The exploration period shall be a term of 4 years from the effective date. The exploration period may be extended, upon approval, for a period of 3 years.
The development and production period shall begin from the date of the government’s approval of the development programme and shall continue for 30 years. This terms shall be extended only subject to the government’s approval.
BP Exploration and SOCAR Oil Affiliate (SOA) shall have the right to flare or vent the applicable amount of associated natural gas in the event of emergencies, equipment malfunctions, repairs or maintenance of any facilities, including delivery systems, or the government’s failure to take delivery of associated natural gas to be delivered to it by BP Exploration and SOA.
BP Exploration and SOA shall develop jointly with the government and the ministry of ecology and natural resources of the republic of Azerbaijan safety and environmental protection standards and practices appropriate for the regulation of petroleum operations.
BP Exploration and SOA shall conduct the petroleum operations in a diligent, safe and efficient manner in accordance with the environmental standard and shall take all reasonable actions to minimize any potential disturbance to the general environment, including without limitation the surface, subsurface, sea, air, lakes, rivers, animal life, plant life, crops and other natural resources and property.
BP Exploration and SOCAR Oil Affiliate (SOA) shall be liable for those direct losses or damages incurred by a third party, other than governmental authority, arising out of any environmental pollution determined by the appropriate court of the republic of Azerbaijan to have been caused by the fault of BP Exploration and SOA. In the event of an environmental pollution or damage caused by BP Exploration and SOA, they shall reasonably endeavor, in accordance with generally acceptable international petroleum industry practices, to mitigate the effect of the effect of any such pollution or damage on the environment.
The accounts of the petroleum operation, together with the auditors’ report shall be submitted to the government. The cost of such audit shall be included in the petroleum operation accounts and shall be borne by BP Exploration and SOCAR Oil Affiliate.
The parties agree that the government shall not carry out an audit of the accounts of BP Exploration and SOA until the commencement of the development and production period and by giving notice, the government shall have the right to carry out an audit of accounts for the entire exploration period and any additional exploration period.
The accounts and records of BP Exploration and SOA’s affiliates providing services to the petroleum operations shall not be audited by the government auditors.
BP Exploration shall pay to the government the bonus as follows:
a) US$ 20 million payable within 30 days following the effective date;
b) if a crude oil discovery is made, US$ 1 million per each 100 million barrels of crude oil specified to be commercially recoverable in the development programme payable within thirty 30 days following the government’s approval or deemed approval of the development programme;
c) if a non-associated natural gas discovery is made, the bonus payments shall be calculated and payable, separately in respect of each natural gas sale and purchase agreement as follows:
i) bonus payments shall be calculated on the basis of US$ 1,798,885 per one trillion cubic feet of non-associated natural gas and US$ 10,000 per one million barrels of crude oil;
ii) an initial bonus payment shall be made in respect of each natural gas sale and purchase agreement entered into during the development and production period, which shall:
1) be calculated on the lesser of (i) the amount of non-associated natural gas that BP Exploration is obliged to make available under the relevant natural gas sale and purchase agreement and (ii) the amount of non-associated natural gas that the purchaser under the relevant natural gas sale and purchase agreement is obliged to take and pay for (or pay for if not taken) if made available, to the extent that such amount is producible within the remaining duration of the development and production period, together with crude oil expected to be produced in association therewith; and
2) be payable within 30 days of the date upon which the relevant natural gas sale and purchase agreement enters into full force and effect with all conditions precedent having been either satisfied or agreed to be waived.
iii) no subsequent bonus payment shall be made in respect of an natural gas sale and purchase agreement until the end of the year in which either the actual cumulative non-associated natural gas or cumulative crude oil production in respect of such natural gas sale and purchase agreement exceeds the amount of non-associated natural gas or crude oil production upon which the initial bonus in respect of such natural gas sale and purchase agreement has been calculated, whereupon the following provisions shall apply in respect of such natural gas sale and purchase agreement:
1) at the end of said calendar year, and at the end of each calendar year thereafter the actual cumulative produced volumes of non-associated natural gas and crude oil shall be determined in respect of such natural gas sale and purchase agreement and BP Exploration shall pay to the government as subsequent bonus an amount equal to the onus payable on such cumulative produced volumes of non-associated natural gas less any amounts already paid to the government as bonus in respect of such non-associated natural gas and an amount equal to the bonus payable on such cumulative produced volumes of crude oil less any amounts already paid to the government as bonus in respect of such crude oil; and
2) any subsequent bonus payable to the government shall be payable within 30 days of the end of the calendar year to which the payment relates.
d) US$ 50 million payable within 30 days of the commencement date of commercial production; and
e) for the purposes of calculation of bonuses payable, the determination of the volume of natural gas equivalent to 1 barrel of crude oil included in the development programme shall be based on a conversion factor of 5559 standard cubic feet per barrel of oil equivalent.
