contractor truly and fairly in accordance with the provisions of the

contract;

(b) The reports on petroleum revenue submitted truly and fairly

determined the arm's length value of disposals of petroleum during the

year.

3.3. the operator shall submit quarterly within thirty (30) days of

each quarter to the Minister:

3.3.1. a report of expenditure and receipts under the contract

analyzed by budget item showing(a) Actual expenditure and receipts for the quarter in question;

(b) Actual cumulative cost to date;

(c) Latest forecast cumulative cost at the year end;

(d) Variations between budget costs and actual costs, and

explanations thereof; and

(e) With effect from adoption of the development plan, the total

payroll costs segregated between Kenyan and non-Kenyan personnel and

the total expenditure segregated between Kenyan and non-Kenyan goods

and services.

3.3.2. A cost recovery statement containing the following

information(a) Recoverable petroleum costs carried forward from the

previous quarter, if any;



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(b) Recoverable petroleum costs incurred and paid during the

quarter;

(c) Total recoverable petroleum costs for the quarter (a) plus

(b) above);

(d) Quantity and value of cost oil taken and separately

disposed of by the contractor for the quarter;

(e) Amount of petroleum recovered for the quarter;

(f) Amount of recoverable petroleum costs to be carried

forward into the next quarter, if any; and

(g) Value of Government's share of production taken by the

contractor pursuant to clause 27 of the contract.

3.4. A copy of each contract for goods or services, requiring a

foreign currency payment, shall be provided to the Minister as soon as

practicable after its execution, together with a contract summary

containing(a) A description of the goods or services to be provided;

(b) The approximate consideration for the contract;

(c) The names of proposed bidders, contractors or suppliers;

and

(d) a brief description of the efforts made to find a Kenyan

supplier or contractor including the names of businesses considered and

the reasons for rejecting them.

3.5. After the commencement of production the operator shall,

within fifteen (15) days after the end of each month, submit a production

report to the Minister showing for each development area the quantity of

petroleum (a) Held in stocks at the beginning of the month



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(b) Produced during the month

(c) Lifted, and by whom;

(d) Lost and consumed in petroleum operations; and

(e) Held in stocks at the end of the month.

3.6. A lifting party shall submit, within fifteen (15) days after the

end of each month, a report to the Minister stating(a) The quantities and sales value of arm's length petroleum

sales made in that month;

(b) The quantities, sales value and arm's length value of

disposals of petroleum other than by sale at arm's length during the month;

and

(c) The total petroleum revenue for that month.



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APPENDIX "C"

PARTICIPATION AGREEMENT

TABLE OF CONTENTS

1 - Interpretation

2 - Participation interests and commencement

3 - Operator and duties of operator

4 - Operating committee and work programmes

5 - Costs and expenses

6 - Payments to operator

7 - Material and equipment

8 - Relationship of the parties and tax provisions

9 - Surrenders and transfers

10 - Disposal of production

11 - Sole risk operations

12 - Confidentiality

13 - Liability

14 - Governing law

15 - Arbitration

16 - Force majeure

17 - Notices

18 - Term

19 - Final provisions

Exhibit "A"-Accounting procedure.



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PARTICIPATION AGREEMENT

This Participation Agreement, made and entered into on this

......................day of...........................2008 by and between the Government

of the Republic of Kenya (hereafter referred to as the "Government")

represented for the purpose of this agreement by the Minister for the time

being responsible for energy (hereinafter referred to as the "Minister") and

………………………………………... (hereinafter referred to as the

"Contractor").

WHEREAS the Government and the Contractor have entered

into a production-sharing contract (referred to as the "Contract"), to which

this Appendix is attached;

WHEREAS the Government may decide to exercise its option

under clause 28 of the Contract; and

WHEREAS the Parties wish to set forth the terms and

conditions under which the Government has agreed to participate in the

Petroleum Operations in the event such an option is exercised;

NOW, THEREFORE, the Parties agree as follows:

1 - INTERPRETATION

1. In this participation Agreement, words in the singular

includes the plural and vice versa, and except where the context otherwise

requires:

"AFE" means an authorization for expenditure;

"Government" includes an appointee as defined in sub clause

28 (2) of the Contract;

"Joint account" means the accounts maintained by the

operator to record all transactions related to operations in the participation

area under this Participation Agreement;

"Joint property" means all property acquired and held for use in

connection with operations under this Participation Agreement;

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"Non-operator" means a party other than the operator;

"Operating committee” means the committee established by

Article 4 hereof;

"Operator" means the party designated to conduct the

petroleum operations, pursuant to Article 3 hereof and its successors;

“Participating interest" means the respective undivided interest

of each of the parties as it may exist at any given time in the participation

area and under this Participation Agreement;

"Participation area" means a development area in which the

Government elects to participate under the Contract;

"Participation dates" means the effective date of participation

by the Government as defined in sub clause 28 (3) of the Contract;

"Participation work programme" means a programme of the

petroleum operations under this Participation Agreement;

"Parties" means, collectively, the Government and the entities

consulting the Contractor, their respective successors or assignees.” party"

means anyone of the parties;

"Year" means calendar year.

2. Words not defined in this Participation Agreement but which

are defined in the Contract have the meanings given to the in the Contract.

3. In the event of any conflict between the Contract and this

Participation Agreement, Contract shall prevail and this Participation

Agreement shall be deemed amended accordingly.

2. PARTICIPATING INTERESTS

1. When and if the Government elects, pursuant to clause 28

of the contract, to participate in petroleum operations in a participation

area, each entity constituting the contractor shall assign proportionately to

the Government a part of its interest in the development area so that the

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rights, interest and obligations of the contractor and the Government in

such area shall be owned and borne as of the participation date in

undivided interests as follows:

Government………… ( …..%) or such lesser amount as may

be elected in accordance with clause 28 of the Contract;

Contractor…………(……. %) or such greater amount as may

remain after the Government's election.

2. In the event a party shall transfer in whole or in part its

Participating interest pursuant to clause 35 of the Contract and Article 9 of

this Participation Agreement, the participating interest of the parties therein

shall be revised accordingly.

