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RIO MAGDALENA ASSOCIATION CONTRACT
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 1
"RIO MAGDALENA"ASSOCIATION CONTRACT
EFFECTIVE DATE :
ARGOSY ENERGY INTERNATIONAL
FEBRUARY 8TH OF 2002
The contracting parties, namely: on the one hand, Empresa Colombiana de
Petroleos, hereinafter ECOPETROL, a State industrial and commercial company,
authorized by Law 165 of 1948, currently governed by its by-laws, amended by
Decree 1209 of 15 June 1994, and 2933 of 10 December 1997, domiciled in Bogota,
represented by ALBERTO CALDERON ZULETA of legal age, bearer of Colombian
Identity Card No. 19,248.238, issued in Bogota, domiciled in Bogota, who states
that: 1. In his capacity as President of ECOPETROL, he acts herein on behalf of
said Company and 2. The ECOPETROL Board of Directors authorized him to enter
into this Contract, as witnessed by Minutes No. 2263 of November 16th, 2001; and
on the other hand, ARGOSY ENERGY INTERNATIONAL, a corporation established
pursuant to the laws of the State of UTAH, with its main domiciled in the United
States of America, hereinafter THE ASSOCIATE, with a duly established Colombian
branch and its main domicile in Bogota, pursuant to Public Deed No. 5323 of 25
October 1983, granted by the Seventh Public Notary (7th) of the Bogota Circle,
represented by ALVARO JOSE CAMACHO RODRIGUEZ, of legal age, bearer of Colombian
Identity Card No. 79,142.747 issued in Usaquen, who states that: 1. He acts, in
his capacity as legal representative of ARGOSY ENERGY INTERNATIONAL, 2. He is
fully authorized to execute this contract, as certified by the certificate of
incorporation and legal representation issued by the Chamber of Commerce of
Bogota, and 3. THE ASSOCIATE, assures that it has the financial capability, the
technical competence, and the necessary professional skills to perform the
activities provided for in this contract.
Based on the aforementioned conditions, ECOPETROL and THE ASSOCIATE hereby
certify that they have entered into the contract contained in the following
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 2
CHAPTER I - GENERAL PROVISIONS
CLAUSE 1 - PURPOSE OF THIS CONTRACT
1.1 The purpose of this contract is the exploration of the Contracted Area and
the exploitation of Hydrocarbons of Colombian property that may be found in such
area, described in Attachment A that is part of this contract.
1.2 In compliance with Article 1 of Decree 2310 of 1974, the exploration and
exploitation of Hydrocarbons of Colombian property will be carried out by
ECOPETROL, a company that may carry out said activities either directly or
through contracts with private entities. Based on the aforementioned provision,
ECOPETROL has agreed with THE ASSOCIATE to explore the Contracted Area and
exploit the Hydrocarbons that may be found in it, in compliance with the terms
and conditions set forth herein, Attachment "A", Attachment "B" (Operations
Agreement) and Attachment "C", which are an integral part of this contract.
1.3 Without prejudice of the provisions in this contract, it is understood that
THE ASSOCIATE shall have, with regard to the hydrocarbons produced in the
Contracted Area and their respective portion, the same rights and obligations
than those who exploit State-owned Hydrocarbons within its territory, as per
1.4 ECOPETROL and THE ASSOCIATE agree to carry out Exploration and Exploitation
Works on the lands located in the Contracted Area, according to the terms set
forth herein, and to split the costs and risks of same in the proportions and
pursuant to that provided herein, and that the Hydrocarbons produced shall
belong to each of the Parties as per shares established herein.
CLAUSE 2 -
This contract is applied to the Contracted Area, identified and delimited in
Clause 3 and Attachment A hereto, or to the remnant portion thereof, whenever
area relinquishment has taken place pursuant to this contract.
CLAUSE 3 -
The Contracted Area is called "RIO MAGDALENA", with an area of fifty eight
thousand five hundred forty six (58,546) hectares, with forty-six (46) square
meters. This sector is located within the municipal jurisdictions of San Juan de
Rioseco, Beltran, Puli, and
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 3
Guataqui, in the province of Cundinamarca and Guatabal, Lerida, Venadillo,
Ambalema and Piedras, in the province of Tolima.
This area is described in Attachment "A" which is part of this contract.
Paragraph 1.- Should any person file a claim asserting ownership of the
Hydrocarbons in the subsoil within the Contracted Area, ECOPETROL shall deal
with the case, assuming such obligations as may arise.
Paragraph 2.- Should a part of the Contracted Area extend over the areas that
are or have been reserved and declared as included in the National Park System,
THE ASSOCIATE is thus committed to comply with the conditions set forth by the
competent authorities, not implying an amendment to this Contract and not
allowing for any claim against ECOPETROL, pursuant to the provisions set forth
in Clause 30 (item 30.2) herein.
CLAUSE 4 - DEFINITIONS. For purposes of this contract, the terms mentioned below
shall have the following meanings:
4.1 Contracted Area is the land defined in Clause 3 above, and described in
Attachment "A" hereto.
4.2 Field: Portion of the Contracted Area where there are one or more structures
and/or totally or partially superposed stratigraphic traps with one or more
Producing Reservoirs, or in which the capacity to produce Hydrocarbons in
commercial quantities has been proven. Such Reservoirs can be found separated
vertically and/or laterally by geological barriers or impermeable strata, or
4.3 Commercial Field: It is the Field which ECOPETROL accepts that is capable of
producing Hydrocarbons in economically exploitable quantity and quality in one
or more Production Targets defined by ECOPETROL upon acceptance of
commerciality, without prejudice of the possibility of other Production Targets
being found during the development phase.
4.4 Gas Field: The field which, based on the information supplied by THE
ASSOCIATE, is designated by ECOPETROL as a Non-Associated Natural Gas (or free
natural gas) producer, when determining commerciality thereof.
4.5 Executive Committee: This is the body formed within thirty (30) calendar
days following the acceptance of the first Commercial Reservoir to supervise,
monitor, and approve all the operations and actions carried out during the term
of the contract.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 4
4.6 Exploration Direct Costs: Monetary expenses incurred reasonably by THE
ASSOCIATE for the acquisition of seismic data and the drilling of Exploratory
Wells, and for locations, termination, equipment and tests for such wells. The
Exploration Direct Costs do not include either administrative or technical
support from the home office or the Company central office.
4.7 Joint Account: The records to be kept on accounting books, in accordance
with Colombian law, to credit or debit each Party their corresponding share in
the Joint Operation of each Commercial Field.
4.8 Budget Execution: Funds actually spent and/or committed in each of the
programs and projects approved for a specific calendar year.
4.9 Structure: The geometric shape with geological closure (anticlinal,
synclinal, etc.) present in the formations, in which fluid accumulations are
4.10 Effective Date: The date on which the sixty (60) calendar day term expires,
as of the date on which this contract is executed, and starting date for all
time limits agreed to herein, regardless of the date of approval thereof by the
Ministry of Mines and Energy.
4.11 Cash Flow: Represented by the physical currency transactions (revenue and
disbursement) that are to be made by the Joint Account to meet the different
obligations acquired by the Association in performance of normal operations.
4.12 Associated Natural Gas: Blend of light Hydrocarbons that exist as a gas
layer or solution state gas in the Reservoir, which is produced jointly with
4.13 Non-Associated Natural Gas (Production of): Hydrocarbons produced in
gaseous state on the surface and reported at standard conditions, with average
values (weighted by production), with an initial gas/oil ratio greater than
15,000 standard cubic feet of gas per barrel of liquid Hydrocarbon, and a molar
heptane plus composition (C7 +) below 4.0%.
4.14 Direct Costs: All expenditures charged the Joint Account on account of
personnel expenses related to personnel directly hired by the Association,
procurement of materials and supplies, contracting of services with third
parties, and other general expenses required by the Joint Operation in the
normal development of its activities.
4.15 Indirect Costs: Expenditures charged to the Joint Account, on account of
technical and/ or administrative support provided by the Operator thorough its
own organization to the Joint Operation.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 5
4.16 Interest in Arrears: When dealing with Colombian pesos, it shall mean the
rate for payment in arrears on the date of the default; when dealing with
Dollars of the United States of America, it shall mean the LIBOR (London
Interbank Borrowing Offered Rate) prime rate on three-month term deposits in USA
currency, plus four per cent (LIBOR plus 4%).
4.17 Participating Interest: It is the share in the obligations and rights
acquired by each of the Parties in the exploration and exploitation of the
4.18 Development Investment: It refers to the amount of money invested in assets
and equipment, to be capitalized as assets for the Joint Operation in a
Commercial Field, once the existence thereof has been accepted by the Parties.
4.19 Hydrocarbons: All organic compounds, made up mainly by the natural blend of
carbon and hydrogen, as well as all other accompanying substances or their
by-products, excepting helium and rare gases.
4.20 Gaseous Hydrocarbons: All those Hydrocarbons produced in gaseous state on
the surface and reported at standard conditions (1 atmosphere of absolute
pressure and a temperature of 60 F degrees).
4.21 Liquid Hydrocarbons: Crude oil and condensates, as well as those produced
in such state as a result of treating the gas, as necessary, reported at
4.22 Production Targets: These are the reservoir(s) located within the
discovered Commercial Field, and proved as commercial producers.
4.23 Joint Operation: Activities and works either performed or being performed
on behalf and at the expense of the Parties.
4.24 Operator: Person designated by the Parties to directly perform the
necessary operations, on their account and without representing them, to explore
and exploit the Hydrocarbons found in the Contracted Area.
4.25 Parties: As of the Effective Date, ECOPETROL and THE ASSOCIATE.
Subsequently, and at any time, ECOPETROL on the one hand, and THE ASSOCIATE
and/or its assignees, on the other.
4.26 Exploration Period: This is the term that THE ASSOCIATE has to fulfill the
obligations set forth in Clause 5 hereunder, which shall not exceed six (6)
years as of the Effective Date, except for the cases set forth in Clauses 5
(Item 5.4), 9 (Item 9.3), and 34.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 6
4.27 Exploitation Period: The period elapsed from the expiration of the
Exploration Period, or Retention Period, if any, until the expiration of this
4.28 Retention Period: The period that may be requested by THE ASSOCIATE and
granted by ECOPETROL to commence the Exploitation Period of each Gas Field
discovered within the Contracted Area, which, due to its specific conditions
cannot be developed in the short term and, therefore, requires an additional
period to perform feasibility studies for the construction of infrastructure
and/or market development.
4.29 Development Plan: Is the guideline document for carrying out the
exploitation of each Field in a technical, efficient, and economic manner, and
shall contain, among others, development strategy, environmental considerations,
activities to be performed, short and medium-term production forecasts, a
five-year (5) forecast of development investment and expenses and, specifically,
a description of the projects, operations program, and the Budget for the rest
of the current calendar year or the following calendar year, as the case may be.
The guidelines for preparing this Development Plan are described in Attachment
"C" , which is part of this contract.
4.30 Exploratory Well: This is the well that has been classified as such by THE
ASSOCIATE to be drilled or deepened, on its account in the Contracted Area, in
search for new reservoirs, or to prove the extension of a Reservoir, or to
determine the stratigraphy of an area. In order to comply with the obligations
agreed in Clause 5 of this contract, the relevant Exploratory Well will be
previously qualified by ECOPETROL and THE ASSOCIATE.
4.31 Discovery Well: Is the Exploratory Well in which the existence of one or
more Reservoirs is discovered or proven, which may require a further evaluation
to determine whether such Reservoir or Reservoirs may be commercially exploited.
4.32 Exploitation Well (or Development Well): Is the well previously considered
as such by the Executive Committee for the production of Hydrocarbons discovered
in the Production Targets within the area of each Commercial Field.