It is a condition to the obligations of BP Exploration and SOCAR Oil Affiliate (SOA), except for profit tax, BP Exploration and SOA shall not be subject to any taxes of any nature whatsoever arising from or related, directly or indirectly, to hydrocarbon activities.
BP Exploration and SOCAR Oil Affiliate (SOA) shall each be liable for profit tax in respect of hydrocarbon activities in accordance with the legislation which is generally applicable and existing in Azerbaijan on the day of execution of the contract and as amended.
BP Exploration and SOA shall each be liable for the payment of the profit tax in connection with its business activities in Azerbaijan that are not related to hydrocarbon activities under the applicable laws and normative acts of the republic of Azerbaijan.
All tax residents, employees of BP Exploration and SOA, the operating company, their affiliates, foreign sub-contractors, including any physical persons acting as foreign sub-contractors, shall be liable to pay Azerbaijan personal income tax only on their income earned as a direct result of their employment in Azerbaijan.
Profit tax rate is a rate of 20% which is the applied profit tax rate existing in Azerbaijan on the day of executing this contract and shall remain fixed for the entire duration of the contract.
Fees from third parties’ access to facilities maintained and controlled by BP Exploration and SOCAR Oil Affiliate (SOA) shall be credited to the petroleum operations account.
Production Share - "Profit Oil features (triggers for variations in split - IRR, factor, production, etc .)
The balance of total production remaining after deducting the quantities of crude oil and non-associated natural gas necessary to enable recovery of operating costs and capital costs is profit petroleum and shall be shared between BP Exploration and SOCAR Oil Affiliate (SOA) and the government according to the R factor model as follows:
0.00<R<1.00: government 45.0; and BP Exploration and SOA 55.0;
1.00</=R<2.00: government 55.0; and BP Exploration and SOA 45.0;
2.00</=R<3.00: government 70.0; and BP Exploration and SOA 30.0;
3.00</=R<4.00: government 80.0; and BP Exploration and SOA 20.0; and
R>/=4.00: government 90.0; and BP Exploration and SOA 10.0.
R factor is determined as BP Exploration and SOA’s cumulative capital costs recovered, including interest accrued, plus BP Exploration and SOA’s profit, divided by the cumulative capital costs.
Production Share - Cost Oil features (basis of calculation, limits on cost recovery - e.g. as % of revenue or production, capex uplift, etc.)
BP Exploration and SOCAR Oil Affiliate (SOA) shall be entitled to recover petroleum costs from total production as follows:
i. All operating costs shall first be removed; and
ii. All capital costs shall then be removed from a maximum of 50% of crude oil and 50% of non-associated natural gas remaining out of total production after deduction of crude oil and non-associated natural gas required to recover BP Exploration and SOA’s operating costs.
Socar Oil Affiliate (SOA) shall have a participating interest of 50%.
BP exploration sell have the obligation to carry, in the proportion of its participating interest, 100% of the petroleum costs attributable to SOA’s participating interest from the effective date and this shall be reimbursable by SOA compensating BP Exploration from part of the petroleum allocated to it.
The operating company incorporated by BP Exploration and SOCAR Oil Affiliate (SOA) shall employ personnel from BP Exploration and SOA, expatriates and Azerbaijani citizens.
BP Exploration and SOA, their sub-contractors and the operating company shall be free to employ such personnel as in their respective opinions are required for the petroleum operation.
BP Exploration and SOA shall require that the operating company give preference, as far as it is consistent with effective operations, to citizens of the republic of Azerbaijan in the performance of petroleum operations provided such citizens have the required knowledge, qualification and experience to meet the requirements of the operating company.
The operating company shall provide the government, from time to time, and shall require that its sub-contractors provide the government, with a list showing the number and job specifications for citizens of the republic of Azerbaijan which it estimates that it would require. The government shall provide the operating company and such sub-contractor with a list of recommended candidates whom shall enjoy priority consideration pertaining to other citizens for employment if they meet the requirements of the operating company and the sub-contractors.
The overall target levels of citizen employees of the republic of Azerbaijan shall be as follows:
i) Prior to commencement date and commercial production: professionals 50% - 70% and non- professionals 80%.
ii) Upon commencement date of commercial production: professionals 80% and non- professionals 90%.
iii) 5 years after commencement date of commercial production: professionals 90% and non- professionals 95%.
BP Exploration and SOCAR Oil Affiliate shall provide training (including retraining) for citizens of the republic of Azerbaijan. The associated cost of training shall be included as petroleum costs, however, if the costs is less that US $ 200,000 in any year, it shall not be recoverable.