3. OPERATOR AND DUTIES OF OPERATOR

1. The operator shall be the party acting as operator on the

participation date and the operator shall have the rights and obligations of

a non-operator in respect of its participating interest.

2. The operator shall serve as operator until it resigns or is

removed pursuant to the provisions of this Article, or until it ceases to hold

a participating interest hereunder. In the event that an operator assigns

the whole of its participating interest hereunder to one of its affiliates, such

affiliate shall become operator hereunder in the former's place.

3. Upon the affirmative vote of all the non-operators, the

operator shall be removed as operator in case of any one of the following(a) Bankruptcy of the operator or its parent company;

(b) Assignment for the benefit of the operator's creditors;

(c) Appointment of a receiver or manager with respect to the

whole or any part of the property or assets of the operator;

(d) entitlement of any person other than an affiliate of the

operator to appoint a majority of the members of the board of directors of

the operator by the reason of any act, default or neglect of the operator;



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(e) Failure without justification by the operator to pay a sum

due to or in the name of the joint account for more than sixty (60) days;

(f) the operator's material breach of this Participation

Agreement which remains unremedied for more than thirty (30) days after

the operator is notified by non-operators of such breach; or

(g) Reduction in the operator's participating interest

to...............per cent (........ %) or less.

4. An operator may at any time resign as operator by giving to

the other parties notice in writing of such resignation. Such resignation

shall be effective one hundred-eighty (180) days after the date of notice

thereof or on the date on which a successor operator appointed by the

parties (other than the operator) shall be ready and able to assume the

obligations of operator in accordance with all the provisions of this

Participation Agreement, whichever shall first occur.

5. Should an operator so resign or be removed, a successor

operator shall immediately be appointed by the operating committee. A

party having been removed as operator may not vote to succeed itself as

operator. Such appointment parties holding not less than the percentage

figure of the remaining participating interests set out in Article 4 (6). For

the purpose of this Article, operator includes any of its affiliates holding a

participating interest in this Participation Agreement.

6. Removal or resignation of an operator shall not in any way

affect its rights or obligations as non-operator party to this Agreement. On

the effective date of removal or resignation, the operator shall deliver to the

successor operator any and all funds, equipment, materials,

appurtenances, books, records, data, interpretations, information and

rights acquired by and in the custody of the operator for the joint account of

the parties (including available petroleum not delivered to the parties),

shall, with the successor or operator, prepare an inventory of joint property,

adjusting the joint account accordingly, and shall co-operate as far as

possible in effecting a smooth transfer of operating responsibilities.

7. An operator that is removed under Article 3 (3) (g) hereof may

charge to the joint account all reasonable and necessary expenditure

incurred in demobilizing and repatriating personnel and equipment.

8. The operator shall have control of the petroleum operations

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in the participation area and shall have exclusive custody of all materials;

equipment and other property acquired therefore, and shall perform the

duties under this Participation Agreement diligently and in accordance with

good international petroleum industry practice, and sound and accepted

engineering, management and accounting principles.

The operator shall not be liable to any non-operator for any

acts or omissions, claims, damages, losses or expenses, in connection

with or arising out of this Participation Agreement or the contract or

petroleum operations save those caused by gross negligence or wilful

misconduct of the operator.

9. The operator shall(a) Consult with non-operators and advise them of all matters

arising from the petroleum operations;

(b) Comply with the decisions of the operating committee;

(c) Keep the participating interests and all property acquired or

used free from liens, except for those authorized by Article 6 hereof; and

(d) Pay the costs of the petroleum operations under this

Participation Agreement promptly and make proper charges to nonoperators.

10. The operator shall submit a copy of an AFE to the nonoperators for each budget item of capital expenditure in the approved

participation work programme and budget that costs more than

.................U.S. dollars (U.S $............).

Where it is necessary to complete an expenditure in a budget

item in the approved participation work programme, the operator may

exceed the budget for the budget item by the lesser of ten per cent (10%)

thereof or.................U.S. $................) and shall report promptly such

excess expenditure to the non-operators.

The operator may spend not more than ......................U.S.

dollars (U.S. $.............) on petroleum operations in the participation area

not included in an approved participation work programme, provided that

such expenditure shall not be for items previously rejected by the operating

committee. The operator shall report promptly that expenditure to the non88

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operators and, if it is approved in accordance with Article 4 (6), the

operator may make further expenditure thereon or on other items not

exceeding U.S. dollars (U.S.$...........) in that year.

The limits in this Article 3(10) may be changed from time to

time by the operating committee.

In the case of emergency, the operator may make such

immediate expenditure and take such immediate action as may seem

necessary for the protection of life or property or the prevention of pollution

and such emergency expenditure shall be reported promptly to the parties

by the operator.

11. A non-operator may inspect the participation area, the

petroleum operations, and the books, records and other information of the

operator pertaining thereto.

The operator shall supply to a non-operator by telephone,

telefax, telegraph or telex, daily reports on drilling and such other reports in

writing normally provided by an operator to a non-operator in the

international petroleum industry, including but not limited to reports on well

tests and core analysis, and copies of drilling logs, well surveys and

velocity surveys. The operator shall furnish any other information

reasonably requested by non-operator, if such information is readily

available.

12. The operator shall obtain and maintain all insurance

required by law and such other insurance as the operating committee may

from time to time determine, provided that, in respect of such other

insurance, any party may elect not to participate provided such party gives

notice to that effect to the operator. The cost of insurance in which all the

parties are participating shall be for the joint account and the cost of

insurance in which less than all the parties are participating shall be

charged to such parties individually. The operator shall, in respect of any

insurance(a) Promptly inform the parties participating therein when it is

taken out and supply them with copies of the relevant policies when the

same are issued;



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(b) arrange for the parties participating therein, according to

their respective participating interests, to be named as co-insureds on the

relevant policies with waiver of subrogation in favour of the parties; and

(c) Duly file all claims and take all necessary and proper steps

to collect any proceeds and, if all the parties are participating therein, credit

them to the joint account or, if less than all the parties are participating

therein, credit them to the participating parties.

Subject as stipulated above, any of the parties may obtain

such insurance as it deems advisable for its own account at its own

expense provided such insurance is acceptable under the applicable law.

