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AGREEMENT ON THE REHABILITATION, DEVELOPMENT AND

PRODUCTION SHARING FOR THE BLOCK INCLUDING THE

ZYKH AND GOVSANY OIL FIELDS IN THE AZERBAIJAN

REPUBLIC



BETWEEN



THE STATE OIL COMPANY OF THE AZERBAIJAN REPUBLIC,



RUSSNEFT APSHERON INVESTMENTS LIMITED



AND



SOCAR OIL AFFILIATE TABLE OF CONTENTS



ARTICLES PAGE



ARTICLE 1

PARTICIPATING INTERESTS 9



ARTICLE 2

GRANT OF RIGHTS AND SCOPE 10

2.1 Grant of Exclusive Right

2.2 Exception from Contractor’s Right to Cost Recovery



ARTICLE 3

WARRANTIES AND GENERAL RIGHTS AND OBLIGATIONS OF THE

PARTIES 11

3.1 Warranties of SOCAR

3.2 General Obligations of SOCAR

3.3 Warranties and Rights of Contractor Parties

3.4 General Obligations of Contractor Parties

3.5 Special Provision for Carrying SOA’s Participating

Interest



ARTICLE 4

CONTRACT AREA 16



ARTICLE 5

REHABILITATION AND PRODUCTION PROGRAMME 17



ARTICLE 6

DEVELOPMENT AND PRODUCTION PERIOD 18



ARTICLE 7

STEERING COMMITTEE FOR PROJECT MANAGEMENT AND ANNUAL

WORK PROGRAMMES 19

7.1 Steering Committee for Project Management

7.2 Steering Committee Procedure

7.3 Annual Work Programmes and Budgets

7.4 Emergency Measures



ARTICLE 8

OPERATING COMPANY, PERSONNEL AND TRAINING 24

8.1 Operating Company

8.2 Responsibilities of Operating Company

8.3 Organisation

8.4 Decisions

8.5 Procedures

8.6 Status of Operating Company

8.7 Personnel

8.8 Training



ARTICLE 9

REPORTS AND ACCESS TO PETROLEUM OPERATIONS 30

9.1 Reports and Records

9.2 Access to Petroleum Operations









[Azerbaijani Text] [Russian Text] 2ARTICLE 10

USE OF LAND AND SEA BEDS 33



ARTICLE 11

USE OF FACILITIES 34

11.1 SOCAR Facilities

11.2 SOCAR Assistance

11.3 Contractor Facilities



ARTICLE 12

CONTRACTOR’S RECOVERY OF PETROLEUM COSTS AND PRODUCTION SHARING 38

12.1 Use of Petroleum for Petroleum Operations

12.2 Cost Recovery for Petroleum Operations

12.3 Transfer of Title

12.4 Profit Petroleum

12.5 Title to Profit Petroleum



ARTICLE 13

LOCAL MARKET OIL 42

13.1 Contractor’s Obligation for Sale of Local Market Oil

13.2 Underlift of Local Market Oil

13.3 SOCAR’s Right to Suspend Local Market Oil Purchase

13.4 Contractor’s Right to Cease Local Market Oil Sales



ARTICLE 14

TAXATION 44

14.1 General

14.2 Profit Tax

14.3 Profit Tax Accounting and Returns

14.4 Taxation of Foreign Sub-contractors

14.5 Taxation of Payments to Foreign Entities

14.6 Taxation of Employees and Physical Persons

14.7 Tax Exemptions

14.8 Other Matters

14.9 Share Transfer Profit Tax

14.10 Survival



ARTICLE 15

VALUATION OF PETROLEUM 69

15.1 Calculation of Net Back Value of Crude Oil and Non-

associated Natural Gas

15.4 Measurement



ARTICLE 16

OWNERSHIP, USE AND ABANDONMENT OF ASSETS 74

16.1 Ownership and Use

16.2 Abandonment, General Terms

16.3 Parties Relationship with respect to Abandonment of

Assets

16.4 Lease of Equipment



ARTICLE 17

NATURAL GAS 79



[Azerbaijani Text] [Russian Text] 3

17.1 Associated Natural Gas

17.2 Non-associated Natural Gas

17.3 Flaring or Venting of Natural Gas



ARTICLE 18

FOREIGN EXCHANGE 81



ARTICLE 19

ACCOUNTING METHOD 83



ARTICLE 20

IMPORT AND EXPORT 84

20.1 Import and Export Rights

20.2 Petroleum Export

20.3 Custome Laws

20.4 Foreign Trade Regulations

20.5 SOCAR Assistance



ARTICLE 21

DISPOSAL OF PRODUCTION 88

21.1 Title to Petroleum

21.2 Overlift and Underlift

21.3 SOCAR Option to Purchase Crude Oil

21.4 Marketing of Crude Oil for SOCAR

21.5 Maximum Efficient Rate



ARTICLE 22

INSURANCE, LIABILITIES AND INDEMNITIES 92

22.1 Insurance

22.2 Liability for Damages

22.3 Indemnity for Personnel

22.4 Indemnity Prior to Effective Date

22.5 Indemnity for Surrendered Areas and SOCAR Operations

22.6 Joint and Several liability

22.7 Consequential Losses



ARTICLE 23

FORCE MAJEURE 98

23.1 Force Majeure

23.2 Extension of Time

23.3 Post-Production Force Majeure



ARTICLE 24

VALIDITY, ASSIGNMENT AND GUARANTEES 101

24.1 Validity

24.2 Assignment

45.3 No Tax on Assignment

24.4 Conditions on Assignment

24.5 Ultimate Parent Company Guarantees, SOCAR Guarantee

24.6 Government Guarantee



ARTICLE 25



[Azerbaijani Text] [Russian Text] 4





APPLICABLE LAW, ECONOMIC STABILIZATION AND ARBITRATION 105

25.1 Applicable Law

25.2 Economic Stabilisation

25.3 Arbitration



ARTICLE 26 108

NOTICES



ARTICLE 27

EFFECTIVE DATE 110

27.1 Effective Date

27.2 Pre-Effective Date Petroleum Operations



ARTICLE 28

ENVIRONMENTAL PROTECTION AND SAFETY 112

28.1 Conduct of Operations

28.2 Emergencies

28.3 Environmental Protection Strategy

28.4 Environmental Damage



ARTICLE 29

CONFIDENTIALITY 116

29.1 General Provisions

29.2 Trading of Data

29.3 Corporate Disclosure



ARTICLE 30

BONUS PAYMENTS 119

30.1 Bonus Payments

30.2 Miscellaneous



ARTICLE 31

TERMINATION 121

31.1 Material Breach

31.2 Termination by SOCAR

31.3 Termination/Relinquishment by Contractor

31.4 Other Remedies

31.5 Partial Relinquishment



ARTICLE 32

MISCELLANEOUS 125



APPENDICES



APPENDIX 1

DEFINITIONS (I)



APPENDIX 2

CONTRACT AREA AND MAP (II)



APPENDIX 3



[Azerbaijani Text] [Russian Text] 5ACCOUNTING PROCEDURE (14)

1. General Provisions

2. Charges and Expenditures

3. Material and Equipment

4. Accounting Reports



APPENDIX 4

FORM OF CONTRACTOR PARTY’S ULTIMATE PARENT

COMPANY GUARANTEE (30)



APPENDIX 5

GUARANTEE AND UNDERTAKING OF THE GOVERNMENT OF THE

AZERBAIJAN REPUBLIC (32)





APPENDIX 6

ARBITRATION PROCEDURE (41)



APPENDIX 7

CRUDE OIL AND NATURAL GAS MEASUREMENT AND EVALUATION

PROCEDURE (44)



1.1 General

1.2 Crude Oil Measurement

1.3 Timing of Crude Oil Measurement

1.4 Natural Gas Measurement

1.5 Petroleum Measurement Procedures



APPENDIX 8

DESIGN STANDARDS AND SPECIFICATIONS (47)



APPENDIX 9

ENVIRONMENTAL STANDARDS AND PRACTICES (49)



ADDENDUM RELATING TO THE FORMATION OF SOCAR OIL AFFILIATE -1-





[Azerbaijani Text] [Russian Text] 6 AGREEMENT ON THE REHABILITATION, DEVELOPMENT AND

PRODUCTION SHARING FOR THE BLOCK INCLUDING THE

ZYKH AND GOVSANY OIL FIELDS (hereinafter referred to as

“Zykh/Govsany Block”) IN THE AZERBAIJAN REPUBLIC





THIS AGREEMENT, made and entered into in Baku, Azerbaijan Republic, this 3rd day of November, 2006 by and between:



THE STATE OIL COMPANY OF THE AZERBAIJAN REPUBLIC

(“SOCAR”) Government body on the one hand; and



RUSSNEFT APSHERON INVESTMENTS LIMITED (“Russneft”) a

company incorporated in the British Virgin Islands; and



SOCAR OIL AFFILIATE ("SOA") a company to be fully owned and

formed by SOCAR



On the other hand, all the Parties being legal persons in accordance with the legislation of the countries of their registration as confirmed by appropriate documentation thereof.



WITNESSETH



WHEREAS, in accordance with the Constitution of the Azerbaijan Republic, and the Constitutional Act of State Independence of the Azerbaijan Republic, dated 18 October 1991, and the Law on Subsoil of the Azerbaijan Republic, dated 13 February 1998, ownership of all Petroleum existing in its natural state in underground or subsurface strata in the Azerbaijan Republic is vested in the Azerbaijan Republic, and based upon the below referenced authorisations the authority to control and manage said Petroleum has been vested in SOCAR; and



WHEREAS, pursuant to Presidential Edict No 200 concerning the creation of the State Oil Company of the Azerbaijan Republic dated 13 September 1992, and Presidential Edict No 844 concerning restructuring of the State Oil Company of the Azerbaijan Republic dated 24 January 2003, and Presidential Edict No 340 dated 22 December 2005 concerning the amendments and changes to the afore-mentioned Presidential Edict No 844 dated 24 January 2003, and its Charter, SOCAR SOCAR owns all Petroleum produced and is vested with the authority to carry out the exploration and development of all Petroleum in the Azerbaijan Republic, and pursuant to Presidential Decree No 1670 “On the Rehabilitation, Development and Production Sharing of the Block including the Zykh and Govsany Fields in the Azerbaijan Republic” dated 14th of September, 2006, SOCAR is authorised to prepare and execute









[Azerbaijani Text] [Russian Text] 74the Agreement on behalf of the Azerbaijan Republic, and represent interests of the Azerbaijan Republic as the Party to the Agreement throughout the entire term thereof; and



WHEREAS, SOCAR being the owner and operator of the Zykh/Govsany Block has carried out certain work in the Contract Area and now the Parties wish to promote the rehabilitation, exploration and development of the Contract Area in order to increase production of Petroleum existing in its natural state in, on or under the Contract Area; and



WHEREAS, SOCAR and RUSSNEFT BAKU İNVESTMENTS LİMİTED have agreed and entered into the Agreement on the Basic Commercial Principles and Provisions of the Rehabilitation, Development and Production Sharing Agreement for the Block including the Zykh and Govsany Oil Fields in the Azerbaijan Republic dated 31 July 2006, and such principles and provisions have constituted the framework of this Agreement; and



WHEREAS, Russneft has the technical knowledge and experience, the administrative and managerial expertise, and financial resources to efficiently develop and produce the Petroleum resources of the Contract Area, and desires to contract with SOCAR for that purpose.



NOW THEREFORE, for and in consideration of the premises and mutual covenants hereinafter set forth, the Parties agree as follows:



Page 8

ARTICLE 1

PARTICIPATING INTERESTS



1.1 The rights and obligations under this Agreement of the Contractor Parties shall be held in the following respective percentage Participating Interests as of the Execution Date:

CONTRACTOR PARTIES | PERCENTAGE

SOA | 25.0%

Russneft | 75.0%

TOTAL | 100.0%



1.2 The Parties agree that from the Effective Date the respective percentage Participating Interest shares replace any rights and obligations which may exist regarding the Contract Area by virtue of any prior agreement or contract between any of the Contractor Parties or their Affiliates on the one hand, and any Governmental Authority or SOCAR on the other hand. The Parties agree that, from the Effective Date, this Agreement constitutes the sole and complete understanding between SOCAR and the Contractor Parties regarding the Contract Area.



Page 9

ARTICLE 2



GRANT OF RIGHTS AND SCOPE



2.1 Grant of Exclusive Right



SOCAR hereby grants to Contractor the sole and

exclusive right to conduct Petroleum Operations

within and with respect to the Contract Area in

accordance with the terms of this Agreement and

during the term hereof. Except for the rights

expressly provided for herein, this Agreement shall

not include rights for any activity other than

Petroleum Operations with respect to surface areas

or to any other natural resources.



2.2 Exception from Contractor’s Right to Cost Recovery



Except as expressly provided elsewhere herein, in

the event production resulting from Petroleum

Operations, upon completion of commercial production

from the Contract Area at the end of the term of

this Agreement, inclusive of all extensions provided

in Article 6 is insufficient for full recovery of

Contractor's Capital Costs and Operating Costs as

provided hereunder, then Contractor shall not be

entitled to any reimbursement or compensation for

any of its costs not recovered.









10 ARTICLE 3



WARRANTIES AND GENERAL RIGHTS

AND OBLIGATIONS OF THE PARTIES



3.1 Warranties of SOCAR



SOCAR represents and warrants that:



(a) it is duly organised and validly existing in

accordance with the terms of its Charter; and



(b) it has full authority under the laws of the

Azerbaijan Republic to execute and perform this

Agreement, to grant the rights and interests to

Contractor as provided under this Agreement and

to fulfill its obligations under this

Agreement.



3.2 General Obligations of SOCAR



(a) Upon the request of Contractor for the

implementation of Petroleum Operations, SOCAR

within the full limits of its authority shall

use its best lawful endeavours with respect to

Governmental Authorities to assist Contractor

to obtain the following:



(i) any necessary Governmental Authority

approvals, including but not limited to

customs clearances, visas, residence

permits, access to communication

facilities, licenses to enter land, import

and export licenses, the opening of bank

accounts, the acquisition of office space

and employee accommodation, as may be

necessary for efficient implementation of

Petroleum Operations; and



(ii) all geological, geophysical, geochemical

and technical data (including well data and

any other information) of relevance to the

Contract Area not in SOCAR's possession or

under its control.



(b) SOCAR within the full limits of its authority

shall also use its best lawful endeavours to

assist Contractor in all other relevant matters

as may be necessary for the efficient

implementation of Petroleum Operations.



(c) Contractor shall reimburse SOCAR for any lawful

reasonable actual direct costs incurred with

respect to the provision of the foregoing,

provided such costs are supported by appropriate





11documentary evidence, and such reimbursements shall be Operating Costs.



(d) Upon request of Contractor, SOCAR shall provide to Contractor all geological, geophysical, geochemical and technical data and information in the possession or control of SOCAR or its Affiliates of relevance to the Contract Area

including all kinds of well data. Contractor shall pay the actual direct costs incurred by SOCAR in the implementation of this Agreement in gathering together, handling and delivering any such data or information to Contractor, which costs will be invoiced to Contractor by SOCAR on the basis that SOCAR is to suffer no loss and obtain no gain, and which costs shall be Operating Costs. If Contractor does not accept that any items as invoiced by SOCAR satisfy this requirement, Contractor shall notify SOCAR of any such objections and SOCAR and Contractor shall take all necessary steps to mutually resolve all objections raised by Contractor. SOCAR makes no warranties as to the accuracy or completeness of any such data or information in connection with the performance of such obligation.



3.3 Warranties and Rights of Contractor Parties



(a) Each Contractor Party represents that it is duly organised and validly existing in accordance with the terms of its foundation documents and is authorised, subject to governmental authorisations, to establish and maintain such branches and offices in the Azerbaijan Republic and elsewhere as may be necessary to conduct Petroleum Operations in accordance with the terms and conditions of this Agreement.



(b) Each Contractor Party, its Affiliates, Contractor's Subcontractors and the Operating Company are hereby authorised throughout the term of this Agreement to establish such branches, permanent establishments, permanent representation and other forms of business in the Azerbaijan Republic as may be necessary or appropriate to qualify to do business in the Azerbaijan Republic and to conduct or participate in Petroleum Operations, including the purchase, lease or acquisition of any property required for Petroleum Operations, provided such establishments and other forms of businesses comply with the formalities and procedures of the laws of the Azerbaijan Republic in respect thereof.



[Azerbaijani Text] [Russian Text] 12













3.4 General Obligations of Contractor Parties



(a) Subject to Article 3.5, the Contractor Parties shall provide the

necessary funds to explore, appraise, evaluate and develop the

Petroleum resources within the Contract Area in accordance

with the terms and conditions set forth in this Agreement.







(b) Contractor shall conduct Petroleum Operations in accordance

with the terms of this Agreement in a diligent, safe and

efficient manner and in accordance with generally accepted

principles of the international Petroleum industry. As regards

design standards and specifications for facilities and

equipment and Design Standards shall apply. No Contractor

Party shall be required to act or refrain from acting if to do so

would make such Contractor Party or its Ultimate Parent

Company (in case of its presence) liable to penalisation under

the laws of any jurisdiction applicable to such Contractor Party

or its Ultimate Parent Company (in case of its presence)

notwithstanding anything to the contrary in this Agreement.











3.5 Special Provision for Carrying SOA's Participating Interest





(a) To the extent that SOA to be one hundred (100) percent owned

by SOCAR or any other Governmental Authority - SOCAR

assignee, the Other Contractor Parties shall have the obligation

to carry, in proportion to their Participating Interest, SOA's

Petroleum Costs attributable to SOA's Participating Interest

from the Effective Date and until the end of the Calendar Year

during which the total production of Crude Oil shall exceed two

(2) times the volume of Crude Oil produced in 2005 ("Carry").









(b) From the Effective Date, Carry shall be reimbursed to the

Other Contractor Parties in proportion to their Participating

Interests as follows:







(i) Carry I shall be reimbursed only out of one hundred

(100) percent of Cost Recovery Petroleum attributable to

SOA, pursuant to Article 13.3 of this Agreement.







(ii) Transfer of title to the Other Contractor Parties of











13



























volumes of Petroleum to reimburse Carry 1, as defined in Article 3.5(b)(i), shall be made at the Delivery Point. The value of the said volumes of Petroleum shall be calculated in accordance with the provisions of Article 15.1.



(iii) Notwithstanding Article 3.5(b)(i) above to the contrary, SOA shall reimburse all or a part of the unrecovered balance of Carry (“Unrecovered Balance”) out of its share of Profit Petroleum or otherwise. The Unrecovered

Balance means all funds advanced by the Other Contractor Parties to carry SOA’s Participating Interest under Article 3.5(a) less the amounts compensated out of Petroleum under Article 3.5(b)(i).



The foregoing provisions related to reimbursement of Carry shall be valid until Carry shall have been reimbursed in full.



(c) Subject to the provisions of Article 24.2 of the Agreement, if SOA assigns all or a part of its Participating Interest to any Third Party or Contractor Party, the obligations of the Other Contractor Parties provided for in Article 3.5(a) of this Agreement shall be reduced to the extent of the Participating Interest assigned to such Third Party or Contractor Party. SOA and/or SOA’s assignee shall be liable to reimburse in full and in cash to the Other Contractor Parties a part of Carry, the Un-recovered Balance corresponding to the Participating Interest assigned at the date of the assignment under the terms described in Article 3.5(b). The acceptance by SOA and/or SOA’s assignee of the said obligation for reimbursement shall be a binding provision of such assignment.



(d) If SOCAR exercises its right to terminate this Agreement pursuant to Article 31.2, or if Contractor terminates this Agreement relinquishing the Contract Area in accordance with Article 31.3, then the Other Contractor Parties shall lose their rights to recover the Un-recovered Balance.



(e) In no event shall an increase by SOA of its Participating Interest above twenty fife (25) percent under this Agreement increase the obligation of the Other Contractor Parties to carry SOA’s Participating Interest in accordance with Article 3.5(a).



(f) If SOA gives notice to the Other Contractor Parties that it



[Azerbaijani Text] [Russian Text] 14wishes to surrender any part of its Participating Interest, from the commencement of the next Calendar Quarter following the date of such notice the obligation of the Other Contractor Parties to carry, and the obligation of SOA to reimburse Carry shall terminate with respect to such Participating Interest surrendered.



[Azerbaijani Text] [Russian Text] 15 ARTICLE 4



CONTRACT AREA



4.1 Contract Area



For purposes of this Agreement the Contract Area means the area inside the perimeter constituted by the geographical co-ordinates set forth in Appendix 2 to this Agreement being on SOCAR’s books and records; and includes vertically all existing subsurface reservoirs, formations and horizons within such perimeter, Petroleum resources discovered by SOCAR at or before the Effective Date, and also all Petroleum resources that may be discovered as the result of implementation of this Agreement.



If a new reservoir has been discovered in the course of Petroleum Operations indicating that the boundary of a geological structure of such reservoir extends horizontally to areas outside the Contract Area, SOCAR shall be entitled to grant the additional areas to Contractor and if granted such additional areas shall be deemed included into the Contract Area.



[Azerbaijani Text] [Russian Text] 16 ARTICLE 5



REHABILITATION AND PRODUCTION PROGRAMME



At least ninety (90) days from the Effective Date, Contractor shall prepare and submit to SOCAR for its approval the draft rehabilitation and production plan for the Zykh and Govsany fields (the “Rehabilitation and Production Programme”) which shall specify Contractor’s obligation to achieve not later than the expiry of two (2) years from the date of SOCAR’s approval of the Rehabilitation and Production Programme an average daily rate of Crude Oil production within ninety (90) consecutive days to be at least one point five (1.5) times the average daily rate of Crude Oil production in 2005. In this regard, if Contractor fails to perform such obligation which shall be deemed to be a Material Breach, SOCAR shall have the right to terminate this Agreement in relation to the Contract Rehabilitation Area pursuant to Article 31.1(b) of this Agreement, and any un-recovered costs incurred by Contractor from the Effective Date to the date of termination of this Agreement shall not be recoverable.



