The People's Republic of China

16/04/2002

The text of the contract, annexes and supplementary documents attached shall be written in both Chinese and English, and both versions shall have equal force and effect. The parties agree that both Chinese and English shall be used as working languages. After the effective date of the contract, technical documents and information concerning the coalbed methane operations including work programs and budgets shall, in general, be written in English except for technical documents and information available previously and received from third parties. Unless otherwise agreed by the government, in consultation with Phillips China Inc., documents and information in respect of administration shall be written in both Chinese and English. Forms for production and other reports and records shall be printed with headings in both Chinese and English and may be filled out in either Chinese or English.

The contract area as of the date of signature of the contract covers a total area of 1,962.80 square kilometers, as marked out by the geographic location and the coordinates of the connecting points of the boundary lines shown on Annex I.

Phillips China Inc.

Coalbed methane, liquid hydrocarbons or coalbed methane products

China United Coalbed Methane Corporation Ltd.

The term of the contract shall not go beyond 30 consecutive contract years from the date of commencement of the implementation of the contract. The exploration period shall be 5 years with the possibility of a 5 year extension. The production period of any field within the contract area shall be up to the date specified in the approved overall development program. However, the production period shall be extended for so long as there exist commercially recoverable reserves of coalbed methane from the field.

Production sharing contract

The operator shall conduct regular audits to ensure compliance with the operator's environmental, health and safety standards. All costs for such regular audits shall be charged to the joint account. When competent authorities under the Chinese Government assign a person to inspect environmental protection, health and safety within the scope of the coalbed methane operations according to the laws, decrees, rules and regulations of the People's Republic of China, the operator shall provide all necessary access to facilities and assistance to enable the inspectors to carry out such inspection smoothly.

In the performance of the coalbed methane (CBD) operations, the operator shall be subject to the laws, decrees, regulations and standards on environmental protection and safety promulgated by the Chinese Government and carry out the CBM operations according to international practice. The operator shall use all reasonable endeavors to protect farmland, aquatic resources, forest reserves and other natural resources, and prevent pollution and damage to the atmosphere, rivers, lakes, groundwater, harbors, other land environments and ecological environment and secure the safety and health of the operating personnel. The operator shall use all reasonable endeavors to eliminate promptly any pollution occurring as a direct result of and in the performance of the CBM operations and minimize its consequences. Economic losses caused by any pollution shall be charged to the joint account, unless otherwise provided in Article 8.4. The operator shall, after the completion of various CBM operations, to the extent reasonable and practicable, level or restore or reclaim the land of the operating sites to the condition existing at the commencement of implementation of the contract in accordance with the relevant rules and regulations.

Any non-operator party to the contract shall have the right to audit all the operator's joint account accounting books and records after the end of each calendar year and shall give the operator a written notice of the auditing results. Any such audit shall be completed within 24 months after the end of each calendar year. In the absence of any written notice of an exception in the audit results given by the non-operator party within such period or if the annual joint account accounting books and records of the operator are not audited by any non-operator party within such period, the operator's joint account accounting books and records shall be deemed correct. A special audit of the operator's joint account accounting books and records may be made if specially required during any such calendar year. Any special audit will be limited to a specific topic and shall not be a general audit. The auditors shall be entitled to access to all relevant joint account records, files and other information including, but not limited to the salary and wage information of operator's personnel dedicated to the CBM operations, and may inspect such sites and facilities as necessary.

Phillips China Inc. shall pay the government a signature fee of US$ 300,000 in 2 installments as follows: a) The first installment of US$ 150,000 shall be paid Phillips China Inc. to the government within 30 days after the date of commencement of the implementation of the contract; b) The second installment of US$ 150,000 shall be paid Phillips China Inc. to the government within 30 days after approval of the first overall development program for a field by the department or unit. Such signature fee shall, in no case, be charged to the joint account, nor be deemed recoverable costs.

Each of the companies comprising Phillips China Inc. shall pay taxes, including but not limited to, enterprise income taxes, to the Government of the People's Republic of China subject to the tax laws and regulations of the People's Republic of China.

5% of the annual gross production of coalbed methane and liquid hydrocarbons shall be paid in kind to the competent authorities for payment of the value added tax in accordance with relevant rules and regulations of the People's Republic of China.

