Iraq

06/11/2007

The initial contract area covers the Sarsang Block and extends over an area of 1226 square kilometers as detailed and indicated on the map attached in Annex A and the following coordinates.

HKN Energy Ltd.

Sarong Block described further in Annex A

Petroleum

Ministry of Natural Resources, Kurdistan Regional Government of Iraq

The exploration period shall be for an initial term of 5 contract years extendable on a yearly basis up to a maximum period of 7 contract years commencing from the effective date. The effective date is the date the contract is signed by the duly authorized representatives of the parties. Where HKN Energy considers that a discovery of crude oil and any associated natural gas is a commercial discovery, it shall have the exclusive right to develop and produce such commercial discovery. The development period in this regard shall be 20 years beginning on the declaration of a commercial discovery by HKN Energy with an automatic right to a 5 year extension period. The development period for the commercial discovery of non-associated natural gas shall be 20 years commencing on the declaration of such commercial discovery by HKN Energy with an automatic right to a 5 year extension period. If commercial production from a production area is still possible upon the expiration of a development period, then upon the request in writing made 6 months before the end of the development period, HKN Energy shall be entitled to an extension of such development period under the same terms as contained in the contract. The term of the extension shall be 5 years for crude oil and any associated natural gas and 5 years for non-associated natural gas.

Production Sharing Contract

HKN Energy shall conduct and submit an environmental impact assessment to the government within 6 months after the effective date.

From the date of first production, HKN Energy is required to contribute US$ 150,000 each contract year during the exploration period and US$ 300,000 for each contract year during the development period into the environment fund established by the government for the benefit of the natural environment of the Kurdistan region. During the performance of petroleum operations, HKN Energy shall take reasonable measures to ensure that it, its subcontractors and agents attend to the protection of the environment and prevention of pollution in accordance with prudent international petroleum industry practice. HKN Energy shall also take reasonable precautions and measures in accordance with prudent international petroleum industry practice in similar physical and ecological environments to prevent any pollution which may arise directly as a result of the petroleum operations and to protect the environment, water sources and any other natural resources. HKN Energy shall take reasonable measures to minimize any adverse material impact on national parks and natural reserves which may arise directly as a result of petroleum operations. The government represents and warrants that as at the effective date there are no national parks, nature reserves or other protected areas located in whole or in part within the contract area where HKN Energy shall not be entitled to carry out petroleum operations.The government also covenants that it shall not designate or create any national parks, natural reserves or other protected areas located in whole or in part within the contract area during the term of the contract.

For the execution of petroleum operation under this contract the company shall have the right to freely use water and any other natural resources located inside or outside the contract area for the petroleum operations. The company shall have the right in the Kurdistan Region to take or use any water necessary for the Petroleum Operations provided it does not damage any existing irrigation or navigation systems and that land, houses or watering points belonging to third parties are not deprived of their water.

The government has the right to request an audit of HKN Energy's accounts with regard to each year within a period of 2 years following the end of such year. The government also has the right to retain an auditor of international standing who is familiar with the international petroleum industry's accounting practice to undertake or assist the government in auditing the accounts of HKN Energy. The cost of retaining the auditor shall be borne by HKN Energy and shall be treated as petroleum cost for the purpose of cost recovery. On the basis of data and information available, if the government considers that HKN Energy made a material mistake or there is any irregularity in its accounts and considers that any correction or adjustments should be made, the government shall make any audit exception in writing and notify HKN Energy. Failure to give this written exception within the specified time shall be deemed to be an acknowledgment of the correctness of HKN Energy's account. Where an audit exception is issued by the government, HKN Energy shall have 60 days to make the necessary corrections or amendments or to present its comment to the government. Within 30 days of HKN Energy's response, the government shall notify HKN Energy in writing of its position on the corrections, adjustments or comments. If a disagreement exists, the dispute shall be settled by referring the dispute for expert determination.

HKN Energy is required to pay to the government the following bonuses: 1) a signature bonus of US$ 1 million within 30 days of the effective date; 2) a capacity building bonus of US$ 24 million payable in US$ 2 million installments every 30 days from the effective date. This payment shall cease when the government and the provider of the corporate guarantee agree on a project to be completed by the guarantor with a value not less that the unpaid balance; 3) if a crude oil commercial discovery is made, a crude oil production bonus as follows: US$ $2.5 million at the start of the first production of crude oil, US$ 5 million when the production of crude reaches a cumulative amount of 10 million barrels, US$ 10 million when production of crude oil reaches a cumulative amount of 25 million barrels, and US$ 20 million when production of crude oil reaches a cumulative amount of 50 million barrels; and 4) if there is a non-associated natural gas discovery, a non-associated natural gas production bonus as follows: US$ 2.5 million upon the start of first production of non-associated natural gas, US$ 5 million when production of non-associated natural gas reaches a cumulative amount of ten million barrels of oil equivalent; US$ 10 million when production of non-associated natural gas reaches a cumulative of 25 million barrels of oil equivalent and US$ 20 million when production of non-associated natural gas reaches a cumulative amount of 50 million barrels of oil equivalent.