SOCAR shall approve or disapprove the Rehabilitation and Production Programme within sixty (60) days after receipt thereof. Unless SOCAR requests in writing to Contractor any changes to the Rehabilitation and Production Programme within sixty (60) days of receipt thereof, the rehabilitation and Production Programme shall be deemed approved by SOCAR. If SOCAR requests changes to the Rehabilitation and Production Programme, Contractor and SOCAR shall discuss a revised Rehabilitation and Production Programme. In the event that the Rehabilitation and Production Programme has not been approved by SOCAR within sixty (60) days of the commencement of such discussion, Contractor may within a further forty (40) days commence arbitration under the Arbitration Procedure to decide the terms of the Rehabilitation and Production Programme. Until the Rehabilitation and Production Programme is approved (or decided by arbitration), Contractor may conduct Petroleum Operations in accordance with good practice in the international petroleum industry.



In the event other than Force Majeure Contractor does not submit to SOCAR the Rehabilitation and Production Programme or does not achieve the average daily rate of Crude Oil production pursuant to the Rehabilitation and Production Programme in the said time and amount as defined in this Article, which shall be deemed to be a Material Breach, SOCAR shall have the right to terminate this Agreement pursuant to Article 31.1(b) of this Agreement, and any un-recovered costs incurred by Contractor from the



[Azerbaijani Text] [Russian Text] 17Effective Date to the date of termination of this Agreement shall not be recoverable.



Implementation of Petroleum Operations by Contractor shall be through Annual Work Programmes and Budgets the approval of which shall be deemed to amend the Rehabilitation and Production Programme to the extent necessary.



ARTICLE 6



DEVELOPMENT AND PRODUCTION PERIOD



The Development and Production Period shall begin from the date of SOCAR’s approval of the Rehabilitation and Production Programme and shall continue for twenty-five (25) years from such date. After the period of twenty-five (25) years the Development and Production Period may be extended by additional five (5) years subject to SOCAR’s approval.



[Azerbaijani Text] [Russian Text] 18 ARTICLE 7



STEERING COMMITTEE

FOR PROJECT MANAGEMENT

AND ANNUAL WORK PROGRAMMES



7.1 Steering Committee for Project Management



SOCAR and Contractor shall, not later than thirty (30) days from the commencement of the Development and Production Period establish the Steering Committee.



The functions of the Steering Committee shall include but not be limited to:



(a) overseeing Petroleum Operations;



(b) examining, revising and approving Contractor’s Annual Work Programmes and Budgets;



(c) overseeing the accounting of costs and expenses in accordance with the Accounting Procedure;



(d) in case of necessity establishing sub-committees of the Steering Committee and reviewing the work of such subcommittees;



(e) reviewing, revising and approving training programmes;



(f) reviewing and approving the abandonment plan and cost of abandonment operations pursuant to Article 16.2.



7.2 Steering Committee Procedure



The following rules shall apply with respect to the Steering Committee and meetings thereof:



(a) The Steering Committee shall be comprised of an equal number of members from SOCAR and Contractor. Initially the Steering Committee shall consist of two (2) representatives appointed by SOCAR and two (2) representatives appointed by Contractor (one (1) representative from each Contractor Party). A person cannot represent both SOCAR and SOA. If at any time the number of Contractor Parties increases or decreases the number of representatives to be appointed by each of SOCAR and Contractor shall be increased or reduced, as the case may be, to equal the number of Contractor Parties, provided, however, that the number of representatives to be appointed by each of SOCAR and Contractor shall never be less than two (2). SOCAR and Contractor shall each be entitled to appoint an alternate for each of their representatives, who shall be entitled to attend in place of the designated



[Azerbaijani Text] [Russian Text] 19representatives, such alternate to be considered a representative for all purposes at such Steering Committee meetings. SOCAR and Contractor shall each advise the other of the names of its representatives and their alternates within twenty (20) days following commencement of the Development and Production Period. Such representatives and their alternates may be replaced by SOCAR and Contractor, respectively, upon written notice to the other.



(b) SOCAR and Contractor shall each have one (1) vote to cast on any matter submitted for approval by the Steering Committee. For this purpose, each of SOCAR and Contractor shall give written notice to the other specifying the identity of the individual representative (and, if desired, his alternate), who shall be authorised to cast such vote on its behalf. Such designated individuals may be changed from time to time upon written notice by SOCAR or Contractor, as the case may be. No vote cast or purported to be cast by any representative other than said designated individuals (or, in the absence of either, his designated alternate) shall be considered as the official vote of either SOCAR or Contractor, as the case may be.



(c) The chairman of the Steering Committee shall be appointed by SOCAR from one of its appointed representatives to the Steering Committee and shall preside over meetings of the Steering Committee.



(d) The secretary to the Steering Committee shall be appointed by Contractor from one of its appointed representatives to the Steering Committee and shall be responsible for:



(i) the production of an agenda before each meeting, such agenda to be agreed between SOCAR and Contractor; and



(ii) the production and circulation of minutes following each meeting, which minutes shall be agreed between the representatives of SOCAR and Contractor who are the representatives authorised to cast the votes in the Steering Committee.



(e) Subject to the provisions of Article 7.2(b), decisions of the Steering Committee shall require the affirmative vote of both SOCAR and Contractor.



(f) SOCAR and Contractor shall each be entitled to send advisers



[Azerbaijani Text] [Russian Text] 20and experts to meetings of the Steering Committee. Unless the Steering Committee agrees, the cost of such advisors and experts in attending the meetings shall not be Cost Recoverable.



(g) A quorum of the Steering Committee shall consist of at least three quarters (3/4) of the representatives from each of SOCAR and Contractor, including the two (2) individuals who have been designated by SOCAR and Contractor, respectively, as authorised to cast votes (or their alternates).



(h) The Steering Committee will meet at least two (2) times in a Calendar Year. Meetings shall be held in Baku, unless otherwise agreed. In the event that SOCAR and Contractor agree, the Steering Committee can take decisions without holding an actual meeting; provided that in the event of a teleconference or video conference the quorum requirements set forth in Article 7.2(g) have been complied with and in the event of a meeting via exchange of letters, faxes, or telexes, such letters, faxes and telexes are copied to all Parties. Such decisions shall be recorded in writing promptly thereafter and signed by the representatives of SOCAR and Contractor who are authorised to cast the respective votes of SOCAR and Contractor. Except in an emergency, all Parties shall be given not less than fifteen (15) days advance notice of each meeting, regardless of whether the meeting is in person, by teleconference, by letter, by fax, or otherwise, so that each Party may have the opportunity to contribute to the decision-making process.



(i) SOCAR and Contractor shall each have the right to call additional meetings of the Steering Committee upon fifteen (15) days prior written notice to each other.



7.3 Annual Work Programmes and Budgets



(a) At least two (2) months from the Effective Date, Contractor shall submit to SOCAR’s consideration and approval the first Annual Work Program and Budget which may upon the approval of the Rehabilitation and Production Program under Article 5, incorporate changes and amendments approved earlier by the Steering Committee.



At least three (3) months before the beginning of each Calendar Year during the Development and Production Period, Contractor shall prepare and submit, or cause to be prepared



[Azerbaijani Text] [Russian Text] 21and submitted, to the Steering Committee for approval an Annual Work Programme together with the related Budget in respect of the Petroleum Operations Contractor proposes to be carried out in such Calendar Year. The Steering Committee shall meet within thirty (30) days of receipt of the Annual Work Programme and Budget to consider same and any revisions thereto and to approve the Annual Work Programme and the Budget in its final form. It is agreed by SOCAR and Contractor that knowledge acquired as the work proceeds or from certain events may justify changes to the details of the Annual Work Programme; thus Contractor may at any time propose to the Steering Committee an amendment to the Annual Work Programme and Budget. Except as provided in this Article 7.3 and in Article 7.4, Contractor shall not conduct any operations which deviate materially from the applicable Annual Work Programme and Budget without the prior consent of the Steering Committee. If necessary to carry out an annual Work Programme, Contractor is authorised to make expenditures during the relevant Calendar Year that are in excess of the Budget adopted therefore so long as an excess expenditure does not exceed ten (10) percent of the Budget item; provided that the cumulative total of all excess expenditures for a Calendar Year does not exceed ten (10) percent of total Budget, unless approved by the Steering Committee which approval shall not be withheld where the expenditures have been demonstrated to be reasonable and necessary.



(b) In the event the Annual Work Programme and Budget has not been approved by the Steering Committee in the case of the first Annual Work Programme and Budget within sixty (60)

days following the formation of the Steering Committee and in the case of each subsequent Annual Work Programme and Budget by the first day of the Calendar Year to which it relates, Contractor shall be entitled (but not obligated) to carry out Petroleum Operations in accordance with some or all of its proposed Annual Work Programme and Budget until such time as the Annual Work Programme and Budget is agreed by the Steering Committee or any dispute relating to the Annual Work Programme and Budget has been resolved by reference to arbitration in accordance with the Arbitration Procedure.



As soon as agreement on an Annual Work Programme and Budget is reached by the Steering Committee or the decision of the arbitrators is rendered, Contractor shall amend the then



[Azerbaijani Text] [Russian Text] 22current and/or next following Annual Work Programme and Budget, as appropriate, to conform with such agreement or decision; provided that Contractor shall not be obligated to undo work already performed, may complete any work in progress to the extent Contractor deems necessary and that all costs incurred by Contractor in performing Petroleum Operations under its proposed Annual Work Programme and Budget shall be deemed to be Petroleum Costs subject to Cost Recovery under this Agreement. The foregoing notwithstanding, Contractor shall not be entitled to Cost Recovery of any costs incurred under any portions of the proposed Annual Work Programme as identified in the written minutes of the Steering Committee meeting at which the proposed Annual Work Programme was considered and which were not approved by the Steering Committee and for which the arbitration award is issued in favour of SOCAR; except that in all cases Contractor shall be entitled to Cost Recovery of the following items:



(i) ongoing commitments of Contractor, including contracts entered into prior to the initiation of any such arbitration; and



(ii) work Contractor considers necessary for the protection of the reservoir and equipment and facilities; and



(iii) work Contractor considers necessary for the protection of the environment, health and safety.



7.4 Emergency Measures



Notwithstanding any provision of this Agreement to the contrary, in the case of an accident or other emergency (or anticipated emergency), Contractor shall take all measures reasonably considered necessary by Contractor for the protection of life, health, the environment and property. The costs of taking such measures shall be included automatically as an approved addition to the then current Budget and shall be deemed to be Petroleum Costs subject to Cost Recovery under this Agreement, unless such accident or other emergency (or anticipated emergency) was the result of Contractor's Willful Misconduct.



Page 23

ARTICLE 8



OPERATING COMPANY, PERSONNEL

AND TRAINING



8.1 Operating Company



(a) As soon as practicable after the Execution Date Contractor shall create the Operating Company owned by all Contractor Parties in proportion to their Participating Interests (“Joint Operating Company”) acting as operator on behalf of the Contractor Parties to carry out petroleum operations. The Contractor Parties shall be represented on the board of directors of the Joint Operating Company in proportion to their Participating Interests.. The Operating Company shall employ personnel seconded from all Contractor Parties in proportion to their respective Participating Interests, and such personnel shall work as an integrated team under the management of the Joint Operating Company.



(b) The Operating Company may be incorporated or created outside of the Azerbaijan Republic but shall be registered to do business in the Azerbaijan Republic in accordance with the Azerbaijan law.



(c) Contractor shall have, upon the prior agreement of SOCAR, the right in the manner and in the cases defined in the joint operating agreement in which the Contractor Parties must enter promptly after the Effective Date (“Joint Operating Agreement”), to substitute the Joint Operating Company by appointing in writing the Operating Company, which is an Affiliate of one of the Contractor Parties. Contractor shall ensure the proper and orderly handover of responsibilities from an outgoing Joint Operating Company to an entering Operating Company.



8.2 Responsibilities of Operating Company



(a) The responsibilities of the Operating Company shall be the management, co-ordination, implementation and conduct on behalf of Contractor of the day to day Petroleum Operations, and such other functions, as may be delegated to it from time to time by Contractor.



(b) The Operating Company shall have, to the extent authorised by Contractor, the right to subcontract any day to day work required to implement any Annual Work Programme.



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8.3 Organisation



The Operating Company personnel shall be kept to the minimum practicable number, and shall include management personnel, technical professionals, operating and maintenance personnel and administrative personnel required to carry out the day to day Petroleum Operations on behalf of Contractor.



8.4 Decisions



(a) Decisions regarding the conduct of Petroleum Operations shall be made by the Contractor Parties participating in voting at the Contractor management committee in accordance with the voting mechanism agreed among them in the Joint Operating Agreement and the Parties agree that during the Development and Production Period the decisions of the Contractor management committee shall at the time of voting require the affirmative vote of the Contractor Parties owning collectively eighty (80) percent of the Participating Interest under the Agreement and participating interest under the Joint Operating Agreement, provided that the Contractor Parties shall develop special provisions for decisions to be taken on the matters regarding the implementation of the work to be carried by the Other Contractor Parties under Article 3.5 of this Agreement.



(b) SOA as a Contractor Party shall participate at all decision levels in the same way as the other Contractor Parties, including without limitation the Contractor management committee.



8.5 Procedures



The Operating Company shall be free to adopt such policies, practices and procedures as it deems necessary for the conduct of Petroleum Operations in accordance with this Agreement.



8.6 Status of Operating Company



The Operating Company shall be entitled to all of the benefits, waivers, indemnities and exemptions accorded to the Contractor Parties under this Agreement. The Operating Company shall have the right to freely use assets or equipment owned or used by the Contractor Parties in conducting Petroleum Operations on behalf of the Contractor Parties and to purchase assets or equipment and to use them in conducting Petroleum Operations. The Operating Company shall act only as operator hereunder upon Contractor Parties’ instructions and directions and shall not be entitled to any share of Petroleum produced and shall neither make a profit nor incur a loss. The Operating Company shall record all financial flows or other transactions of the Contractor Parties as passing through to the Contractor Parties in accordance with this Agreement as though the



Page 25

Operating Company did not exist as a commercial entity, and for all purposes the amount of its Taxable Profit shall be zero (0). During the Development and Production Period Contractor shall bear all costs of the Operating Company related to the conduct of internal inspections, inventories, audits, reorganisations, structural changes and the like and such costs shall not be Cost Recoverable unless the conduct of such internal inspections, inventories, audits, reorganisations, structural changes and the like is approved by the Steering Committee.



8.7 Personnel



(a) Notwithstanding the provisions of this Article 8.7, and Article Article 8.1 and 8.3 of the Agreement to the contrary, Contractor shall ensure that the Operating Company will employ personnel of the “Gum Adasi” Oil and Gas Production Division (OGPD), being a structural unit of SOCAR, directly engaged with the production operations in the Zykh and Govsany fields at the Effective Date and dismissed as the result of a transfer to Contractor of the Zykh and Govsany fields after the Effective Date. Such employment shall be in accordance with the existing law of the Azerbaijan Republic.



(b) Contractor and its Sub-contractors and the Operating Company and its Sub-contractors, shall have all rights granted by the existing law of the Azerbaijan Republic to the employer in relation to its employees including the right to employ such personnel as in Contractor’s and its Sub-contractors’ and the Operating Company’s and its Sub-contractors’ respective opinions are required for the purpose of carrying out Petroleum Operations.



(c) Contractor shall, to the extent reasonably practical, require the Operating Company to give preference, as far as is consistent with efficient operations, to employing citizens of the Azerbaijan Republic in the performance of Petroleum Operations, provided that such citizens have the required knowledge, qualifications and experience to meet the requirements of the Operating Company. Such citizens shall be eligible for training in accordance with Article 8.8. With respect to the employment of citizens of the Azerbaijan Republic, Contractor agrees as follows:



[Azerbaijani Text] [Russian Text] 26 (i) the Operating Company shall provide SOCAR from time to time with a list showing the numbers and job specifications for citizens of the Azerbaijan Republic which it estimates that it may require. In addition, the Operating Company shall require its Sub-contractors to provide SOCAR from time to time with a list showing the numbers and job specifications for its employees that they estimate they may require. The number of positions and qualifications required may be modified by the Operating Company during the period said list is under review by SOCAR, due to business need (as determined by the Operating Company) or as a result of one or more positions becoming filled by the internal reassignment of Azerbaijani citizens already employed by the Operating Company or its Sub-contractors;



(ii) SOCAR shall, within thirty (30) days of receipt of such list, provide the Operating Company and such Subcontractors with a list of candidates recommended by SOCAR;



(iii) persons from the list provided by SOCAR shall enjoy a priority consideration pertaining to any other citizen of the Azerbaijan Republic for employment by the Operating Company and the Sub-contractors if they meet the requirements of the Operating Company or such Sub-contractors;



(iv) in the event that vacant positions remain in the Operating Company or Sub-contractors’ organisations, SOCAR shall within two (2) weeks of receipt of vacant positions, provide the Operating Company or such Subcontractors an additional list of candidates recommended by SOCAR and if vacant positions still remain the Operating Company or such Sub-contractors shall be entitled to fill these vacant positions with such citizens of the Azerbaijan Republic as the Operating Company or such Sub-contractors choose;



(v) in the event that the candidates selected independently by the Operating Company and such Sub-contractors include SOCAR employees, then such persons shall be hired by the Operating Company or such Subcontractors after consultation with SOCAR;



(vi) overall target manning levels of citizen employees of



[Azerbaijani Text] [Russian Text] 27the Azerbaijan Republic pertaining to Petroleum Operations shall be as follows:



Citizens of the Azerbaijan Republic



From the Effective Date



Professionals not less than 70%

Non-professionals not less than 90%



Five (5) years after the Effective Date



Professionals not less than 90%

Non-professionals not less than 95%



(d) Subject to Article 8.7(c), Contractor, Operating Company and any Sub-contractors are hereby authorised and shall be free, throughout the term of this Agreement, to determine the number and selection of all employees to be hired by them in connection with the conduct of Petroleum Operations. All citizens of the Azerbaijan Republic hired by Contractor, the Operating Company and any Sub-contractors shall be hired pursuant to written employment contracts which shall specify the hours of work required of the employee, the compensation and benefits to be paid or furnished by the employer and all other terms of employment. Such employees may be located wherever Contractor, the Operating Company or Subcontractors deem appropriate in connection with the Petroleum Operations in accordance with such written employment contracts entered into with them. Contractor, the Operating Company and Sub-contractors shall be free to implement recruitment, dismissal, performance review and incentive compensation programmes and practices (both with respect to foreign expatriate employees and citizens of the Azerbaijan Republic) that are customary in international Petroleum operations and in Contractor's, the Operating Company's and Sub-contractor's experience and judgement are best able to promote an efficient and motivated workforce.



8.8 Training



[Azerbaijani Text] [Russian Text] 28Contractor shall provide training (including retraining) for personnel citizens of the Azerbaijan Republic with respect to the Petroleum Operations. Expenditures by Contractor pursuant to this Article 8.8 shall be approved as part of the relevant Annual Work Programme and Budget and shall be included as Petroleum Costs, however the aforesaid expenditures less than one hundred fifty thousand (150,000) Dollars in any year shall not be Cost Recoverable. Expenditures in excess of one hundred fifty thousand (150,000) Dollars in any year shall be included as Petroleum Costs and shall be Cost Recoverable.



[Azerbaijani Text] [Russian Text] 29

















ARTICLE 9



REPORTS AND ACCESS TO PETROLEUM

OPERATIONS





9.1 Reports and Records





Contractor shall keep and submit reports and records of Petroleum

Operations as follows:





(a) Contractor shall record, in an original or reproducible form of

good quality and on tape or other media where relevant, all

geological and geophysical information and data relating to the

Contract Area obtained by Contractor in the course of

conducting Petroleum Operations thereon and shall deliver a

copy of all such information and data, including the

interpretation thereof and logs and records of wells, and any

other information obtained by Contractor consistent with

generally accepted international Petroleum industry standards,

to SOCAR as soon as practicable after the same has come into

the possession of Contractor.









(b) Contractor shall keep logs and records of the drilling,

deepening, plugging or abandonment of wells consistent with

generally accepted international Petroleum industry practice

and containing particulars of:







(i) the strata through which the well was drilled;



(ii) the casting, drill pipe, tubing and down-hole equipment

run in the well and modifications and alterations

thereof;



(iii) Petroleum, water and valuable mineral resources

encountered;



and any other information consistent with generally accepted

international Petroleum industry standards.







(c) The information required by Article 9.1(b) above shall be

submitted to SOCAR in the form of well completion reports

within ninety (90) days from completion of the well in

question.







(d) Contractor may if necessary remove from the Azerbaijan

Republic, for the purpose of laboratory examination or









30



































analysis, petrological specimens (including cores

and cuttings) or samples of Petroleum found in the

Contract Area and characteristic samples of the

strata or water encountered in a well and seismic

data on tape or other media. Upon request,

Contractor will provide SOCAR with copies or

equivalent samples and specimens of the materials

which the Contractor proposes to remove from the

Azerbaijan Republic.