4.33 Budget: Is the basic planning instrument, through which resources are
allocated to specific projects, to be applied within one calendar year or part
of it, to meet the targets and objectives proposed by THE ASSOCIATE or the
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 7
4.34 Long-Term Tests: Are operations performed in one or several producer
Exploratory Wells, in order to evaluate the production conditions and Reservoir
behavior, with temporary production facilities.
4.35 Reimbursement: Is the payment of thirty percent (30%) of the Direct
Exploration Costs incurred by THE ASSOCIATE.
4.36 Exploration Works: Are operations performed by THE ASSOCIATE in regard to
the prospecting and discovery of Hydrocarbons in the Contracted Area.
4.37 Reservoir: Is all rock beneath the surface, in which Hydrocarbons are
accumulated in the pore or fractured spaces, which is producing, or able to
produce Hydrocarbons, and which behaves as an independent unit as to its
petrophysical and fluid properties, and has a common pressure system throughout
its entire expanse.
CHAPTER II - EXPLORATION
CLAUSE 5. TERMS AND CONDITIONS
5.1 THE ASSOCIATE is committed to carry out Exploration Work in accordance with
modern standards and practices commonly accepted and used by the international
oil industry and in compliance with all legal and regulatory provisions in
force. The Exploration Period will be divided in two (2) Phases. The First Phase
will last eighteen (18) months, and the Second Phase will last twelve (12)
months. The first Phase will commence as of the Effective Date, and the next
phase will commence on the calendar day immediately following the expiration of
the first one.
During the Exploration Period, THE ASSOCIATE is committed to perform, at least,
the following Exploration Works:
During the First Phase, which lasts eighteen (18) months, THE ASSOCIATE must
carry out the assessment of the wells drilled in the area, the reprocessing of
the area's existing seismic data, and the acquisition of a 40 kilometer 2D
seismic program, or the drilling of an Exploratory Well that penetrates and
tests the formations able to produce hydrocarbons in the Contracted Area.
Upon conclusion of the First Phase, THE ASSOCIATE may opt for rescinding the
Association Contract or continue with it, upon having complied with the
exploration commitments agreed to for this phase.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 8
During the Second Phase, which lasts twelve (12) months, THE ASSOCIATE is to
undertake: the acquisition of a 30 square kilometer 3D seismic program, or the
acquisition of a 2D seismic program equivalent to the cost of the 3D seismic
program, or the drilling of an Exploratory Well that penetrates and tests the
formations able to produce hydrocarbons in the Contracted Area.
Upon expiration of the Exploration Period the contract will end, if its
extension has not been requested and authorized pursuant to item 5.2 in this
Clause or a field has not been discovered.
5.2 If THE ASSOCIATE has satisfactorily fulfilled the obligations set forth in
Clause 5.1, ECOPETROL, upon request by THE ASSOCIATE, shall extend for up to
three (3) additional phases, the Exploration Period, the fourth phase will last
eighteen (18) months and the Fifth and Sixth Phases will last twelve (12) months
each. For such purpose, THE ASSOCIATE, shall report its intention to continue
exploring the contracted block with an anticipation of not less than thirty (30)
calendar days prior to the date of termination of the Exploration phase,
attaching to such request the proposed schedule for the Exploration Work to be
performed in each extension period. Within the thirty (30) calendar days
following the date of receipt by ECOPETROL of THE ASSOCIATE's request, the
Parties may agree the Exploration Work Program to be performed during these
extensions. In the absence of an agreement, THE ASSOCIATE shall be committed, at
least, to perform Exploration Work in the Contracted Area, comprising the
drilling of one Exploratory Well until penetrating and test the formations
likely to produce hydrocarbons in the Contracted Area per each phase. At the end
of each extension, THE ASSOCIATE shall have the option to rescind the CONTRACT,
after fulfilling the exploratory commitments agreed for each of them.
5.3 THE ASSOCIATE may, at its discretion and at its own expense and risk, carry
out additional Exploration Work, beyond that agreed, for each respective period.
Nevertheless, if THE ASSOCIATE wishes such additional Exploration Work to be
credited to compliance with exploratory commitments of the following phase in
the Exploration Period, it must request the appropriate approval from ECOPETROL.
If the request is accepted by ECOPETROL, the latter shall determine how and in
what amount the transfer of the mentioned obligations shall be made.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 9
5.4 If at the end of the six (6) year Exploration Period, THE ASSOCIATE has
drilled one or several Discovery Wells that may indicate the possible existence
of a Commercial Field, upon written request from THE ASSOCIATE, ECOPETROL may
authorize the extension of the Exploration Period for a term not exceeding two
(2) years, in order for THE ASSOCIATE to have the opportunity to prove the
existence of such Commercial Field. In order to enforce the provisions contained
herein, prior to the termination of the Exploration Period and, simultaneously
with its request, THE ASSOCIATE shall supply ECOPETROL with the maps and other
descriptions of the area that THE ASSOCIATE may consider capable of producing
Hydrocarbons, the Exploration Work program, as well as that of other operations
to be carried out by THE ASSOCIATE, and the budget for carrying out such work at
its own expense and risk, to determine the extension of the Reservoir or
Reservoirs that have been discovered, and to prove the existence of a Commercial
Field, without prejudice to the provisions of Clause 8. In order to enforce the
partial relinquishing of areas, during this extension of the Exploration Period,
THE ASSOCIATE shall retain the greater area of two: fifty percent (50%) of the
Contracted Area, and the area it considers capable of producing Hydrocarbons
plus its reserve zone, having a width of two and a half (2.5) kilometers around
the latter, within the boundaries of the Contracted Area. If the proposed work
program meets international standards and is aimed at proving the commerciality
of the Reservoirs discovered within the agreed term, ECOPETROL shall grant its
authorization to perform this program.
5.5 Throughout the term of this Contract, and pursuant to provisions in Clause 7
herein, THE ASSOCIATE may conduct Exploration Works on the areas it keeps, as
per Clause 8 hereto, and THE ASSOCIATE shall be exclusively responsible for the
risks and costs of these activities and, thus, it shall have the full and
exclusive control of such activities, without changing the maximum term of the
contract for this reason.
CLAUSE 6 - SUPPLY OF INFORMATION DURING EXPLORATION
6.1 ECOPETROL will supply THE ASSOCIATE, with all the information available it
possesses on the Contracted Area, when THE ASSOCIATE so requests. The costs
incurred in the reproduction and delivery of said information shall be borne by
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 10
6.2 During the Exploration Period, THE ASSOCIATE shall provide ECOPETROL, as it
obtains it, and in accordance with ECOPETROL's information provision manual, all
geological and geophysical information, cores, edited magnetic tapes, processed
seismic sections, and all support field information, magnetic and gravimetric
profiles, all in reproducible originals, copies of geophysical reports,
reproducible originals of all well logs of the wells drilled by THE ASSOCIATE,
including a final composite log of each well, and copies of the final drilling
report, including core sample analysis, results of production tests, and any
other information related to the drilling, the study or interpretation of any
nature performed by THE ASSOCIATE on the Contracted Area, without any
limitation. ECOPETROL is entitled, at all times, to use the procedures it deems
appropriate, to witness all operations and verify all the above mentioned data.
6.3 The Parties hereby agree that all geological, geophysical and engineering
information obtained in the Contracted Area valid during performance of this
contract will be strictly confidential during the three (3) years following the
acquisition date or upon termination of the contract, whatever occurs first. The
information released comprises, without limitation, seismic information,
potential methods, remote sensors, geochemistry, along with their corresponding
supports, surface and subsurface cartography, well reports, electric logs,
formation tests, biostratigraphic, petrophysical and fluid analyses, and
production records. In spite of confidentiality stated herein, the Parties agree
that in each case they may exchange such information with companies that are or
not associated with ECOPETROL, or release same to a potential assignee of part
or all of the share of one of the Parties, considering that prior to such
release, the Party that makes such a release must have signed a confidentiality
agreement with the potential assignee, whereby the latter commits to give a
strictly confidential treatment to the information received during the three (3)
years following the date of acquisition thereof or until contract termination,
whatever occurs first, pursuant to and in accordance with the exceptions set
forth in this item 6.3. It is understood that all that is agreed to herein will
take place without prejudice to the obligation to submit to the Ministry of
Mines and Energy all the information requested by the latter in compliance with
the legal and regulatory provisions in force. Nevertheless, it is hereby
understood and agreed that the Parties may supply, as they may deem appropriate,
all the information that their affiliates, consultants, contractors, and
financial entities may request, required by the
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 11
relevant authorities having jurisdiction over the Parties or their affiliates,
or by regulations from any stock exchange in which the shares of the Parties or
related corporations are registered.
6.4 Within the ninety (90) calendar days following completion of the drilling
operations of each Exploratory Well, THE ASSOCIATE shall advise ECOPETROL in
writing on the status of the corresponding well, its classification derived from
the results obtained (Dry or Discovery) and the type of fluids produced, if any.
CLAUSE 7 -
BUDGET AND EXPLORATION PROGRAMS
According to the provisions of this contract, THE ASSOCIATE shall be responsible
for preparing the programs, activity schedule, and Budget to be executed in the
short term (the following calendar year), and the plan for the following two (2)
years, under the estimated budget, to carry out the exploration in the
Contracted Area. Said plan, programs, schedule, and budgets shall be submitted
to ECOPETROL, for the first time, within the sixty (60) calendar days following
the execution of this contract and, subsequently, no later than fifteen (15)
December every year.
Every six months, THE ASSOCIATE shall deliver to ECOPETROL a technical and
financial report listing the different exploratory activities performed, the
area's prospects based on information acquired, the allocated Budget, and the
exploration costs incurred up to the date of the report, along with the comments
on the reasons for any deviations.
At ECOPETROL's request, THE ASSOCIATE will provide explanations, as requested,
on the report at meetings summoned to this end. The information presented by THE
ASSOCIATE in the reports and the aforementioned explanations shall, in no case,
be understood as accepted by ECOPETROL. The financial information will be
subject to auditing by ECOPETROL within the terms established in Clause 22 of
Attachment "B" (Operation Agreement) of this contract.
CLAUSE 8 - AREA RELINQUISHMENT
8.1 Upon conclusion of the first and second phase of the Exploration Period or
any extension thereof obtained by THE ASSOCIATE, pursuant to Clause 5 (item
5.2)m should a Commercial Field have been discovered in the Contracted Area and
accepted by ECOPETROL, such area shall be reduced to fifty per cent (50%); two
(2) years later, it shall be reduced to the area of the Commercial Field or
Fields that may be producing
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 12
or being developed, plus a two and a half (2.5) kilometers wide reserve area
surrounding each Commercial Field, and it shall be the only part of the
Contracted Area subjected to the terms established herein. Pursuant to this
item, the discovered Commercial Fields shall be included in the areas retained
by THE ASSOCIATE.
8.2 Notwithstanding the obligation to relinquish the areas to which Clause 8
(Item 8.1) refer to, THE ASSOCIATE shall not be compelled to relinquish the
Commercial Fields that are being developed or producing, or under a Retention
Period, including the two and a half (2.5) kilometers wide reserve zone
surrounding such areas, unless that, for reasons imputable to THE ASSOCIATE, the
development or production operations are continuously suspended for over one
year, without a just cause therefor, in which case Commercial Fields will revert
to ECOPETROL, thus terminating the contract for such areas or part thereof. The
provisions set forth herein are equally applicable to the Fields developed under
the Sole Risk method.
Paragraph: To demonstrate just cause, THE ASSOCIATE shall present to ECOPETROL
the reasons and grounds for acceptance thereof.
8.3 Retention Period: If THE ASSOCIATE has discovered a Gas Field and it
requests the commerciality of such Field as discussed in Clause 9, item 9.1, it
may require at the same time from ECOPETROL the approval of a Retention Period,
fully justifying the reasons for acceptance thereof.