If the operator is unable to obtain such other insurance

required by the operating committee, it shall so advise the parties and

thereafter, it shall be discharged of its obligation to obtain such insurance.

The operator shall take all reasonable steps to ensure that all

contractors (including sub-contractors) performing work in respect of the

petroleum operations and the joint property obtain and maintain all

insurance required by the law and obtain from their insurers a waiver of

subrogation in favour of the parties.

13. The operator may prosecute, defend and settle claims and

litigations arising out of the petroleum operations and may compromise or

settle such claims or litigations which involve an amount not exceeding the

equivalent of one hundred thousand U.S. dollars (U.S. $100,000) without

the approval of the operating committee. Any claim or litigation involving

an amount in excess of the equivalent of one hundred thousand U.S.

dollars (U.S. $100,000) shall be reported promptly to the non-operators

and a non-operator shall have the right to be represented by its own

counsel at its expense in the compromise, settlement or defence of such

claims or litigation.

14. The operator shall fulfil the reporting obligations of the

Contractor as specified in the [Contract] unless otherwise stipulated in this

Participation Agreement and the Contract.

4. - OPERATING COMMITTEE AND WORK PROGRAMMES



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1. The parties shall establish an operating committee to

supervise and control the petroleum operations. The operating committee

shall consist of one representative appointed by each of the Parties

provided always that more than one of the Parties may appoint the same

representative who shall represent them separately.

Each party shall, as soon as possible after the date of this

Participation Agreement, give notice to all the other parties of the name of

its representative and of an alternate on the operating committee. Such

representative may be replaced, from time to time, by like notice.

Representatives may bring to meetings of the operating committee such

advisers as they consider necessary. The representative of a Party or, in

the absence of the representative, his alternate, shall be deemed

authorized to represent and bind such party with respect to any matter

which is within the powers of the operating committee. The representative

of the party, which is the operator, shall be the chairman of the operating

committee and shall report the proceedings.

2. Except as otherwise provided in this Participation

Agreement the powers and duties of the operating committee shall

include(a) The consideration and determination of all matters relating

to general policies, procedures and methods of operation hereunder;

(b) The approval of any public announcement or statement

regarding this Participation Agreement or the petroleum operations;

(c) The consideration, revision and approval or disapproval, of

all proposed participation work programmes, budgets and AFE's prepared

and submitted to it pursuant to the provisions of this Participation

Agreement;

(d) The determination of the timing and location of all wells

drilled under this Participation Agreement and any change in the use or

status of a well;

(e) the determination of whether the operator will represent the

parties regarding any matters or dealings with the Minister, any other

governmental authorities or third parties in so far as the same relate to the

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petroleum operations, provided that there is reserved to each party the

unfettered right to deal with Minister or any other government authorities in

respect of matters relating to its own participating interest; and

(f) the consideration and, if so required, the determination of

any other matter relating to the petroleum operations which may otherwise

be designated under this Participation Agreement for reference to it.

3. The operator shall, when requested by a representative of

any party, call a meeting of the operating committee. The operator may do

so at any time to keep the parties informed on the petroleum operations.

4. A request to call a meeting of the operating committee shall

state the purpose of that meeting and, except in an emergency, the

operator shall give the parties at least fifteen (15) days' written notice with

an agenda of the meeting, but where a meeting is called in an emergency,

the operator shall give as much notice thereof as possible by telephone,

telex or telegraph and except with the consent of all the parties, the

business of a meeting shall be only that for which it was called.

5. The operator may, instead of calling a meeting, submit

matters to the parties by written notice, upon which each party may vote

within the period prescribed in the notice which shall not be less than three

(3) days or more than fifteen (15) days from the date notice is received.

Failure of a party to vote within the above time limits shall be deemed a

negative vote.

6. Each party shall have a voting interest equal to its

participating interest. Unless otherwise provided in this Participation

Agreement, all decisions of the operating committee shall be made by the

affirmative vote of at least two (2) parties holding not less than ............per

cent (.......%) of the participation interests.

7. The operator shall, at least four (4) months before the end of

each year, submit to the parties for approval a participation work

programme and budget, which shall contain details of the petroleum

operations to be carried out in the next year and allocation of funds

therefore including administrative overheads and third party expenditure, in

accordance with the accounting procedure attached to this Participation

Agreement as exhibit "A".



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8. Unless unanimously agreed at least sixty (60) days prior to

the beginning of the year, the operator shall call a meeting of the operating

committee to discuss and approve a participation work programme and

budget for the ensuing year and such work programme and budget shall

be approved not later than thirty (30) days prior to the commencement of

such year and the decision of the operating committee shall bind the

parties. Upon approval of such work programme and budget the operator

is hereby authorized and obliged to proceed with it in accordance with

such approval.

9. Such approved participation work programme and budget

may be reviewed and revised from time to time by the operating

committee. Any party may in writing request a review of an approved

participation work programme or budget, or of a project within a

programme, if that project costs more than ...............U.S. dollars (U.S.

$.............), and the request shall state the objections of the party, which

shall be considered by the operating committee, who may amend the

participation work programme or budget.

5. - COST AND EXPENSES.

1. Except as otherwise specifically provided in the Contract

and this Participation Agreement, all costs and expenses incurred by the

operator in the conduct of operations hereunder shall be borne by the

parties in proportion to their respective Participating Interests set forth in

Article 2.

2. All costs and expenses incurred by the operator in the

conduct of petroleum operations hereunder shall be determined and

settled in accordance with internationally accepted accounting practice

consistent with the provisions of the Contract and its accounting procedure

as complemented by the provisions of exhibit "A" to this Participation

Agreement, and the operator shall keep its records of costs and expenses

in accordance therewith.

6. PAYMENTS TO OPERATOR

1. A non-operator shall pay its share of an expenditure relating

to the petroleum operations, within fifteen (15) days of receipt of the

account of the operator.

2. The operator may, upon twenty (20) days' written notice,

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request a non-operator to advance a share of the estimated expenditure

for the following month, stipulating the due date of payment, provided

however that such due date of payment shall not be before the first

banking day of that month and the operator shall include with such notice

an estimate of the cash calls for the next three (3) months. The operator's

estimate of expenditure shall not exceed the approved year's budget. The

operator may, at any time upon fifteen (15) days' written notice, request

additional advances to cover unforeseen expenditure.