(e) Contractor shall supply to SOCAR:



(i) daily reports on drilling operations and weekly

reports on field geophysical surveys as soon as

they are available;



(ii) within fifteen (15) days after the end of each

Calendar Quarter, a report on the progress of

Petroleum Operations during the preceding

Calendar Quarter covering:



(1) description of the Petroleum Operations

carried out and the factual information

obtained including Petroleum production data

from the Contract Area overall and on a well

by well basis; and



(2) a description of the area in which

Contractor has operated; and



(3) a map indicating the location of all wells

and other Petroleum Operations;



(iii) within three (3) months of the end of each

Calendar Year, an annual report summarising the

matters specified in paragraph (ii) above for

the preceding Calendar Year;



(iv) reports on completion of major elements of

Petroleum Operations or unforeseen events and

other reports requested by the Steering

Committee. Additionally Contractor will inform

SOCAR of all discoveries other than of

Petroleum, such as discoveries of non-Petroleum

natural resources.





The daily and weekly reports required to be

submitted to



31



SOCAR pursuant to Article 9.1(e)(i) shall be submitted in the original language of the reports and all other reports and records required to be submitted to SOCAR pursuant to this Article 9.1 shall be submitted to SOCAR in the English and Azeri languages.



9.2 Access to Petroleum Operations



Duly authorised representatives of SOCAR may on not less than three (3) days notice in writing inspect at justified intervals and at reasonable times work, facilities, equipment and materials relating to the Petroleum Operations, provided that such inspection shall not unreasonably interfere with or delay the conduct of Petroleum Operations.



Page 32

ARTICLE 10



USE OF LAND AND SEA BEDS



SOCAR shall make available to Contractor, at no cost to Contractor, the use of any land and sea beds which SOCAR utilises legally l as necessary to carry out Petroleum Operations, (provided such use by Contractor does not interfere unreasonably with SOCAR's use thereof and further provided that if such use by Contractor results in expense for SOCAR, Contractor shall reimburse SOCAR for such expense, without creating any profit directly or indirectly for SOCAR), and SOCAR shall within the full limits of its authority use its best lawful endeavours to make available, at no cost to Contractor, all other land owned by the state and located beyond the land which SOCAR utilises legally as necessary to carry out Petroleum Operations including, but not limited to, the construction, laying, operating and maintaining of pipelines, cables and equipment. Contractor shall have the right to construct and maintain, above and below any such lands and sea beds, the facilities necessary to carry out Petroleum Operations. Land allocation (including inter alia such land allocation as transferred by SOCAR to Contractor under this Article 10) and location of facilities constructed by Contractor on such land shall be in accordance with Azerbaijan legislation regarding land use restrictions, except as may be modified by this Agreement.



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ARTICLE 11



USE OF FACILITIES



11.1 SOCAR Facilities



Contractor and the Operating Company shall be granted the exclusive right to use for Petroleum Operations, without charge by SOCAR, the capital assets (including but not limited to production equipment, vehicles, wells, pumps, storage facilities, tools, generators, compressors, pipelines, offices, warehouses, buildings, rigs, yards, roads, infrastructure, radios, tubular goods, supplies, materials, facilities, equipment and facilities for social purposes) used by SOCAR and OGPD before its liquidation in and for the purposes of carrying out Petroleum Operations in the Zykh/Govsany Block, provided that SOCAR shall retain the right of ownership to such capital assets and on the condition that the said capital assets shall not be used by SOCAR in their internal operations.



In the event that Contractor materially refurbishes, upgrades or improves any facilities that are under SOCAR’s direct or indirect ownership or control, including inter alia infrastructure, vessels, drilling rigs, means of transportation, supply bases, warehouses and port facilitites, then SOCAR shall ensure that Contractor has prior right to use such facilities as may be necessary for the purpose of carrying out Petroleum Operations.



As soon as possible after the Execution Date and before the Effective Date, Contractor and SOCAR shall inventory all capital assets to be transferred by the OGPD to Contractor being on the books of OGPD before its liquidation and/or within the Contract Area, and used by SOCAR and OGPD in and for the purposes of carrying out Petroleum Operations in the Zykh/Govsany Block until the Execution Date, and the Parties shall make an immediate orderly transition from use of capital assets by OGPD to use of capital assets by the Operating Company.



11.2 SOCAR Assistance



(a) SOCAR shall within the full limits of its authority use its best lawful endeavours with respect to Governmental Authorities and Third Parties to provide Contractor access for its share of Petroleum to all necessary transportation, treatment and export facilities and infrastructure in the Azerbaijan Republic on terms no less favourable to Contractor than those granted to, or



Page 34











agreed with, any other bona fide arm's length user of such

facilities and infrastructure.



(b) SOCAR shall within the full limits of its authority use all

lawful reasonable endeavours, with respect to Governmental

Authorities and Third Parties, to assist Contractor in obtaining

such rights, privileges, authorisations, approvals and other

agreements from authorities and jurisdictions, outside the

territory of the Azerbaijan Republic as Contractor shall

reasonably deem necessary for Petroleum Operations and/or as

may be required by such authorities and jurisdictions, but shall

not be responsible if such rights, privileges, authorisations and

approvals are not obtained. Such agreements may include, but

need not be limited to, such matters as export pipeline rights of

way and operation rights, permits and undertakings with

respect to the transhipment, storage or staging of Petroleum

produced and saved from the Contract Area, materials,

equipment and other supplies destined to or from the territory

of the Azerbaijan Republic, and exemptions from national,

local and other taxes, transit fees, and other fees and charges on

Petroleum Operations being conducted in such other

jurisdictions.







(c) SOCAR shall within the full limits of its authority use all

reasonable lawful endeavours with respect to Governmental

Authorities and Third Parties, and shall be obligated with

respect to its Affiliates, joint ventures or enterprises in which

it has an interest and the right to control, manage or direct the

action of such companies, ventures or enterprises, to ensure

that Contractor has access to inter alia construction and

fabrication facilities, offshore infrastructures, supply bases

and vessels, warehousing, goods, services and means of

transportation in the Azerbaijan Republic provided that those

items are not subject to prior obligations to Third Parties and

that Contractor's use thereof does not interfere with the

existing operations of SOCAR and/or any Third Party. As

used herein, "control" shall mean the ownership or more than

fifty (50) percent of the shares authorised to vote at a general

meeting of shareholders, or the ability to pass or procure the

passing of a decision (whether by casting of votes or

otherwise) at a general meeting of shareholders, or at any

meeting of the executive or management body, of the

company, venture or enterprise. Such access shall be:











35

















































(i) with respect to facilities and services of Third Parties,

on terms which are no less favourable to Contractor

than those granted or agreed with any other bona fide

arms's length user of such facilities and services; and





(ii) with respect to facilities and services of SOCAR and

such Affiliates, joint ventures or enterprises in which

SOCAR has an interest and the right to control, manage

or direct the action thereof, at rates commensurate with

the quality and efficiency of such facilities and services,

which rates shall be the same as are available to

SOCAR and/or such Affiliates, joint ventures or

enterprises and as regard other terms no less favourable

to Contractor than those granted to or agreed with

SOCAR and/or such Affiliates, joint ventures or

enterprises.



11.3 Contractor Facilities



Contractor shall be responsible for the maintenance and repair of all

facilities controlled and operated by Contractor in connection with the

Petroleum Operations ("Contractor Facilities"). Fees from Third

Parties' access to Contractor Facilities shall be credited to the

Petroleum Operations Account. SOCAR shall have the right to use

excess capacity in Contractor Facilities provided such use does not

interfere with or adversely affect Petroleum Operations. Third Parties

may use such excess capacity on terms agreed with Contractor. Prior

to Zero Balance the priority of such use of Contractor Facilities shall

be first Contractor, second Third Parties, and finally SOCAR. SOCAR

shall pay a mutually agreed fee for such use to be credited to the

Petroleum Operations Account. After Zero Balance the priority shall

be first Contractor, second SOCAR and finally Third Parties.

SOCAR's use after Zero Balance shall be free of charge, except that

maintenance of Contractor Facilities, for the time being not used by

Contractor and being utilised exclusively by SOCAR, shall be on

terms to be mutually agreed. Notwithstanding anything to the contrary

in this Agreement, Contractor shall have the right to dispose of

equipment and facilities which are either obsolete or are nearing the

end of their useful economic life. Contractor shall notify SOCAR of

its intention to dispose of any such equipment and facilities (except in

the case of fixed assets to which the provisions of Article 16.3(a) shall

apply). Unless SOCAR elects, within thirty (30) days to assume

responsibility for and take delivery thereof, Contractor shall be free to















36dispose of any such equipment and facilities at the best price obtainable. Funds from such sales will be credited to the Petroleum Operations Account, and costs of disposal will be charged as Operating Costs. Notwithstanding any provision herein to the contrary, SOCAR and Contractor shall have equal priority to capacity in Contractor Facilities to transport Petroleum produced from the Contract Area in proportion to their rights to take Petroleum under this Agreement.



Page 37ARTICLE 12



CONTRACTOR'S RECOVERY OF PETROLEUM COSTS AND PRODUCTION SHARING



12.1 Use of Petroleum for Petroleum Operations



Contractor shall have the right to use free of charge Petroleum produced from the Contract Area for Petroleum Operations in accordance with generally accepted international Petroleum industry practice, including but not limited to reinjection to preserve the pressure of Petroleum reservoirs in the Contract Area. Contractor shall endeavour to minimise use of Petroleum for Petroleum Operations. For planning purposes Contractor shall provide in the Annual Work Programme an estimate of the amount of Petroleum it anticipates will be used for the optimum implementation of Petroleum Operations. Without prejudice to the said above, if during the implementation of the Annual Work Programme Contractor estimates that it will use more than ten (10) percent over and above the amount estimated, Contractor shall submit its proposals for the revised estimate to the Steering Committee for its review and approval.



12.2 Cost Recovery for Petroleum Operations



(a) Contractor shall be entitled to the recovery of its Petroleum Costs from Total Production as follows:



(i) all Operating Costs shall first be recovered;



(ii) all Capital Costs shall then be recovered from a maximum of fifty (50) percent of Crude Oil and fifty (50) percent of Non-associated Natural Gas remaining out of Total Production after deduction of Crude Oil and Non-associated Natural Gas required to recover Contractor's Operating Costs ("Capital Cost Recovery Petroleum").



(b) Accounting of costs to be recovered in accordance with Article 12.2(a) shall be in a manner consistent with the Accounting Procedure.



(c) Cost Recovery shall be calculated on a Calendar Quarter basis.



(d) (i) At the end of each Calendar Quarter, Finance Costs shall be applied to any unrecovered Capital Costs;



Page 38

(ii) Finance Costs in respect of unrecovered Capital Costs for each Calendar Quarter shall, at the end of each Calendar Quarter, be aggregated with the unrecovered balance of Capital Costs at that date and thereafter be recovered as Capital Costs.



(e) Notwithstanding the foregoing, Finance Costs shall not be applied to any unrecovered Capital Costs before the Calendar Quarter following such Calendar Quarter in which the average level of daily rate of Crude Oil produced from the Contract Area within ninety (90) consecutive days is at least one point five (1.5) times the average level of daily rate of Crude Oil produced from the Contract Area in 2005.



(f) Contractor shall have the continuing right to carry over to subsequent Calendar Quarters accumulated Petroleum Costs which are Cost Recoverable but which have not been recovered in previous Calendar Quarters.



(g) To the extent that the unrecovered accumulated Capital Costs incurred or carried forward in any Calendar Quarter are less than the value of the Capital Cost Recovery Petroleum available for Cost Recovery purposes during such Calendar Quarter, then the unused Capital Cost Recovery Petroleum shall be treated as additional Profit Petroleum.



12.3 Transfer of Title



Cost Recovery by Contractor shall be achieved by transferring from SOCAR to Contractor title at the Delivery Point to quantities of Crude Oil and Non-associated Natural Gas of equivalent value (as determined pursuant to Article 15.1) to the Petroleum Costs to be recovered in accordance with Article 12.2.



12.4 Profit Petroleum



The balance of Total Production remaining after deducting the quantities of Crude Oil and Non-associated Natural Gas necessary to enable recovery of Operating Costs and the portion of Capital Costs Recovery Petroleum used to recover accumulated Capital Costs (as provided in Article 12.2) ("Profit Petroleum"), shall be calculated on a Calendar Quarter basis and shall be shared between SOCAR and Contractor according to the R Factor model below.



Page 39

Beginning at the Effective Date the value of the R Factor in respect of Calendar Quarter (n+1) shall be determined at the end of Calendar Quarter (n) in accordance with the procedure below:



R (n + 1) = (CCRn +FCn + PPLn) / (CCSn)



Where:

CCRn | means Contractor's Capital Costs recovered in the nth Calendar Quarter;

FCn | means Contractor’s Finance Costs recovered in the nth Calendar Quarter;

PPLn | means the value of Contractor's share of Profit Petroleum lifted in the nth Calendar Quarter;

CCSn | means Contractor's Capital Costs incurred in the nth Calendar Quarter;

n | means the index number of the relevant Calendar Quarter;

 | means the cumulative arithmetic sum of the items to the right of the  symbol up to and including Calendar Quarter (n).



The R Factor shall be applied to the Profit Petroleum Sharing Table below to find the percentage split between SOCAR and Contractor of Profit Petroleum in Calendar Quarter (n+1).



Profit Petroleum Sharing Table

R Factor Band | SOCAR Share (%) | Contractor Share (%)

0.00 < R < 1.25 | 40.0 | 60.0

1.25 < R  1.75 | 50.0 | 50.0

1.75 < R  2.00 | 70.0 | 30.0

2.00 < R  2.50 | 80.0 | 20.0

2.50 < R < 2.75 | 85.0 | 15.0

2.75 < R < 3.00 | 87.5 | 12.5

3.00 < R | 90.0 | 10.0



12.7 Title to Profit Petroleum



Page 40



































































































Title to Contractor's share of Profit Petroleum shall be out of Crude

Oil and Non-associated Natural Gas and shall be transferred to

Contractor at the Delivery Point.



















































































41



































































ARTICLE 13



LOCAL MARKET OIL



13.1 Contractor’s Obligation for Sale of Local Market Oil



Contractor shall have the obligation to sell annually to SOCAR the amount of Crude Oil (“Local Market Oil”), under the quarterly schedule to be annually approved by the Parties together with the Annual Work Program and Budget, provided that the first schedule shall be agreed between the Parties within sixty (60) days following the Effective Date calculated in accordance with the procedure below:



first year| – fifty five thousand (55.000) Tonne

second year | – fifty thousand (50.000) Tonne

third year | – forty five thousand (45.000) Tonne

forth year | – forty thousand (40.000) Tonne.



Any costs associated with transportation of Local Market Oil beyond the Delivery Point shall be included in Operating Costs.



Each of the Contractor Parties shall quarterly sell to SOCAR at the Delivery Point such portion of Local Market Oil in proportion to such Contractor Party’s share of the total amount of Crude Oil received by Contractor at the Delivery Point in such Calendar Quarter.



SOCAR shall make its best endevours to pay, within thirty (30) days of receipt of an invoice, to each Contractor Party the value of Local Market Oil sold in such Calendar Quarter, in agreed currency and at the price of Crude Oil established by the Governmental Authorities for local market at the date of such sale.



13.2 Underlift of Local Market Oil



(a) In the event of failure by Contractor of its obligations set forth in Article 13.1 (“Shortfall”) during the Calendar Quarter according to the schedule agreed by the Parties which constitutes a Material Breach by Contractor of its obligations, the Shortfall shall be paid back by Contractor in full in the next Calendar Quarter following such Calendar Quarter (i) with Crude Oil of similar quality or any other quality agreed by



Page 42

SOCAR; or (ii) in any other order agreed by the Parties. If Contractor fails to pay back the Shortfall as set forth in this Article 13.2 (a), such failure shall constitute a Material Breach of this Agreement.





(b) In the event of Shortfall within two (2) consecutive Calendar Quarters and failure by Contractor to pay back the Shortfall, in pursuant to Article 13.2(a), SOCAR shall have the right to terminate this Agreement with respect to the Contract Rehabilitation Area in accordance with the procedure and terms set out in Article 31.1(b).



13.3 SOCAR’s Right to Suspend Local Market Oil Delivery



Notwithstanding any other provision of Article 13, SOCAR shall be entitled at its sole discretion to suspend Local Market Oil delivery. In such case, SOCAR shall notify Contractor in writing within thirty (30) days before the Calendar Quarter in which SOCAR desires to suspend Local Market Oil delivery. If SOCAR elects to resume Local Market Oil delivery thereafter, SOCAR shall notify Contractor in writing within sixty (60) days before the Calendar Quarter in which SOCAR desires to resume Local Market Oil delivery. For the avoidance of doubt, in respect to any Calendar Quarter in which the delivery of quantities of Local Market Oil has been suspended by SOCAR in accordance with this Article 13.3, the Contractor shall have no obligation to make-up such quantities in later Calendar Quarters and no Shortfall shall occur in respect of such Calendar Quarter.



13.4 Contractor’s Right to Suspend Local Market Oil Sales



If any amount payable by SOCAR pursuant to Article 13.1 remains unpaid for two (2) consecutive Calendar Quarters, then Contractor shall be entitled to suspend sales of Local Market Oil to SOCAR under this Article 13. Upon SOCAR paying the outstanding amount, Contractor shall not more than ninety (90) days thereafter resume sales of Local Market Oil to SOCAR in accordance with the provisions of this Article 13. For the avoidance of doubt, in respect of any Calendar Quarter in which the sale of quantities of Local Market Oil has been stopped by Contractor in accordance with this Article 13.4, the Contractor shall have no obligation to make-up such quantities in later Calendar Quarters and no Shortfall shall occur in respect of such Calendar Quarter.



Page 43

[no text]



44











ARTICLE 14



TAXATION





14.1 General



(a) Except for the Profit Tax obligation described in this Article

14, the Contractor Parties shall not be subject to any Taxes of

any nature whatsoever arising from or related, directly or

indirectly, to Hydrocarbon Activities.







(b) It is acknowledged that Double Tax Treaties shall have effect

to provide more favourable conditions for taxation.





(c) For the purposes of this Article 14 the following expressions

shall have the meanings ascribed to them below:



(i) "State Budget" means consolidated Republican and

local budgets or such other budgets as may be created

by Governmental Authority pursuant to the applicable

law of the Azerbaijan Republic for the purposes of

taxation.





(ii) "Fixed Assets" shall include all assets which it is usual

to include in the Contractor Party's tax balance sheet

under the heading of fixed or intangible asset (other

than Buildings, as described in Article 14.2(1)(i)(bb)),

each of which has an anticipated useful life of more

than one (1) year and the total value of each asset

exceeds the following limit: the limit for the Calendar

Year in which this Agreement is executed shall be five

thousand (5,000) Dollars and for each subsequent

Calendar Year, the limit shall be increased by four (4)

percent straight line basis respectively.





(iii)"Hydrocarbon Activities" means all Petroleum

Operations and all other activities carried out in

connection with this Agreement by the Contractor

Party, directly or through the Operating Company,

relating to the rehabilitation, exploration, development

and production of Petroleum from the Contract Area,

including processing Petroleum and further storage

and sale of the products processed thereof inside and

outside of the Azerbaijan Republic, whether such

activities are performed in the Azerbaijan Republic or

elsewhere. Each Contractor Party shall maintain

separate books and accounts for its respective

Hydrocarbon Activities.











45

















































(iv) "Tax Authority" means the Ministry on Taxes of the

Azerbaijan Republic or any successor thereto appointed

by the Ministry on Taxes of the Azerbaijan Republic.



(v) "Profit Tax Rate" is a rate of twenty seven (27) percent

which is the applied Profit Tax Rate existing in the

Azerbaijan Republic on the day of execution of this

Agreement and which shall remain fixed for the entire

term of this Agreement.



14.2 Profit Tax



(a) Each Contractor Party shall be severally liable for Profit Tax in

respect of its Hydrocarbon Activities. In the event of any

conflict between the provisions of internal law of the

Azerbaijan Republic and those of this Agreement, the

provisions of this Agreement shall govern. Each Contractor

Party shall be liable for payment of Profit Tax in connection

with its business activities in the Azerbaijan Republic that are

not related to Hydrocarbon Activities, under the applicable

laws and regulations of the Azerbaijan Republic.



(b) It is specifically acknowledged that the provisions of this

Article 14 shall apply individually to each Contractor Party and

govern the individual liability of a Contractor Party for the

Profit Tax which shall be based on such Contractor Party's

separate share of the items of Sales Income and Other Income

and Deductions.



(c) SOCAR shall in respect of each Calendar Year pay out of its

funds on behalf and in the name of each of the Contractor

Party's Profit Tax to the State Budget in Dollars including

estimated Profit Tax, and any interest, fines or penalties with

respect thereto which is attributable to the failure to pay any

such Profit Tax or estimated Profit Tax when it is due (except

interest resulting from a Contractor Party's failure to prepare a

required return by the due date therefor). SOCAR hereby

guarantees to Contractor Parties that payment of each of

Contractor Party's Profit Tax to the State Budget including any

interest, fines or penalties as aforesaid, shall have first priority

upon the proceeds of sale of Petroleum to which SOCAR is

entitled under this Agreement. SOCAR shall cause the Tax

Authority to issue to the appropriate Contractor Party official

receipts for such payments as provided for in Article 14.3(f).

Upon request of any Contractor Party, SOCAR shall provide to

such Contractor Party within ten (10) days of such request a









46





































document (in a form acceptable to all Contractor Parties) confirming direct evidence of the actual transfer of funds to the State Budget in satisfaction of SOCAR's obligation as described in the preceding sentence. For purposes of computing the liability, if any, of SOCAR for Taxes assessed on SOCAR's income or profits, SOCAR shall not be entitled to credit against its tax liability the Profit Tax paid by SOCAR on behalf and in the name of each of the Contractor Parties pursuant to this Article 14.2(c). SOCAR shall be entitled to receive and retain any Profit Tax refunds (other than refunds of Profit Tax, interest, and penalty sanctions paid by a Contractor Party) on behalf and in the name of each of the Contractor Parties and shall provide to the appropriate Contractor Party a statement showing that any such refund has been received.