8.3.1 The Retention Period shall be requested by THE ASSOCIATE and granted by
ECOPETROL prior to the date on which the last area relinquishment mentioned in
item 8.1 in this Clause is to take place. Should the Retention Period be
granted, it is understood that the term foreseen in Clause 9 (item 9.1) for
ECOPETROL to decide regarding the acceptance or not acceptance of the existence
of a Commercial Gas Field, shall be extended for the same term of the Retention
8.3.2 The Retention Period shall not exceed four (4) years. Should the term
initially granted as a Retention Period be insufficient, ECOPETROL, prior
written and duly supported request by THE ASSOCIATE, may extend the Retention
Period for an additional term, without the addition of the initial retention
period and the extensions thereof exceeding four (4) years. The Retention Period
applies exclusively to the Gas Field area that ECOPETROL in principle determines
as able to produce Hydrocarbons,
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 13
including the reserve zones of two and a half (2.5) kilometers wide area
surrounding such area.
CHAPTER III - EXPLOITATION
CLAUSE 9 - TERMS AND CONDITIONS
9.1 To initiate the Joint Operation under the terms and conditions of this
contract, it is understood that the Exploitation Work will begin once the
Parties recognize the existence of the first Commercial Field or upon compliance
with the provisions of Clause 9 (Item 9.5). The existence of a Commercial Field
will be determined by the drilling, carried out by THE ASSOCIATE in the proposed
Commercial Field, of a sufficient number of Exploratory Wells so as to allow to
reasonably define the area capable of producing Hydrocarbons and the commercial
nature of the Field. If, after evaluating the results obtained from the
Discovery Wells, THE ASSOCIATE considers that it has discovered a Commercial
Field, it shall inform ECOPETROL in writing, providing it with the studies on
which it has based the conclusion, as well as the relevant Development Plan.
ECOPETROL, within a ninety (90) calendar day period, starting on the date on
which THE ASSOCIATE supplies all the support documentation, must accept or
reject the existence of the Commercial Field. ECOPETROL may request all the
additional information deemed necessary within the thirty (30) days following
the date of submission of the first support documentation.
9.2. Should ECOPETROL accept the existence of the Commercial Field, it shall
inform THE ASSOCIATE thereof, within the period specified in Clause 9, (Item
9.1), and shall specify the area and the Production Target of the Commercial
Field, and begin to participate, pursuant to the terms set forth herein, in the
exploitation of the Commercial Field discovered by THE ASSOCIATE.
9.2.1 ECOPETROL shall reimburse THE ASSOCIATE thirty percent (30%) of the Direct
Exploration Costs incurred by THE ASSOCIATE, at its own risk and expense, within
the Contracted Area and prior to the date of acceptance of commerciality by
ECOPETROL for each new Commercial Field discovered, as established in item 9.1
of this Clause, provided such expenses have not been charged previously to
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 14
9.2.2 The amount of these costs will be determined in United States dollars,
using as a reference date, the date on which THE ASSOCIATE has made the relevant
disbursements; therefore, costs incurred in Colombian currency will be
calculated at the representative market exchange rate prevailing on the date
established herein and certified by the Banking Superintendence or its
Paragraph: Once the amount of the Direct Exploration Costs to be reimbursed in
USA currency has been determined, such amount will be updated monthly according
to the average consumer price index of industrialized countries, as of the date
of disbursement, in constant U.S. dollars at the rate prevailing on the date on
which ECOPETROL disburses as provided for in the Operation Agreement (Attachment
"B") hereto. Balances to be reimbursed shall also be updated up to the date in
which ECOPETROL reimburses its total share in the respective Commercial Field.
9.2.3 Reimbursement of Direct Exploration Costs, according to Clause 9 (Item
9.2.1) will be made by ECOPETROL to THE ASSOCIATE as of the date on which the
Commercial Field is put on line by the Operator, through payment of the dollar
equivalent to fifty percent (50%) of its direct share in the total production of
the Commercial Field, after deducting the corresponding royalties.
Paragraph: If dealing with a Commercial Gas Field, such reimbursement will be
made by ECOPETROL to THE ASSOCIATE, as of the date on which the Commercial field
is put on line by the Operator, through payment of the dollar equivalent to one
hundred percent (100%) of its direct share in the total production of the
Commercial Field, after deducting the corresponding royalties.
9.3 Should ECOPETROL, based on the information supplied, not accept the
existence of the Commercial Field as stated in Clause 9 (Item 9.1), it may
request THE ASSOCIATE to submit and carry out an additional work program, to
demonstrate Field commerciality. Such work shall be performed at THE ASSOCIATE'S
risk and expense and its duration may not exceed two (2) years. In such case,
the Exploration Period for the Contracted Area will be automatically extended
for a period equal to that agreed between the Parties as required for performing
the additional work provided for in this Clause, without prejudice, however, of
provisions regarding area reduction in Clause 8 (item 8.1). THE ASSOCIATE may
submit and carry out a work program that complies with the requested objective,
or submit such request for additional information to the
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 15
opinion of an expert, according to Clause 28 of this contract. Should the expert
opinion favor ECOPETROL, THE ASSOCIATE shall meet the requirements and, once
again, submit the commerciality studies and a revised Development Plan to
ECOPETROL's consideration. Should the expert opinion favor THE ASSOCIATE, it
shall be understood that ECOPETROL has the necessary information and,
consequently, the ninety (90) calendar day term discussed in Clause 9.1 for
accepting or objecting the existence of the Commercial Field shall be counted as
of the date in which ECOPETROL received the experts' opinion.
9.4 If, after performance of the additional work or if the disagreement has been
resolved by an expert as motioned herein in the previous number in compliance
with Clause 9, ECOPETROL accepts the existence of the Commercial Field referred
to in Clause 9 (Item 9.1), it shall commence participating in the development
activities of the aforementioned Commercial Field, under the terms and
conditions established in this contract and shall reimburse THE ASSOCIATE as
provided for in Clause 9 (Items 9.2.2 and 9.2.3), thirty percent (30%) of the
cost of the additional work requested, referred to in Clause 9 (Item 9.3), and
the works performed shall become property of the Joint Account.
9.5 Sole Risk Method: If ECOPETROL does not accept the existence of a Commercial
Field, even after the additional work described in Clause 9 (Item 9.3) has been
completed, THE ASSOCIATE shall be entitled to perform, on its own account and
risk, the work deemed necessary for the exploitation of said Field, according to
the Development Plan presented to ECOPETROL and following good practices of the
international petroleum industry, and to recover the cost of such work, and the
Direct Exploration Costs incurred by THE ASSOCIATE prior to the presentation
date of the commerciality studies of the respective Field, provided such costs
have not been charged previously to another Field. For purposes of this Clause,
the recovery of the aforementioned costs will be achieved through THE
ASSOCIATE's share in the Hydrocarbons produced in the respective Field, minus
the royalties referred to in Clause 13, as provided in Clause 14 (Item 14.2.3)
of this contract for exploitation under the Sole Risk Method.
For purposes of calculating the dollar amount of disbursements made in
pesos, the representative market rate of exchange will be used, as certified by
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 16
Superintendence or the agency replacing it, on the date on which THE ASSOCIATE
made the disbursements. For purposes of this clause, the value of each barrel of
Hydrocarbon produced in said Field during a calendar month shall be the price of
reference agreed on by the Parties. If THE ASSOCIATE wishes to use the right to
develop the Reservoir under the Sole Risk Method, it should expressly state so
at the latest during the one hundred and twenty (120) calendar days following
the date in which ECOPETROL informs about the non-acceptance of the Commercial
Field existence. Should THE ASSOCIATE fail to use this right, it shall return
the Field and its reserve zone to ECOPETROL, terminating the contract for such
area or part of the Contracted Area.
9.6 In order to define the limits of a Commercial Field, all geological,
geophysical and data related to wells drilled in said Field, or related thereto,
will be taken into consideration.
9.7 If upon acceptance of one or more Commercial Fields, or after having
commenced the Sole Risk Method as per Clause 9.5, THE ASSOCIATE continues
fulfilling its exploratory obligations agreed in Clause 5, it may simultaneously
exploit such Fields before the end of the Exploration Period defined in Clause
4, but the Exploitation Period shall not be considered to have commenced until
the expiration date of the former. If dealing with Gas Fields on which ECOPETROL
has granted a Retention Period, the Exploitation Period for each Field shall
commence as of the expiration date of the respective Retention Period.
9.8 If, as a result of the drilling of Exploration Wells after a decision has
been made regarding the existence of a Commercial Field, THE ASSOCIATE proves
the presence of additional Hydrocarbon accumulations associated with such Field,
it must request that ECOPETROL expand the Commercial Field area and its
commerciality, following the procedure provided for in Clause 9 (Item 9.1). If
ECOPETROL accepts commerciality, it shall reimburse THE ASSOCIATE thirty percent
(30%) of the Direct Exploration Costs exclusively related to the expansion of
the Commercial Field area, under the terms provided for in items 9.2.2 and
9.2.3. If ECOPETROL does not accept the existence of a Commercial Field, THE
ASSOCIATE shall be entitled to a reimbursement of up to two hundred percent
(200%) of the total cost of the work performed at its own account and risk for
the exploitation of the Exploratory Wells classified as producers, and up to
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 17
seventy percent (70%) of the Direct Exploration Costs incurred by THE ASSOCIATE,
related exclusively to the extension of the requested area prior to ECOPETROL's
decision on this matter. Such reimbursement shall be effected through the
production from Exploratory Wells classified as producers, minus the royalty,
following the procedure established in Clause 21 (Item 21.2) up to the
percentages stipulated herein.
CLAUSE 10 -
10.1 The Parties hereby agree that ARGOSY ENERGY INTERNATIONAL is the Operator
and, as such, and with the limitations contained herein, shall have full control
of all operations and activities deemed necessary for the technical, efficient,
and economic exploitation of the Hydrocarbons that may be found in the area of
the Commercial Field. They further agree that, despite the fact that this
Contract - entered into for the commercial purposes provided in Clause 1 ARGOSY ENERGY INTERNATIONAL is the Operator, it is hereby understood by the
Parties who have so decided, that for all legal purposes of a labor nature,
ARGOSY ENERGY INTERNATIONAL does not act as a representative of the Parties, but
rather as the sole and true employer of the workers it contracts for the
operation of a commercial field and, consequently, it shall be responsible for
all labor obligations arising from the associated relations or labor contracts,
such as payment of wages and fringe benefits, parafiscal contributions,
affiliation and payments on account of pensions, health, and professional risks
to the Social Security Integral System, as provided for in Law 100 of 1993 and
its regulatory decrees or other regulations which may substitute or amend it.
10.2 The Operator is committed to carry out all development and production
operations in compliance with the known standards and practices, to which end it
shall use the best technical methods and systems required for the economic and
efficient exploitation of the Hydrocarbons and apply all relevant legal and
regulatory provisions. Likewise, it shall, in a timely manner, provide the
Parties with the reports and documents set forth in the contract, as well as any
other information required by the executive Committee with regard to the Joint
Account and/or Operation.
10.3 In view of the above and considering that for the performance of and
compliance with the Commercial Field operation, ARGOSY ENERGY INTERNATIONAL will
perform all its activities using its own resources, with technical and
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 18
such Operator shall be considered an entity different from the Parties for all
purposes of this contract, as well as for the application of civil, labor, and
administrative law, and for its relations with the personnel hired in accordance
with Clause 32.