The government shall within the full limits of its authority use its best lawful endeavors with respect to governmental authorities and third parties to provide BP Exploration and SOCAR Oil Affiliate (SOA) access for their share of petroleum to all necessary transportation, treatment and export facilities and infrastructure in Azerbaijan on terms no less favorable to BP Exploration and SOA than those granted to, or agreed with, any other bona fide arm’s length user of such facilities and infrastructure.
Fees from third parties’ access to facilities maintained and controlled by BP Exploration and SOCAR Oil Affiliate (SOA) shall be credited to the petroleum operations account. Third parties may use such excess capacity on terms agreed with BP Exploration and SOA.
Prior to zero balance, the priority of the use of BP Exploration and SOA’s facilities shall be first BP Exploration and SOA, second third parties and finally the government. After zero balance, the priority shall be first BP Exploration and SOA, second the government and finally third parties.
During the exploration period, BP Exploration and Socar Oil Affiliate (SOA) shall:
i) Shoot, process and interpret a minimum of 1059 square kilometers of 3 dimensional seismic in the contract area and carry out an upper section survey in the area to select a safe and environmentally sound site for drilling;
ii) Drill 2 exploration wells;
iii) Conduct the necessary environmental protection study; and
iv) Provide the government with all information on specified operations, both routine and final, after completion of seismic, drilling of each well and all other work.
BP Exploration and SOA shall submit a development programme during the development and production period which shall be a long range plan for the efficient and prompt development and production of petroleum in accordance with generally accepted international petroleum industry standards and shall include, but not limited to the following:
i) Proposals relating to the spacing, drilling and completion of all types of wells;
ii) Proposals relating to the production and storage installations, and transportation and delivery facilities required for the production, storage and transportation of petroleum;
iii) Proposals relating to necessary infrastructure investments and use of Azerbaijan materials, products and services in accordance with the contract;
iv) Production forecasts for formation fluids for the entire contract area by reservoir derived from individual well forecasts and estimates of the investments and expenses involved;
v) An environmental impact and health and safety assessment and a plan for preventing environmental pollution and any environmental accident, and for steps to clean up any pollution related to such accident; and
vi) Estimates of the time required to complete phases of the development programme.
For the purposes of exploring the oil and gas potential, BP Exploration and SOA shall carry out a programme of work in accordance with the following guidelines:
i) shoot, process and interpret three dimensional seismic which may for operational reasons upon the government’s approval be shot partially outside the contract area;
ii) carry out an upper section site survey to select a safe and environmentally sound site for drilling;
iii) drill 2 exploration wells to ascertain the presence of oil and gas in the prospective horizons. During the exploration period 1 well shall be drilled to the base of the Fasila suite or to a depth of 7000 metres subsea, whichever occurs first. If the decision to drill the second well is taken by BP exploration, it shall also be drilled to the base of the Fasila suite or to a depth of 7000 metres subsea, whichever occurs first;
iv) during the additional exploration period, drill 2 wells to the base of the Fasila suite or to a depth of 7000 metres subsea, whichever occurs first.
v) exploratory wells drilled as set out in (iii) and (iv) shall have the objective of further defining the areal extent, downdip limits and reservoir properties of any petroleum found within the contract area. Drilling of such wells shall be accomplished with conventional core acquisition techniques according to international petroleum industry standards;
vi) to evaluate the wells an appropriate logging and testing programme may include but not be limited to the following:
(a) at the conductor casing point, gamma ray and neutron log (from approximately conductor setting point to seafloor);
(b) at the surface casing point, gamma ray log, induction logs, sonic log, density and neutron logs, sidewall cores as appropriate (from approximately surface casing point to conductor casing shoe through the Surakhany, Akchagyl and Apsheron suites);
(c) at the intermediate casing point, gamma ray log, induction logs, sonic log, density and neutron logs, microlaterolog, dipmeter, caliper (profiler), sidewall cores and formation tests as appropriate (from approximately intermediate casing setting point to surface casing shoe through the upper Balakhany and Sabunchi suites);
(d) at the final casing point, gamma ray log, induction logs, sonic log, density and neutron logs, microlaterolog, dipmeter, caliper (profiler), sidewall cores and formation tests as appropriate (from approximately liner casing point to the intermediate casing shoe through the Balakhany suite);
(e) at total drilled depth, gamma ray log, induction logs, sonic log, density and neutron logs, microlaterolog, dipmeter, caliper (profiler), sidewall cores and formation tests as appropriate (from approximately production casing point to the linear casing shoe through the Fasila and lower Balakhany suites) as well as a vertical seismic profile log taken at intervals between total depth to seafloor; and
f) drill stem tests of major productive horizons as appropriate.
vii) BP Exploration and SOA shall have the right, but not the obligation, to sidetrack any exploration wells, drill to greater depths or drill additional exploration wells within the contract area for the purposes of obtaining additional geological information; and
viii) all reporting and records pertaining to exploration drilling and evaluation shall be submitted in accordance with the contract.