(d) (i) On not less than thirty (30) days written notice each Contractor Party shall have the right at any time to have the payment by SOCAR of that Contractor Party's Profit Tax liability from funds generated by SOCAR's share of Profit Petroleum and SOCAR's commercial activity for any Calendar Year audited by a firm of internationally recognised independent accountants selected by the Contractor Party. Contractor Party shall bear the costs of such audit and such cost shall not be Cost Recoverable. Such audit may not relate to a Calendar Year which has been finally and conclusively determined in accordance with the procedure set out in Article 14.3(d). Such audit shall be conducted in such a fashion that it does not cause unreasonable inconvenience to SOCAR. SOCAR shall accord to the auditor reasonable access to such evidence as the auditor may require to satisfy the auditor as to full payment of Contractor Party's Profit Tax for any Calendar Year from funds generated by SOCAR,s commercial activities.



(ii) It is specifically acknowledged that Profit Petroleum sharing as set out in Article 12.4 shall be so determined to include Contractor Party's Profit Tax in SOCAR's share of Profit Petroleum from which SOCAR must pay such Contractor Party's Profit Tax to the State Budget as provided in Article 14.2.(c). Therefore, the payment



47of the Profit Tax by SOCAR on behalf and in the name of the Contractor under Article 14.2.(c) shall be treated by SOCAR and the Tax Authority as having been paid by the Contractor and as a complete satisfaction and release of the Contractor’s obligation to pay Profit Tax related to its Hydrocarbon Activities as set forth in Articles 14.2(a) and 14.2(b). Notwithstanding Contractor’s obligation to pay Profit Tax, the Tax Authority shall look solely to SOCAR for the payment of the Contractor’s Profit Tax, unless Contractor elects to make any Profit Tax payments according to the provisions of Article 14.2(d)(iii).



(iii) If SOCAR fails from time to time to pay a Contractor Party’s Profit Tax, including estimated Profit Tax, then Contractor Party shall have the right, individually and at its option, to elect to make payments of its Profit Tax, including estimated Profit Tax directly to the State Budget as provided for in Article 14.2(c). In such case the Contractor Party’s future entitlement to lift Profit Petroleum shall be increased, and SOCAR’s entitlement shall be correspondingly diminished, by a volume of equivalent value to such amount of Profit Tax, including estimated Profit Tax, paid by the Contractor Party. In the event that the non-payment by SOCAR of a Contractor Party’s Profit Tax, including estimated Profit Tax, continues for a period exceeding thirty (30) days from the due date for payment, the Contractor Party shall have the option of discharging its liability for all future payments of Profit Tax, including estimated Profit Tax, itself, and requiring that the terms of this Agreement shall be adjusted to re-establish the initial economic equilibrium of the Parties.



(e) Taxable Profit, or if such sum is negative Taxable Loss, of a Contractor Party for a Calendar Year shall be equal to the sum of the Sales Income, the Other Income received by the Contractor Party during the Calendar Year and Profit Tax Gross Up less Deductions. The terms Taxable Profit, Taxable Loss, Sales Income, Other Income, Profit Tax Gross Up and Deductions shall have the meaning ascribed to them in this Article 14.2.



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(f) Taxable Losses shall be carried forward to the next Calendar Year and set off against any available Taxable Profit in that Calendar Year and Taxable Losses shall be reduced accordingly. Any balance of Taxable Losses not so set off in that Calendar Year shall be carried forward without limitation to future Calendar Years until fully set off against Taxable Profit.



(g) Taxable Profit as reduced by Taxable Losses brought forward, shall be subject to Profit Tax at the Profit Tax Rate.



(h) Sales Income shall be defined as the amount of income derived during the Calendar Year by the Contractor Party from sales of Petroleum produced in the conduct of Hydrocarbon Activities. In the event such Petroleum is exchanged or swapped, then Sales Income shall be defined as the amount of income derived during the Calendar Year by such Contractor Party from sales of the Petroleum received in the exchange or swap. For purposes of this Article 14.2(h), Sales Income shall be determined by applying, in the case of arm's length sales (as defined in Article 15.1(d)(v)), the actual price realised by such Contractor Party, and, in the case of non arm's length sales, the principles of valuation as set out in Article 15.1 for such non arm's length sales.



(i) Other Income shall be defined as any amounts of cash received by a Contractor Party in the carrying on of Hydrocarbon Activities, whenever it was received in the Azerbaijan Republic or elsewhere, and such amounts shall include all Other Income received by the Operating Company and allocated to the Contractor Party under Article 8.6, including but not limited to the following:



(i) insurance proceeds; and



(ii) realised exchange gains; and



(iii) amounts received under Articles 16.3(a) and (b) from the Abandonment Fund; and



(iv) amounts received under Article 16.3(е) for distributions of excess funds in the Abandonment Fund; and



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(v) interest income; and



(vi) amounts received from suppliers, manufacturers or their

agents in connection with defective materials and

equipment; and



(vii) amounts received for the use of facilities or intellectual

property, compensation for services, sales of materials

or charter hire; and



(viii)refunds of Profit Tax originally paid by SOCAR, and

refunded to a Contractor Party, in the event SOCAR is

not compensated by such Contractor Party. SOCAR

shall be entitled to deduct such amount of Profit Tax in

computing its own taxable profit.







Provided, however, Other Income shall not include the

following amounts received by a Contractor Party:





(1) amounts received from sales of Petroleum; and



(2) except as otherwise provided in Articles 14.2(1)(iii) and

14.2(1)(iv), amounts received from sales or Fixed

Assets; and



(3) amounts received as loans, or funds contributed, to the

Contractor Party; and



(4) amounts received from sales of any of the Contractor

Party's rights and obligations arising under this

Agreement; and



(5) amounts received as refunds of Taxes (except as

provided in 14.2(i)(viii) above) or as dividends received

by a Contractor Party from an Affiliate of such

Contractor Party; and



(6) amounts received in reimbursement of or otherwise in

connection with expenditures incurred by a Contractor

Party (or an Affiliate thereof) in excess of the amounts

of such expenditures that have been treated as

Deductions by the Contractor Party for purposes of

computing Taxable Profit or Taxable Loss (in which

case the amounts of any such excess shall not thereafter









50









be treated as Deductions by the Contractor Party for such purposes and corresponding adjustments shall be made to the balance in Article 14.2(l) without including items defined in Article 14.2(k)(xii)); and



(7) amounts received which are not freely at the disposal of and do not increase the wealth of the Contractor Party; and



(8) income otherwise subject to Profit Tax.



(j) Profit Tax Gross Up shall be defined as an amount equal to the total amount of a Contractor Party's Profit Tax liability for a Calendar Year which is payable on behalf of the Contractor Party by SOCAR pursuant to Article 14.2(c) above; such Profit Tax liability being twenty four (24) percent of Contractor Party's Taxable Profit for such Calendar Year. Final net after tax income shall equal to Sales Income, plus Other Income, less Deductions. This Article 14.2 (j) shall be used to calculate the tax SOCAR should pay. If SOCAR fails to pay such tax and the terms of this Agreement are permanently changed so that Contractor Party pays instead, then Profit Tax Gross Up shall equal to zero (0).



(k) For purposes of determining the amount of the Taxable Profit or Taxable Loss of a Contractor Party for a Calendar Year, Deductions shall include all costs incurred by the Contractor Party in connection with the conduct of Hydrocarbon Activities, and such amount shall include all Deductions incurred by the Operating Company and allocated to the Contractor Party under Article 8.6, whether incurred in the Azerbaijan Republic or elsewhere (provided that no Deduction is accounted more than once), including but not limited to the following:



(i) the full amount of gross wages, salaries, and other amounts paid to all employees of the Contractor Party together with all costs incurred in connection with the provision of accommodation, food, public utilities, children's education, and travel to and from home country for employee and family; and



(ii) all costs of state social insurance of the Azerbaijan Republic, including, but not limited to contributions to the pension fund, social insurance fund, employment



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fund and medical insurance fund and all the other social payments for the employees; and



(iii) all exploration and appraisal costs; and



(iv) all costs associated with drilling wells (excluding the costs of any item of equipment or capital asset which is usually salvaged in accordance with practices generally accepted and recognised in the international Petroleum industry) related to the Contract Area; and



(v) all costs of transportation of Petroleum to the Point of Sale and of marketing, including without limitation pipeline tariffs, commissions and brokerages; and



(vi) all payments made under a lease agreement for the current year of the lease; and



(vii) all insurance costs; and



(viii) all personnel training costs; and



(ix) all costs connected with the activities of the offices or other places of business of each Contractor Party including management, research and development, and general administration expenses; and



(x) the cost of any item of equipment or asset which is not a Fixed Asset; and



(xi) all amounts of interest, fees and charges paid in respect of any debt incurred in carrying out the Hydrocarbon Activities and any refinancing of such debts, excluding (1) in the case of Affiliate debt, interest in excess of a rate which would have been agreed upon between independent parties in similar circumstances, and (2) additional interest which becomes payable because the debt is repaid after its due date for repayment; and



(xii) an allocable portion covering general administrative support provided by a Contractor Party’s Affiliates outside of the Azerbaijan Republic which results in an indirect benefit to Hydrocarbon Activities. Such support



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will include the services and related office costs of personnel performing administrative, legal, treasury, tax and employee relations, provision of expertise and other non-technical functions which cannot be specifically identified or attributed to particular projects. The allocable portion of such costs with respect to this Agreement for each Contractor Party for the Calendar Year shall be equal to the amount determined using the following formula:



a = (b/c) d



where:



a = the allocable portion for a Contractor Party for the Calendar Year;



b = the percentage Participating Interest of that Contractor Party at the end of the Calendar Year;



c = the sum of the percentage Participating Interests of the Contractor Parties at the end of the Calendar Year; and



d = the sum of the general and administrative overhead of the Contractor Parties for the Calendar Year.



The sum of the general and administrative overhead of the Contractor Parties for the Calendar Year shall be the amount determined using the following formula:



d = w + x + y + z



where:



d = the sum of the general and administrative overhead of the Contractor Parties for the Calendar Year;



w = five (5) percent of the sum of the Contractor Parties' Capital Costs for the Calendar Year, if any, up to fifteen million (15,000,000) Dollars;



x = two (2) percent of the sum of the Contractor Parties' Capital Costs for the Calendar Year from fifteen million (15,000,000) Dollars to thirty (30,000,000) million Dollars, if any;





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y = one (1) percent of the sum of the Contractor Parties' Capital Costs for the Calendar Year in excess of thirty million (30,000,000) Dollars, if any; and



z = one point five (1.5) percent of the sum of the Contractor Parties' Operating Costs for the Calendar Year; and



(xiii) all payments into the Abandonment Fund; and



(xiv) losses of materials or assets resulting from destruction or damage, assets which are renounced or abandoned during the Calendar Year, bad debts and payments made to Third Parties as compensation for damage; and



(xv) any other losses, including realised exchange losses, or charges directly related to Hydrocarbon Activities; and



(xvi) all other expenditures which the Contractor Party incurs in carrying out Hydrocarbon Activities; and



(xvii) all incidental costs incurred for the acquisition or occupation of land in connection with Hydrocarbon Activities; and



(xviii) all liabilities and related costs charged to the Contractor Party which are in excess of such Contractor Party’s Participating Interest share of such liabilities and related costs and which shall only be entered in the books and accounts of such Contractor Party;



(xix) amortization calculated as hereinafter provided in Article 14.2(l).



(l) (i) Amortisation Deductions shall be calculated as follows:





(aa) | Fixed Assets which are not described in (bb) below | twenty (25) percent per Calendar Year declining balance basis

(bb) Оffice buildings, warehouses, and similar constructions ("Buildings") | two point five (2.5) percent per Calendar Year straight line basis



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(cc) | Bonus Payments percent per referred to in Article 30 | ten (10) Calendar Year straight line basis



The amount of amortisation for expenditure on a Fixed asset shall be computed on the cost of the Fixed asset exclusive of VAT on goods purchased in Azerbaijan Republic. Any item which is treated as Deduction under Article 14.2 (k) shall not be amortised under Article 14.2(l).



(ii) All expenditures on Fixed assets described in Article 14.2 (l)(i)(aa) incurred during the Calendar Year shall be deemed to have been incurred on first (1st) July with the result that fifty (50) percent of the expenditure shall be added to the balance of the unamortised amounts brought forward from the preceding Calendar Year. The balance shall then be reduced by any amounts received from the disposal of Fixed assets to give an adjusted balance ("Adjusted Balance") which will then be amortised as follows:



Balance brought forward from preceding Calendar Year | x

Add fifty (50) percent of the expenditure incurred of Fixed assets during Calendar Year | x

Less the full amount of the actual proceeds from sales of Fixed assets during Calendar Year | (x)

Adjusted Balance | x

Less amortization: twenty five (25) percent of the Adjusted Balance | (x)

Add excluded fifty (50) percent Balance of expenditure Incurred on Fixed assets during the Calendar Year | x



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(iii) If in any Calendar Year, all Fixed assets in the Azerbaijan Republic used in Hydrocarbon Activities for the purposes of this Agreement are disposed of (including but not limited to a transfer pursuant to Article 16.1) then:



(aa) if the Adjusted Balance plus the "excluded fifty (50) percent balance of expenditure incurred on Fixed assets during the Calendar Year" is positive, the full amount shall be treated as a Deduction in that Calendar Year, or



(bb) if the Adjusted Balance plus the "excluded fifty (50) percent balance of the expenditure incurred on Fixed assets during the Calendar Year" is negative, the full amount shall be treated as Other Income in that Calendar Year.



(iv) There shall be treated as Other Income or Deductions the amount of gains or losses recognised by a Contractor Party during the Calendar Year from the sale, disposition or abandonment ("Disposition") of a Building computed as follows:



Proceeds (if any) from Building Disposition | x

Less: Adjusted Basis of Building | (x)

Gain/(Loss) on Building Disposition | x



The Adjusted Basis of such Building shall be calculated as follows:



Original Cost of the Building | x

Add cost of capitalized Improvements | x

Less accumulated amortization Deductions | (x)

Adjusted Basis of Buildings | x



(m) For purposes of computing a Contractor Party's Taxable Profit or Taxable Loss, all costs incurred by the Contractor Party in connection with Hydrocarbon Activities (including but not



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limited to costs incurred directly or indirectly in connection with technical work in the Azerbaijan Republic or elsewhere and costs incurred by representative offices in the Azerbaijan Republic of the Contractor Party) which were incurred prior to the Effective Date shall be deemed to have been incurred on such date. Notwithstanding the foregoing, direct or indirect costs of conducting the negotiation of this Agreement and in supporting medical, cultural or charitable activities prior to the execution of this Agreement shall not be included in computing the Contractor Party's Taxable Profit or Taxable Loss.



(n) A Contractor Party has the right to sell or transfer any Fixed assets which it owns at market prices without regard to book value of the Fixed assets.



(o) Should any Contractor Party assign all or any part of its Participating Interest in the Agreement, the assigning Contractor Party shall have the option to elect to have the assignee treat as Deductions for the Calendar Year in which the assignment occurs all, or a proportional part if only part is assigned, of the Taxable Loss, if any, of the assignor Contractor Party for such Calendar Year.



14.3 Profit Tax Accounting and Returns



(a) Each Contractor Party shall:



(i) maintain its tax books and records, and compute its Taxable Profit and Taxable Loss, exclusively in Dollars.



(ii) recognize items of Sales Income, Other Income and Deductions on accrue basis and in accordance with the cash receipts and disbursements method whichever is used in the Azerbaijan Republic as of the Effective Date.



(iii) draw up its tax financial statements and Profit Tax returns in Dollars and submit one set of accounts for the Calendar Year consisting of a tax balance sheet and profit and loss account, together with one Profit Tax computation for the Calendar Year reflecting its Hydrocarbon Activities.





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(iv) have its tax financial statements and Profit Tax return for each Calendar Year audited by an auditor appointed by the Contractor Party and who has relevant permits (licenses) to carry out such audits in the Azerbaijan Republic.



(v) submit such tax financial statements and Profit Tax returns for each Calendar Year together with an appropriate comment from the auditor to the Tax Authority no later than the fifteenth (15th) March of the following Calendar Year. In the case of preliminary Profit Tax return filing, Contractor Party shall have the right to file the final Profit Tax return within three (3) calendar months after the filing deadline.



(vi) beginning in the first Calendar Year in which it estimates it will earn a Taxable Profit, be liable for estimated Profit Tax for each Calendar Quarter based upon its estimate of its Taxable Profit for such Calendar Quarter and or the preceding Calendar Quarters in such Calendar Year. Estimated Profit Tax shall be paid in accordance with Article 14.2(c) to the State Budget on or before twenty-five (25) days following the end of the relevant Calendar Quarter. In calculating the estimated Profit Tax for a Calendar Quarter, each Contractor Party may utilise the Annual Work Program along with any other information which it deems appropriate.



(b) Upon filing the final Profit Tax return for a Calendar Year, estimated Profit Tax paid with respect to the Calendar Quarters during such Calendar Year shall be credited against the final Profit Tax as calculated on the final Profit Tax return. Any overpayment shall be refunded by the State Budget within forty five (45) days following the date the Contractor Party's final Profit Tax return (for such Calendar Quarter's or Quarters' estimated Profit Tax payment (s) is submitted. Any underpayment shall be paid by SOCAR to the State Budget in accordance with Article 14.2(c) within forty five (45) days following the date such final Profit Tax return is submitted. In any event, the final Profit Tax for a Calendar Year as calculated in the Profit Tax return shall be payable no later than twenty-fifth (25th) March of the following Calendar Year.



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(c) All estimated and final payments (and refunds of overpayments) of Profit Tax and any interest and penalty sanctions thereon as described in Article 14.3(d) below shall be made in Dollars.



(d) (i) The filing of the Profit Tax returns and payment of Profit Tax thereunder for a Calendar Year shall be deemed to be a final and conclusive settlement of all Profit Tax liabilities for that Calendar Year upon the date sixty (60) months from the date the Profit Tax return for such Calendar Year was filed.



(ii) The Tax Authority shall have the authority to conduct an audit of each Contractor Party’s Profit Tax return for each Calendar Year. Upon completing such audit, the Tax Authority shall discuss any proposed adjustments with the Contractor Party and, where appropriate, issue a notice of additional Profit Tax due or a notice of refund. Any agreed underpayments or overpayments of Profit Tax shall be paid in accordance with Article 14.2(c) within ten (10) days following receipt by the Contractor Party of the appropriate notice. If the Contractor Party and the Tax Authority are unable to agree upon the amount of Profit Tax underpaid or overpaid, the issue shall be submitted to arbitration applying the principles contained in Article 25.3.



(iii) Upon a final determination that there has been either an underpayment or overpayment of Profit Tax on the Contractor Party's final Profit Tax return for a Calendar Year, SOCAR shall as provided in Article 14.2(c), pay to the State Budget (or, in the case of a refund of an overpayment, receive from the State Budget) interest on the amount of the underpayment or overpayment at the rate of LIBOR prevailing on the day before payment plus four (4) percent. Such interest shall be computed from twenty-fifth (25th) March in the Calendar Year the final Profit Tax return was filed until the date the Profit Tax is paid or refunded.



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(iv) In addition to interest payable as computed under (iii) above, a Contractor Party shall be subject to only the following penalty sanctions with respect of Taxes:



(aa) if a Contractor Party fails to file a final Profit Tax return, it shall be liable for a penalty of one hundred and ten (110) percent of the Profit Tax required to be paid with such Profit Tax return.



(bb) if the amount of Profit Tax due as shown on the final Profit Tax return for a Calendar Year was understated due to fraud by the Contractor Party, it shall be liable for a penalty of two hundred (200) percent of the amount of the understatement. The same penalty shall apply to a Contractor Party or Foreign Sub -contractor which commits a fraud resulting in a failure to withhold tax under Articles 1 4.4 or 1 4.5.



(cc) any decision of the Tax Authority relating to paragraphs (aa) and (bb) hereabove may be rejected by the Contractor Party and, if necessary any dispute shall be settled by arbitration in accordance with the principles of Article 2 5.3.



(dd) In the event that after audit it is determined that a Contractor Party, the Operating Company or a Sub -contractor has failed to withhold the correct amount of tax from payments made to a Foreign Sub -contractor, (other than a case to which (bb) above applies) the amount of such underpayment or overpayment shall be paid by the withholding party to the State Budget, or by the State Budget to the withholding party within ten (10) days of the final determination of such underpayment or overpayment. Interest shall be payable at a rate of LIBOR prevailing on the day before payment plus four (4) percent. Such interest shall be calculated from the date on which the tax or refund should have been paid until the date it is actually paid. .



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(e) Each Contractor Party shall submit its tax financial statements and Profit Tax returns to the Tax Authority. Estimated and final Profit Tax payments shall be made to the State Budget by SOCAR, for and on behalf of each Contractor Party.



(f) The Tax Authority will issue to each Contractor Party official tax receipts evidencing the payment of estimated or final Profit Tax within thirty (30) days of any such payment. Such tax receipts shall state the date and amount of such payment, the currency in which such payment was made and any other particulars customary in the Azerbaijan Republic for such receipts.



14.4 Taxation of Foreign Sub-contractors

(a) Foreign Sub-contractors shall be taxed in accordance with with below regulations.