10.3 The Operator shall have the right to resign from its position, by means of
a written notice given to the Parties at least six (6) months prior to its
effective date of resignation. The Executive Committee shall designate the new
Operator in compliance with Clause 19 (Item 19.3.5). In the event that the
Operator designated by the Executive Committee were a third party, other than
the Parties hereto, a contract must be executed between the Parties and the new
10.5 The Operator shall carry out the operations provided for in this contract
in a diligent, responsible, efficient, technically and economically appropriate,
whereby it is understood that it shall, in no way be responsible for errors of
judgment, or losses or damage not resulting from the Operator's gross
10.6 The Operator shall be entitled to perform any work through a contractor,
subject to the powers of the Executive Committee, according to Clause 11 (Item
11.1). For purposes of compliance herewith, the Operator shall enter into
contracts following the procedure described in Attachment "B", and subject to
the principles of good faith, transparency, economy, equity, responsibility,
planning, quality, expeditiousness, and social and environmental responsibility
that should govern all contracting.
CLAUSE 11 - EXPLOITATION PROGRAMS AND BUDGETS
11.1 Within three (3) months following the acceptance of a Commercial Field in
the Contracted Area, the Operator shall submit to the Parties the proposed
projects, programs, and Budget for the Development Plan of the Commercial Field,
for the rest of the respective calendar year, to be approved by the Executive
Committee. In the event that less than six and a half (6 1/2) months remain
before the end of said year, the Operator shall prepare and submit the proposed
projects, programs, and budget for the following calendar year, within a
11.1.1. The projects, programs and Budget contained in the Development Plan for
the Commercial Field shall be reviewed and revised annually, and submitted to
the Parties by the Operator during the month of May, each calendar year, to
which end, the Operator shall submit its proposal within the first ten (10) days
of May. Within twenty
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 19
(20) days following the receipt of the proposed projects, programs, and Budget
of the Development Plan for the Commercial Field, the Parties shall inform in
writing to the Operator in regards to the changes they wish to propose. When
this occurs, the Operator shall take into consideration the remarks and
amendments proposed by the Parties in the preparation of the revised Development
Plan that will be submitted to the Executive Committee for final approval in the
ordinary meeting of July of each year. In case that the total budget of the
Commercial Field has not been approved before July, those aspects of the Budget
on which an agreement has been reached will be approved by the Executive
Committee, and those aspects not approved will be immediately submitted to the
Parties for further approval and final decision as provided for in Clause 20.
11.2 The Parties may propose additions or revisions to the projects, programs,
and annual budget approved for every Commercial Field, but except for emergency
cases, they should not be suggested with a frequency less than three (3) months.
The Executive Committee will decide about the additions and revisions proposed
in a meeting, which will be summoned within the thirty (30) days following the
submission of the proposals.
11.3 The main objectives of projects, programs, and budgets are the following:
11.3.1 To determine the operations to be carried out, and the expenses and
investments (Budget), which the Operator is authorized to execute in each
Commercial Field during the following calendar year.
11.3.2 To keep a mid and long-term view on the development of every Field.
11.4 The projects, programs, and annual budget approved by the Executive
Committee and contemplated in the Development Plan for each Commercial Field are
the scheduled working plan, as well as the estimated expenses and investments to
be made by the Operator in the different aspects of the operation, such as:
11.4.1 Capital investment for production: Reservoir development drilling,
reconditioning or workover of wells, and specific production facilities.
11.4.2 General construction and equipment: industrial and camp facilities,
transportation and construction equipment, drilling and production equipment.
Other construction and equipment.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 20
11.4.3 Maintenance and operating expenses: production, geological, and
administrative operating expenses.
11.4.4 Working capital requirements
11.4.5 Contingency funds
11.5 The Operator shall incur all expenses and investments and shall carry out
all development and production operations in accordance with the project,
programs and the annual budget approved in the Development Plan for each
Commercial Field to which Clause 11 (Item 11.1), refers, as per the Operating
Agreement (Attachment B) that is an integral part of this Contract, without
exceeding the total Budget for each year, except for authorization of the
Executive Committee in special cases.
11.6 The Operator is fully authorized to make disbursements which are not
expressly included in each Commercial Field's Budget and charge them to the
Joint Account without the Executive Committee's prior authorization, in the
event of emergency measures intended to protect the Parties' personnel or
property; emergency expenses caused by fires, floods, storms or other disasters;
emergency expenses considered essential to the operation and maintenance of
production facilities, including all maintenance works for producing wells to
work with maximum efficiency; emergency expenses essential to the protection and
preservation of materials and equipment required in the operations. In such
cases, the Operator must summon, as soon as possible, a special Executive
Committee meeting, to obtain its approval of carrying on with the emergency
11.7 The Operator shall be the only responsible for the expenses incurred and
the contracts executed by the Operator for amounts higher than the annual Budget
authorized by the Executive Committee for each Commercial Field, in accordance
with Clause 19 (Item 19.3.9) without having been approved timely by the
Executive Committee, except for the assumptions regulated by Clause 11 (Item
11.6). Therefore, the Operator shall assume the corresponding total value of
this expense. When the Executive Committee ratifies such expense or contract,
the Operator will be reimbursed with the corresponding value, in accordance with
the guidelines to be defined by the Executive Committee. In the event that the
expenditure or the contract are not accepted by the Executive Committee, the
Operator, whenever it is possible, will be entitled to withdraw the asset by
reimbursing the Parties for any expenditure that its withdrawal
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 21
may cause. In the event that the Operator cannot withdraw such asset, or if he
decides not to do so, the benefit or patrimony increase resulting from such
expenditures or contracts will become the property of the Parties in a
proportion equal to their share in the operation.
CLAUSE 12 - PRODUCTION
12.1 Subject to the approval of the Executive Committee, the Operator will
determine with the necessary frequency, the Maximum Efficiency Rate (MER) for
each Commercial Field. This Maximum Efficiency Rate (MER) will be the
hydrocarbon maximum production rate that can be extracted from a Reservoir to
obtain the maximum economic benefit in the final recovery of reserves, in
accordance with the economic and engineering principles and the practices and
procedures generally employed and in use within the international petroleum
industry, under conditions and circumstances similar to the activities performed
under this contract. The estimated production shall be adjusted as necessary to
compensate the actual or anticipated operational conditions, such as wells being
repaired that are not producing, capacity limitations in collecting lines,
pumps, separators, tanks, pipelines, and other facilities.
12.2 The Operator will determine periodically, at least once a year, upon
approval of the Executive Committee, the area considered capable of producing
hydrocarbons in commercial quantities in each Commercial Field.
12.3 The Operator shall prepare and deliver to each of the Parties, with regular
three (3) month intervals, a program indicating each Party's share of
production, and another one indicating the share of production for each Party
for the following six (6) months. The production forecast will be based on the
Maximum Efficiency Rate (MER), as stipulated in Clause 12 (Item 12.1), and
adjusted to the rights of each Party, in accordance with this contract. The
production sharing program will be determined based on the periodic request of
each Party, and in accordance with Clause 14 (Item 14.2) with the necessary
revisions to ensure that none of the Parties, entitled to a share, will receive
less than the amount it is entitled to in accordance with the provisions in
Clause 14, and without prejudice to the provisions in Clauses 21 (Item 21.2),
and 22 (Item 22.5).
12.4 If any of the Parties foresees a reduction in its capacity to lift
hydrocarbons with respect to the forecast submitted to the Operator, it must so
inform him as soon as possible, and if such reduction is due to an emergency
situation, it will notify the
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 22
Operator within twelve (12) hours immediately following the event causing the
reduction. Consequently, said Party will submit the new lift program taking into
account the pertinent reduction.
12.5 The Operator may use the hydrocarbons that are necessary in performance of
production operations in the Contracted Area, and such consumption shall be
exempt from royalties mentioned in Clause 13 (number 13.1).
CLAUSE 13. ROYALTIES
13.1 For purposes of paying royalties for the exploitation of State-owned
Hydrocarbons, the Operator shall pay ECOPETROL a production percentage as
determined by Law. The delivery of said production shall take place at the same
point and in the same moment in which the Parties distribute their production
share pursuant to Clause 14 herein. In the case of Fields being exploited under
the Sole Risk Method, THE ASSOCIATE will deliver to ECOPETROL the percentage of
production corresponding to royalties at the point agreed by the Parties.
13.2 From the percentage of production delivered to ECOPETROL under the above
numbered terms, ECOPETROL, in the manner and under the terms established by Law,
shall pay to those agencies established by Law, the royalties caused in favor of
the State over the Field's total production and, in no event, will THE ASSOCIATE
be responsible for any payment to such agencies.
CLAUSE 14 - DISTRIBUTION AND DISPOSAL OF THE HYDROCARBONS
14.1 The Hydrocarbons produced, excepting those which may have been used in
benefit of the operations under this contract, and those which will inevitably
be wasted throughout the operation, will be transported to the jointly owned
tanks of the Parties or to other measuring facilities agreed by the Parties.
Should no agreement be reached, it shall be the metering location nearest to the
inspection site determined by the Ministry of Mines and Energy. Hydrocarbons
will be measured in compliance with the standards and methods accepted by the
petroleum industry and, based on such measurement, the volumes referred to in
Clause 13 will be determined. As of that moment, the remaining Hydrocarbons will
be the property of each Party, in the proportions specified in this contract.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 23
14.2 Production Distribution
14.2.1 After deducting the percentage that corresponds to royalties, the rest of
the hydrocarbons produced from each Commercial Reservoir is the property of the
Parties in a proportion of thirty per cent (30%) for ECOPETROL, and seventy per
cent (70%) for THE ASSOCIATE, until the time in which the audited accumulated
production in the respective Commercial Reservoir reaches sixty (60) million
barrels of standard condition liquid hydrocarbons or nine hundred (900) cubic
giga feet of standard condition gaseous hydrocarbons, whatever occurs first. (1
cubic giga feet = 1x10/9/ cubic feet). For Reservoirs exploited under the Sole
Risk Method, the distribution of the production, after deducting the royalty
percentage, is the property of the Parties in a proportion of (100%) for THE
ASSOCIATE, and zero per cent (0%) for ECOPETROL, until the audited accumulated
production from the respective Reservoir first reaches either one of the
aforementioned production limits.
14.2.2 Regardless of the classification of the Commercial Reservoir granted by
ECOPETROL upon declaring commerciality, above the limits defined in number
14.2.1 hereunder, the distribution of the production in each Commercial
Reservoir (after deducting the percentage that corresponds to royalties) is the
property of the Parties in the proportion resulting from applying the R Factor,
as explained herein below:
188.8.131.52 If the Hydrocarbon that first reached the limit stated in number 14.2.1
in this Clause was the liquid hydrocarbon, the following table will apply:
0.0 to 1.5
1.5 to 2.5
2.5 or more
Production Distribution after Royalties (%)
100 - [70 / R-0.5)]
184.108.40.206 If the Hydrocarbon that first reached the limit stated in number 14.2.1
in this Clause was the gaseous hydrocarbon, the following table will apply:
Production Distribution after Royalties (%)
0.0 to 2.0
2.0 to 3.0
3.0 or more
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 24
70 / (R - 1.0)
100 - [70 / (R - 1.0)]
14.2.3 Regardless of the classification of the Reservoir granted by ECOPETROL
when the commerciality is defined, above the limits set in number 14.2.1
hereunder, the production from each Commercial Reservoir exploited under the
Sole Risk Method, as per Clause 9 (number 9.5), after deducting the percentage
that corresponds to royalties, is the property of the Parties in the proportion
resulting from applying the R Factor, as explained herein below:
220.127.116.11 If the Hydrocarbon that first reached the limit stated in number 14.2.1
in this Clause was the liquid hydrocarbon, the following table will apply:
0.0 to 1.5
1.5 to 2.5
2.5 or over
Production Distribution after Royalties (%)
197.5 - (65R)
100 - [197.5 - (65R)]
18.104.22.168 If the Hydrocarbon that first reached the limit stated in number 14.2.1
in this Clause was the gaseous hydrocarbon, the following table will apply
0.0 to 2.0
2.0 to 3.0
3.0 or over
Production Distribution after Royalties (%)
230 - (65R)
100 - [230 - (65R)]
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 25
14.2.4 For purposes of the above tables, the R Factor shall be defined as the
relation of accumulated income expressed in constant terms, over accumulated
expenses, also expressed in constant terms, which correspond to THE ASSOCIATE
for every Commercial Reservoir in the following terms:
R = --------------------------ID + A - B + GO
IA (THE ASSOCIATE's ACCUMULATED INCOME): This is the appraisal of the
accumulated income corresponding to THE ASSOCIATE's Hydrocarbons yield produce
after royalties, at the reference price agreed between the Parties except for
Hydrocarbons reinjected in the Fields of the Contracted Area, those consumed in
the operation, and the burnt gas.