Except matter to be referred to an expert, if any dispute arises under the contract, the disputing parties shall meet in an attempt to resolve the dispute to their mutual satisfaction by reference to the terms of the contract.
If the matter is not mutually resolved, it shall be referred to arbitration under the arbitration rules of the United Nations Commission on International Trade Law. The arbitration shall be heard by 3 arbitrators and shall be held in Stockholm, Sweden. The language of the arbitration shall be English language.
Nothing in the contract shall limit the right of the parties pursuant to existing laws of Azerbaijan on protection of foreign investments, which rights shall apply in addition to any other rights the parties may have under this contract. If any of the contractor’s rights, interest or property are expropriated, nationalized or otherwise taken by reason of any act or failure to act of any governmental authority, then the arbitrators shall apply the principle of indemnification (including prompt, full and effective compensation in dollars) at full market value, on the basis of an on-going concern utilizing the discounted cash flow method, assuming a willing buyer and seller in a non-hostile environment, and disregarding the unfavorable circumstances under which or following which the contractor shall be deprived of its rights, interest and property.
Each party agrees that all information and data of a technically, geologically or commercially sensitive nature acquired or obtained relating to petroleum operations and which on the effective date is not in the public domain or otherwise legally in the possession of such party without restriction on disclosure shall be considered confidential and shall be kept confidential (subject to contractor’s right to use such data and information i and to trade in such data and information in accordance with the contract) and not be disclosed to any person or entity not a party to the contract, except:
i) to an affiliate, provided such affiliate maintains confidentiality as provided in the contract;
ii) to a governmental authority when required;
iii) to the extent such data and information is required to be furnished in compliance with any applicable laws or regulations, or pursuant to any legal proceedings or because of any order of any court binding upon a party;
iv) to potential sub-contractors, consultants and attorneys employed by BP Exploration and SOA where disclosure of such data or information is essential to such sub-contractors’, consultant’s or attorney’s work;
v) to a bona fide prospective transferee of a party’s participating Interest (including an entity with whom a party is conducting bona fide negotiations directed toward a merger, consolidation or the sale of a majority of its or an affiliate’s shares);
vi) to a bank or other financial institution to the extent appropriate to a party arranging for funding for its obligations;
vii) to the extent such data and information must be disclosed pursuant to any rules or requirements of any government or stock exchange having jurisdiction over such BP Exploration and SOA, or their affiliates;
viii) where any data or information which, through no fault of party, becomes a part of the public domain; and
ix) to the arbitrators or to any expert.
Each party shall take customary precautions to ensure such data and information on petroleum operations is kept confidential by its respective employees. Disclosures in (iv), (v) and (vi) above shall not be made unless prior to the disclosure the disclosing party has obtained a written undertaking from the recipient to keep the data strictly confidential and not to use or disclose the data except for the express purpose for which disclosure is to be made without prior written permission of the other parties.
If either BP Exploration and SOA cease to own participating interest under the contract, they shall nonetheless remain bound by the obligation of confidentiality. This obligation shall survive 5 years from the termination of the contract.
The contract shall be governed and interpreted in accordance with principles of law common to the law of the republic of Azerbaijan and English law, and to the extent that no common principles exist in relation to any matter, then in accordance with the principles of the common law of Alberta, Canada (except for laws regarding conflicts of laws). The contract shall be subject to the international legal principle of pacta sunt servanda (agreements must be observed).
The rights and interest accruing to BP Exploration and SOCAR Oil Affiliate (SOA), or their assignees or sub-contractors, under this contract shall not be amended, modified or reduced without the prior consent of BP Exploration and SOA.
If any governmental authority invokes any present or future law, treaty, intergovernmental agreement, decree or administrative order which contravenes the provisions of the contract or adversely or positively affects the rights or interest of BP Exploration and SOA, including but not limited to any changes in tax laws, regulations or administrative practices or jurisdictional changes pertaining to the contract area, the terms of the contract shall be adjusted to re-establish the economic equilibrium of the parties. If the rights of either BP Exploration and SOA have been adversely affected, then the government shall indemnify the affected party, and its assignees, for any dis-benefit, deterioration in economic circumstances, loss or damages that ensue therefrom. The government shall within the full limits of its authority use its reasonable lawful endeavors to ensure that the appropriate governmental authorities stake appropriate measures to resolve promptly, in accordance with the foregoing principles, any conflict or anomaly between any such treaty, intergovernmental agreement, law, decree or administrative order and this contract.