(i) Foreign Sub-contractors providing work and services in connection with Hydrocarbon Activities in the Azerbaijan Republic shall be deemed to earn a taxable profit equal to twenty-five (25) percent of the payments received in respect of works and services (less reimbursable expenses) and they shall be subject to tax on the rate of twenty four (24) percent resulting in a total tax obligation of six (6) percent of such payments. Any person making such payments shall therefore withhold such tax from such payments at a rate of six (6) percent and shall pay such withheld tax to the State Budget within thirty (30) days from the end of the month in which the payment is made. Except as provided below, such taxes withheld shall fully satisfy such Foreign Sub-contractor’s Profit Tax compliance and liability for all such Taxes.



(ii) (ii) Each Foreign Sub-Contractor which sells goods to a Contractor Party, Operating Company or other Sub Contractor within the Azerbaijan Republic in connection with Hydrocarbon Activities, and receives payment of an amount in excess of the actual documented costs of the goods sold within the Azerbaijan Republic (“Mark-up”),



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which excess amount is not connected with work and services provided within the Azerbaijan Republic shall be subject to tax on the full amount of such Mark -up at the rate of twenty four (24) percent. Therefore, any entity making payments for such goods sold to a Foreign Sub - Contractor shall withhold tax from such Mark -up at a rate of twenty four (24) percent and shall pay such withheld tax to the State Budget within thirty (30) days from the end of the calendar month in which the payment is made. If the Foreign Sub -Contractor fails to provide information regarding its Mark -up on such goods to the payer entity before such payment is made, then the Foreign Sub - Contractor shall be subject to Tax at the rate of six (6) percent from the whole amount of payments (without deducting the expenses) received from the sale of such goods.



(aa) Each Foreign Sub -Contractor shall be responsible for filing each Calendar Year a Profit Tax return and tax reports (returns) reporting all income earned in the Azerbaijan Republic during the Calendar Year, including but not limited to the payments received in connection with Hydrocarbon Activities. Each Foreign Sub -contractor shall include with this return a statement provided by a firm of internationally recognised independent accountants of international standing that costs and profits incurred in connection with its activities in the Azerbaijan Republic have been fully and fairly reported.





(bb) Each Foreign Sub -contractor shall also file all other Tax returns, reports and financial statements (including but not limited to personal income tax withholding reports, customs documentation fee statements and social fund contribution returns) in accordance with applicable law.



(cc) The failure of any Sub -contractor to file any Tax return, report or financial statement pursuant to (aa) or (bb) above shall not result in any interest, fines or penalties against any party withholding such Taxes due .



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(iii) a Contractor Party, the Operating Company or Subcontractors shall have no liability or responsibility for any Taxes which their Sub-contractors do not withhold or pay or for any other failure of such Sub-contractors to comply with the laws of the Azerbaijan Republic.



(iv) no Profit Taxes or personal income taxes shall be otherwise once again imposed or withheld with respect to payments made to any Foreign Sub-contractors in connection with the Hydrocarbon Activities.



(b) Notwithstanding the foregoing, Foreign Sub-contractors shall be entitled to the provisions of an applicable Double Tax Treaty if such provisions, in the opinion of a Foreign Subcontractor, place such Foreign Sub-contractor in a tax situation more favourable than that provided for in this Agreement.



(c) Notwithstanding any other provisions of this Article 14.4:



(i) Articles 14.5(b) shall apply to the terms of this Agreement.



(ii) ) No Foreign Sub-contractor shall be subject to any Taxes in respect of any activity relating to Petroleum Operations that is carried on outside of the territory of the Azerbaijan Republic.



(iii) Each Sub-Contractor shall be liable for payment and reporting of Taxes in connection with its business activities in the Azerbaijan Republic that are not related to Hydrocarbon Activities under the applicable laws and regulations of the Azerbaijan Republic.



14.5 Taxation of Payments to Foreign Entities

(a) Except as provided in Article 14.4, no Taxes shall be withheld or imposed on any payments made by any Contractor Party to any entity organised outside the Azerbaijan Republic. Notwithstanding the preceding sentence, Taxes may be



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withheld or imposed at rates of up to six (6) percent on:



(i) interest paid by a Contractor Party directly related to a loan to the Contractor Party received in connection with Petroleum Operations from a bank or other financial institution organised outside the Azerbaijan Republic.



(ii) royalties paid by a Contractor Party directly to authors or inventors who are not citizens of the Azerbaijan Republic for the use of their publications, inventions or other intangible property in Petroleum Operations (but not for goods, equipment or products relating to such publications, inventions or intangible property used in Petroleum Operations).



(iii) a non-resident legal entity shall not have a liability to file any Tax return, report or financial statement pursuant to (i) or (ii) above, and satisfy such non-resident entities tax compliance, filing obligations and liabilities for all Taxes.



(b) Notwithstanding the foregoing, entities organised outside the Azerbaijan Republic shall be entitled to the provisions of an applicable Double Tax Treaty, or if there is no such treaty, the benefits that would have been available if a treaty equivalent to the OECD Model Tax Convention on Income and Capital, updated as of 1 November 1997, were in force. In either event, no further administrative action shall be necessary to enable the foreign entity to take advantage of such benefits.

(c) Affiliates of any Contractor Party, in accordance with the established practice of the international Petroleum industry and with their ordinary business activities (and such activities shall not include activities directed towards avoidance of Taxes), shall provide goods, works or services on a no gain/no loss basis. If this above mentioned condition is fulfilled, no profit shall be deemed to arise in the Azerbaijan Republic, and therefore no Taxes shall be imposed or withheld to them.



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14.6 Taxation of Employees and Physical Persons

(a) All Tax Residents, employees of: each Contractor Party, the Operating Company, their Affiliates, Foreign Sub-contractors, including any physical persons acting as a Foreign Subcontractor, shall be liable to pay Azerbaijan personal income Tax only on their income earned as a direct result of their employment in the Azerbaijan Republic, and employees who are not Tax Resident shall not be liable to pay Azerbaijan personal income Tax. For purposes of this Article 14.6, and subject to any applicable Double Tax Treaty and of a non discriminatory nature, “Tax Resident” shall be defined as any physical person who satisfies either of the following requirements for a specific period:



(i) any person who does not have a primary place of employment in the Azerbaijan Republic and is either (1) is present in the Azerbaijan Republic in connection with Hydrocarbon Activities for a period exceeding thirty (30) consecutive days, provided that such person shall be liable for Azerbaijan personal income Tax only on his or her Income earned as a direct result of his or her employment in the Azerbaijan Republic during periods in excess of thirty (30) consecutive days; or (2) whose presence in the Azerbaijan Republic shall not exceed thirty (30) consecutive days in any Calendar Year, but whose presence in the Azerbaijan Republic shall cumulatively exceed ninety (90) days in such Calendar Year shall be liable for Azerbaijan personal income Tax only on his or her taxable income earned after the ninetieth (90th) day of the presence in the Azerbaijan Republic as a direct result of employment in the Azerbaijan Republic;



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(ii) Any person who has a primary place of employement in the Azerbaijan Republic for periods cumulatively exceeding ninety (90) days in any Calendar Year shall be liable for Azerbaijan personal income Tax on all income earned as a direct result of his or her employement in the Azerbaijan Republic during the Calendar Year, including income earned during the ninety (90) days of employement in the Azerbaijan Republic before such person has become Tax Resident.

(b) Each Contractor Party, the Operating Company, their Affiliates, Sub-contractors, including any physical persons acting as a Sub-contractor, shall make contributions of Azerbaijan State social insurance and similar payments (including but not limited to contributions to the pension funds, the social insurance fund, the employment fund and the medical fund) with respect to employees who are citizens of the Azerbaijan Republic.

(c) Each Contractor Party, the Operating Company, their Affiliates, and/or Sub-Contractors shall pay the Azerbaijan Republic personal income Тax according to the applicable laws and regulations of the Azerbaijan Republic for the employees and physical persons who are the citizens of the Azerbaijan Republic



15.7 Tax Exemptions

(a) Each Contractor Party, the Operating Company and their Subcontractors shall be exempt with credit (zero (0) percent rate) from VAT in connection with Hydrocarbon Activities. This will apply to the following:

(i) goods, works and services supplied to or by it,

(ii) exports of Petroleum and all products processed or refined from such Petroleum, and;



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(iii) imports and acquisitions of goods (excluding tobacco, foodstuff and alcohol), works and services.

(b) In addition, every supplier of goods, works and services (directly or indirectly) to each Contractor Party or the Operating Company in connection with Hydrocarbon Activities shall treat those supplies for VAT purposes as being exempt with credit (zero (0) percent rate).

(c) Where in accordance with Article 14.7(a) above a person should pay VAT at zero (0) percent and is charged and pays input VAT at a rate of more than zero (0) percent on the supply to that person of goods, works or services, that person shall be entitled to receive a refund or offset against the amount of any other Taxes payable by that person (including Taxes withheld by that person on payments to its employees or Subcontractors).

(d) Except as provided by Article 14.4 and Article 14.5 no Taxes shall be withheld or imposed on payments made by each Contractor Party or its permanent establishments to any entity incorporated, legally created or organised outside the Azerbaijan Republic.

(e) The Tax Authority or other appropriate tax or customs body shall provide each Contractor Party, Operating Company and their Sub-contractors with certificates confirming the exemptions and/or VAT zero (0) percent rate as provided in Article 14.7(a) of this Agreement within thirty (30) days of the Contractor Party, Operating Company, or their sub-contractors requesting such certificate.



14.8 Other

The Contractor Parties and their Foreign Sub-contractors shall pay registration or similar fees imposed by a Governmental Authority to the extent they are nominal and of a non-discriminatory nature.



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14.9 Share Transfer Profit Tax

Tax due on the Net Income received for a Sale or Permanent Assignment of all, or any portion, of any Contractor Party’s Participating Interest to a Third Party or any Contractor Party shall be payable according to the following:

(а) For the purposes of this Article 14.9 the following terms shall have the following meanings:

(i) “Gross Income” means the total consideration received by an assigning Contractor Party for an assignment of any portion of Participating Interest under this Agreement.

(ii) “Written-Down-Value” means the un-amortised balance of any investment (accumulated costs) which, pursuant to this Agreement, is not subject to Cost Recovery.

(iii) “Sale or Permanent Assignment" shall mean any transfer or assignment of the ownership rights of all or a portion of a Participating Interest excluding:

(aa) a transfer resulting from a loan made in respect of this Agreement;or

(bb) any exchange of рarticipating interests in projects where no profit is generated;or

(cc) any transfer for which consideration consists of a work obligation; or

(dd) any involuntary transfer.

(iv) “Net Income” means the difference between the Gross Income and the total amount of established Tax withholdings, which shall consist of:



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(aa) Contractor Party’s share of the accumulated Petroleum Operations Costs incurred up to date on which the assignment becomes effective;



(bb) Written-Down-Value of any investment (accumulated costs) made by the assigning Contractor Party, which is not charged to the Petroleum Operations Costs under this Agreement;



(сс) Costs incurred for such assignment.



(b) Profit Tax Rate defined in Article 14.1(c)(v) shall be applied to the Net Income of Sale and Permanent Assignment. Upon receipt of Gross Income, an assigning Contractor Party shall compute the Net Income, and shall apply to the Net Income the computed Profit Tax Rate indicated above.



(c) The amounts set forth in Article 14.9 (a)(iii)(aa) shall be certified by the statutory auditor of the Operating Company and the amounts set forth in Article 14.9(a)(iii)(bb) shall be certified by the statutory auditor of the Contractor Party or Affiliate of a Contractor Party which incurred the costs.



(d) An assigning Contractor Party shall pay the Tax so calculated to the State Budget of the Azerbaijan Republic no later than thirty (30) calendar days after receipt of the Gross Income. In the event that Gross Income is received in instalments the total Tax due shall be paid in instalments. Each such Tax instalment shall be the same proportion of the total tax due, as the corresponding instalment of Gross Income is in relation to total Gross Income.



14.10 Survival

The provisions of this Article 14 shall survive the termination of this Agreement until such time as all matters pertaining to each Contractor Party’s liabilities for Taxes are finally and conclusively determined.



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ARTICLE 15



VALUATION OF PETROLEUM



15.1 Calculation of Net Back Value of Crude Oil and Non-associated Natural Gas

(a) The valuation of Crude Oil for purposes of Cost Recovery pursuant to Article 12.2, and sharing of Profit Petroleum pursuant to Article 12.4 and as otherwise specifically provided in this Agreement in any Calendar Quarter shall be the net back value calculated as follows :

(i) where there have been export sales of Crude Oil from the Contract Area (or such other Crude Oil obtained through exchanges or swap agreements which is exchanged or swapped for Crude Oil from the Contract Area) by any Party in arm's length transactions during the Calendar Quarter, the weighted average per unit price realised in all such sales (after deducting commissions and brokerages), at the Point of Sale, adjusted for costs incurred by the Parties of transporting the Crude Oil to the Point of Sale, including but not limited to pipeline tariffs, transit fees, Transit Losses, terminal fees, weather-related demurrage charges at the port, costs of treatment, tanker costs and pipeline taxes to arrive at a value of the Crude Oil at the Delivery Point ("Net Back Value"); provided that the total volume of such arm's length sales made by all Parties exceeds thirty-three and one-third (33 1/3) percent of the total volume of all sales made by all Parties during the Calendar Quarter; for the purposes of this Article 15, all sales of Crude Oil to SOCAR, any Affiliate of SOCAR, or any Governmental Authority (including, without limitation, sales pursuant to Articles 13 and 21.3) shall be deemed to be arm’s length transactions; or

(ii) where the total volume of arm's length export sales does not exceed the percentage of sales referred to in Article 15.1(a)(i) above, the weighted average per unit price of: (A) Crude Oil sold in arm's length sales (determined as provided in Article 15.1(a)(i) above) and (B) Crude Oil



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sold in non-arm's length sales at the average price quoted for such Crude Oil in Platt's Oilgram during the Calendar Quarter, but if no such price is quoted then the average of per unit F.O.B. price quotations for three (3) representative crude oils to be agreed by the Parties, as published in Platt's Oilgram in the Calendar Quarter, adjusted for quality, grade, quantity, costs of transporting the Crude Oil to the Point of Sale as provided in (i) above, to arrive at a Net Back Value of the Crude Oil.



In the event that Platt’s Oilgram ceases to be published or is not published for fifteen (15) days in the period required for its use in this Article 15.1(a)(ii) then the required data shall be taken from an available alternative publication internationally recognised by the Petroleum industry. If the Parties cannot agree on the three (3) representative crude oils by the Commencement Date of Commercial Production or fail to agree on any alternative publication the matter shall be referred for final decision to an internationally recognised expert in accordance with the provisions of Article 15.1(c) below.



(b) The value of Non-associated Natural Gas in any Calendar Quarter for the purposes of Cost Recovery, sharing of Profit Petroleum, and as otherwise specifically provided in this Agreement shall be the actual arm's length sale price realised under a gas sales agreement less costs incurred by the Contractor Parties of transporting such Non-associated Natural Gas to the Point of Sale including but not limited to pipeline tariffs, Transit Losses and pipeline taxes ("Net Back Value"). For the purposes of this Article 15, all sales of Non-associated Natural Gas to SOCAR, any Affiliate of SOCAR, or any Governmental Authority shall be deemed to be arm’s length transactions.



Where Non-associated Natural Gas is sold by Contractor in non-arm's length sales, such Non-associated Natural Gas shall be valued at a price to be determined by agreement between SOCAR and Contractor based on pricing principles prevailing internationally, taking into account market, grade, quality and quantity, transportation and other relevant considerations ("Net Back Value").



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(c) Within thirty (30) days after the end of the relevant Calendar Quarter, all Parties shall notify the Operating Company of the volumes, dates, prices and Point of Sale for all arm's length sales of Crude Oil and/or Non-associated Natural Gas during such Calendar Quarter, and the Operating Company shall notify SOCAR of valuations of Crude Oil and/or Nonassociated Natural Gas for the purposes of Article 15.1(a) and Article 15.1(b) above, which notice shall specify volumes, dates, prices, and Points of Sale for all arm's length sales. If any Party does not accept any valuation notified by the Operating Company pursuant to Article 15.1(a) or Article 15.1(b) and SOCAR and Contractor cannot reach agreement on the value of Crude Oil and/or Non-associated Natural Gas within thirty (30) days of receipt of notice by SOCAR of Contractor's valuation of Crude Oil and/or Non-associated Natural Gas, such determination shall be made by an internationally recognised expert appointed by Contractor and SOCAR, but if they fail to agree within thirty (30) days from the end of the thirty (30) days referred to above on the appointment of such expert, then such appointment shall be made by the President of the Stockholm Chamber of Commerce, Sweden on the application of SOCAR or Contractor. Such expert shall be a person internationally recognised as having expertise in the marketing of Petroleum. Only the English language text of this Agreement will be utilised by the expert. The expert shall in writing, report his determination within thirty (30) days of his appointment and his determination shall be final and binding upon SOCAR and Contractor.



Pending the determination of the Net Back Value of Crude Oil or as the case may be Non-associated Natural Gas for a given Calendar Quarter, the Net Back Value of Crude Oil and/or Non-associated Natural Gas determined for the preceding Calendar Quarter shall be provisionally applied to make calculation and payment until the applicable Net Back Value for that period is finally determined. Any adjustment to such provisional calculation and payment, if necessary, will be made within thirty (30) days after such applicable Net Back Value is finally determined.



(d) In determining the applicable Net Back Value of Crude Oil and/or Non-associated Natural Gas pursuant to Articles 15.1(a)



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and (b) the following shall apply:



(i) provisions in this Article 15.1 dealing with "sales" shall equally apply to a single sale and shall be interpreted accordingly; and



(ii) the point in time at which title in Crude Oil and/or Nonassociated Natural Gas transfers at the Point of Sale from a Party to the buyer shall be deemed to be the time of sale; and



(iii) "Point of Sale" shall mean the geographical location or locations where title to Crude Oil or as the case may be Non-associated Natural Gas passes from a seller to a buyer, whether such sale is F.O.B., C.I.F., C. and F., F.C.A. as per Incoterms 2000 or any other manner generally recognised by the international Petroleum industry. Examples of possible Points of Sale include the sales meter at the outlet of the terminal at the terminus of the export pipeline, the inlet meter at a refinery, or the inlet flange to a tanker; and



(iv) "Transit Losses" – shall mean losses incurred during the pipeline transport of Crude Oil and/or Non-associated Natural Gas from the Delivery Point to the terminus of the export pipeline, (including, if applicable, any pipeline utilised for transhipment of the Crude Oil to exit the Black Sea area or in the case of Non-associated Natural Gas to the Point of Sale) in excess of the normal international pipeline loss allowance of one-tenth of one (0.1) percent. Transit Losses (other than losses for which Contractor has been reimbursed from any insurance taken out by Contractor and losses for which Contractor has been reimbursed from pipeline owners or operators) shall be deducted from Total Production. Insurance premiums paid by Contractor for insurance taken out by Contractor covering Transit Losses shall not be Cost Recoverable. Any insurance reimbursements for such losses shall not be credited to Cost Recovery. Contractor shall be responsible for the insurance of Transit Losses, pursuant to Article 22.1; and



(v) an "arm's length sale" is a sale or exchange of Petroleum between a willing and non-affiliated buyer and seller on the international market in exchange for



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payment in Foreign Exchange, excluding a sale involving barter, sales from government to government and other transactions motivated in whole or in part by considerations other than the usual economic incentives involved in Petroleum sales on the international market.



15.2 Measurement



(a) The volume and quality of Petroleum produced by Contractor shall be measured by methods and appliances in accordance with generally accepted international Petroleum industry practice, and shall be monitored by the Parties in accordance with the Measurement Procedure.



(b) Contractor shall give prior written notice to SOCAR of any testing and calibration by Contractor of the appliances used in the measurement and determination of quality of Petroleum pursuant to the Measurement Procedure. SOCAR, at its cost and risk, shall be entitled to have witnesses present at such testing and calibration.



(c) Where the method of measurement, or the appliances used there for, have caused an overstatement or understatement of production, the error shall be presumed to have existed since the date of the last calibration of the measurement devices, unless otherwise proved, and an appropriate adjustment shall be made to the average value for the period of the error, or by an adjustment in deliveries in kind over an equivalent period.



(d) Petroleum produced from the Contract Area and not used by Contractor pursuant to Article 13.2 shall be measured at the Delivery Point.



[Azerbaijani Text] [Russian Text] 74 ARTICLE 16

OWNERSHIP, USE AND ABANDONMENT

OF ASSETS



16.1 Ownership and Use



Title to the following categories of fixed and moveable assets for use in Petroleum Operations shall pass to SOCAR in accordance with the following:





(a) When legally permissible to purchase land, any land purchased by Contractor for Petroleum Operations shall become the property of SOCAR,as soon as it is purchased.



(b) Title to fixed and moveable assets employed by Contractor in the performance of Petroleum Operations and the cost of which is claimed as Petroleum Costs shall be transferred to SOCAR upon the earlier to occur of (i) the end of the Calendar Quarter following the achievement of Zero Balance or (ii) the termination of this Agreement. In this latter case, without prejudice to Contractor's rights under Articles 25.3(b) and 31,

title to fixed assets will pass to SOCAR irrespective of whether the costs thereof have been Cost Recovered. Except in respect of items which have limited residual economic life, fixed and moveable assets the title to which is transferred to SOCAR following the achievement of Zero Balance shall be in reasonable working order and shall comply with generally accepted international technical standards, subject to wear and tear.



(c) Contractor is entitled, at no additional cost, to the full and exclusive use and enjoyment of all land and fixed and moveable assets acquired for the purpose of Petroleum Operations throughout the term of this Agreement irrespective of whether title to such asset has passed to SOCAR in accordance with this Article 17.1.





(d) With respect to any fixed asset Contractor shall, upon agreement of partial relinquishment pursuant to Article 31.5, give notice of abandonment of such assets in the area to be relinquished which Contractor does not intend to use or relocate elsewhere in connection with Petroleum Operations. Subject to Article 16.1(f), SOCAR may, within sixty (60) days of receipt of such notice, elect to assume ownership, possession and custody of such fixed assets.