Hydrocarbons average price will be mutually agreed between the Parties.
Monthly income will be the basis to determine the accumulated income that will
be determined as the result of multiplying the average monthly reference price
for the monthly production, in accordance with the forms that have been issued
by the Ministry of Mines and Energy for such purpose.
ID (Accumulated Development Investments): Seventy percent (70%) of the
accumulated Development Investment approved by the Association's Executive
Committee for each Commercial Field.
A: These are the Exploration Direct Costs incurred by THE ASSOCIATE, in
accordance with Clause 9 of this contract and adjusted in accordance to
Paragraph in Clause 9 (Item 9.2.2).
B: This is the accumulated reimbursement of the aforementioned direct
exploration costs, according to Clause 9 of this contract.
GO (Accumulated Operation Expenses): These are the accumulated operation
expenses approved by the Association's Executive Committee, in the proportion
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 26
corresponds to THE ASSOCIATE, plus THE ASSOCIATE's accumulated transportation
expenses. It is understood as transportation costs the investment and operation
costs of Hydrocarbons produced in the Commercial Fields located in the
Contracted Area, from the Contracted Area to the exportation port or the place
that has been agreed to take the price to be used for IA income calculation.
Such transportation costs will be agreed by the Parties upon commencement of the
development phase of the Fields, whose commerciality has been accepted by
Special contributions or the like that can be applied over Hydrocarbons
production in the Contracted Area are included in the operation's expenses.
All values included in the equation to determine the R Factor will be taken in
constant terms and to such effect they will be updated monthly with the average
consumer index prices in industrialized countries, as of its execution date to
the last day of the month to which the R factor is being applied. For the
monthly update, 1/12 of the value resulting of averaging the annual percentage
variation during the last two years of the consumer index price in
industrialized countries will be used, taken from "International Financial
Statistics" of the International Money Market Fund (page S63 or its substitute),
or in absence thereof, the publication agreed by the Parties.
To such effect, expenses in Colombian currency must be exchanged to U.S. dollars
at the representative rate in the market, duly approved by the Banking
Superintendence, or its substitute, that is in force on the date that the
respective reimbursements are made.
Paragraph: For Fields exploited under the Sole Risk Method, according to Clause
9 (Item 9.5) of this contract, to the purpose of applying the equation to
calculate the R Factor , the following will be considered:
The ID corresponds to 100% of the accumulated development investment made by THE
The value of the accumulated Reimbursement of the Exploration Direct costs (B)
will equal zero (0).
The GO refers to accumulated operation expenses incurred by THE ASSOCIATE,
including the transport costs incurred by THE ASSOCIATE for the transport of
Hydrocarbons produced in the Field to the export port or the place where it is
agreed to take the price to be used in calculating the IA income.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 27
Calculation of the R Factor: The distribution of production based on the R
Factor will start being applied as of the first day in the third calendar month
following that in which the accumulated production of the respective Commercial
Field has reached (60) million barrels of liquid hydrocarbon or an amount of
nine hundred (900) cubic giga feet gaseous hydrocarbon, at standard condition,
as per above number 14.2.1.
The calculation of the R Factor of the respective Commercial Field shall be
based on the accounting close corresponding to the calendar month in which the
audited accumulated production of (60) million barrels of liquid hydrocarbon or
an amount of nine hundred (900) cubic giga feet gaseous hydrocarbon, at standard
condition, as per above number 14.2.1.
The resulting production distribution will be applied until June 30th of the
next year. From that moment on, the production distribution to which the R
Factor has been applied will be made for one-year terms (from July 1st to June
30th) over factor R's liquidation based on the accumulated values as of December
31st of the immediately previous year, in accordance with the corresponding
accounting closing term.
Provisions contained herein also apply for the Fields developed under the Sole
14.3 In addition to the tanks and other jointly-owned facilities, each Party
will be entitled to build its own production facilities in the Contracted Area
for its own and exclusive use, previous fulfilling of legal regulations.
Transportation and delivery of Hydrocarbons by each Party to the pipeline and
other receivers different from the jointly-owned ones will be made on the sole
account and risk of the Party receiving the Hydrocarbons.
14.4 In case that production is yielded in places not connected to pipelines,
the Parties will be able to agree the installation of pipelines up to a
hydrocarbon point of sale, or to a location connected to the pipeline. If the
Parties agree to the construction of such pipelines, they shall enter into the
contracts they deem appropriate to this end, and shall designate the Operator in
keeping with the legal provisions in force.
14.5 Each Party will be the owner of the Hydrocarbons that have been yielded and
stored as a result of the Operation and that have been made available to it, as
provided for herein, and, at its expense, it should receive them in kind, sell
them, or dispose of them separately, pursuant to Clause 14 (Item 14.3).
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 28
14.6 If any of the Parties, for any reason, cannot dispose of separately or
withdraw from the Joint Account's tanks, partially or totally, its share of the
Hydrocarbons, the following procedure will apply, pursuant to this Contract:
14.6.1 If ECOPETROL is the party that cannot withdraw, partially or totally, its
Hydrocarbon share (share plus royalties), according to Clause 12 (Item 12.3),
the Operator will be able to go ahead with the Field's production and deliver to
THE ASSOCIATE besides the portion represented by THE ASSOCIATE's share in the
operation, based on one hundred percent (100%) of the MER, all those
Hydrocarbons that THE ASSOCIATE decides and is capable of withdrawing up to a
limit of one hundred per cent (100%) of the Maximum Efficiency Rate and
crediting ECOPETROL, for further delivery, the amount of Hydrocarbons that
ECOPETROL was entitled to withdraw but did not. However, with regard to the
amount of not-withdrawn Hydrocarbons corresponding to ECOPETROL's monthly
royalties, the ASSOCIATE, upon request by ECOPETROL, shall pay to ECOPETROL, in
U.S. Dollars ,the difference between the pertinent amount of hydrocarbon on
account of royalties, to which Clause 13 refers to, and the amount of
Hydrocarbons that ECOPETROL has taken, on account of royalties, it being
understood that any Hydrocarbon withdrawal by ECOPETROL will be applied, first,
to the payment of royalties in kind and, after paying these, any additional
Hydrocarbon withdrawals made will be applied to its corresponding share,
according to Clause 14 (Item 14.2).
14.6.2. In the event that THE ASSOCIATE is the Party which cannot take all or
part of its share designated under Clause 12 (Item 12.3), the Operator shall
deliver to ECOPETROL, on the basis of one hundred percent (100%) of the MER, not
only its own share and quota, but also all the hydrocarbons that ECOPETROL is
capable of taking up to a limit of one hundred percent (100%) of the MER,
crediting THE ASSOCIATE for later delivery, with the portion that corresponds to
its quota and that it has not been able to take.
14.7 When both Parties are able to take the Hydrocarbons designated as per
Clause 12 (Item 12.3), the Operator will deliver to the Party that has
previously been unable to take its share of the production, and upon its
request, and in addition to its participation
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 29
in the operation, a minimum of ten percent (10%) per month of the production
belonging to the other Party, and by mutual agreement, until one hundred percent
(100%) of the quota not taken, up to the point in which the total amount that
had not been credited to the Party that was unable to take its Hydrocarbon share
has been canceled.
14.8 Without prejudice of legal regulations on the subject, each Party will be
free, at any time, to sell or export its share of the Hydrocarbons obtained,
according to this contract, or dispose of same in any manner.
CLAUSE 15 - UTILIZATION OF ASSOCIATED NATURAL GAS
In the event that one or more Associated Natural Gas Fields are discovered, the
Operator within the three (3) years following the date of commencement of field
exploitation, as defined by the Ministry of Mines and Energy, shall submit a
project for utilization of Natural Gas for the benefit of the Joint Operation.
The Executive Committee will decide on the project, and if that is the case, it
shall determine the timing for execution of same. If the Operator does not
submit any project within the three (3) years or does not perform the project
approved in the terms determined by the Executive Committee, ECOPETROL may take,
gratuitously, all the Associated Natural Gas available from the Reservoirs being
developed, as long as it is not required for the efficient development of the
CLAUSE 16 - UNIFICATION
When an economically exploitable field extends continuously into another area or
areas out of the Contracted Area, the Operator, in agreement with the Parties,
and other interested Parties, subject to prior approval of the Ministry of Mines
and Energy, shall formulate a unified exploitation plan, which must conform to
the engineering techniques for hydrocarbon exploitation.
CLAUSE 17 - INFORMATION SUPPLY AND INSPECTION DURING EXPLOITATION
17.1 The Operator shall deliver to the Parties, as they are obtained,
reproducible originals (sepias) and copies of the drilled wells' electric,
radioactive, and sonic logs, history, core analyses, cores, production tests,
reservoir studies, and other relevant technical data, as well as any routine
data produced or received in relation with the operations and activities
performed in the Contracted Area.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 30
17.2 Each of the Parties, at its own risk and expense, shall be entitled,
through authorized representatives, to inspect the wells and facilities in the
Contracted Area, as well as all the activities related thereto. Such
representatives shall have the right to examine cores, samples, maps, records of
drilled wells, surveys, books, and any other source of information related to
performance of this contract.
17.3 In order for ECOPETROL to comply with the provisions of Clause 29, the
Operator shall prepare and deliver to ECOPETROL all the reports required by the
17.4 All information and data related to exploitation works must be held as
confidential pursuant to the same conditions of Clause 6 (Item 6.3) of this
CHAPTER IV - EXECUTIVE COMMITTEE
CLAUSE 18. CONSTITUTION
18.1 Within the first thirty (30) calendar days following the acceptance of the
first Commercial Field, each Party must appoint a representative and its
respective first and second alternates, to form the Executive Committee and
shall notify the other party in writing the names and addresses of its
representative and alternates. The Parties may change their representative or
alternates at any time, but must so advise the other Party in writing. The vote
or decision of each Party representative is binding on said Party. Should the
main representative of one of the Parties not be able to attend a Committee
meeting, his first or second alternates, in order, may attend and will have the
same authority as the principal.
18.2 The Executive Committee shall hold ordinary meetings during the months of
March, July, and November, at which the Operator's development program and
immediate plans will be reviewed. Annually, in the ordinary meeting held in
July, the Operator shall submit to the Executive Committee for its approval, the
annual operations program and the expense and investment Budget for each
Commercial Field for the next calendar year, and if such is the case, the
revised Development Plan.
18.3 The Parties and the Operator may request summons for special meetings of
the Executive Committee, to analyze specific operating conditions. The
representative of the
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 31
interested Party shall notify ten (10) calendar days in advance about the date
of the meeting and the topics that will be dealt in them. Any matter not
included in the meeting agenda may be dealt during such meeting, after
acceptance by the representatives of the Parties in the Committee.
18.4 The representative of each of the Parties will have a right to vote
equivalent to the percentage of his total interest in the Joint Operation when
discussing all matters discussed in the Executive Committee. However, Executive
Committee's decisions related to items contained in clauses 19.3.4 to 19.3.9
herein, will be adopted by unanimous vote of the Parties.