3. Cash requirements shall be specified by the operator in the

currencies required for the petroleum operations and the non-operators

shall advance their shares in the currencies so specified.

4. If any non-operator's advances for a given month exceed its

share of cash disbursements for the same month, the next succeeding

cash advance, after such determination, shall be reduced accordingly.

However, non-operator(s) may request that excess advances be

refunded. The operator shall make such refund within fifteen (15) days

after date of such notice.

5. Where a party is in default of payment, the operator and the

non-defaulting parties shall have, as security for amounts due hereunder

from a defaulting non-operator, a lien on the participating interest share,

the interest in material and equipment acquired for the petroleum

operations and upon the proceeds from the sale of petroleum, of that nonoperator, and a non-operator shall have for amounts due hereunder, a

similar lien on the same interests and property of the operator.

6. A lien may be exercised by a non-defaulting party by

collecting the amount due from a purchaser of petroleum and the

statement of the operator of the amount due shall be proof thereof.

7. A late payment shall attract interest at LIBOR

plus...............per cent (......%) or...........per cent (.......%), whichever is the

greater, compounded monthly and calculated from the due date of

payment. A payment not received within seventy-two (72) hours of the

due date shall accrue interest from the due date and the non-paying party

shall be deemed to be in default from the due date of the payment.

8. A party which remains in default for five (5) days shall have

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no right to vote at any operating committee meeting held during the period

of the default but shall be bound by all decisions of the operating

committee made during such period, and the defaulting party's

participating interest shall be deemed to be vested pro-rata in the nondefaulting parties for voting purpose during the continuation of the default.

9. Where a party fails to pay an amount required to be paid

hereunder, and remains in default for ninety (90) days, the participating

interest share of the defaulting party may be declared forfeit by the nondefaulting parties, unless the amount due is an advance and the defaulting

party provides an irrevocable letter of credit or other security, acceptable to

the operator, for the amount due.

10. When the participating interest share of a defaulting party

is declared forfeit, the operator shall give notice thereof to all the parties,

and that share shall vest rateably, unless otherwise agreed, in the nondefaulting parties without payment of compensation and the defaulting

party shall at its sole expense take all steps necessary to vest that share

accordingly, and the defaulting party hereby appoints the operator to act as

its attorney to execute any and all documents required to effect such

transfer. Notwithstanding the transfer of a defaulting party's participating

interest share in accordance with the foregoing, the defaulting party shall

remain liable for its proportionate share of the commitments incurred

before its rights lapsed.

11. Where a party is in default of payment, the remaining

parties shall advance the operator on demand a share of that payment, in

proportion to the participating interests of those parties. Any payments

received from a defaulting party shall be credited to the accounts of the

non-defaulting parties who advanced funds on behalf of the defaulting

party.

7. - MATERIAL AND EQUIPMENT

1. All material and equipment acquired by the operator for

petroleum operations hereunder shall be owned by the parties in undivided

shares in the proportion of their respective participating interests.

2. Except as may be otherwise approved by the operating

committee, the operator shall purchase for the joint account of the parties

only such material and equipment as are reasonably required in the

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conduct of operation provided for in approved participation work

programmes or revisions thereof, the operator shall not stockpile material

or equipment for future use without the approval of the operating

committee.

3. Jointly acquired material or equipment declared by the

operator to be surplus shall be disposed of in such manner as the

operating committee may direct; or, if the book value thereof does not

exceed.................U.S. dollars(U.S. $...........), the operator shall dispose of

same in such manner as the operator shall deem appropriate; provided,

however, that each Party may, if practicable, separately take or sell and

dispose of its interest in such material or equipment or may by notice in

writing, and subject to revocation at will, authorize the operator, for a

period or periods of not more than one (1) year each, to sell such material

and equipment for the account of the party or parties giving such

authorization. Each party shall have the right to purchase, at the prevailing

market price in the area, material or equipment which the operator has

declared to be surplus and which the operator intends to dispose of on the

open market.

4. Subject to the provision of clause 12 of the Contract, upon

termination of this Participation Agreement the operator shall salvage for

the jointly-owned material and equipment which can reasonably be

salvaged, to be disposed of as provided in Article 7 (3) hereof.

8. - RELATIONSHIP OF THE PARTIES AND TAX PROVISIONS

1. The parties declare that it is not their intention by entering

into this Participation Agreement to create or be considered as a

partnership or any other similar entity.

2. Each party shall be responsible for and shall pay its own

taxes to the Kenyan authorities on its operations hereunder.

3. It is recognized that a party hereunder may be

subject to the laws of its place of incorporation in addition to the laws of

Kenya. For United States Federal income tax purposes, each of the

parties hereto which is subject to United States Income Tax laws ("U.S.

Party") hereby elects to be excluded from the application of all of the

provisions of Sub-chapter "K", chapter 1, Sub-title "A", of the United

States Internal Revenue Code of 1954, as permitted and authorized by

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Section 761 of that Code and the regulations promulgated there under.

Should there be any requirement that each U.S. Party evidence this

election, each U.S. Party agrees to execute such documents and furnish

such other evidence as may be required by the United States Federal

Internal Revenue Service. Upon the request of any U.S. Party, the

Operator shall provide data necessary for filing United States tax returns.

9. - SURRENDERS AND TRANSFERS

1. Any party desiring that all of the participation area be

surrendered voluntarily shall notify the other parties in writing accordingly,

specifying its reasons thereof, and thereafter:

(a) Each party shall within thirty (30) days after receipt of the

notice inform the other parties in like manner whether it concurs in or

opposes the proposed surrender;

(b) If all the parties concur in the proposed surrender, the

participation area shall be surrendered as soon as possible under the

Contract;

(c) If one or more of the parties shall oppose the proposed

surrender, the party or parties desiring to surrender shall, upon request by

the opposing parties, transfer and convey without warranty of title-free and

clear of all liens, charges and encumbrances and without right to

compensation, all of its or their interest(s) in the participation area and

material left thereon to said opposing party or parties, each in the

proportion that its or their participating interest(s) hereunder bear to the

sum of the participating interests of all the opposing parties, or as

otherwise agreed by the opposing parties. The transferring party or parties

shall bear(i) Its or their participating interest share(s) of costs,

expenses and liabilities incurred hereunder which are attributable to the

participation area for the period prior to the effective date of such transfer

of interest;

(ii) Its or their participation interest share(s) of all

costs and expenses incurred by the operator after such date under any

contracts entered into by the operator in execution of a participation work

programme theretofore approved by the operating committee; and

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(iii) Its or their participating interest share(s) of any

accrued obligations under the contract which are not included rights or

other obligations in connection therewith.