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(e) Data and other information collected and generated by Contractor in the course of Petroleum Operations shall, during the term of this Agreement, be jointly owned by SOCAR and Contractor. Following the termination of this Agreement ownership of all such data and information shall revert to SOCAR. Thereafter, each Contractor Party shall be entitled to continue to use such data and information in relation to its other Petroleum related activities in the Azerbaijan Republic. Contractor shall be entitled to trade such data and information in accordance with the principles set out in Article 29.2 of this Agreement during the term of this Agreement.



(f) Except as otherwise provided in Article 16.3 of this Agreement, ownership of leased equipment shall not transfer to SOCAR at the end of this Agreement, and Contractor shall at such time be free to export such equipment.



(g) For purposes of this Article, “fixed assets” means structures and facilities essential to the conduct of Petroleum Operations that are located within the Contract Area, such as wells, flowlines, pipelines, oil, gas and water separation facilities, oil pump stations, loading terminals, gas compression stations and the like.



16.2 Abandonment, General Terms

In order to finance abandonment of all fixed assets employed in Petroleum Operations within the Contract Area by Contractor, the Parties shall open a joint escrow account at a bank of good international repute to be agreed between SOCAR and Contractor. This account shall be known as the "Abandonment Fund" and shall be administered by the Operating Company for a maximum value. The structure of the escrow account and the terms for the administration of the Abandonment Fund monies shall be mutually agreed between SOCAR and Contractor. All monies allocated to the Abandonment Fund shall be recoverable as Operating Costs. In no event shall the Abandonment Fund exceed ten (10) percent of all Capital Costs. The Abandonment Fund shall be created from the sale of mutually agreed upon portion of Total Production.



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16.3 Parties Relationship with respect to Abandonment of Assets



If, at any time, Contractor recommends abandonment of a fixed asset within the Contract Area prior to the termination of this Agreement, SOCAR may elect, within thirty (30) days of receipt of Contractor's recommendation, to continue using such fixed asset, in which event SOCAR shall be responsible for abandoning such fixed asset as and when it decides, and the appropriate portion of the Abandonment Fund shall be transferred to SOCAR at the time it commences abandonment of such fixed asset or termination of this Agreement, whichever is earlier. If SOCAR fails to elect to continue using such fixed asset the Steering Committee shall determine whether to abandon such asset provided that if the Steering Committee fails to reach agreement on the abandonment of such fixed asset at the meeting at which Contractor's recommendation first appears on the agenda then SOCAR shall be deemed to have elected to continue using such fixed asset and Contractor shall have no further liability of any kind with respect to such asset. If the Steering Committee decides to abandon such fixed asset, within thirty (30) days of such decision SOCAR shall notify Contractor whether Contractor or SOCAR shall be responsible for abandoning such fixed asset. If SOCAR fails to notify Contractor within such thirty (30) day time period, SOCAR shall be deemed to have decided that Contractor is to abandon such fixed asset. The appropriate portion of the Abandonment Fund shall be transferred to the Party responsible for abandoning such fixed asset. Any abandonment operations, or continued use by SOCAR, shall be conducted in accordance with international Petroleum industry practice and in such a manner that does not interfere with Petroleum Operations.



b) Upon termination of this Agreement, Contractor shall notify SOCAR of all fixed assets employed in Petroleum Operations within the Contract Area, which Contractor intends to abandon. SOCAR shall, within thirty (30) days of receipt of Contractor's notice, notify Contractor of such fixed assets which SOCAR elects to continue to use, as well as whether SOCAR elects to



[Azerbaijani Text] [Russian Text] 77abandon all other fixed assets or have Contractor abandon such other fixed assets. A portion of the Abandonment Fund commensurate with and attributable to any fixed assets shall be transferred to Contractor or SOCAR, as the case may be, who is responsible for abandoning such fixed assets. If SOCAR elects to continue to use or to abandon any fixed assets, SOCAR may abandon such fixed assets as and when it decides. Abandonment of any fixed assets shall be in accordance with generally accepted international Petroleum industry practice; provided, however, in the event there are insufficient funds in the Abandonment Fund to enable Contractor to complete abandonment operations for which Contractor is responsible, Contractor shall expend all amounts available in the Abandonment Fund in the performance of its abandonment operations and have no further liability or obligation to abandon such remaining fixed assets. Any unabandoned fixed assets shall as part of the abandonment operations be left in a safe condition.



(c) Upon SOCAR electing to abandon any fixed assets in the Contract Area or electing pursuant to Article 16.3(a) above, to continue using any such fixed assets, Contractor shall be released from all responsibility and liability of every kind pertaining to such fixed assets and abandonment thereof as well as payment of any further funds should there be insufficient funds in the Abandonment Fund. SOCAR shall indemnify Contractor from and against any loss, damage and liability of any nature whatsoever, as well as any claim, action or proceeding instituted against Contractor, or any Contractor Parties, by any person or entity, including, but not limited to any Governmental Authority, arising from, or in any way connected with, the continued use of such fixed assets and their ultimate abandonment, as well as any failure by SOCAR to properly abandon any such fixed assets.



78(d) Not later than on (1) year prior to the Calendar Year in which the achievement of Zero Balance is planned, Contractor shall prepare an abandonment plan and an estimate of the cost of abandonment operations for approval by the Steering Committee. Annually thereafter Contractor shall examine the estimated costs of abandonment operations and, if appropriate, revise the estimate.



(e) In the event that there are excess funds in the Abandonment Fund following completion of all abandonment operations, then such excess shall be distributed between SOCAR and Contractor in proportion to the cost of abandonment operations undertaken by Contractor and SOCAR, but in no event shall Contractor's share exceed an amount it would have received had the excess funds been distributed in the ratio of the weighted average of the last ten (10) years Profit Petroleum distribution between SOCAR and Contractor under the provisions of Article 12.4 prior to termination of this Agreement.



(f) No Taxes shall be imposed on any amounts paid into, received or earned by or held in the Abandonment Fund.



16.4 Lease of Equipment



Each Contractor Party shall have the right to use equipment leased from its Affiliates or Third Parties in the course of Petroleum Operations. In the case of any equipment, which is on long-term lease (which for the purposes of this Article 16 shall mean a lease in excess of ten (10) years) to Contractor. Contractor shall, with respect to such leases from such Affiliates of equipment owned by such Affiliates, ensure, and with respect to such leases from Third Parties, use reasonable lawful efforts to procure, that any such lease is transferable to SOCAR when Contractor no longer wishes to use such equipment for Petroleum Operations and that such lease includes an option to purchase excercisable by SOCAR.



79ARTICLE 17



NATURAL GAS



17.1 Associated Natural Gas

Contractor shall have the right to produce hydrocarbon liquids found within the Contract Area and to process Associated Natural Gas produced with any such liquids in order to extract such liquids for sale. Liquids saved shall be treated as Crude Oil. Subject to Contractor's rights pursuant to Article 12.1 and Article 17.3, residue Associated Natural Gas from such processing shall be delivered free of charge to SOCAR at the Delivery Point.



18.2 Non-associated Natural Gas

In the event of a Non-associated Natural Gas discovery in the Contract Area additional terms for commercial development of such Non-associated Natural Gas shall be agreed between SOCAR and Contractor. In the case of a Non-associated Natural Gas discovery Profit Petroleum shall be shared through marketing of Non-associated Natural Gas in accordance with the mechanism described in Article 12.4. Contractor together with SOCAR shall use full and reasonable endeavours to rapidly conclude terms acceptable to the Parties to develop the discovery, and with Third Parties to enter into the necessary long term Non-associated Natural Gas export sales and pipeline contracts. Contractor shall pursue markets for Non-associated Natural Gas both within and outside the Azerbaijan Republic.



17.3 Flaring or Venting of Natural Gas

(a) Contractor shall have the right to flare or vent the necessary amount of Associated Natural Gas in the event of emergencies, equipment malfunctions, repairs or maintenance of any facilities, including delivery systems, or SOCAR's failure to take delivery of Associated Natural Gas to be delivered to it by Contractor as provided in Article 17.1.



(b) In the case of Non-associated Natural Gas if a buyer fails to take delivery, then Contractor shall first offer such Nonassociated Natural Gas to SOCAR on the same terms agreed with such buyer and if SOCAR refuses or fails to take delivery thereof, then Contractor shall reduce the production of Non-associated Natural Gas by the volumes not taken by any buyer or SOCAR. In the event of Contractor's failure to market its entitlement of Non-associated Natural Gas for any



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reason Contractor shall reduce the production of Non-associated Natural Gas by the applicable volumes and shut in Non-associated Natural Gas well or restrict its production rate.



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ARTICLE 18



FOREIGN EXCHANGE



Contractor and each Contractor Party, and their Affiliates and Subcontractors and Operating Company, are authorised throughout the duration of this Agreement and in connection with this Agreement to:

(a) Open, maintain and operate Foreign Exchange bank accounts both in and outside the Azerbaijan Republic, and local currency bank accounts in the Azerbaijan Republic;



(b) Import into the Azerbaijan Republic funds required for Petroleum Operations in Foreign Exchange;



(c) Purchase local currency with Foreign Exchange at the most favourable exchange rate legally available to it (and in any event at a rate of exchange no less favourable than that granted by the National Bank of the Azerbaijan Republic to other foreign investors), without deductions or fees other than usual and customary banking charges, as may be necessary for conduct of the Petroleum Operations and performance of other obligations of Contractor hereunder;



(d) Convert local currency available for use in, or earned in connection with, Petroleum Operations exceeding their immediate local requirements into Foreign Exchange at the most favourable exchange rate legally available to it (and in any event at a rate of exchange no less favourable than that granted by the National Bank of the Azerbaijan Republic to other foreign investors), without deductions or fees other than usual and customary banking charges;



(e) Export, hold and retain outside the Azerbaijan Republic, and dispose of all proceeds obtained under this Agreement, including without limitation all payments received from export sales of Contractor Parties' share of Petroleum and processing products thereof;



(f) Transfer outside the Azerbaijan Republic any Foreign Exchange in excess of their immediate local requirements;



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(g) Be exempt from all legally required or mandatory conversions of Foreign Exchange into local or other currency;



(h) Pay in Foreign Exchange partly or wholly outside the Azerbaijan Republic any salaries, allowances and other benefits due to their expatriate employees assigned to work in the Azerbaijan Republic for Petroleum Operations; and



(i) Pay directly outside the Azerbaijan Republic in Foreign Exchange their Foreign Sub-contractors working on Petroleum Operations.



SOCAR shall within the full limits of authority use all reasonable lawful endeavours with any Governmental Authorities, in order for Contractor to obtain any of the above authorisations in the event that Contractor requests it to do so.



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ARTICLE 19



ACCOUNTING METHOD



Contractor shall maintain books and accounts of Petroleum Operations in accordance with the Accounting Procedure.



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ARTICLE 20



IMPORT AND EXPORT



20.1 Import and Export Rights

(a) Each Contractor Party, its Affiliates, its agents, Operating Company and Sub-contractors, shall have the right to import into, and re-export from the Azerbaijan Republic free of any Taxes and restrictions in their own name the following: all equipment, materials, machinery and tools, vehicles, spare parts, goods and supplies (excluding foodstuff, alcohol and tobacco products) necessary in Contractor's reasonable opinion for the proper conduct and achievement of Petroleum Operations, provided, however, that with respect to the purchase thereof, Contractor shall give preference to Azerbaijani Suppliers in those cases in which such Azerbaijani Suppliers are in all material respects competitive in price, quality and availability with those available from other sources, even if the contract price of such an Azerbaijani Supplier is higher by not more than ten (10) percent than the contract price of the potential winning foreign supplier. Then the contract will be awarded exclusively to such Azerbaijani Supplier. For purposes of this Article 20.1 Azerbaijani Suppliers shall mean business entities entered into the appropriate registers of the State Statistical Committee and/or the Ministry of Taxes, regardless of ownership, legally operating in the Azerbaijan Republic.

Notwithstanding the foregoing, (except when necessary for repair or maintenance provided that, within a reasonable time after completion of the repair or maintenance, such items shall be re-imported into the Azerbaijan Republic), Contractor shall not have the right to export from the Azerbaijan Republic any items purchased for Petroleum Operations, the costs of which have been included in the Petroleum Operations Account.

(b) Each Contractor Party, Operating Company, their Affiliates, agents, and Sub-contractors, and all of their employees and family members, shall have the right to import into and reexport from the Azerbaijan Republic, free of Taxes and restrictions and at any time, all furniture, clothing, household appliances, vehicles, spare parts and all personal effects



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(excluding foodstuff, alcohol and tobacco products) for personal use by the foreign employees and their families assigned to work in, or travel to, the Azerbaijan Republic. Private sales of imported goods by Contractor and/or its Subcontractors and their employees in the Azerbaijan Republic to any Third Party will be taxable in accordance with Azerbaijan legislation (subject to Article 14).

(c) Any purchase of goods, works and services where the value exceeds one hundred thousand (100,000) Dollars shall be made on a competitive tender basis (except when only one supplier is available). The threshold value of one hundred thousand (100,000) Dollars shall be escalated annually in line with increases in the GDP Deflator Index. Contractor and SOCAR agree that they will work cooperatively to permit SOCAR's involvement in a meaningful and positive manner in the contracting and procurement process implemented by the Operating Company. In that regard, SOCAR will send to the Operating Company an appropriate number of its personnel, ("SOCAR Representatives"), whose number shall be agreed between SOCAR and the Operating Company, whose responsibility shall include monitoring the contracting and procurement process from initial preparation of the prequalification lists; to the ultimate selection of contractors; and through to implementation. The SOCAR Representatives shall have responsibility to report to SOCAR and the Operating Company their findings and to give timely input to the Operating Company as to SOCAR's position on relevant matters prior to each contract award. The SOCAR Representative(s), shall not have the right to vote on any matters before the Operating Company's contract committee; provided however, the SOCAR Representatives may express their professional opinion and that of SOCAR with regard to any bids, awards, and/or subsequent implementation for the Operating Company to duly consider and take account of.



20.2 Petroleum Export

Each Contractor Party, its customers and its and their carriers shall have the right to freely export, free of all Taxes (except for Profit Tax) and at any time, Petroleum and processing products thereof to which such Contractor Party is entitled in accordance with the provisions of



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this Agreement.



20.3 Customs Laws



Subject to Articles 14, 20.1 and 20.2, all imports and exports carried out in connection with this Agreement shall be subject to the procedures and documentation required by applicable customs laws and regulations, and each Contractor Party, the Operating Company, their Affiliates, agents and Sub-contractors shall pay any customs service/documentation fees to the extent they are nominal and consistent with the actual costs of providing such customs service/documentation and are of a non-discriminatory nature, but in no event shall the service/documentation fees exceed the following:



Declared Value of Shipment in Dollars | Duty

0 - 100,000 | 0.15% of value

100,000.01 - 1,000,000.00 | $150.00 plus 0.10% of value over $100,000.00

1,000,000.01 - 5,000,000.00 | $1,050.00 plus 0.07% of value over $ 1,000,000.00

5,000,000.01 - 10,000,000.00 | $3,850.00 plus 0.05% of value over $ 5,000,000.00

more than 10,000,000.01 | more than 10,000,000.01



20.4 Foreign Trade Regulations

Each Contractor Party, the Operating Company, their Affiliates, agents and Sub-contractors shall also be exempt from the provisions of Azerbaijan Republic foreign trade regulations concerning the prohibition, limitation and restriction of import and export and country of origin of those items indicated in Article 20.1 and with respect to the Petroleum allocated to Contractor pursuant to this



Page 87

Agreement.



20.5 SOCAR Assistance

SOCAR shall, within the full limits of its authority, use all reasonable lawful endeavours, when requested to do so by Contractor, to ensure that the above mentioned exemptions are applied and expedite the movement through customs of any equipment or supplies of a Contractor Party, the Operating Company, their Affiliates, agents and Sub-contractors and all of their employees and family members.



Page 88

ARTICLE 21

DISPOSAL OF PRODUCTION



21.1 Title to Petroleum

Except as expressly provided in Article 15.1(d)(iv) concerning the risk of loss of Petroleum production, the transfer of title and possession to each Contractor Party and SOCAR of the share of the Petroleum production to which such Contractor Party and SOCAR is entitled shall be made at the Delivery Point.



21.2 Overlift and Underlift

Each of SOCAR and Contractor Parties shall have the right and obligation to lift and dispose of the share of Petroleum to which it is entitled under this Agreement with the understanding that Contractor may, subject to its obligations under Article 13 and the remaining provisions of this Article 21, determine such quantities of Crude Oil lifted from the Contract Area which will be exported for further sale and such quantities which will be sold within the Azerbaijan Republic. Such share shall be lifted on as regular a basis as possible, it being understood that each of SOCAR and Contractor Parties, within reasonable limits, shall be authorised to lift more (overlift) or less (underlift) than its share of Petroleum produced and unlifted by the lifting day, to the extent that such overlift or underlift does not infringe on the rights of the other and is compatible with the production rate and the storage capacity. SOCAR and Contractor shall establish the rules and procedures to govern the lifting programme on the basis of the principles described above.



21.3 SOCAR Option to Purchase Crude Oil

(a) During each Calendar Quarter SOCAR shall be entitled to purchase from Contractor a portion of the Crude Oil allocated to Contractor under the provisions hereof, at the Delivery Point, by giving ninety (90) days written notice to Contractor of such purchase preceding the Calendar Quarter in which SOCAR elects to purchase the Crude Oil. Contractor shall initially invoice SOCAR for such Crude Oil purchased hereunder at the per Tonne price determined in accordance with Article 15.1 for the last Calendar Quarter preceding the date of lifting in which the price has been established. At such time that the per Tonne price for the Calendar Quarter in which such Crude Oil is lifted as determined in accordance with Article 15.1 is known, Contractor shall issue an amended invoice indicating any monies owed to Contractor or SOCAR, as the case may be. In no event shall the proportion of Crude Oil so purchased from Contractor exceed the proportion



Page 89purchased from Third Parties under similar circumstances and in no event shall such quantities exceed more than ten (10) percent of Contractor's entitlement at the Delivery Point during that Calendar Quarter. In the event any Taxes are levied on such Crude Oil, SOCAR shall be solely responsible for the payment thereof to the relevant Governmental Authorities and shall indemnify and hold harmless Contractor from any liability with respect thereto.



(b) SOCAR shall have the additional right to purchase up to an additional ten (10) percent of Contractor's share of Crude Oil available in any Calendar Quarter at the Point of Sale or at any other export point located at the terminus when marketing Crude Oil through any other export alternative. The price for such Crude Oil shall be mutually agreed (using those factors normally utilised by the international Petroleum industry in determining a fair market price) prior to the relevant Calendar Quarter, and in the event any Taxes are levied on such Crude Oil, SOCAR shall be solely responsible for the payment thereof to the relevant Governmental Authorities and shall indemnify and hold harmless Contractor from any liability with respect thereto. In the event of any failure to agree on the sales price as provided above, SOCAR's right to purchase such additional Crude Oil from Contractor shall lapse with respect to the relevant Calendar Quarter.



(c) The quantity of Crude Oil for which SOCAR may exercise its option to purchase pursuant to Article 21.3(a) and (b) shall be specified in a written notice to Contractor at least ninety (90) days preceding each Calendar Quarter. SOCAR shall pay for any Crude Oil purchased under this Article 21.3 in Dollars within thirty (30) days of Contractor's invoice to be issued no earlier than the date of lifting such Crude Oil. In the event that SOCAR fails to make timely payment of sums due to Contractor then its right to purchase Crude Oil under this Article 21.3 shall be suspended until all outstanding sums have been paid. If payment so due is not paid within said thirty (30) day period, Contractor shall be entitled to lift and export from Crude Oil to which SOCAR is entitled a quantity of Crude Oil, as is necessary to satisfy sums due to Contractor. The volume of Crude Oil to which Contractor shall be entitled shall be determined in accordance with the valuation procedure setforth in Article 15.1 applicable on the date Contractor lifts such Crude Oil from SOCAR's entitlement.



(d) To the extent that Contractor Parties (or their Affiliates) incur any fees, charges or penalties under contracts with Third Parties (including but not limited to pipeline and terminaling agreements) as a result of SOCAR's exercise of its rights pursuant to Article 21.3(a), SOCAR shall be liable for and shall reimburse Contractor Parties in Foreign Exchange for such fees, charges and penalties. SOCAR shall have no liability

to Contractor Parties for penalties Contractor Parties (or their Affiliates) may incur under contracts with Third Parties as a result of SOCAR's exercise of its rights under Article 21.3(b). Contractor to the extent practicable will from time-to-time notify SOCAR of any anticipated fees, charges and penalties.



22.4 Marketing of Crude Oil for SOCAR



If a marketing agreement has been mutually agreed between SOCAR and Contractor, Contractor shall market for SOCAR, if SOCAR so requests pursuant to the terms of such separate marketing agreement, all or a portion of SOCAR's share of Crude Oil. The amount of Crude Oil which will be subject to the foregoing obligation to market shall be stated in a written notice from SOCAR to Contractor no later than ninety (90) days prior to the beginning of the applicable Calendar Quarter. Any marketing undertaken by Contractor pursuant to this Article 21.4 shall not affect title to and risk of loss of SOCAR's share of Total Production which shall remain with SOCAR.