HKN Energy, its affiliates and subcontractors shall be exempted from all taxes as a result of its income, assets and activities under the contract. The government shall indemnify HKN Energy, upon demand, against any liability to pay any taxes assessed or imposed on it which relate to this exemption.

HKN Energy shall be subject to corporate income tax on its income from petroleum operations and this shall be deemed to be inclusive and in full and total discharge of any tax on its income, receipt, revenues, gains or profit. The share of the profit petroleum to which the government is entitled in any calendar year shall be deemed to include a portion representing the corporate income tax imposed upon and due by each company, and which will be paid directly by the government.

The rate of the corporate income tax applicable to HKN Energy shall be the generally applicable rate prescribed in the law of Kurdistan region, as may be amended from time to time or substituted for petroleum operations but it shall not exceed 40%. The parties acknowledge and agree that at the effective date, the corporate income tax rate is 40% for all net taxable profits in excess of 9 million Iraqi dinar. The parties agree that the contractor's corporate income tax shall be calculated on its net taxable profit under the contract.

To take account of specific conditions related to natural gas and to promote its development in the Kurdistan region, the government will grant specific benefits to the company on principles materially similar to those contained in this contract, including consistent with the Kurdistan Region Oil and Gas Law, more generous provisions in respect of the recovery of petroleum costs and the sharing of profit petroleum than in respect of crude oil.

In determining HKN Energy's percentage share of the profit crude oil and profit natural gas, the R factor shall be calculated as follows R = X/Y ( where X is equal to cumulative revenue actually received by HKN energy and Y is equal to cumulative costs actually incurred by the HKN Energy from the date of signing the contract). The share of profit petroleum to which the company shall be entitled from first production is: (a) for profit crude oil equal to the quantities of petroleum resulting from the application of the relevant percentage an indicated below to the daily volume of production of profit crude oil within the production area at the corresponding delivery point: R < 1: Company 35%; 1 < R < 2: Company (35 - (35-15) * (R-1)/(2-1)%; R> 2: Company 15%; and for profit natural gas, equal to the quantities of non-associated natural gas resulting from the application of the relevant percentage as indicated below to the daily volume of production of profit natural gas within the production area at the delivery point: R < 1: Company 40%; 1 < R < 2.75: Company (40 - (40 - 20) * (R - I) / (2.75 - I))%; R > 2.75: Company 20%.

Subject to the provisions of the contract, from the first production, HKN Energy shall at all times be entitled to recover all petroleum costs incurred of up to 43% of available crude oil, which shall apply regardless of the gravity of the oil, and available associated natural gas produced and saved within any year. Subject to the provisions of the contract, from first production, HKN Energy shall at all times be entitled to recover all petroleum costs incurred of up to 53% of available non-associated natural gas produced and saved with any year. If in any year, the available crude oil and/or available non-associated natural gas do not allow HKN Energy recover all of its petroleum costs, the un-recovered petroleum costs in that year shall be carried forward indefinitely to the subsequent years until all the petroleum costs are recovered but unless as provided in the contract, in no other case after the termination of the contract. The petroleum costs under the contract are not recoverable against other contract areas, outside the contract, held by HKN Energy.

For export crude oil, the royalty rate shall be 10% which shall apply regardless of the gravity of the oil. For export non-associated natural gas, the royalty rate shall be 10%. Associated natural gas and any other petroleum are exempt from any royalty payments.