(d) A transfer under paragraph (c) above shall be effective as

among the parties thirty (30) days after the opposing parties' receipt of the

transferring party's first mentioned notice proposing surrender. Thereafter

until such transfer has received whatever approvals may be necessary

under the provisions of the Contract or applicable law, the transferring

Party or parties shall hold at most legal, but not equitable, title to the

interest (s) transferred for the benefit of the opposing party or parties. The

transferring party or parties receiving the interest(s) transferred shall

execute and deliver such documents and do such other acts as may be

necessary to give legal effect to such transfer, to obtain all approvals

thereof as may be required from the Minister, and otherwise to effectuate

the purpose of this paragraph.

(e) Notwithstanding the foregoing, if the operating committee

determines that .................per cent (.............%) or more of the estimated,

discovered and recoverable reserves under the participation area have

been produced, no party shall be allowed to surrender or required to

transfer interest in this Participation Agreement and the Contract without

the unanimous consent of all parties.

2. No transfer of any interest under this Participation

Agreement and the Contract shall be made by any party otherwise than in

respect of an undivided interest in all or part of its participating interest in

this participation Agreement and the Contract, and in accordance with the

following provisions of this Article 9.

3. If any party shall receive a bona fide offer for the purchase

of all or a portion of an offeree party's participation interest in this

Participation Agreement and the participation area which the offeree party

is willing to accept, the offeree party shall give notice thereof in writing to

the other parties:

(a) Such notice shall set forth the identity of the offeror, the

terms and conditions (including monetary and other considerations) offered

in good faith, and all other relevant particulars.



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(b) For a period of thirty (30) days next following the receipt of

such notice, the other parties shall have an option to purchase the entire

interest proposed to be sold on the same terms offered by the offeror, as

set forth in the respective offer.

(c) If more than one of the parties should exercise its right to

purchase said interest, each shall have the right to acquire such interest in

the proportion that the Participating Interest hereunder of such party bears

to the sum of the Participating interests of all the parties exercising such

right except as they may otherwise agree.

(d) If within such a period of thirty (30) days, none of the other

parties shall exercise its rights to purchase said interest, the sale to said

offeror may be made under the terms and conditions set forth in the notice

given; provided that the sale shall be consummated within six (6) months

from the date of such notice and that the sale and any transfer shall be in

accordance with the Contract and applicable law.

(e) For the purpose of this paragraph, an offer to purchase

shall also include an acceptance of an entity's offer to sell.

4. The limitations of Article 9 (3) shall not apply to transfer of a

participating interest by a party to an affiliate of such party, or by the

Contractor to an acceptable assignee as defined in the Contract, or by the

Government to an appointee, or from an appointee to another appointee,

nor shall they apply to a transfer of a participating interest effected as a

result of merger, consolidation, re-organization or sale of capital stock of

the parent company of a Party.

5. Every transfer of a participating interest in the participation

area shall be made expressly subject to this Participation Agreement and

shall include a corresponding interest in jointly acquired equipment and

facilities. No transfer of an interest hereunder shall be effective unless

made by an instrument in writing duly executed by the parties thereto in

accordance with applicable law, and until the same has received all

consents required under this Participation Agreement and the Contract. A

transfer shall provide that the transferor remains liable for obligations

incurred before the date of transfer and such obligations shall in addition

become the obligations of the transferee. Where after the transfer, the

transferee or transferor owns a participating interest of less than five per

cent (5%), they shall be jointly represented.

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6. A transfer other than to an affiliate on an appointee shall be

of sufficient financial standing to meet its participating interest share of its

obligations under the Contract and this Participation Agreement. In the

event of a transfer of a participating interest to an affiliate of a party the

transferor party shall remain responsible for the full performance by the

affiliate of the obligations undertaken by said party under this Participation

Agreement and the Contract, and if such affiliate ceases to be an affiliate,

the participating interest shall be transferred back to the party.

7. In this Article, transfer means a transfer, assignment, sale or

other disposal of the interest of a party.

10. DISPOSAL OF PRODUCTION

1. Each party shall separately own, take in kind and dispose of

its participating interest share of that portion of the petroleum produced

and saved from the participation area to which the Contractor is entitled

under clause 27 of the Contract.

2. Within six (6) months following the signing of this

Participation Agreement, the parties shall, in accordance with the

provisions of the Contract and in light of the gathering and transportation

facilities available under the adopted development plan, in good faith

establish a set of rules governing the scheduling, lifting and other

necessary provisions for the crude oil offtakes of the parties, consistent

with good international petroleum industry practice, which shall provide,

among other things, such detailed terms and procedures as required for(a) Short-term production forecasts;

(b) Nomination and calculation of entitlements;

(c) Scheduling of deliveries;

(d) Lifting tolerances;

(e) Under lift, over lift and make-up provisions;

(f) Passage of title and risk;

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(g) Penalties assessable to the Parties which cause shut-in or

reductions of production; and

(h) Other related matters.

Whatever is mutually agreed by the Parties shall be deemed to

form part of this Participation Agreement.

The above terms and procedures shall apply separately to

each grade of crude oil that is segregated and separately stored for off

take.

3. The Government may request from time to time that the

Contractor purchase all or part of the Government's participating interest

share of crude oil. The Contractor shall use its best efforts to comply with

this request but in the event that the Contractor is not able to take such

crude oil, then the Contractor will assist the Government in good faith to

market such crude oil at the best price, terms and conditions available in

the international market for the sale of such crude oil.