21.5 Maximum Efficient Rate



It is the intention of the Parties that the Petroleum resources of the Contract Area should be produced at the optimum rate which is to be fully consistent with the then current economic conditions, and the principles of sound reservoir management according to international

Petroleum industry practice, in order to provide for the most economically efficient recovery of Petroleum ("Maximum Efficient Rate"). Consistent with the foregoing, and taking into account local experience in managing similar reservoirs, Contractor shall submit foragreement of the Steering Committee, at the same time as it submits the Annual Work Programme and Budget to the Steering Committee, Contractor's estimate of the relevant Calendar Year's production volume, but such agreed estimate shall be used for planning purposes only. However, in the event any Governmental Authority requires Contractor to produce Petroleum from the Contract Area at less than the Maximum Efficient Rate Contractor will reduce production, subject to the express condition that such reduction in Petroleum production shall in no event be greater than can be borne entirely from SOCAR's share of Petroleum remaining after satisfying all other SOCAR obligations hereunder. Contractor's total entitlement to Petroleum under this Agreement shall, at no time throughout the term of this Agreement, be less than it would have been had such reduction not been made. If due to a declared national emergency Governmental Authority requires an increase in the production rate above the Maximum Efficient Rate, Contractor shall so increase the production rate for a period of time not to exceed forty-five (45) days in any Calendar Year; provided, however, that in no event shall Contractor ever be required to increase the production rate to a level which in Contractor's opinion could possibly cause damage to the reservoir(s).



Page 92

ARTICLE 22



INSURANCE, LIABILITIES AND INDEMNITIES



22.1 Insurance

(a) Contractor (which for purposes of clarification with respect to this Article 22 shall include the Operating Company) shall provide the annual insurance programme included to an Annual Work Programme for the approval of the Steering Committee. Such annual insurance programme shall include purchase of insurance coverage for and in relation to Petroleum Operations for such amounts and against such risks as listed below and/or may be specifically agreed by Contractor and SOCAR. Contractor shall also furnish SOCAR with policies/certificates of insurance confirming the effectiveness of such coverage and waiver by Contractor of subrogation against SOCAR in relation to SOCAR's property managed by Contractor. Insurance specified in Article 22.1(i) to (vii) below, shall be obtained from a reputable insurance company established in the Azerbaijan Republic, so long as risks covered by such company are comparable with customary insurance practice of international Petroleum industry. Without prejudice to the generality of the foregoing, the said insurance shall cover:

(i) Loss or damage to any installation, equipment or other assets of Contractor used in or in connection with Petroleum Operations; however, if for any reason Contractor fails to insure any such installation, equipment or assets used in or in connection with Petroleum Operations; Contractor shall be liable for any loss or damage arising therefrom;

(ii) Loss, damage, injury arising from pollution of environment in the course of or as a result of Petroleum Operations;

(iii) Loss of property or damage or bodily injury suffered by any Third Party in the course of or as a result of Petroleum Operations for which Contractor may be liable;



Page 93

(iv) Any claim for which SOCAR may be liable relating to the loss of property or damage or bodily injury suffered by any Third Party in the course of or as a result of Petroleum Operations;



(v) Cost of removing wreck and cleaning up operations caused by any accident in the course of or as a result of Petroleum Operations;



(vi) Contractor’s liability to its employees engaged in Petroleum Operations;



(vii) Cost of well control and redrilling expenses in accordance with Sections A, B and C of the Energy Exploration and Development Wording 8.86 (Standard London Insurance Market Wording issued by the Rig Committee with respect to well insurance coverage for any types of well), shall include coverage extension as follows:



(aa) unlimited redrilling;

(bb) subsurface blowout;

(cc) evacuation;

(dd) well safety



(b) Unless specifically agreed by SOCAR, minimum limits for the above coverages specified in this Article 22.1 shall be as follows:



рursuant to Article 22.1(a)(i) – replacement value of the installation/property insured.

рursuant to Articles 22.1 (a)(ii) and 22.1(a)(vi) – а combined single limit of five million (5,000,000) Dollars in respect of onshore Petroleum Operations;

рursuant to Article 22.1(a)(iii) and 22.1(a)(iv) – tfive million (5,000,000) Dollars for any one occurrence.

рursuant to Article 22.1(a)(iv) – twenty five (25) percent of the value of property insured up to twenty five million (25,000,000) Dollars for any one accident or occurrence.



Page 94(c) Unless otherwise agreed by SOCAR, maximum insurance deductible for any one accident or occurrence shall be two hundred fifty thousand (250,000) Dollars as defined in Articles 22.1(a)(i) – (vi) above.



(c) Unless otherwise agreed by SOCAR, maximum insurance deductible for any one accident or occurrence shall be two hundred fifty thousand (250,000) Dollars as defined in Articles 22.1(a)(i) – (vi) above.



(e) Contractor shall provide medical insurance and other mandatory insurance to respective employees in accordance with applicable law of the Azerbaijan Republic.



(f) Except as provided in Article 15.1 (d)(iv), the premiums for all insurance (excluding premiums for insurance covering the marketing of Petroleum) obtained by Contractor for Petroleum Operations pursuant to this Article 22.1, shall be Cost Recoverable. Insurance cover may be denominated in Foreign Exchange.



(g) Upon the Contractor Party's request, local insurance company as an insurer to such Contractor Party shall reinsure its own liability by internationally accepted reinsurance mechanisms to the extent of Participating Interest of the Contractor Party. The reinsurance arrangement between the local insurance company and the reinsurance company shall be approved by SOCAR and the Contractor Party requesting reinsurance. Insurance company shall submit to SOCAR and the Contractor Party the evidence of reinsurance cover in the form of sertificates, cover notes or other legal documents of.



(h) Sub-contractors, or if agreed between Contractor and Sub-contractors, Contractor on behalf of Sub-contractors, shall insure the work performed for Contractor within the Azerbaijan Republic in accordance with applicable law of the Azerbaijan Republic and pursuant to Article 22.1 above. All deductibles shall be covered by Sub-contractors.



(i) Contractor shall furnish SOCAR with certificates and/or cover notes confirming the insurance coverage of Subcontractor.



Page 95

22.2 Liability for Damages

The Contractor Parties shall be liable to SOCAR and/or any Governmental Authority only for any loss or damage arising from their Wilful Misconduct or the Wilful Misconduct of their respective employees, their respective Sub-contractors and Sub-contractors’ employees acting in the scope of their performance of Petroleum Operations. SOCAR shall release each Contractor Party and its respective Affiliates and Sub-contractors from all other losses and damages suffered by SOCAR and any of its Affiliates and shall indemnify and hold harmless each Contractor Party and its respective Affiliates and Sub-contractors against all claims, demands, actions and proceedings brought against such Contractor Party and/or any of its Affiliates and Sub-contractors pertaining to all other losses and damages suffered by SOCAR and/or any Governmental Authority. The liabilities of the Contractor Parties to Third Parties (other than Governmental Authorities) shall be governed by applicable laws of the Azerbaijan Republic, provided that structures and facilities of SOCAR located outside of the Contract Area shall be treated as if such structures and facilities were owned by a Third Party.



22.3 Indemnity for Personnel

Notwithstanding the other provisions of this Agreement:

(a) Contractor shall indemnify and hold harmless SOCAR against all losses, damages and liability arising under any claim, demand, action or proceeding brought or instituted against SOCAR by any employee of any Contractor Party (or any Affiliate thereof, provided that such Affiliate, at the time of the injury or damage, is not acting in the capacity of a Subcontractor) or dependent thereof, for personal injuries, industrial illness, death or damage to personal property sustained in connection with, related to or arising out of the performance or non performance of this Agreement regardless of the fault or negligence in whole or in part of any entity or individual.

(b) SOCAR shall indemnify and hold harmless Contractor against all losses, damages, and liability arising under any claim,



Page 96

demand, action or proceeding brought or instituted against Contractor by any employee of SOCAR (or any Affiliate thereof, which shall include any Governmental Authority, provided that such Affiliate, at the time of the injury or damage, is not acting in the capacity of a Sub-contractor) or dependent thereof, for personal injuries, industrial illness, death or damage to personal property sustained in connection with, related to or arising out of the performance or nonperformance of this Agreement regardless of the fault or negligence in whole or in part of any entity or individual. Contractor shall, if so requested by SOCAR, use its reasonable lawful endeavours to assist SOCAR in its obtaining insurance with respect to its liability under this Article 22.



22.4 Indemnity Prior to Effective Date

SOCAR shall indemnify each Contractor Party and its Affiliates from and against all losses, damages and liabilities, arising under any claim, demand, action or proceeding instituted against any Contractor Party and/or any of its Affiliates by any person or entity, including but not limited to Governmental Authorities, arising out of or in any way connected with any injury, death or damage of any kind sustained in connection with or arising from the Contract Area or any operations of SOCAR or any of its predecessors, prior to the Effective Date, including but not limited to damage to the environment.



22.5 Indemnity for Surrendered Areas and SOCAR Operations

(a) SOCAR shall indemnify each Contractor Party and its Affiliates from and against all losses, damages and liabilities arising under any claim, demand, action or proceeding instituted against any Contractor Party and/or any of its Affiliates by any person or entity, including but not limited to Governmental Authorities, arising out of or in any way connected with any injury, death or damage of any kind sustained in connection with or arising from:

(i) SOCAR’s operations pursuant to Article 23.3, or as the



Page 9

result of SOCAR access pursuant to Article 9.2; and р

(ii) Any portion of the Contract Area surrendered by Contractor pursuant to Articles 31.3 and 31.5 and/or any continued use of any assets, and/or the abandonment of any assets, for which SOCAR has assumed control and responsibility from Contractor pursuant to Article 16 and accruing after the date of such surrender and/or SOCAR's assumption of the use of any such assets and abandonment of any assets, including but not limited to damage to the environment (but excluding any claim, action or proceeding which results from Contractor's Wilful Misconduct whether occurring before or after the date of surrender).

(b) In respect of any loss, damage or liability, as well as any claim, demand, action or proceeding instituted against SOCAR by any person or entity for death or damage of any kind sustained in connection with or arising from any portion of the Contract Area surrendered by Contractor and accruing on or before the date of surrender, including but not limited to damage to the environment, the provisions of this Agreement, and Contractor's obligations hereunder, shall continue to apply.



22.6 Joint and Several Liability

Except as provided under Articles 14 and 29.1 the liability of the Contractor Parties shall be joint and several with respect to all of the obligations of Contractor under this Agreement.



22.7 Consequential Losses

With respect to indirect or consequential loss arising out of or in connection with this Agreement or any activities thereunder, notwithstanding anything to the contrary elsewhere in the Agreement, without prejudice to the rights of the Contractor Parties under Articles 25.2 and 25.3(b), the Parties shall not be liable whether in contract, tort or otherwise and regardless of any negligence under any circumstances whatsoever for any indirect or consequential loss. For the purposes of this Article 22.7 the expression "indirect or consequential loss" shall mean any indirect or consequential loss or damage including but not limited to inability to produce Petroleum, loss of or delay in production of Petroleum or loss of profits.



Page 98

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Page 99 ARTICLE 23



FORCE MAJEURE





23.1 Force Majeure



Non-performance or delays in performance on the

part of any Party of its obligations (or any part

thereof) under this Agreement, other than the

obligation to pay money, shall be excused if

occasioned or caused by Force Majeure. "Force

Majeure" means any event which prevents, hinders or

impedes Petroleum Operations and is beyond the

ability of the affected Party to control such event

or its consequences using reasonable efforts,

including without limitation, extraordinary events,

natural disasters (for example lightning and

earthquake), wars (declared or undeclared) or other

military activity, fire, labour disputes,

insurrections, rebellions, acts of terrorism, riot,

civil commotion, and laws, treaties, rules,

regulations, decrees, orders, actions or in actions

of any governmental authority (inside or outside of

the Azerbaijan Republic) which prevent hinder or

impede Contractor's conduct of operations or which

substantially impairs or threatens Contractor's

rights under this Agreement; provided, however,

that laws, treaties, rules, regulations, decrees,

orders or other acts of any entity or agency acting

on behalf of, under the auspices of, or at the

direction of any Governmental Authority within the

territory of the Azerbaijan Republic shall not

constitute Force Majeure with respect to delay or

non-performance on the part of SOCAR. Each Party

shall use its reasonable lawful efforts to prevent

the occurrence of Force Majeure events. Upon the

occurrence of any Force Majeure event, the Party

affected shall give prompt notice to the other

Parties specifying the event of Force Majeure (and

providing evidence thereof) and shall do all things

possible using reasonable lawful efforts to remove

or mitigate the effect of such Force Majeure event.

If the government within whose jurisdiction a

Contractor Party or its Ultimate Parent Company is

incorporated or is subject takes actions which

preclude such Contractor Party from fulfilling its

obligations under this Agreement, the remaining

Contractor Parties may not claim such an event as

Force Majeure and shall, consistent with the

principles set forth in Article 22.6, continue to

fulfill their obligations under this Agreement.





Notwithstanding anything to contrary in this

Agreement and except





100for any event of Force Majeure that results from the act or failure to act of any Governmental Authority, Finance Costs shall not be applied to any unrecovered Petroleum Costs during a period of Force Majeure.



23.2 Extension of Time



If Petroleum Operations are delayed, curtailed or prevented by Force Majeure, then the time for carrying out the obligations affected thereby, the duration of the relevant phase of Petroleum Operations, the duration of the Development and Production Period (including any extension period hereof) and all rights and obligations hereunder shall be extended for a period equal to the delay caused by the Force Majeure occurrence plus such period of time as is necessary to reestablish operations upon removal or termination of Force Majeure.



23.3 Post-Production Force Majeure



If at any time during the Development and Production Period, Contractor declares Force Majeure and such Force Majeure situation has continued for a period of not less than ninety (90) consecutive days and such Force Majeure did not arise as a result of events within the Azerbaijan Republic or as a result of any action on the part of a Governmental Authority and as a result of such Force Majeure

Contractor has been unable to produce Petroleum under this Agreement then SOCAR and Contractor shall meet within fifteen (15) days following the expiry of the said period of ninety (90) days to

discuss how best to continue production. Failing agreement on satisfactory arrangements within ninety (90) days thereafter SOCAR shall have the option of itself or its Affiliate assuming operations hereunder and continuing production of Petroleum during the period of Force Majeure at its risk and cost with the possible participation of sub-contractors until Contractor declares the cessation of the Force Majeure circumstance when Contractor shall resume its full responsibilities for production of Petroleum under this Agreement.



SOCAR or its Affiliate shall be entitled to recover SOCAR's or its



Affiliate's direct costs in accordance with the Cost Recovery mechanism and shall credit the Petroleum Operations Account for the volumes of Petroleum delivered while the Force Majeure circumstances continue at international prices at the Points of Sale used prior to commencement of the Force Majeure.













102 ARTICLE 24



VALIDITY, ASSIGNMENT AND GUARANTEES



24.1 Validity



(a) Except as otherwise provided under Article

24.1(b), this Agreement shall constitute a

valid and binding legal obligation enforceable

in accordance with its terms among the Parties

and their respective successors and assigns as

of the Effective Date. SOCAR guarantees that as

of the date of execution no other agreement

exists with respect to the right to explore

for, develop or produce Petroleum with respect

to the Contract Area. SOCAR further guarantees

that between the Execution Date and the

Effective Date it shall not enter into any

negotiations or arrangements with any Third

Party for the granting of rights to

rehabilitate and develop the Contract Area (or

any part thereof). From and after the Effective

Date this Agreement shall not be cancelled,

amended or modified except in accordance with

its terms or by written agreement between the

Parties. The Parties acknowledge the necessity

of continuing to work in good faith to resolve

any matters not presently covered by this

Agreement.



(b) In recognition by the Parties that certain

obligations have to be performed on or before

the Effective Date, it is agreed that the

provisions of Articles 28.1(b), and SOCAR's

guarantees under Article 25.1(a) shall come

into force on the Execution Date.



(c) In the event this Agreement is finally rejected

by the Parliament of the Azerbaijan Republic

and Contractor has notified SOCAR that any

further revisions to this Agreement, if any,

necessary for ratification are unacceptable to

Contractor, this Agreement shall not become

effective, and the rights and obligations of

the Parties under this Agreement and any

previous agreements pertaining to the Contract

Area shall be extinguished.



24.2 Assignment

















103







(a) Restriction. No assignment, mortgage, pledge or

other encumbrance shall be made by a Contractor

Party of its rights and obligations arising under

this Agreement other than in accordance with the

provisions of this Article 24.2. Any purported

assignment made in breach of the provisions of this

Article 24.2 shall be null and void. For purposes

of this Article 24 change in the structure of

ownership of an Other Contractor Party (other than

for the purposes of internal reconstruction or

amalgamation of the Ultimate Parent Company of the

Other Contractor Party) shall be deemed an

assignment under this Agreement. Except in the case

of a Contractor Party assigning all of its

percentage Participating Interest, no Contractor

Party shall assign less than a five (5) percent

percentage Participating Interest without SOCAR’s

approval.



(b) By a Contractor Party



(i) Assignments to Third Parties. Subject to the

provisions of this Article 24.2(b) a Contractor

Party shall be entitled to assign all or part

of its rights and obligations arising under

this Agreement to any Third Party which:



(aa) has the technical and financial ability

commensurate with the responsibilities and

obligations which would be imposed on it

hereunder;



(bb) as to the interest assigned, accepts and

assumes all of the terms and conditions of

this Agreement; and



(cc) is an entity with which SOCAR and each of

the Contractor Parties can legally do

business.



(ii) Encumbrance by Contractor Party. Without

prejudice to its obligations hereunder, each

Contractor Party shall have the right to freely

mortgage, pledge or otherwise encumber its

interests in the Agreement or any property in or

outside the Azerbaijan Republic which is used

for Petroleum Operations, provided that any such

mortgage, pledge or other encumbrance shall be

made expressly subject to the terms of this

Agreement.









104(iii) Approval of SOCAR. Any proposed assignment,

mortgage, pledge or other encumbrance by a

Contractor Party to a Third Party shall require

the prior approval of SOCAR which approval shall

not be unreasonably withheld. If within ninety

(90) days following notification to SOCAR of a

proposed assignment accompanied by the relevant

information and the draft deed of assignment,

mortgage, pledge or other encumbrance, SOCAR has

not given its decision, such assignment,

mortgage, pledge or other encumbrance shall be

deemed to be approved by SOCAR.



(iv) Obligations of Assignee. In the event a

Contractor Party assigns all or a portion of its

rights and obligations arising under this

Agreement, and the assignment has been approved

or deemed approved by SOCAR, the assignor shall,

to the extent of the interest assigned, be

released from all further obligations and

liabilities arising under this Agreement after

the effective date of such assignment. The

assignee with the remaining Contractor Parties

shall thereafter be jointly and severally liable

for the obligations arising from this Agreement,

except to the extent otherwise provided under

this Agreement.



(v) Assignments to Affiliates and Contractor Parties.

A Contractor Party shall be entitled at any time

to assign all or part of its rights and

obligations arising from this Agreement to one or

more of its Affiliates or to any of the

Contractor Parties without the prior consent of

SOCAR, provided however that SOCAR shall be

promptly advised of any such assignment.

Additionally, with respect to an assignment by a

Contractor Party to an Affiliate, any such

Affiliate must satisfy the requirements of

Article 24.2(b)(i) above, and further, provided

that the assigning party shall remain liable for

its Affiliates obligations under this Agreement

in the same manner as though no assignment had

been made to such Affiliate unless and until said

assignment is approved or deemed approved by

SOCAR, in the manner provided under Article

24.2(b)(iii).





10524.3 No Tax on Assignments



Any assignment or transfer pursuant to Article

24.2 shall be free of Taxes, except Profit Tax,

and shall be free of any cost or charge to

Contractor Parties.



24.4 Conditions on Assignment



Any assignment by a Contractor Party shall be

expressly conditioned upon the assignee providing

to SOCAR an Ultimate Parent Company Guarantee

similar to the guarantee specified in Article

24.5.



24.5 Ultimate Parent Company Guarantees, SOCAR

Guarantee



Each Contractor Party other than SOA shall, as

soon as practicable after execution of this

Agreement but not later than the Effective Date,

provide to SOCAR an Ultimate Parent Company

Guarantee.



SOCAR hereby guarantees to each Contractor Party

other than SOA:



(a) all funds necessary for SOA to fulfill all of

its obligations, financial or otherwise, under

the Agreement; and



(b) the rights granted and the obligations

undertaken by SOA





24.6 Government Guarantee



Upon the execution of this Agreement but not later

than the Effective Date SOCAR shall procure the

execution of the Government Guarantee. An executed

original of the Government Guarantee shall be

provided to each Contractor Party and shall be

included in the executed copy of this Agreement to

be submitted to the Parliament of the Azerbaijan

Republic. Upon ratification and approval of this

Agreement by the Parliament of the Azerbaijan

Republic and publication in the customary manner

the Government Guarantee shall have the force of

law.



106 ARTICLE 25



APPLICABLE LAW, ECONOMIC STABILIZATION

AND ARBITRATION





25.1 Applicable Law



This Agreement shall be governed and interpreted in

accordance with principles of law common to the law

of the Azerbaijan Republic and English law, and to

the extent that no common principles exist in

relation to any matter then in accordance with the

principles of the common law of Alberta, Canada

(except for laws regarding conflicts of laws). This

Agreement shall also be subject to the

international legal principle of pacta sunt

servanda (agreements must be observed). Upon

approval by the Parliament of the Azerbaijan

Republic of this Agreement, this Agreement shall

constitute a law of the Azerbaijan Republic and

shall take precedence over any other current or

future law, decree or administrative order (or part

thereof) of the Azerbaijan Republic which is

inconsistent with or conflicts with this Agreement

except as specifically otherwise provided in this

Agreement.