All Executive Committee's decisions, in accordance with the aforementioned
procedure, will be mandatory and final for the Parties and for the Operator.
CLAUSE 19 - FUNCTIONS
19.1 The representatives of the Parties will form the Executive Committee,
having full authority and responsibility to set and adopt exploitation,
development, operations plans and budgets related to this contract. One
representative of the Operator will attend the meetings of the Executive
19.2 The Executive Committee will appoint a Secretary for every session. This
Secretary will write the corresponding Minutes containing a summary of all the
discussions and determinations adopted by the Committee. The Minutes must be
approved and signed by the representatives of the Parties within ten (10)
working days following the closing of the meeting and delivered to them as soon
19.3 The functions of the Executive Committee are, among others, the following:
19.3.1 Adopt its own regulations.
19.3.2 Decide about the matters submitted by the Operator for its consideration.
19.3.3 Supervise the operation of the Joint Account and the Joint Operation.
19.3.4 Create the subcommittees deemed necessary and assign their functions
under its direction.
19.3.5 Appoint the Operator in case of resignation or removal, and write the
regulations to be followed by the Operator, when it is a third party other than
the Parties, indicating in detail the reasons for his removal.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 32
19.3.6 Appoint the external auditor of the Joint Account.
19.3.7 Approve or reject projects, and any subsequent change or revision.
19.3.8 Determine the expense regulations and policies.
19.3.9 Approve or reject projects, programs and annual Budgets of each
Commercial Field and authorize extra-expenses that have not been included in the
19.3.10 In general, perform all the functions authorized by this contract and
not corresponding to the Operator or another entity or individual, based on an
express clause or by legal or regulatory provision.
CLAUSE 20 - DECISION IN CASE OF DISAGREEMENT
20.1. Any disagreement that cannot be resolved in the Executive Committee will
be directly submitted to the highest executive of each of the Parties who
resides in Colombia, so as to take a joint decision. If in the sixty calendar
days following the submission of the consultation, the Parties agree on a
decision in regards to the matter in question, they will so inform the Operator,
who should call for an extraordinary meeting of the Executive Committee, within
the fifteen (15) calendar days following the receipt of the communication, where
the agreement or decision taken will be approved.
20.2 If within sixty (60) calendar days following the date of consultation to
the highest executive of each of the Parties who resides in Colombia, an
agreement is not reached, the procedure will be as provided for in Clause 28 of
this contract, except for differences related to the operations, in which case
they could be executed in accordance with Clause 21.
CLAUSE 21. OPERATIONS AT THE RISK OF ONE OF THE PARTIES
21.1 If at any time one of the Parties wishes to drill a Development Well not
approved in the operating program, it shall notify the other Party in writing,
at least thirty (30) calendar days prior to the following meeting of the
Executive Committee, of its desire to drill such well and include information,
such as location, drilling recommendation, depth and estimated costs. The
Operator shall include this proposal among the items to be discussed at the
following Executive Committee meeting. Should the proposal be approved by the
Executive Committee, said well will be drilled with charge to the Joint
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 33
Account. Should the proposal not be accepted by the Executive Committee, the
party wishing to drill such well, hereinafter the "Participating Party", shall
have the right to drill, complete, produce, or abandon such well at its own risk
and expense. The party not wishing to participate in the above-mentioned
operation shall be known as the "Non Participating Party". The Participating
Party must commence drilling of the well within one hundred eighty (180) days
following the refusal of the Executive Committee. Should drilling not be
commenced within this period, it must be submitted to the Executive Committee's
consideration once again. At the request of the Participating Party, the
Operator shall drill the aforementioned well at the risk and expense of the
Participating Party, provided that in the Operator's opinion, such operation
does not interfere with the normal operation of the Field, whereby the
Participating Party shall have advanced to the Operator the amount that the
Operator deems necessary to drill the well. In the event that such well cannot
be drilled by the Operator without interfering with the normal operation of the
field, the Participating Party shall have the right to drill such well by
itself, or through a service company that is competent and, in such event, the
Participating Party shall be responsible for such operation, without interfering
with the normal development of field operations.
21.2 Should the well referred to in Clause 21 (Item 21.1), be completed as
producer, it shall be administered by the Operator and the production from such
well, after deducting the royalties referred to in Clause 13, shall be property
of the Participating Party, which will bear all costs of operating such well
until the net value of production, after deducting production, collection,
storage, transport and other similar costs, as well as the cost of sale, equal
to hundred percent (200%) of the costs of drilling and completing such well. As
of that moment, and for the purposes of this contract, such well shall become
the property of the Joint Account holders, in the proportion established, as
though it had been drilled with the approval of the Executive Committee at the
Parties' risk and expense. To this effect, the investments made and costs
incurred in the development of this well shall be part of the R Factor of the
Commercial Field. For purposes of this clause, the value of each barrel of
Hydrocarbon produced from such well, during a calendar month, before deducting
the aforementioned costs, shall be the reference price agreed on by the Parties.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 34
21.3 If at any time, one of the Parties wishes to workover, deepen to reach the
production targets, or plug a well that is not producing commercial quantities,
or if that is a dry hole that was drilled by the Joint Account, and if such
operations have not been included in a program approved by the Executive
Committee, such Party must notify the other Party of its intention to workover,
deepen, or plug such well. Should there be no equipment on site, the procedure
described in Clause 21 (Items 21.1 and 21.2) shall be followed. Should there be
adequate equipment to conduct the proposed operations at the wellsite, the Party
receiving the notice of the operations that the other Party wishes to conduct,
shall have forty-eight (48) hours, as of the time it received the notice, within
which to approve or disapprove the operation and, if during this term no reply
is received, it is understood that the operation will be carried out at the risk
and expense of the Joint Account. Should the proposed work be carried out at the
sole risk and expense of a Participating Party, the well shall be managed
subject to Clause 21 (Item 21.2).
21.4 If at any time, one of the Parties wishes to
extraction of gaseous Hydrocarbon liquids and for
the Hydrocarbons produced, hereinafter additional
notify the other Party in writing and provide the
build new facilities for the
the transport and export of
facilities, said Party shall
21.4.1 General description, design, specifications, and estimated costs of the
21.4.2 Projected capacity
21.4.3 Approximate date of commencement of the construction and duration
thereof. Within ninety (90) days starting on the date of notification, the other
Party shall have the right to decide whether it intends to participate in the
projected additional facilities, by giving written notice. In the event that
such Party should elect to not participate in the additional facilities, or does
not reply to the Participating Party's proposal, hereinafter "the Constructing
Party", the latter may proceed with the additional facilities and will instruct
the Operator to build, operate, and maintain such facilities at the exclusive
risk and expense of the Constructing Party, without prejudice to the normal
development of the Joint Operation. The Constructing Party may negotiate the use
of such facilities for the Joint Operations, with the other Party. During the
time the facilities are operated at the risk and expense of the Constructing
Party, the Operator shall charge such Party for
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 35
all operating and maintenance costs of the additional facilities, in accordance
with generally accepted accounting practices.
CHAPTER V - JOINT ACCOUNT
CLAUSE 22. MANAGEMENT
22.1 Without prejudice to the provisions of other clauses in this contract, the
expenses attributable to exploration works will be at the risk and expense of
22.2 From the moment ECOPETROL accepts the existence of a Commercial Field and
subject to the provisions of Clause 5 (Item 5.2) and of Clause 13 (Items 13.1
and 13.2), the ownership of the rights or interests in the Contracted Area shall
be divided as follows: ECOPETROL, thirty percent (30%), THE ASSOCIATE, seventy
percent (70%). From that point on, all the expenses, payments, investments,
costs, and obligations performed and assumed for development of the Joint
Operation, in compliance with this contract, shall be charged to the Joint
Account and the Exploration Direct Costs incurred by THE ASSOCIATE before and
after acceptance of the existence of each Commercial Field and its extensions,
in compliance with Clause 9 (Item 9.8), shall be entered into the Joint Account.
Except as provided for in Clauses 14 (Item 14.3) and 21, all the property
acquired or used from that moment on for the fulfillment of operating activities
of the Commercial Field, shall be paid for and belong to the Parties, in the
same proportions described in this clause.
22.3 The Parties shall tender to the Operator, to the Joint Operation banking
account, their proportionate shares in the budget of each Commercial Field, as
needed, within the first five (5) days of each month, in the same currency in
which the expenses must be made, that is, in Colombian pesos, or in USA dollars,
as requested by the Operator, in accordance with the programs and budgets
approved by the Executive Committee. When THE ASSOCIATE does not have the
necessary pesos to cover its portion of this currency, ECOPETROL shall have the
right to furnish such pesos and be credited for the contribution that is to be
made in dollars, converted at the official rate for purchase of exchange
certified by the Banking Superintendence, or the official agency in charge, on
the day in which ECOPETROL should make the corresponding contribution, provided
such transaction does not violate any legal provision.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 36
22.4 The Operator shall submit to the Parties, within the ten (10) calendar days
following the end of each month, a monthly statement showing the anticipated
amounts, the expenses made, the outstanding obligations, and a report of all
charges and credits to the Joint Account. Such report shall be prepared in
compliance with Attachment B and in a separate attachment, the parameters and R
Factor calculation referred to in Clause 14 (Items 14.2.4 and 14.2.5). If the
payments referred to in Clause 22 (Item 22.3) are not made within the agreed
term and the Operator decides to make them, the delinquent Party shall pay the
commercial interest for payment in arrears, in the same currency during the
22.5 Should one of the Parties fail to pay to the Joint Account the
corresponding amounts on time, from that date on, said Party shall be considered
a Delinquent Party and the other Party the Performing Party. If the Performing
Party should make the payment belonging to the Delinquent Party, in addition to
its own, said party shall have the right, after sixty (60) days of delinquency,
to have the Operator deliver to it the total of the Delinquent Party's
production share in the Contracted Area (excluding the percentage corresponding
to royalties), up to a production amount such that permits the Performing Party
a net income from the sales made equal to the amount the Delinquent Party failed
to pay, plus an annual interest equal to the Commercial Interest for Payment in
Arrears starting sixty (60) days after the initial date of the delinquency. "Net
income" is understood as the difference between the sale price of the
Hydrocarbons taken by the Performing Party, less the cost of transport, storage,
loading and other reasonable expenses incurred by the Performing Party from the
sale of the products taken. The right of the Performing Party may be exercised
at any time thirty (30) calendar days after written notification to the
Delinquent Party of its intention to take part or all of the production
corresponding to the Delinquent Party.
22.6 Direct and Indirect costs
22.6.1 All Direct Costs of the Joint Operation shall be charged to the Parties
in the same proportion that the production is allocated after royalties.
22.6.2 Indirect Costs shall be charged to the Parties in the same proportion
that has been established for Direct Costs in Item 22.6.1 of this Clause. The
amount of such costs shall be the result of taking the total annual investment
value and direct expenses (excepting technical and administrative support) and
applying the equation "a + m
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 37
(X-b)" In such equation, "X" is the total value for investments and annual
expenses and "a", "m", and "b" are constants whose values are indicated in the
following table in relation with the amount of investments and annual expenses:
INVESTMENT AND EXPENSES
VALUE OF THE CONSTANTS
The equation will be applied once a year in each case with the value of the
constants corresponding to the total value of annual investments and expenses.
22.7 The monthly statements referred to in Clause 22 (Item 22.4) may be reviewed
or objected to by either of the Parties from the moment they receive them, up to
two (2) years after the end of the calendar year to which they pertain,
specifying clearly the entries corrected or objected to and the reason therefor.
Any account which has not been corrected or objected to within such period shall
be considered final and correct.