4. In the event of production of associated natural gas or of

any discovery of natural gas, the parties shall agree upon appropriate

procedures for disposal of any natural gas available under this

Participation Agreement and the Contract.

11. SOLE RISK OPERATIONS

1. Any party may undertake petroleum operations at sole risk

(hereinafter referred to as "sole risk project") in a participation area, subject

to the provisions of this Article.

2. The following types of sole risk project may be proposed(a) the drilling of a well or the deepening, side-tracking,

completing, plugging back, testing or reworking of an existing well drilled

for the joint account of the parties, in order to test a formation in which no

jointly-owned well has been completed as a well producing or capable of

producing petroleum;



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(b) The installation of production and transportation facilities.

3. The conduct of a project in a development area may not be

the subject of a sole risk notice under this Article until after it has been

proposed in complete form to the operating committee for consideration

pursuant to Article 4 hereof and has not been approved within the period

therein provided.

In the event that such project fails to obtain the requisite

approval of the operating committee, then any party may serve notice on

the other parties of its intention to carry out that project at sole risk. The

other parties may give counter-notice that they wish to participate in the

project within sixty (60) days after receipt thereof but, where a drilling rig is

on the location and has not been released, the period is reduced to

seventy-two (72) hours after receipt thereof. The periods set forth in this

Article 11 (3) shall be extended for any period of time mutually agreed by

the parties as necessary or desirable for acquiring or developing additional

information on the sole risk project.

4. If all the other parties elect to participate in the project

identified in the proposing party's notice within the period thereof provided,

such project is considered as being approved by the operating committee

and the provisions of Article 4 (8) of this Participation Agreement shall

apply.

5. In the event that less than all the parties elect to participate

in the project, the parties which elected to participate (hereafter referred to

as "sole risk parties") shall be entitled to have the sole risk project carried

out.

The interest of each sole risk party in a sole risk project shall

be in proportion to its participation interest in this Participation Agreement,

or in such other proportion as the sole risk parties may agree. Any sole

risk project shall be carried out at the sole risk, cost and expense of the

sole risk parties in the proportion of their respective interests.

6. A sole risk project shall be carried out by the operator on

behalf of the sole risk parties under the provisions of this participation

agreement. No sole risk project may be commenced after one hundred

and eighty (180) days following the expiration of the notice period

prescribed in Article 11 (3), but the operator shall commence work as

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promptly as reasonably possible if the notice period of seventy two (72)

hours, set forth in Article 11 (3), applies. The operator shall complete the

sole risk project with due diligence provided that it does not jeopardize,

hinder or unreasonably interfere with petroleum operations carried out

under the Contract and adopted by the operating committee pursuant to

Article 4 of this Participation Agreement.

The sole risk parties may use for the sole risk project any

production, handling, processing and/or transporting facilities, which are

joint property, subject to a determination by the operating committee as to

usage fees, availability of capacity and production compatibility.

7. In connection with any sole risk project(a) the sole risk project will be carried out under the overall

supervision and control of the sole risk parties in lieu of the operating

committee;

(b) the computation of costs and expenses of the sole risk

project incurred by the sole risk parties shall be made in accordance with

the principles set out in exhibit"A" attached hereto;

(c) the operator carrying out the sole risk project shall maintain

separate books, records and accounts (including bank accounts) for the

sole risk project which shall be subject to the same right of examination

and audit by the sole risk parties;

(d) the costs and expenses of the sole risk project shall not be

reflected in the statements and billing rendered by the operator for

petroleum operations under the Participation Agreement; and

(e) if the operator is carrying out a sole risk project on behalf of

the sole risk parties, the operator shall be entitled to request the sole risk

parties in connection with the sole risk project to advance their share of the

estimated expenditure and shall not use joint account funds or be required

to use its own funds for the purpose of paying the costs and expenses of

the sole risk project; furthermore the operator shall not be obliged to

commence or, having commenced, to continue the sole risk project unless

and until relevant advances have been received from the sole risk parties.



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8. The sole risk parties shall indemnify and hold harmless the

other parties against all actions, claims, demands and proceedings

whatsoever brought by any third party arising out of or in connection with

the sole risk project and shall further indemnify the other parties against all

damages, costs, losses and expenses whatsoever directly or indirectly

caused to or incurred by them as a result of anything done or omitted to be

done in the course of carrying out such sole risk project.

9. Subject to the provision of Article 11 (10) below, the sole risk

project, including data and information, is wholly owned by the sole risk

parties in accordance with the provisions of the Contract, but the sole risk

parties shall keep the other parties informed about the project.

In the event that such project results in an increase of

production of petroleum from the participation area, the portion of such

increase, which is available to the Contractor, shall be owned solely by the

sole risk parties. Each of them shall have the right and obligation to take in

kind, and separately dispose of its proportional share of supplementary

petroleum production.

10. Any party or parties which are not participating in the sole

risk project may, by giving thirty (30) days' notice to the sole risk parties,

become participants in such project, at any time after the sole risk parties

have recovered from the supplementary petroleum production the

following sums of money to which they are entitled on the project:

In the case of a project under Article 11 (2) (a) hereof........per

cent (........%) of the Sole Risk cost of such project, plus one hundred per

cent (100%) of the cost of operating such well incurred by the Sole Risk

Parties.

In the case of a project under Article 11 (2) (b) hereof..........per

cent (.......%) of the Sole Risk cost of such project, plus one hundred per

cent (100%) of the cost of operating such facilities.

The value of the supplementary production to which a Sole

Risk Party is entitled shall be the market value in sales at arm's length,

determined in accordance with clause 26 of the Contract.

From and after the election of any party or parties to become

participants in such project, all relevant wells, facilities, equipment and

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other property appurtenant thereto shall be owned jointly by the

participating parties and each of the participating parties shall be entitled to

receive its proportional share of the supplementary petroleum production.

12. CONFIDENTIALITY

1. All information related to the petroleum operations shall be

confidential and shall not be disclosed to a person other than a party

except to(a) an affiliate;

(b) the Government and other public authorities to the extent

necessary for the purpose of any applicable law;

(c) a stock exchange to which a party is obliged to make

disclosure;

(d) contractors, consultants, legal counsels or arbitrators of a

Party, where disclosure is essential;

(e) a bona fide prospective purchaser of an interest of a Party

in the Contract, but that purchaser shall undertake to treat that information

as confidential;

(f) a lender, where disclosure is essential; or

(g) a person to whom disclosure has been agreed by the

Parties.