The remainder of the annual gross production of coalbed methane (CBM) and liquid hydrocarbons after the VAT, royalty and cost recovery have been deducted shall be divided into "share CBM and liquid hydrocarbons" of the government and "allocable remainder CBM and liquid hydrocarbons". The "allocable remainder CBM and liquid hydrocarbons" of each CBM field in each calendar year shall be equal to the "remainder CBM and liquid hydrocarbons" of that calendar year multiplied by the factor (X) for each CBM field within the contract area in that calendar year. The factor (X) of each CBM field in each calendar year shall be determined in accordance with the following successive incremental tiers on the basis of the annual gross production of CBM and liquid hydrocarbons from such CBM field during that calendar year. Annual gross production of CBM and liquid hydrocarbons Factors (X) in Percentage From Each CBM Field Applicable to Each (Million Cubic Meters) Production Tier of Each CBM Field Within the Contract Area < 500 X(l) = 100 percent (100%) 500 < x < 800 X(2) = 99 percent (99%) 800 < x < 1200 X(3) = 98 percent (98%) 1200 < x < 1800 X(4) = 95 percent (95%) 1800 < x < 2500 X(5) = 93 percent (93%) 2500 < x < 5000 X(6) = 91 percent (91%) 5000 < X X(7) = 90 percent (90%) In the above table, it is assumed that each cubic meter of CBM has a heating value of 36,960 BTU approximately. On this basis, a metric ton of liquid hydrocarbons in general will have a heating value of 43 million BTU, or equivalent to 1,164 cubic meters of CBM. 1.0 kilo calorie is equal to 3.97 BTU. Adjustments will be made if actual heating value exceeds or is less than the above by 10% or more. The "allocable remainder CBM and liquid hydrocarbons" of each CBM field in each calendar year shall be shared by the parties in proportion to their respective participating interests in the development costs, 30% for the government and 70% for Phillips China Inc. In the event that the government does not participate in the development of a CBM field within the contract area, Phillips China Inc. shall obtain 100% of the "allocable remainder CBM and liquid hydrocarbons" of that CBM field. In the event that the government participates to an extent less than 30% in the development of an CBM field within the contract area, the "allocable remainder CBM and liquid hydrocarbons" of such CBM field in that calendar year shall be shared by the parties in proportion to their actual respective participating interests in such CBM field.

75% of the annual gross production of coalbed methane and liquid hydrocarbons shall be deemed as cost recovery coalbed methane and liquid hydrocarbons and shall be used for payments or for cost recovery.

Payment of royalty shall be made pursuant to the relevant rules and regulations of the People's Republic of China through CUCBM.

Phillips China Inc. shall bear all the exploration costs required for the exploration operations. In the event that any coalbed methane field is discovered within the contract area, the development costs of such field shall be borne by the parties in proportion to their participating interests: 30% by the government and 70% by Phillips China Inc. In the event that the government opts to participate at a level less than 30% of the participating interests, or not to participate in the development of the field, Phillips China Inc. shall bear the remaining development costs necessary for the development of the field.

Phillips China Inc. may give preference to the employment of Chinese personnel in the performance of the coalbed methane (CBM) operations in accordance with relevant regulations. For this purpose, Phillips China Inc. may submit in advance to the government a plan for the employment of Chinese personnel listing all the posts and number of the persons involved. The government shall, at the request of Phillips China. Inc. and in accordance with the plan, provide or assist in recruiting Chinese employee candidates for such employment. Phillips China Inc. shall, as the CBM operations require, with the approval of the government revise the training and employment plan to make the plan the most efficient and economical for CBM operations. For the performance of CBM operations, Phillips China Inc. may have the obligation to employ competent Chinese personnel and to employ those who have become qualified after having being trained in accordance with the training program. Phillips China Inc. may give preference in employing the Chinese personnel who have participated in the training program provided by Phillips China Inc. It is agreed between the government and Phillips China. Inc. that total Chinese personnel employment levels, including the costs, for the purpose of conducting CBM operations, including training therefore, shall always be consistent with conducting such operations in an efficient and economic manner in accordance with good and generally accepted international oil field practices.