22.8 The Operator shall keep accounting records, vouchers and reports for the
Joint Account in Colombian pesos in accordance with Colombian law, and all
charges and credits to the Joint Account shall be made following the accounting
procedure described in Attachment B, which is part of this contract. In the
event of discrepancy between such Accounting Procedure and the provisions of
this contract, the provisions of the latter shall prevail.
22.9 The Operator may perform sales of materials or equipment during the first
twenty (20) years of the Exploitation Period, or the first twenty eight (28)
years of the Exploitation Period, in the case of a Gas Field, for the benefit of
the Joint Account when the value of the sold items does not exceed five thousand
USA dollars (US$5,000) or its equivalent in Colombian pesos. This type of
operation, per calendar year, may not
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 38
exceed fifty thousand USA Dollars (US$50,000) or its equivalent in Colombian
pesos. The sales exceeding these amounts or those of real estate property are
subject to the Executive Committee's approval. The sale of such materials or
equipment will be made at a reasonable commercial price in accordance with the
conditions of use of the item. 22.10 All the machinery, equipment, or other
goods or property acquired by the Operator for the execution of this contract
and charged to the Joint Account, will be the property of the Parties in equal
shares. However, in the event that one of the Parties should decide to terminate
its interest in the contract before the end of the first seventeen (17) years of
the Exploitation Period, except as foreseen in Clause 25, said Party agrees to
sell to the other Party, its interest in said assets at a reasonable commercial
price or their book value, whichever is lower. In the event that the other Party
does not wish to buy such assets within ninety (90) days following the formal
offer to sell, the Party wishing to withdraw shall have the right to assign to a
third party the interest corresponding it in such machinery, equipment and
items. If THE ASSOCIATE decides to withdraw after seventeen (17) years of the
Exploitation Period, its right in the Joint Operations will pass free of charge
to ECOPETROL upon its acceptance.
CHAPTER VI - DURATION OF THE CONTRACT
CLAUSE 23 - MAXIMUM TERM
This contract shall have a maximum term, as of its Effective Date, of
twenty-eight (28) years, distributed as follows: up to six (6) years as the
Exploration Period, pursuant to Clause 5 without prejudice of that stipulated in
Clause 5 (number 5.4) and Clause 9 (number 9.3); and twenty two (22) years as
the Exploitation Period, as of the date of expiration of the Exploration Period.
It is understood that the events contemplated hereunder, in which the
Exploration Period is extended, shall not extend the total twenty eight (28)
year total term.
Paragraph 1: The Exploitation Period for the Gas Fields discovered within the
Contracted Area shall have a maximum duration of thirty (30) years as of the
date of expiration of the Exploration Period or Retention Period granted.
Anyhow, the total contract term for such Reservoirs shall not exceed forty (40)
years, as of the Effective Date.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 39
Paragraph 2: Notwithstanding the above, ECOPETROL and THE ASSOCIATE, with no
less than five (5) years in advance of the expiration date of the Exploitation
Period of each Reservoir, will undertake the study of conditions to continue
exploitation thereof after the expiration mentioned in this Clause. Should the
Parties agree to pursue such development, they shall define the terms and
conditions for performance thereof.
CLAUSE 24 - TERMINATION
This contract shall terminate in each of the following cases on which THE
ASSOCIATE's rights contained within this contract shall cease, either in its
capacity as interested Party, or as Operator, provided both mentioned capacities
concur in THE ASSOCIATE at the time of termination:
24.1 Upon expiration of the Exploration Period if THE ASSOCIATE has not
discovered a Commercial Field, except as provided in Clauses 5 (Item 5.4), 9
(Item 9.5), and 34.
24.2 When the contract term established in Clause 23 expires.
24.3 At any time, and at THE ASSOCIATE's will, after having complied with its
obligations referred to in Clause 5, and the other obligations acquired in
compliance with this contract up to the date of termination.
24.4 Should THE ASSOCIATE assign this contract, in whole or in part, without
complying with the provisions of Clause 27.
24.5 Due to breach of the obligations assumed by THE ASSOCIATE in accordance
with this contract.
24.5.1 ECOPETROL shall not be able to terminate this contract until sixty (60)
calendar days after having notified THE ASSOCIATE or its assignees in writing,
clearly specifying the causes for making such a declaration and only if the
other Party has not submitted explanations that are satisfactory to ECOPETROL or
if THE ASSOCIATE has not corrected the fault in complying with the contract,
without prejudice to THE ASSOCIATE's right to file the legal suits it deems
24.5.2 If, within the period mentioned above, THE ASSOCIATE submits explanations
that are satisfactory to ECOPETROL and if the remaining term for completing the
period of sixty (60) days it is insufficient to meet the obligations pending
according to good petroleum industry practice, the Parties may agree to an
additional term to allow said compliance, without prejudice to ECOPETROL's right
to demand the guarantees
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 40
necessary for backing it. If, after this time has elapsed, all of the works
agreed to have still not been performed, ECOPETROL shall terminate the contract.
24.6 At any time upon mutual agreement between the Parties.
24.7 Due to the unilateral termination causes contemplated in Clause 25.
CLAUSE 25 - CAUSES OF UNILATERAL TERMINATION
25.1 Unilaterally, ECOPETROL may terminate this contract at any time before the
period agreed in Clause 23 expires, in the following cases:
25.1.1 Death or permanent physical disability or legal interdiction of THE
ASSOCIATE in the case of an individual.
25.1.2 Due to initiation of a wind-up process of THE ASSOCIATE, if it is a
25.1.3 Due to legal embargo of THE ASSOCIATE that seriously affects contract
25.1.4 When THE ASSOCIATE is made up of several companies and/or individuals,
the reasons given in items 25.1.1 and 25.1.2 shall be applied when they
seriously affect contract performance.
25.2 In the event of a declaration of unilateral termination, the rights of THE
ASSOCIATE's rights stated in this contract shall cease, not only as an
interested Party, but also as Operator, if at the moment of the declaration of
unilateral termination THE ASSOCIATE acts in both capacities.
CLAUSE 26 - OBLIGATIONS IN CASE OF TERMINATION
26.1 If the contract is terminated as per the provisions in Clause 24, during
its Exploration Retention, or Exploitation Period, THE ASSOCIATE shall leave in
production those wells which on that date are producing and shall deliver the
facilities, pipelines, transfer lines and other real estate property belonging
to the Joint Account (located in the Contracted Area), all of which shall pass,
free of charge, to ECOPETROL's ownership, together with the rights of way and
assets acquired exclusively for the benefit of the contract, regardless of
whether or not these assets are located outside the Contracted Area.
26.2 If the contract is terminated for any reason after the first seventeen (17)
years of its Exploitation Period, all of THE ASSOCIATE's machinery, equipment or
other assets or
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 41
items used or acquired by THE ASSOCIATE or by the Operator in performance of
this contract shall pass, free of charge, to ECOPETROL.
26.3 If the contract is terminated before the end of the seventeen (17) year
Exploitation Period, the provisions of Clause 22 (Item 22.10) shall apply.
26.4 If the contract is terminated through a declaration of unilateral
termination issued at any time, all current assets and fixed assets acquired for
the exclusive benefit of the Joint Account, shall pass, free of charge, to
26.5 If the contract is terminated for any reason and at any time, the Parties
have the obligation to satisfactorily fulfill their legal obligations to each
other and to third Parties and those acquired under this contract, which are in
force or have become due as of the date of termination.
CHAPTER VII - MISCELLANEOUS PROVISIONS
CLAUSE 27 - ASSIGNMENT RIGHTS
27.1 After previous written approval by ECOPETROL, THE ASSOCIATE is hereby
entitled to assign or transfer either partially or totally its interests, rights
and obligations in this contract to another individual, company or group that
has the economic capacity, the technical competence, the professional skills
necessary, and the legal capacity to operate in Colombia.
For such purpose, THE ASSOCIATE shall submit a written request to ECOPETROL,
indicating the main elements of the negotiation, such as the name of the
possible assignee, information on its legal, financial, technical, and
operational capacities, value of the rights and obligations to be assigned,
scope of the operation, etc. Within sixty (60) workdays following receipt of the
complete request, ECOPETROL shall exercise the discretional faculty of analyzing
the information furnished by THE ASSOCIATE, after which it shall make its
decision, without the obligation of expressing its reasons for it.
27.1.1 When assignments are made in favor of companies that control or direct
THE ASSOCIATE, or to any of the companies that make it up or their affiliates or
subsidiaries, or between companies that are part of the same economic group, it
shall suffice to inform ECOPETROL beforehand and in a timely manner regarding
the essential elements of the negotiation mentioned above.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 42
27.1.2 The actions taken to develop this clause that might be taxable according
to the Colombian tax legislation will cause payment of the corresponding taxes.
Paragraph 1: When THE ASSOCIATE is made up of more than one company and one of
them wishes to assign their interests, rights and obligations in the contract,
in whole or in part, in accordance with this clause, it must prefer the other
companies that comprise THE ASSOCIATE, offering to them before than other
interested third parties, the interests, rights and obligations it wishes to
assign, unless the companies that make up THE ASSOCIATE have agreed otherwise.
CLAUSE 28 - DISAGREEMENTS
28.1 In any case where a discrepancy or contradiction arises in the
interpretation of the clauses of this Contract relative to the contents in
Attachment B called "Operation Agreement", or in Attachment "C" called
"Guidelines for the Preparation of the Development Plan", the stipulations of
the former shall prevail. Likewise, should a conflict arise between the terms of
Attachment B and Attachment C, the terms of the former shall prevail.
28.2 Disagreements between the Parties as to legal matters related to the
interpretation and performance of the contract, which cannot be resolved
amicably, shall be submitted for examination and determination by the proper
Colombian legal public authority.
28.3 Any factual or technical difference between the Parties, related to the
interpretation and application of this contract, which cannot be resolved
amicably, shall be submitted to the final decision of experts in the following
manner: each Party shall appoint an expert representative, one for each Party,
and a third one mutually agreed by the main experts appointed. If they cannot
agree as to the naming of the third expert, the Board of Directors of the
Colombian Association of Engineers (Sociedad Colombiana de Ingenieros-SCI), with
headquarters in Bogota, will choose the third candidate, upon the request by
28.4 Any difference concerning the accounting which may arise between the
Parties by reason of the interpretation and performance of this contract, which
cannot be resolved amicably, shall be submitted to a decision taken by experts.
Such experts shall be sworn Certified Public Accountants, and shall be appointed
as follows: one by each of the Parties and a third one mutually agreed by the
two main experts. Upon failure of the
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 43
former two to reach an agreement and, at the request of either of the Parties,
said third expert shall be appointed by the Central Board of Accountants (Junta
Central de Contadores) in Bogota.
28.5 Both parties accept that the decision of the experts shall have the same
effect as a transaction between themselves and, consequently, said decision
shall be binding.
28.6 In the event of a disagreement between the Parties concerning the
technical, accounting or legal aspects of the controversy, said disagreement
shall be considered legal and Clause 28 (Item 28.2) shall apply.