The government shall have the option of exercising a government participation and/or a third party participation. The government shall have the option of government participation which is the option to participate as a contractor through a public company under the contract with respect to the entire contract area with an undivided interest in the petroleum operations and all other rights, duties, obligations and liabilities of the contractor of up to 25% but not less than 5% participating interest. The government may exercise this option at any time in the period commencing on the effective date and ending 180 days after HKN Energy declares the first commercial discovery by notifying the contractor in writing and nominating the participating public company. If the government fails to exercise this option within the stipulated period, the option is deemed waived except for in relation to any pre-emption rights to participate that may be granted. Where the government exercises the government participation option, from the date of the notice, the public company shall participate as a contractor under the contract with all the ensuing rights, duties, obligations and liabilities. The public company shall not have any liability to other contractors to contribute its government interest share of the petroleum costs incurred before the first commercial declaration date and the other contractors shall be responsible for its government interest share which shall be recoverable as petroleum cost. The public company would however be liable to the other contractors to contribute its government interest share of all petroleum costs incurred on or after the first commercial declaration date (except the production bonuses provided in Art. 32) if pursuant to the terms of the joint operating agreement, it participates in the development of commercial discovery. If the government exercises the government participation option on or after the first commercial declaration date, the public company shall reimburse the other contractors, within 30 days of the date of the government's notification of its election, for all petroleum cost for which it is liable and which have been incurred by the other contractors on or after the first commercial date. The government shall also have the option of nominating a third party as a contractor with an undivided interest in the petroleum operations in respect of the entire contract area and all other rights, duties, obligations, and liabilities of the contractors of up to 25% and not less than 5% participating interest. The government may exercise this option at any time prior to the date 12 months after the effective date by nominating in writing to HKN Energy, the size of the third party interest and the nominated company which has adequate resources to discharge the obligations of a contractor under the contract and a joint operating agreement. Prior to the expiration of a period of 8 months from the effective date, the parties shall commence an investigation into the nominated third party in accordance with the standards and requirements of the United States Federal Law Foreign Corrupt Practices Act of 1977 and this investigation shall be concluded prior to 12 months after the effective date. This option is only exercisable once and after this, the third party interest may not be subsequently increased. However, if the nominated company does not satisfy the investigation requirement, upon a formal rejection of the nomination, the government shall have the option to nominate a second company which shall not be an affiliate of the nominated company. If the second company does not also satisfy the investigation requirement, the government shall nominate, and HKN Energy shall accept, a public company.The public company in this instance shall be a wholly owned entity of the government. If the government fails to nominate a third party participant, the option is deemed waived. Upon signing a binding and enforceable instrument of assignment and novation with regard to the contract, the third party participant shall pay the contractor an amount equivalent to the proportion of petroleum cost incurred by the contractor until the date of the payment attributable to the third party interest. After making this payment and signing the assignment and novation agreements, the third party shall participate as a contractor under the contract from the effective date with all right, duties, obligations and liabilities. Where the government exercises the government participation option after the exercise of the third party participation option, the government interest shall be assigned to the public company by the contractors pro rata to their respective participating interests under the contract. If the government exercises the government participation option prior to the exercise of the third party participation option, then the third party interest shall be reduced by a percentage to put the other contractors, other than the holder of the government interest, and the third party participant in the position they would have been if the third party participation option was exercised before the government participation option.

For the petroleum operation, HKN Energy shall give, and shall ensure that its contractors give, preference to personnel from the Kurdistan region and other parts of Iraq to the extent that such personnel has the requisite technical capability, qualifications, competence and experience. HKN Energy shall also give due consideration to the secondment of government personnel to HKN Energy and the secondment of HKN Energy personnel to the government. The parties shall mutually agree on the terms, conditions and associated costs of the secondment. HKN Energy shall have the right to hire foreign personnel where local personnel do not meet the required technical capabilities, qualification or experience for the position. If such foreign personnel engage in any activities which breach any Kurdistan law, HKN Energy shall take necessary steps to repatriate the foreign personnel. For the first 3 contract years, HKN Energy is required to provide up to US$ 250,000 to the government in advance each contract year for the recruitment or secondment of personnel from Kurdistan, other parts of Iraq or abroad to the Ministry of Natural Resources. This cost is recoverable as petroleum cost.

The company shall give priority to subcontractors from the Kurdistan Region and other parts of Iraq to the extent their competence, rates, experience, reputation, qualifications, specialties, credit rating and terms of availability, delivery and other commercial terms are, in the company's sole opinion, comparable in all material respects with those provided by foreign companies operating in the international petroleum industry. Such subcontractors must be bona fide Kurdistan Region companies not related to any public officer, directly or indirectly, and must have all necessary resources and capacity.