For the performance of the CBM operations, Phillips China Inc's procurement of necessary goods, leasing of equipment and signature of subcontracts or other construction and service contracts shall be subject to relevant regulations. Phillips China Inc. may give preference to Chinese goods, equipment and service, provided that they are competitive in terms of price, quality and terms of delivery. The engineering design corporations entrusted by the government shall have the right to participate in the master designs and engineering designs made by Phillips China Inc. for the purpose of the implementation of the contract. Qualified engineering design companies within the territory of the People's Republic of China as determined by the parties may be given preference in entering into subcontracts, provided that their technical level, quality, price and delivery time are competitive. After Phillips China Inc. signs equipment leasing contracts, service contracts or subcontracts with the government or its affiliates, Phillips China Inc. shall endeavor to provide technical assistance to the government or its affiliates, at the request of the government, so as to enable them to meet the needs of CBM operations to be undertaken. The expenses so incurred shall be borne by the government or its affiliates.

Phillips China Inc. agrees, in the course of the implementation of the contract, to transfer to the government and its affiliates, the advanced technology and managerial experience including proprietary technology e.g. patented technology, know-how or other confidential technology, used in the performance of the CBM operations and the necessary data and/or information for mastering such technology and experience, provided, however, such technology to be transferred shall be proprietary to Phillips China Inc. If the transfer of any of the technology is restricted in any way during the term of the contract, Phillips China Inc. shall, to the extent reasonably possible, endeavor to obtain permission for the transfer of such restricted technology. However, rights under patents, commercial proprietary information and information covered by confidentiality agreements, shall not be transferred, except in accordance with a licensing agreement which may be negotiated and entered into between Phillips China Inc. and the government. Phillips China Inc. agrees to train the Chinese personnel including workers, technical, economic, managerial, legal and other professional personnel, in order to improve their technical and/or managerial capabilities relating to CBM operations. Phillips China Inc. shall, after consultation with the government, complete and submit training and technology transfer programs and corresponding budgets for a reasonable number of the Chinese personnel in the exploration, development and production periods, respectively, for review and approval before the commencement of the development operations and production operations, and upon approval, put them into practice in time so as to have ample time in advance for such training and technology transfer. The expenses and costs incurred for performing the training and technology transfer program shall be charged to the exploration costs if such costs are incurred before the date of approval of the overall development program of the first CBM field. They shall be charged to the development costs if such costs are incurred after the date of approval of the overall development program of the first CBM field, and before the date of commencement of commercial production of the first CBM field. If the costs are incurred after the date of commencement of commercial production of the first CBM field shall be charged to the operating costs. In the course of the implementation of the contract, the parties shall have scientific and technical cooperation and academic exchanges in connection with the CBM operations. The relevant provisions concerning the program, participating personnel and type related to the scientific and technical cooperation and academic exchanges shall be determined by the parties. The expenses required by the scientific and technical cooperation and academic exchanges shall be included in the budget and charged to the joint account. All inventions, experiments or research results arising from the said cooperation and academic exchange shall be shared by and belong to the parties who shall not disclose them to any third party. The costs and expenditures incurred by Phillips China Inc. annually for training of Chinese personnel and transfer of technology shall be no less than US$ 60,000 during the exploration period and no less than US$ 150,000 during the development and production periods unless otherwise agreed by the parties.

All assets purchased, installed and constructed under the work program and budget for each coalbed methane (CBM) field within the contract area shall be owned by the government from the date on which all the development costs and deemed interest incurred by Phillips China Inc. in the development period of such CBM field have been fully recovered or from the date on which the production period expires, even though the aforesaid costs have not been fully recovered. In the production period, the operator may use these government-owned assets free of charge for performing the CBM operations. Such assets shall not be used in any operations other than the CBM operations or any operations by third parties without the consent of the parties.

Phillips China. Inc. shall fulfill the minimum exploration work commitment and expected minimum exploration expenditures for each phase of the exploration period in accordance with the following provisions: During the first phase of the exploration period, Phillips China. Inc. shall drill 1 exploration well with footage totaling 700 meters estimated to cost US$ 350,000, or acquire an equivalent amount of seismic equal to the estimated cost of drilling 1 exploration well. During the second phase of the exploration period, Phillips China. Inc. shall: - drill 2 exploration wells with footage totaling 1,400 meters; - spend US$ 700,000 as its expected minimum exploration expenditures for such exploration operations. During the third phase of the exploration period, Phillips China. Inc. shall: - drill and complete 1 pilot development consisting of 6 wells; and - spend US$ 1,800,000 as its expected minimum exploration expenditures for such exploration operations.