2. A party making a disclosure to a person described in

paragraph (1) (e) or (f) shall give ten (10) days' written notice thereof to the

other parties.

3. The parties shall consult with each other prior to the release

of any public statement or press release, and except to the extent required

by law, rule or regulation of any government authority or stock exchange,

no party shall make any public statement or press release without the

approval of all the other parties, which shall not be unreasonably withheld.

The operator shall utilize its best efforts to co-ordinate all such public

statements to the end that all Parties may effect simultaneous press

releases.

4. The obligations of the parties under this Article 12 are

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continuing obligations and any party ceasing to be a party to this

Agreement shall remain bound by this Article until this Agreement is no

longer in force between any remaining parties and the Contract has

expired.

13. LIABILITY

1. The parties shall be severally liable in accordance with their

respective participating interest to third parties.

2. Where the Government has nominated an Appointee, as

defined in clause 28 (1) of the Contract, and the appointee defaults the

Government shall be liable.

3. If because of the operation of the joint and several liability

provisions contained in the Contract, any one of the Parties hereto shall be

required to pay in full to the Government or any other party, any sum

which, if the liability were several, would be required separately from each

of the Parties or from one other party only, then the Party (ies) shall notify

forthwith and request immediate payment of the Party’s (ies') proportionate

share according to its Participating interest. If within ten (10) days from

receipt of said notice, the other Party (ies) shall fail to make payment as

provided above such Party (ies) shall be in default and the provisions of

Article 6 above shall apply, this being without prejudice to any other legal

remedies available to the non-defaulting Party (ies) against the defaulting

Party (ies).

14. GOVERNING LAW

This Participation Agreement shall be governed by and be

construed in accordance with the laws of Kenya.

15. ARBITRATION

A dispute under this Participation Agreement shall be referred

to arbitration in accordance with clause 41 of the Contract.

16. FORCE MAJEURE

1. In this Article 16, , “Force Majeure” shall include Acts of

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God, unavoidable accidents, acts of war or conditions attributable to or

arising out of war (declared or undeclared), laws, rules, regulations, and

orders by any government or governmental agency strikes, lockouts, or

other labour or political disturbances, insurrections, riots, and other civil

disturbances, hostile acts of hostile forces constituting direct and serious

threat to life and property, and all other matters or events of a like or

comparable nature beyond the control of the Party concerned, other than

rig availability which prevents any of them from performing their

obligations under this Participation Agreement.

2. In this clause, “Force Majeure” means an occurrence

beyond the reasonable control of the Minister or the Government or the

contractor which prevents any of them from performing their obligation

under this contract

3. Where a party is prevented from performing an obligation

under this Participation Agreement by force majeure, that party shall give

written notice to the other Parties, and the obligation of the affected Party

shall be suspended for the period of the force majeure.

4. The affected party shall promptly notify the other parties

when the period of force majeure terminates.

5. No Party may claim force majeure as a reason for the failure

to timely pay any monies pursuant to this Participation Agreement.

6. Where any Party disputes the existence of force majeure,

that dispute may be referred to arbitration as provided in clause 44 of the

Contract.



17. NOTICES

1. All notices and other communications provided for in this

Participation Agreement shall be made in writing and shall be delivered by

hand or sent by registered airmail, as appropriate, return receipt

requested, or by telegram or telex (with confirmation by mail) to the Parties

at the following addresses:

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To the Government:

Ministry of Energy: FAO Hon. Minister of Energy

Nyayo House

Kenyatta Avenue

P O Box 30582.00100

Nairobi, Kenya

Tel 00254 20 310 112

Fax 00254 20 228 314

To the Contractor:

FAO…………….

…………………..

…………………..

2. Notices given by registered airmail shall be deemed

received on the date shown on the return receipt. Notices given by

telegram or telex shall be presumed received on the working day at the

place of receipt following the time of transmission.

3. Any party may at any time and from time to time change its

authorized representative or its address herein on giving the other Parties

ten (10) days notice in writing to such effect.

18. TERM

1. This Participation Agreement shall come into force on the

participation date and shall remain in force until(a) It is terminated by the written consent of all the parties;

(b) All the Participating interests are vested in one Party; or

(c) The expiration or termination of the Contract.

2. Before this Participation Agreement is terminated, there

shall be a final accounting and settlement of the Joint Account.



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19. FINAL PROVISIONS

1. Headings are inserted in this Participation Agreement for

convenience and shall not affect the construction for interpretation hereof.

2. This Participation Agreement shall not be amended,

modified or supplemented except by an instrument in writing signed by the

parties.

3. Subject to the provisions hereof, this Participation

Agreement is binding upon and shall apply to the successors and

assignees of the parties hereto and each of them respectively.

IN WITNESS WHEREOF, the Parties hereto have signed this

Participation Agreement on the day and year first above written.

EXHIBIT "A"

ACCOUNTING PROCEDURE

Attached to and made a part of the Participation Agreement.

TABLE OF CONTENTS

Section 1 - General Provisions

1.1 - Interpretation

1.2 - Statements, billings and adjustments

1.3 - Advances and payments

1.4 – Audits



SECTION 1

GENERAL PROVISIONS



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The purpose of this accounting procedure is to establish

equitable methods for determining charges and credits applicable to

operations under the Agreement.

It is the intent of the Parties that no Party shall lose or profit by

reason of its duties and responsibilities as either operator or as nonoperator and that no duplicate charges to the joint account for the same

work shall be made.

The parties agree that if any procedure established herein

proves unfair or inequitable to any party, the parties shall meet and in good

faith endeavour to agree on the changes necessary to correct that

unfairness or inequity.

1.1. - INTERPRETATION

1.1.1. In this Exhibit(i) "The Agreement" means the Participation Agreement,

of which this Exhibit forms part,

(ii)"the Contract" means the production sharing contract

to which the Agreement is attached

(iii) Words and expressions defined in the Agreement,

the Contract and its appendices have the meanings therein ascribed to

them.