HKN Energy shall train all its personnel from Kurdistan and other parts of Iraq directly or indirectly involved in the petroleum operations to improve their knowledge and professional qualification to the same level as that of its foreign personnel. The training shall include the transfer of knowledge of petroleum technology and the necessary management experience to enable the local personnel apply advanced technology in the petroleum operations to the extent permitted by law and agreements with third parties, and subject to appropriate confidentiality agreements. The training plan shall provide for the allocation of US$ 150,000 for each contract year during the exploration period and US$ 300,000 for each contract year during the development period. All reasonable training expenses can be counted as petroleum costs. Before the end of the first contract year, the company shall provide to the government in kind technological and logistical assistance to the Kurdistan Region petroleum sector, including geological computing hardware and software and such other equipment as the government may require, up to the value of US$ 1 million. The form of such assistance shall be mutually agreed by the parties and any costs associated therewith shall be considered petroleum costs and shall be recoverable.

For its petroleum operation, the company shall have the right in the Kurdistan Region to clear land, excavate, drill, bore, construct, erect, place, procure, operate, emit and discharge, manage and maintain ditches, tanks, wells, trenches, access roads, excavations, dams, canals, water mains, plants, reservoirs, basins, storage and disposal facilities, primary distillation units, extraction and processing unit, separation units, sulphur plants and any other facilities or installations for the Petroleum Operations, in addition to pipelines, pumping stations, generators, power plants, high voltage lines, telephone, radio and any other telecommunications systems, sheds, houses for personnel. hospitals, schools, premises, dikes, vehicles, railways, roads, bridges, airlines, airports and any other transportation facilities, garages, hangars, workshops, foundries, repair shops and any other auxiliary facilities for the petroleum operations and, generally, everything which is required for its performance of the petroleum operations. For its petroleum operations, the company shall have the right in the Kurdistan Region to use, subject to applicable law. any railway, tramway, road, airport, landing field, canal, river, bridge or waterway, any telecommunication network and any existing pipeline or transportation infrastructure, on terms no less favorable than those offered to other entitles and, unless generally in force, to be mutually agreed. The company shall have the right to design, construct, operate and maintain pipelines and any related facilities for the transportation of petroleum produced under this contract.

Subject to spare capacity being available and to their petroleum being compatible, third parties shall be entitled to transport their petroleum through any pipeline constructed by the contractor on terms to be agreed between the company and such third party. Those terms shall be reasonable commercial terms and shall not discriminate among third party users. The company shall always have priority of access to such pipelines. To the extent related to transportation upstream of the delivery point, any tariffs received from third parties for use of any pipeline and related facilities by the company shall be applied to the recovery of petroleum costs until all pipeline costs have been fully recovered.

Gas flaring is prohibited unless it is a short term flaring of up to 12 months necessary for testing or other operational reasons in accordance with prudent international petroleum industry practice and this shall include the flaring of associated natural gas to the extent that HKN Energy considers that re-injecting the associated natural gas is not economically and technically justified and provided the government decides not to take the associated natural gas. The company shall sell and transfer to the government, upon written request of the government, any amounts of crude oil that the government shall deem necessary to meet Kurdistan Region internal consumption requirements.

During the first sub-period the company shall: (a) carry out geological and geophysical studies, comprising the following: (i) The compilation of a technical database; (ii) The performance of a remote sensing study (if appropriate); (iii) A field visit to verify initial geological and geophysical work and remote sensing results and plan for 2 dimensional seismic acquisition; and (b) carry out a data search for existing data specific to this contract area, comprising the following: (i) well data, if available, for example electric logs; (ii) seismic data and gravity data, if available; and (iv) Reprocess seismic data, if available; (c) perform field work comprising structural, stratigraphic and lithologica mapping and sampling; (d) acquire, process and interpret 200 line kilometers of 2 dimensional seismic data within the contract area, committing for this purpose a minimum financial amount of US$ 7.5 million; and (e) drill 1 exploration well, committing for this purpose a minimum financial amount of US$ 7.5 million. During the second sub-period, the company shall: (a) Acquire, process and interpret further seismic data (being either 2 dimensional or 3 dimensional) if the company considers that the results from the first exploration well justify the acquisition of further seismic data; and, (b) Drill 1 exploration well committing for this purpose a minimum financial amount of US$ 7.5 million unless the data from the first exploration well demonstrates that there is not a reasonable technical case for drilling the second exploration well in the contract area. Each company shall provide the government if so required with a corporate guarantee no later than 90 days after the effective date. It shall be given in respect to the minimum financial commitment for each sub-period and shall expire automatically upon completion of the performance of the minimum exploration obligations.