CLAUSE 29. LEGAL REPRESENTATION
Without prejudice to the rights that THE ASSOCIATE may legally have, as a
consequence of legal regulations or pursuant to the provisions of this contract,
ECOPETROL shall represent the Parties before the Colombian authorities with
respect to the exploitation of the Contracted Area as required, and it shall
submit to governmental officials and entities all the data and information which
may be legally required. The Operator shall be obliged to prepare and furnish
ECOPETROL with the pertinent information. Any expense that ECOPETROL may incur
pursuant to any matter referred to herein, shall be at the expense of the Joint
Account, and when such expenses exceed five thousand USA dollars (US$5,000) or
its equivalent in Colombian pesos, THE ASSOCIATE prior approval shall be
required. The Parties declare that, insofar as any relationship with third
Parties is concerned, neither the conditions of this clause nor of any other
clause of this contract, shall imply the granting of a General Power of
Attorney, or that the Parties have established a joint civil or commercial
venture or other relationship under which any of the Parties may be considered
jointly and severally responsible for the other Party's acts or omissions, or to
have the authority or mandate which could commit the other Party with regard to
any obligation whatsoever. This contract refers to operations within the
territory of the Republic of Colombia, and even though ECOPETROL is a Colombian
State-owned industrial and commercial company, the parties agree that THE
ASSOCIATE, if necessary, may elect to be excluded from the application of all
the provisions in Subchapter K, entitled PARTNERS AND PARTNERSHIPS of the
Internal Revenue Code of the United States of America. THE ASSOCIATE shall make
this election on its behalf in a proper manner.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 44
CLAUSE 30. RESPONSIBILITIES
30.1 The responsibilities acquired by ECOPETROL and THE ASSOCIATE in connection
with this contract before third parties shall not be joint liabilities and,
therefore, each Party shall be solely responsible for its share of the expenses,
investment, and obligations derived from such responsibilities.
30.2 Environmental Management: THE ASSOCIATE or the Operator, in performance of
all contract activities, must timely comply with that set forth in the National
Code of Renewable Natural Resources and Protection of the Environment, and other
legal provisions on the subject. Likewise, they shall promote amongst their
contractors, suppliers, intermediaries and/or workers working in benefit of the
contract, the conservation of a healthy environment, taking the necessary
precautions to protect the environment, human life and property of others and
prevent contamination of the Contracted Area. As of contract initiation, THE
ASSOCIATE shall prepare a general diagnosis of the environmental and social
reality of the zones where the Exploration Works shall be performed and shall
establish the communication channels with the local authorities and communities.
THE ASSOCIATE agrees to implement a permanent plan, of a preventive nature, to
ensure the conservation and restoration of the natural resources within the
zones where the Exploration, Exploitation and Transportation works that are the
subject-matter of this contract are performed.
THE ASSOCIATE must convey said plans and programs to the communities and
national and regional order agencies that are related to this subject.
Likewise, specific contingency plans must be established to take care of the
emergencies that may arise and to perform the remedial actions called for. For
such purpose, THE ASSOCIATE must coordinate said plans and actions with the
THE ASSOCIATE, in accordance with the pertinent Clauses of this contract, must
prepare the respective plans and budgets.
All costs caused shall be borne by THE ASSOCIATE during the Exploration Period
and Exploitation under the Sole Risk Method, and by both Parties, charged to the
Joint Account in the Exploitation Period.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 45
CLAUSE 31. TAXES, LIENS, AND OTHERS
All taxes and liens caused after establishing the Joint Account and before the
Parties receive their production shares in and that are chargeable to
Hydrocarbon exploitation, shall be charged to the Joint Account. The income,
patrimony and complementary taxes will be at the exclusive expense of each of
the Parties, accordingly.
CLAUSE 32. PERSONNEL
32.1 When THE ASSOCIATE is the Operator, the Operator Manager's appointment will
be consulted previously with ECOPETROL.
32.2 Pursuant to the terms of this contract and subject to the regulations
established herein, the Operator, as the sole and actual employer, shall have
administrative autonomy to designate personnel required for the operations under
this contract, and may establish their salaries, functions, categories, and
conditions. The Operator will adequately and diligently train the Colombian
personnel required to substitute the foreign personnel that the Operator may
consider required for the performance of the operations of this contract. In all
cases, the Operator shall comply with any legal provisions that set forth the
proportion of local and expatriate employees and workers.
32.3 TECHNOLOGY TRANSFER
THE ASSOCIATE agrees to implement, at its expense, a training program for
ECOPETROL professionals in areas related to the development of the contract.
For compliance with this obligation in the Exploration Period, training may be,
among others, in the areas of geology, geophysics and related areas, evaluation
and definition of characteristics of reservoirs, drilling and production.
Training shall take place throughout the six (6) year Exploration Period and
extensions thereof, through the integration of the professionals appointed by
ECOPETROL to the work group THE ASSOCIATE organizes for the Contracted Area or
for other similar activities of THE ASSOCIATE.
To decide on the waiver mentioned in Clause 5 of this contract, THE ASSOCIATE
must have previously complied with the training programs herein provided for.
In the Exploitation Period, the scope, duration, place, participants, training
conditions and other aspects shall be established by the Association's Executive
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 46
All of the costs of supervised training, with the exception of labor-related
ones caused in favor of the professionals who receive said training, shall be
borne by THE ASSOCIATE in the Exploration Period, and by both Parties charged to
the Joint Account in the Exploitation Period.
PARAGRAPH: For fulfillment of obligations regarding Technology Transfer, as per
provisions contained herein, THE ASSOCIATE hereby commits to carry out training
programs directed to ECOPETROL professionals for a value up to twenty five
thousand U.S. Dollars (US$25.000.oo), for each phase of the Exploration Period.
Likewise, and for each extended year of the Exploration Period THE ASSOCIATE
commits to carry out training directed to ECOPETROL professionals for the same
amount mentioned. The subject and type of program shall be agreed in advance
between ECOPETROL and THE ASSOCIATE. Should the Exploration period be extended,
the supervised training shall consist in programs directed to ECOPETROL
professionals for each extended year, for a value up to fifty thousand U.S.
CLAUSE 33. INSURANCE
THE ASSOCIATE or the Operator will take all the insurance policies required by
the Colombian law. Likewise, it will require each contractor that perform any
job in development of this contract to acquire and keep in effect all the
insurance policies that the Operator may consider necessary. Likewise, the
Operator will take all the insurance policies that the Executive Committee may
Upon termination of this contract, at any time during the Exploitation period or
due to expiration of the term set forth in Clause 23, the Operator and/or THE
ASSOCIATE shall take out an insurance policy to guarantee payment of salaries,
benefits and indemnities and other labor debts due to eventual legal sentences
derived from claims from the workers hired by the Operator in its condition as
their sole and true employer and during the time of operation of the Commercial
Field. The policy term shall not be less than three (3) years counted as of the
date of termination of the Association Contract, and the insured value shall be
defined by the Executive Committee, subject to that set forth in the labor
provisions applicable to the respective employment contracts.
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 47
CLAUSE 34 - FORCE MAJEURE OR ACTS OF GOD
The obligations of this contract shall be suspended for as long as the Parties
are unable to fulfill them totally or partially, due to unforeseen events that
constitute force majeure or acts of God such as strikes, shutdowns, war,
earthquakes, floods or other catastrophes, governmental laws, regulations or
decrees that prevent obtainment of essential material and, in general, any
non-financial cause which may actually obstruct the works, even if not mentioned
above, but affecting the Parties beyond their control. If one of the Parties is
not able, due to force majeure or acts of God, to fulfill its obligations under
this contract, it must immediately notify the other Party for its consideration,
specifying the causes of such impediment. In no event shall the occurrences of
force majeure or acts of God extend the total Exploration and Exploitation
Periods beyond the maximum term of the Contract, as per provisions in Clause 23,
but any impediment due to force majeure during the six (6) year Exploration
Period mentioned in Clause 5, which lasts longer than sixty (60) consecutive
days, will extend this six (6) year term for the same period that the impediment
CLAUSE 35 - APPLICATION OF COLOMBIAN LAW
For all the purposes of this contract, the Parties set as their domicile the
city of Bogota, D.C., Republic of Colombia. This contract is fully in force
under Colombian Law and THE ASSOCIATE is subject to the jurisdiction of the
Colombian Courts and waives any attempt to make any diplomatic claim in regards
to the rights and obligations arising from this contract, except in the event
that justice is denied. It is understood that justice will not be denied when
THE ASSOCIATE, in its capacity as Operator or Party, has exhausted all the
resources and actions that, in compliance with Colombian Law, may be used before
Colombian legal authorities.
CLAUSE 36. NOTICES
The services or communications between the Parties in regards to this contract
will require to be valid, the mention of the relevant clauses and should be sent
to the representatives or delegates designated by the Parties to the following
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 48
To ECOPETROL: Cra 13 #36-24, Santa Fe de Bogota, D.C., Colombia. To THE
ASSOCIATE: Diagonal 108 No. 7 - 54, Bogota, D.C., Colombia Santa Fe de Bogota,
Colombia. Any change of address and representatives should be duly notified in
advance to the other Party.
CLAUSE 37. HYDROCARBON VALUATION
The payments or reimbursements referred to in Clauses 9 (Items 9.2 and 9.4) and
22 (Item 22.5), will be made in USA dollars, or in Hydrocarbons, based on its
current market price and the limitations established or that may be established
by Colombian Law for the sale of the portion payable in USA dollars of
Hydrocarbons coming from the Contracted Area to be used in refining in the
CLAUSE 38. HYDROCARBON PRICES
38.1 The Hydrocarbons corresponding to THE ASSOCIATE in performance of this
contract, destined to the refinery or to domestic supply, shall be paid placed
at the refinery that must process them or at the receiving station agreed to by
the Parties, in accordance with the governmental provisions or rules in force,
or that replace them.
38.2 The differences arising from the application of this clause will be settled
in the manner provided for in this contract.
CLAUSE 39. PERFORMANCE BOND
At ECOPETROL,s discretion, in order to ensure completion of the Exploration
Works corresponding to each phase of the Exploration Period, in accordance with
Clause 5, THE ASSOCIATE, at its expense, agrees to submit in favor of ECOPETROL
one or more irrevocable Stand-By Letters of Credit or Bank Bonds issued by a
financial corporation acceptable to ECOPETROL, for an amount in dollars of the
United States of America equal to the estimated cost of the Exploration Works
agreed to as the minimal program to be developed during each phase and with a
term corresponding to the phase covered plus ninety (90) days more, counted as
of the date on which it is issued. The bond for backing the First Phase of the
Exploration Period shall be submitted within the ten (10) business days
following the date on which the resolution of approval of this contract by the
Ministry of Mines and Energy is official, and the subsequent ones, within
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 49
the first ten (10) business days following the initiation of each subsequent
phase. Upon request of THE ASSOCIATE, the value of this bond may be reduced
every six (6) months as of the Effective Date, in proportion to the physical
amount of Exploration Works performed, as agreed to in Clause 5.
CLAUSE 40 - DELEGATION AND ADMINISTRATION
The President of EMPRESA COLOMBIANA DE PETROLEOS - ECOPETROL -delegates on the
Exploration and Production Vice-President the administration of this contract,
according to ECOPETROL's standards and regulatory provisions, with power for
executing all transactions and processes inherent in Contract performance. The
Vice-President of Exploration and Production may exercise this delegation
through the Joint Exploration and Production Vice-Presidents.
CLAUSE 41. LANGUAGE
For all purposes and actions regarding this contract, the official language is
CLAUSE 42. VALIDITY
This contract requires approval from the Ministry of Mines and Energy.
In witness whereof, this is signed in Bogota, D.C., in the presence of
witnesses, on the tenth (10) day of the month of December in the year two
EMPRESA COLOMBIANA DE PETROLEOS
/s/ Alberto Calderon Zuleta
---------------------------------ALBERTO CALDERON ZULETA
RIO MAGDALENA ASSOCIATION CONTRACT Pag. 50
ARGOSY ENERGY INTERNATIONAL
/s/ Alvaro Jose Camacho Rodriquez
--------------------------------ALVARO JOSE CAMACHO RODRIQUEZ
/s/ Edgar L. Dyes
/s/ R. Suttill
/s/ Victor Hugo Franco
/s/ Edward Tovar
This is a fair and accurate English translation of the original document which
is in the Colombian language.
/s/ James L. Busby
----------------------James L. Busby
Secretary and Treasurer
of Aviva Petroleum Inc.