1.1.2. In the event of any conflict between the provisions of the

Agreement and this exhibit, the provisions of the Agreement shall prevail.

1.1.3. By mutual agreement between the parties, this

accounting procedure attached to the Agreement may be revised from

time to time by an instrument in writing signed by the parties.

1.2. - STATEMENTS, BILLINGS AND ADJUSTMENTS

1.2.1. The operator shall maintain financial accounts

necessary to record in reasonable details the transactions relating to

petroleum operations under the Agreement which shall be prepared in

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accordance with generally accepted standards of the international

petroleum industry. The operator shall upon request by the Party furnish a

description of its accounting classifications.

1.2.2. Each party to the Agreement is responsible for preparing

its own accounting and tax reports and paying of its own tax obligations to

meet Kenyan requirements. The operator shall furnish the non-operator(s)

with all reports, statements, billings and accounting documents necessary

to maintain their own accounting records.

1.2.3. The operator shall bill the non-operator(s) on or before

the last day of each month for their proportionate share of expenditure for

the preceding month. Such billings shall be accompanied by statements of

all charges and credits to the joint account, summarized in reasonable

detail by appropriate accounting classifications indicative of the nature

thereof, except that items of controllable material and unusual charges and

credits shall be detailed.

1.2.4. The operator shall, upon request by non-operator(s)

furnish a description of such accounting classifications.

1.2.5. Amounts included in the billings shall be expressed in

the currency in which the operator's records are maintained. In the

conversion of currencies when accounting for advances or payments in

different currencies as provided for in sub-section 1.3., or any other

currency transactions affecting operations under the Agreement, it is the

intent that none of the parties shall experience an exchange gain or loss at

the expense of, or to the benefit of, the other Parties. It is agreed that any

loss or gain to the joint account resulting from the exchange of currency

required for operations under the Agreement or from the translations

required, shall be charged or credited to the joint account. The operator

shall furnish the parties with a description of the procedure applied by the

operator to accomplish said translation or exchange of currencies and

provide currency exchange data sufficient to enable non-operator(s) to

translate the billings to the currency of the non-operator(s) accounts.

1.2.6. Payment of billings by non-operator(s) shall not

prejudice the right of any non-operator(s) to protest or question the

correctness thereof; however, all bills and statements rendered to nonoperator(s) by the operator during any year shall conclusively be presumed

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to be true and correct after twenty-four (24) months following the end of

any such year, unless within the said twenty-four (24) month period a nonoperator takes written exception thereto and makes claim on the operator

shall be made unless it is made within the same prescribed period. The

provisions of this Sub-section shall not prevent adjustment resulting from a

physical inventory or the joint property or from a third party claim.

1.3. - ADVANCES AND PAYMENT

1.3.1. If operator so requests, non-operator(s) shall advance to

the operator the non-operator(s)' share of estimated cash requirements for

the succeeding month's operation in accordance with Article 6 of the

Agreement. Operator shall make written request for the advance to nonoperator(s) at least twenty (20) days prior to the first banking day of such

succeeding month. The advance shall not be due and payable before the

first banking day of the month for which the advance is requested. The

request shall set out the funds in the currencies to be expended as

estimated by the operator to be required. The non-operator(s) shall on or

before the due date make corresponding advances in the currencies

requested by depositing such funds to operator's account at a bank as

may be from time to time designated by the operator.

1.3.2. Should the operator be requested to pay any large sums

of money for operations under the Agreement, which were unforeseen at

the time of providing the non-operator(s) with said monthly estimates of its

requirements, the operator may make a written request of the nonoperator(s) for special advances covering the non-operators' share of such

payments. Non-operator(s) shall advance to operator their share of such

advances within fifteen (15) days after date of such notice.

1.3.3. If non-operators' advances exceed their share of actual

expenditure, the next succeeding cash advance, after such determination,

shall be reduced accordingly. However, non-operator(s) may request that

excess advances be refunded. The operator shall make such refund with

fifteen (15) days after the date of such notice.

1.3.4. If non-operators' advances are less than their share of

actual expenditure, the deficiency shall, at operator's option, be added to

subsequent cash advance requirements or be paid by non-operators within

fifteen (15) days following operator's billing to non-operator(s) of such

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deficiency.

1.3.5. If the operator does not request non-operator(s) as

provided in sub-part 1.3.1., to advance their share of estimated cash

requirements, non-operator(s) shall pay their share of actual expenditure

within fifteen (15) days following date of operator's billing.

1.3.6. Payments of advances or billings shall be made on or

before the due date; and if not so paid, the unpaid balance shall be treated

as provided under Article 6 of the Agreement.

1.4. - AUDITS

1.4.1. A non-operator, upon at least thirty (30) days' advance

written notice to the operator and other non-operator(s), shall have the

right at its sole expenses to audit the joint account and related records for

any year or portion thereof within the twenty-four (24) month period

following the end of such year; however, the conducting of an audit shall

not extend the time for the taking of written exception to and the

adjustment of accounts as provided for in sub-part 1.2.5. The operator

shall make every reasonable effort to co-operate with the non-operators,

and the non-operators shall make every reasonable effort to conduct

audits in a manner which will result in a minimum of inconvenience to the

operator.

1.4.2. All adjustments resulting from an audit agreed between

the operator and the non-operator conducting the audit shall be rectified

promptly in the joint account by the operator and reported to the other nonoperator. Any unresolved dispute arising in connection with an audit shall

be referred to arbitration in accordance with Article 15 of the Agreement.

1.4.3. Except as otherwise provided in the Contract, the cost of

any audit or verification of the joint account that is for the benefit of all

parties shall be chargeable to the joint account if the parties mutually

agree.

SECTION 2

CHARGEABLE COSTS, EXPENDITURE AND CREDITS

The operator shall charge the joint account for all those costs

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and expenditure necessary to conduct petroleum operations under the

agreement pursuant to the provisions of sub-parts 2.12. inclusive of

appendix "B" to the Contract.

The operator shall credit the joint account for all the proceeds

resulting from petroleum operations under the Agreement pursuant to the

provisions of sub-part 2.31. of Appendix "B" to the Contract.



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