Any dispute arising under the contract shall first be resolved by negotiations in good faith. The parties shall attempt to settle the dispute by negotiation between senior representatives. Senior representatives are individuals who have authority to negotiate the settlement on behalf of the parties. If the dispute cannot be settled by negotiation, the dispute may be referred to mediation in accordance with the London Court of International Arbitration (LCIA) mediation procedure which is deemed incorporated in the contract by reference. If the dispute is not settled by mediation, the dispute may be referred to arbitration in accordance with the LCIA rules for final determination. The arbitration shall be held in London, England and shall be conducted in English. The arbitration shall be heard by 3 arbitrators. During the arbitral proceeding and until the dispute is determined, the parties are required to continue to perform their obligations under the contract. The parties agree that the arbitral award shall be final and not object to any appeal including an appeal to the English courts on issues of law. In addition, any dispute relating to articles 15.9, 27.2 and 27.7 of this contract and any issue which the parties agree to refer to an expert, shall be referred to an expert for determination. The management committee shall prepare an appropriate terms of reference relating to the disagreements to be submitted to expert determination.

Unless exceptions under the contract apply, the parties undertake to keep all data and information relating to the contract and the petroleum operations confidential during the entire term of the contract and to refrain from disclosing such information to third parties without the consent of the other party. The confidentiality obligation does not apply to: 1) information which is, or through no fault of the parties becomes, a part of the public domain; 2) information which is known to the recipient at the date of disclosure; 3) information disclosed in compliance with any applicable, by a government agency having jurisdiction over HKN Energy, or by a court order or any legal proceedings; 4) disclosure required pursuant to the rules and regulations of any government or recognized stock exchange having jurisdiction over HKN Energy. In accordance with prudent international petroleum industry practice, confidential information may be disclosed to: 1) HKN Energy's affiliates, employees, officers, directors for the purpose of the petroleum operations and subject to HKN Energy ensuring that customary precautions to keep the information confidential is taken; 2) consultants or agents retained by HKN Energy or its affiliates for the purpose of analyzing or evaluating information; 3) banks or other financial institutions, including any such consultants retained by the banks, engaged by HKN Energy or its affiliate for the purpose of financing the petroleum operations. 4) bonafide prospective assignees of a participating interest under the contract; 5) prospective or actual subcontractors engaged by a party; and 6) any other person with the prior written approval of the non-disclosing party. Subject to the contract, HKN Energy is precluded from engaging in the sale or exchange of any data relating to the petroleum operations without the approval of the government which shall not be unreasonably withheld or delayed where in HKN Energy's opinion such sale or exchange would benefit the petroleum operation.

The governing law is English law except any rule of English law which would refer the matter to another jurisdiction, together with any relevant rules, customs and practices of international law.

The government and any public company which may be a contractor under the contract waive fully and irrevocably any claim to immunity for itself or any of its assets. This waiver includes any claim to immunity from any expert determination, mediation, arbitration, enforcement of any decision, settlement, award or judgment or the service of processes. In addition, if it is reasonably proven that this contract was obtained in violation of Kurdistan region law relating to corruption, the contract shall be void. Also, each contractor agree that if, at any time, it is reasonably found to be in breach of Kurdistan region law concerning corruption, the government or any other contractor shall have the right to terminate this contract.

The government shall not change the obligations of HKN Energy under the contract and the general and overall equilibrium between the parties under the contract shall not be affected in a substantial and lasting manner. The government guarantees that for the entire duration of the contract, it will maintain the stability of the legal, fiscal and economic conditions of the contract as they result from the contract and from laws and regulations in force on the date of signing the contract. If at any time after the effective date there is a change in the fiscal, legal and economic framework under the Kurdistan region law or other applicable law in or to the Kurdistan region which adversely affects HKN Energy, or any person entitled to benefits under the contract, the terms and conditions of the contract shall be altered to restore HKN Energy or such other person to the same overall economic position as they would have been if the change did not occur. If HKN believes that its economic position or that of any person entitled to benefits under this contract has been detrimentally affected by any change, upon HKN Energy's written request, the parties shall meet to agree on any necessary measures or amendments to the terms of the contract to reestablish the equilibrium between the parties and restore HKN Energy and such person to the position they were prior to the occurrence of the change. If the parties fail to agree on the merit of amending the contract or on any amendment to be made within 90 days from HKN Energy's request to meet, or such other period as may be agreed by the parties, HKN Energy may refer the matter directly to arbitration in accordance with the provision for arbitration under the contract. Without prejudice to the foregoing, HKN Energy shall always be entitled to the benefits of any future changes in the petroleum legislation or any other legislation complementing, amending or replacing it.