Any dispute that has not been settled through consultation within 90 days after the dispute arises may be referred to arbitration at the request of and by either party. If agreed upon by the parties, the dispute shall be referred to arbitration conducted by the China International Economic and Trade Arbitration Commission in accordance with its arbitration proceeding rules. If the parties fail to reach an agreement on the arbitration arrangement within 60 days after a party has requested in writing that a dispute be referred to arbitration, the parties shall establish an ad hoc arbitration tribunal to conduct arbitration in accordance with the following provisions: The ad hoc arbitration tribunal shall consist of 3 arbitrators. The place of arbitration shall be determined by the parties through consultations or, failing the agreement of the parties within 60 days after the appointment of the third arbitrator, by the majority of arbitrators of the ad hoc arbitration tribunal. The ad hoc arbitration tribunal shall conduct the arbitration in accordance with the arbitration rules of the United Nations Commission on International Trade Law ("UNCITRAL") of 1976, as amended. However, if the above-mentioned arbitration rules are in conflict with the provisions of this Article 25, including the provisions concerning appointment of arbitrators, the provisions of this Article 25 shall prevail. Both the Chinese and English languages shall be official languages used in the arbitration proceedings. All hearing materials, statements of claim or defense, awards and the reasons supporting them shall be written in both Chinese and English. Any award of the arbitration tribunal shall be final and binding upon the parties. The right to arbitrate disputes under the contract shall survive the termination of the contract.

The government shall, in conformity with applicable laws and regulations of the Government of the People's Republic of China on confidentiality and by taking into account international practice, determine in consultation with Phillips China Inc. the confidentiality periods for which the contract and all documents, information, data and reports related to the coalbed methane (CBD) operations within the contract area shall be kept confidential. Without the written consent of the other party, no party to the contract shall disclose, during such confidentiality periods, the contract, documents, information, data and reports or any other information regarded as confidential, to any third party except the third parties specified in Article 21.5 and to any affiliate not directly connected with the implementation of the contract, and no party to the contract shall otherwise transfer, donate, sell or publish them in any way within the confidentiality periods. The government shall have the right to disclose confidential information to relevant third parties upon the termination of this contract. The government shall, in conformity with relevant provisions of laws and regulations of the People's Republic of China and lawful requests of relevant government departments and units, provide them with all documents, information, data and reports. During the term of the contract and after the termination of the contract, the government shall not disclose to any third party any patent, know-how or proprietary technology transferred to the government by Phillips China Inc. without the written consent of Phillips China Inc. except for any technology, the patent of which has expired and any proprietary and confidential technology which has entered the public domain. After the termination of the contract or after any assignment of rights and/or obligations of the contract, Phillips China Inc. and any assignee shall, within the confidentiality periods, continue to be obligated to keep confidential documents, information, data and reports except for official documents and information published with the consent of the parties. For the implementation of the contract, the government and each company comprising Phillips China Inc. may furnish the necessary documents, information, data and reports to affiliates related to the CBM operations. The government and each company comprising Phillips China Inc. may furnish the necessary documents, information, data and reports to the third party related to the CBM operations. The third parties include: - banks or other credit institutions from which financing is sought by any party to the contract for the implementation of the contract; - third parties which provide services for the CBM operations, including subcontractors and other service contractors; and - any assignee or assignees to whom the rights and/or obligations under the contract may be assigned. Necessary information, documents, data and reports may be furnished by the parties or an affiliate of the parties related to CBM operations in accordance with the laws of their home countries to the governments and stock exchanges, provided that the parties report to joint management committee in advance. The government and each company comprising Phillips China Inc. when furnishing the documents, information, data and reports to third parties and affiliates shall require them to assume the confidentiality obligations as set forth, or shall bear full responsibility for any violation.

The validity, interpretation and implementation of the contract shall be governed by the laws of the People's Republic of China. Failing the relevant provisions of the laws of the People's Republic of China for the interpretation or implementation of the contract, the principles of the applicable laws widely used in coalbed methane resources countries acceptable to the parties shall be applicable.

If a material change occurs to Phillips China Inc's economic benefits after the effective date of the contract due to the promulgation of new laws, decrees, rules and regulations or any amendment to the applicable laws, decrees, rules and regulations of the People's Republic of China, the parties shall consult promptly and make necessary revisions and adjustments to the relevant provisions of the contract in order to maintain Phillips China Inc's normal economic benefits.