25.2 Economic Stabilization



The rights and interests accruing to Contractor (or

its assignees) under this Agreement and its Sub-

contractors under this Agreement shall not be

amended, modified or reduced without the prior

consent of Contractor. In the event that any

Governmental Authority invokes any present or

future law, treaty, intergovernmental agreement,

decree or administrative order which contravenes

the provisions of this Agreement or adversely or

positively affects the rights or interests of

Contractor hereunder, including, but not limited

to, any changes in tax legislation, regulations, or

administrative practice, the terms of this

Agreement shall be adjusted to re-establish the

economic equilibrium of the Parties, and if the

rights or interests of Contractor have been

adversely affected, then SOCAR shall indemnify

Contractor (and its assignees) for any disbenefit,

deterioration in economic circumstances, loss or

damages that ensue therefrom. SOCAR shall within

the full limits of its authority use its reasonable

lawful endeavours to ensure that the appropriate

Governmental Authorities will take appropriate

measures to resolve promptly in accordance with the

foregoing principles any conflict or anomaly

between any such treaty, intergovernmental

agreement, law, decree or administrative order and

this Agreement.



107 25.3 Arbitration



(a) Except for any matter to be referred to an

expert pursuant to Articles 15.1(a)(ii) and

15.1(c), in the event of a dispute arising

between SOCAR and any or all of the Contractor

Parties (including matters which are not

resolved at the Steering Committee), the

disputing Parties shall meet in an attempt to

resolve the dispute to their mutual

satisfaction by reference to the terms of this

Agreement. If satisfactory mutual agreement is

not achieved within thirty (30) days after

receipt by a Party of notice of such dispute,

such dispute shall be settled in accordance

with the Arbitration Procedure and the

applicable law provisions of Article 25.1.



(b) Nothing in this Agreement shall limit the

rights of the Contractor Parties under the

existinge law of the Azerbaijan Republic on

protection of foreign investment, which rights

shall apply in addition to any other rights

Contractor may have under this Agreement

notwithstanding any other law, both current

and future, in the Azerbaijan Republic. If any

of Contractor's rights, interests or property

are expropriated, nationalised or otherwise

taken by reason of any act or failure to act

of any Governmental Authority, then the

arbitrators shall apply the principle of

indemnification (including prompt, full and

effective compensation in Dollars) at the full

market value, on the basis of an on-going

concern utilising the discounted cash flow

method, assuming a willing buyer and seller in

a non-hostile environment, and disregarding

the unfavourable circumstances under which or

following which Contractor shall be deprived

of its rights, interest (including its

interest in undeveloped reserves) or property.

The arbitrators shall select an investment

bank of good international reputation for

purpose of appraising the full market value of

said rights, interest (including its interest

in undeveloped reserves) or property of

Contractor.



(c) The rights and obligations under this Article

25.3 shall survive



108the termination of this Agreement.





















































109 ARTICLE 26



NOTICES





All notices required to be given pursuant to this Agreement shall be in writing in English and Azeri and may be given by telex, facsimile or letter to the address set out below for each Party (or such other address as a Party may notify to the other Parties from time to time) provided, however, that following the Effective Date and formation of the Operating Company any notices required to be given to Contractor Parties hereunder by SOCAR (except any notice of breach pursuant to Article 31, any notice pursuant to Article 24.2(b)(iii) and any notice of termination of this Agreement and any notice of arbitration pursuant to Article 25.3) shall be considered effective as to all Contractor Parties if given to the Operating Company in accordance with this Article 26. Contractor shall advise SOCAR of details of the name and address of the Operating Company (and of any changes thereto) as soon as practicable after its formation. A notice given by telex or facsimile shall be deemed to be received on the first working day following the date of dispatch. A notice sent by letter shall not be deemed to be delivered until received. Notices of termination of this Agreement and notices of Material Breach shall be given only by letter.





SOCAR: State Oil Company of the Azerbaijan Republic

73 Neftchilar Prospecti

Baku AZ 1000 Azerbaijan Republic



Facsimile: (+994 12) 493 64 92

Telephone: (+994 12) 492 07 45

Attention: The President





Russneft: RUSSNEFT APSHERON INVESTMENTS

LIMITED

P.O. Box 3175

Road Town, Tortola,

British Virgin Island

Facsimile:

Telephone:

Attention: The President





SOA: SOCAR Oil Affiliate











110



73 Neftchilar Prospecti

Baku AZ 1000 Azerbaijan Republic



Facsimile: (+994 12) 493 64 92

Telephone: (+994 12) 492 07 45

Attention: The President













































111 ARTICLE 27



EFFECTIVE DAY



27.1 Effective Date



(a) The Effective Date shall be the date upon which

SOCAR delivers to Contractor written evidence

of the enactment by the legislature of the

Azerbaijan Republic in full compliance with the

Constitution and all requisite legal

formalities and procedures and publication in

the customary manner of legislation giving this

Agreement (including the Government Guarantee),

the full force of law in the Azerbaijan

Republic, provided, however, that the Effective

Date shall not occur until the following

conditions precedent have been satisfied:



(i) authorisation to enter into this Agreement

by the Boards of Directors of each of the

Parties (if applicable under foundation

documents of such Party);



(ii) execution by the Parties of the instruments

in the order specified by the legislation

of the Azerbaijan Republic justifying

acceptance by the Operating Company of the

OGPD capital assets used in the Petroleum

Operations within and/or for the Contract

Area at the Effective Date;



(iii) delivery to SOCAR of the Ultimate Parent

Company Guarantee of each of the Contractor

Parties (except SOA); and



(iv) delivery to each of the Contractor Parties

(except SOA) of the Government Guarantee.



(b) The Parties shall use their best endeavours to

obtain as soon as possible (1) satisfaction of

the conditions referred to in Article 27.1(a)(i)

- (iv) and upon satisfaction thereof (2) the

enactment as aforesaid by the legislature of the

Azerbaijan Republic giving this Agreement and the

said Government Guarantee the full force of law

in the Azerbaijan Republic.





27.2 Pre-Effective Date Petroleum Operations





112 Notwithstanding the provisions of Article 27.1, in the event that, from the Execution Date and prior to the Effective Date, Contractor, without prior written consent of SOCAR, does conduct Petroleum Operations, the costs incurred by Contractor in relation to such Petroleum Operations shall not be Cost Recoverable.































113































ARTICLE 28



ENVIRONMENTAL PROTECTION AND SAFETY





28.1 Conduct of Operations



Contractor shall conduct the Petroleum Operations

in a diligent, safe and efficient manner in

accordance with present and future Azerbaijani laws

with respect to safety and protection of the

environment, international Petroleum industry

environmental standards and practices, provided

that such standards and practices comply with

Azerbaijani laws with respect to safety and

protection of the environment. Contractor shall

take all reasonable actions in accordance with

those laws and standards to minimise any potential

disturbance to the general environment, including

without limitation the surface, subsurface, sea,

air, lakes, rivers, animal life, plant life, crops

and other natural resources and property. The order

of priority for actions shall be the protection of

life, environment and property. Contractor shall

implement an integrated management system covering

all health, safety and environmental aspects of the

activities carried out in relation to the Petroleum

Operations; provided that:





(a) Contractor shall elaborate Health, Safety and

Environmental Protection Programme for the

Contract Area to be developed on the base line

study and approved by Contractor and SOCAR and

the Ministry of Ecology and Natural Resources

of the Azerbaijan Republic (MENR). Costs

incurred with respect to preparation and

implementation of the Health, Safety and

Environmental Protection Programme shall be

Petroleum Costs, and shall be Cost Recoverable.



(b) Contractor shall conduct Petroleum Operations

in compliance with the safety and environmental

protection standards outlined in paragraph 2 of

Appendix 9. Contractor shall develop and

further agree with SOCAR and MENR safety and

environmental protection standards and

practices appropriate for the regulation of

Petroleum Operations. Safety and environmental

protection standards shall take account of the

specific environmental characteristics of the

territory within the Contract Area and area

adjacent, including but not limited to the

coastal zone and the Caspian Sea and draw on

present and future Azerbaijani laws with

respect to safety and protection of environment

and, as appropriate, on international Petroleum

industry standards and experience with their

implementation in rehabilitation, exploration

and production operations in the other parts of

the world. In compilation of such standards and

practices account shall be taken of such

matters as environmental quality objectives,

technical feasibility and







114

economic and commercial viability. When new

safety and environmental protection standards

devised and agreed between SOCAR, Contractor and

MENR shall take effect under this Agreement,

standards and practices outlined in Appendix 9

shall not apply any more; and such new standards

and practices shall further apply to Petroleum

Operations under this Agreement and have the

force of law as a part of this Agreement.



28.2 Emergencies



In the event of emergency and accidents, including

but not limited to explosions, blow-outs, leaks

and other incidents which damage or might damage

the environment, Contractor shall promptly notify

MENR and SOCAR of such circumstances, including

the estimate of oil spilled, its first steps to

remedy this situation and the results of said

efforts. Contractor shall use all reasonable

endeavours to take immediate steps to bring the

emergency situation under control and protect

against loss of life, prevent harm to natural

resources and to the general environment and loss

of or damage to property. Contractor shall also

report to SOCAR and appropriate Governmental

Authorities on the measures taken.



28.3 Environmental Protection Strategy



An environmental protection strategy shall be

developed which shall include:



(a) Establishment of an environmental management

system as an integral part of Petroleum

Operations and the formation by the Steering

Committee of an environmental sub-committee as

described in paragraph 1 of Appendix 9;



(b) Health, Safety and Environmental Protection

Programme carried out in sequences appropriate

to the normal phases of Petroleum Operations

in accordance with the Annual Work Programmes

and Budget;



(c) Environmental sub-committee shall develop the

said Health, Safety and Environmental

Protection Programmee only upon an independent

assessment of the environmental base line

study has been carried out. Health, Safety and

Environmental Protection Programmee shall be

reviewed and approved by the Steering

Committee upon agreement by SOCAR and MENR.











1158.4 Environmental Damage



(a) Upon agreement by Contractor of the Health,

Safety and Environmental Protection Programmee

with SOCAR and MENR, Contractor shall be

liable for and indemnify direct losses or

damages incurred by a Third Party (other than

Governmental Authority) arising out of any

environmental pollution determined by the

appropriate court of the Azerbaijan Republic

to have been caused by the fault of

Contractor. In the event of any environmental

pollution and/or environmental damage caused

by the fault of Contractor, Contractor shall

take necessary steps, in accordance with

generally acceptable international Petroleum

industry practices, to mitigate the effect of

any such pollution and/or damage on the

environment.



(b) Contractor shall not be responsible and shall

bear no cost, expense or liability for claims,

damages or losses arising out of or related to

any environmental pollution or other

environmental damage, condition or problems

caused by action or inaction of SOCAR or a

Third Party prior to the Effective Date.

Contractor shall bear no cost, expense or

liability for claims, damages or losses

arising out of or related to any environmental

pollution or other environmental damage in

relation to existing assets in the Contract

Area which have not been passed to

Contractor’s use, provided that SOCAR shall

indemnify and hold harmless Contractor, its

Sub-contractors and its and their consultants,

agents, employees, officers and directors from

any and all costs, expenses and liabilities

relating thereto.



(c) Contractor shall conduct an environmental

baseline study using an environmental

consulting firm, which shall be selected on a

competitive basis under the laws of the

Azerbaijan Republic, which study shall

describe the condition of the environment and

any environmental damage existing on the

Effective Date, the costs of this study being

recoverable as Petroleum Costs. Once completed

and reviewed, the environmental baseline study

shall be approved according to the procedure

provided for by the laws of the Azerbaijan

Republic and after that it shall be the sole

evidence of the condition of the environment

in the Contract Area as of the Effective Date.





116(d) Any damages, liability, losses, costs and expenses

incurred by Contractor arising out of or related to

any claim, demand, action or proceeding brought

against Contractor, as well as the costs of any

remediation and clean-up work undertaken by

Contractor, on account of any environmental pollution

or environmental damage (except for such pollution or

damage resulting from Contractor's Wilful Misconduct)

caused by Contractor shall be included in Petroleum

Costs.













117

ARTICLE 29



CONFIDENTIALITY





29.1 General Provisions



(a) Each Party agrees that all information and data

of a technically, geologically or commercially

sensitive nature acquired or obtained relating

to Petroleum Operations and which on the

Effective Date is not in the public domain or

otherwise legally in the possession of such

Party without restriction on disclosure shall

be considered confidential and shall be kept

confidential (subject to Contractor's right to

use such data and information in accordance

with Article 16.1(e) and to trade in such data

and information in accordance with Article

29.2) and not be disclosed to any person or

entity not a Party to this Agreement, except:



(i) To an Affiliate, provided such Affiliate

maintains confidentiality as provided in

this Agreement;



(ii) To a Governmental Authority when required

by this Agreement;



(iii) To the extent such data and information is

required to be furnished in compliance with

any applicable laws or regulations, or

pursuant to any legal proceedings or

because of any order of any court binding

upon a Party;



(iv) Subject to (c) below, to potential Sub-

contractors, consultants and attorneys

employed by any Contractor Party where

disclosure of such data or information is

essential to such Sub-contractor's,

consultant's or attorney's work;



(v) Subject to (c) below, to a bona fide

prospective transferee of a Party's

Participating Interest (including an entity

with whom a Party is conducting bona fide

negotiations directed toward a merger,

consolidation or the sale of a majority of

its or an Affiliate's shares);



(vi) Subject to (c) below, to a bank or other

financial institution and their respective

advisors, consultants and







118

attorneys to the extent appropriate to a Party

arranging for funding for its obligations under

this Agreement or general financing;



(vii) To the extent such data and information must be

disclosed pursuant to any rules or requirements

of any government or stock exchange having

jurisdiction over such Contractor Party, or its

Affiliates;



(viii) Where any data or information which, through no

fault of a Contractor Party, becomes a part of

the public domain; and



(ix) To the arbitrators in accordance with Article 25

or to any expert in connection with Article

15.1(c) of this Agreement.



(b) Each Party shall take customary precautions to

ensure such data and information on Petroleum

Operations is kept confidential by its respective

employees.



(c) Disclosure pursuant to Article 29.1(a)(iv), (v), and

(vi) shall not be made unless prior to each such

disclosure the disclosing Party has obtained a

written undertaking from the recipient party to keep

the data and information strictly confidential from

Third Parties (except for data which is or becomes

in the public domain) and not to use or disclose the

data and information except for the express purpose

for which disclosure is to be made without the prior

written permission of the other Parties.



(d) Any Contractor Party ceasing to own a Participating

Interest in this Agreement during the term of this

Agreement shall nonetheless remain bound by the

obligations of confidentiality set forth above and

any disputes shall be resolved in accordance with

the Arbitration Procedure, and the confidentiality

obligations of the Contractor Parties as set forth

herein shall survive a period of five (5) years from

the termination of this Agreement.



29.2 Trading of Data



Notwithstanding the foregoing, in accordance with

Article 16.1(e), Contractor shall have the free

right to trade with Third Parties all data relating

to the Contract Area for other data with the

approval of





119

SOCAR, such approval not to be unreasonably withheld.



29.3 Corporate Disclosure



Each Contractor Party, notwithstanding any other provisions in this Article 29 may make disclosures in annual reports, employee and stockholder newsletters, magazines and the like of summarisations of a general nature relating to Petroleum Operations, which are customarily or routinely described or reported in such publications.



120 ARTICLE 30



BONUS PAYMENTS



30.1 Bonus Payments



The Bonus shall be payable as follows:



(a) Contractor (other than SOA) shall pay to SOCAR two millions (2,000,000) Dollars within thirty (30) days following the Effective Date.



(b) Other Contractor Parties shall, in proportion to their respective Participating Interests, pay to SOCAR the total sum of two millions (2,000,000) Dollars within thirty (30) days following the date upon which the average daily rate of Crude Oil production from the Contract Area within ninety (90) consecutive days exceeds one point five (1.5) times the average daily rate of Crude Oil produced in 2005.



(c) If Contractor fails to perform the obligation provided in Articles 30.1(a)(b) which shall be deemed to be a Material Breach, SOCAR shall have the right to terminate this Agreement pursuant to Article 31.1(b) of this Agreement, and any un-recovered costs incurred by Contractor from the Effective Date to the date of termination of this Agreement shall not be Cost Recoverable.



If during the implementation of the Agreement, as the result of SOA’s assignment of a part of its Participating Interest to any Third Party or Contractor Party the percentage share of the Other Contractor Parties by the time of the next tranche of Bonus payment exceeds seventy five (75) percent, the total amount of Bonus payable by the Other Contractor Parties shall increase in proportion to the total increase of the Other Contractor Parties’ Participating Interest.



Bonus payments made hereunder shall be made into SOCAR's nominated account in a bank of good international repute and shall be deemed paid when a full amount has been deposited into such SOCAR bank account, net of any possible charges.



30.2 Miscellaneous



121Subject to Article 31.2(a)(i) each Other Contractor Party shall be liable in proportion to its relative percentage Participating Interest share of the Bonus.



The payments made pursuant to this Article 30 shall not be Cost Recoverable.



122 ARTICLE 31



TERMINATION



31.1 Material Breach



(a) This Agreement may be terminated at any time:



(i) by SOCAR if Contractor commits, or



(ii) by Contractor if SOCAR or any Governmental Authority commits



a Material Breach of its obligations under this Agreement or the Government Guarantee, as the case may be, and fails to cure or remedy such Material Breach within ninety (90) days following written notice to it from the other describing the particulars of such Material Breach as well as its intention to terminate this Agreement on account of such Material Breach; provided however, that



(aa) if such Material Breach can be cured or remedied but not within ninety (90) days despite the exercise of reasonable diligence, then there shall be no right to terminate so long as the Party alleged to be in Material Breach commences within said ninety (90) days actions reasonably necessary to cure or remedy such Material Breach and diligently pursues such actions until the Material Breach is cured or remedied, it being understood that in such instance the Parties shall endeavour to reach mutual agreement on the actions necessary to cure or remedy the Material Breach; and



(bb) if either Contractor or SOCAR, as the case may be, within said ninety (90) day period refers the question of Material Breach to arbitration in accordance with the Arbitration Procedure, then termination of this Agreement will not occur unless and until (1) the arbitration proceeding results in a finding that such Material Breach does in fact exist, and (2) the Party found to have been in breach has had a reasonable opportunity thereafter (but in no event less than ninety



123(90) days), but failed, to cure or remedy the Material Breach identified by the arbitration panel, unless such Party has been diligently pursuing such actions and continues to do so until such Material Breach is cured or remedied. The arbitration tribunal's award shall be final and binding on the Parties and shall be immediately enforceable; and



(cc) as used in this Agreement the term “Material Breach” means a fundamental breach, which, if not cured, is tantamount to the frustration of the entire Agreement either as a result of the unequivocal refusal of either Contractor, SOCAR or a Governmental Authority, as the case may be, to perform its contractual obligations or as a result of conduct which has destroyed the commercial purpose of this Agreement.



(b) Non-performance or a failure to complete any of the activities listed in Articles 5, 13.1 и 13.2(b), other than as a result of Force Majeure, and Bonus payment obligation in accordance with Article 30.1(a)(b) shall be deemed to constitute a Material Breach of the Agreement by Contractor whereupon SOCAR shall have the right to unilaterally terminate this Agreement upon giving written notice to Contractor without Contractor being entitled to any period within which to cure or remedy such Material Breach as provided in Article 31.1. Termination of the Agreement by SOCAR pursuant to Articles 5, 13.1 и 13.2(b), 30.1(c) and this Article 31.1(b) shall be SOCAR's sole remedy against Contractor for such Material Breach and Contractor shall have no claim for reimbursement of any costs incurred by Contractor with respect to the execution of the said activities.



31.2 Termination by SOCAR



SOCAR may terminate this Agreement by giving Contractor ninety (90) days prior written notice:



(а) If any company issuing an Ultimate Parent Company Guarantee on behalf of any Contractor Party becomes insolvent or goes into liquidation (other than for the purpose of amalgamation or reorganisation), provided that such notice



124of termination shall take effect only if the other Contractor Parties because of their insolvency or liquidation, and subject to the provisions of joint liability, are not able to assume such Contractor Party’s rights and obligations under this Agreement and so notify SOCAR within such ninety (90) day period.



(b) If all Contractor Parties collectively become insolvent or go into liquidation (other than for the purposes of amalgamation or reconstruction).



(с) If, for reasons other than Force Majeure production of Petroleum in commercial quantities shall have permanently ceased.



31.3 Termination/Relinquishment by Contractor



(а) Subject to the remaining provisions of this Article 31.3, Contractor may at any time voluntarily relinquish all of the Contract Area by giving SOCAR not less than ninety (90) days prior written notice. Such notice shall specify the date upon which the relinquishment is to take effect and the manner in which Contractor will perform any remaining obligations pursuant to Article 31.3(b). Upon such relinquishment, the Agreement shall terminate. If SOCAR or Contractor requests, a meeting of the Steering Committee shall be convened to address any questions which may arise in connection with the relinquishment of the Contract Area.



(c) Termination of this Agreement or relinquishment of the entire Contract Area by Contractor pursuant to Article 31.3(a) shall not relieve Contractor of any remaining obligations under the then current Annual Work Programme which Contractor upon the prior agreement with SOCAR may fulfill at its option:



(i) by performing in full in accordance with their terms or



(ii) by payment in Dollars to SOCAR of the outstanding balance of money stipulated in the respective Budgets.



(с) In the event of termination of this Agreement or relinquishment of the entire Contract Area pursuant to Article 31.3(a), without prejudice to any rights which may have accrued, or claims which have been made, prior to such termination, Contractor



125shall have no further right to conduct Petroleum Operations and to recover any Petroleum Costs not Cost Recovered by the date of termination of the Agreement.



31.4 Other Remedies



Except as specifically stated in the provisions of this Agreement, in the event that Contractor or SOCAR terminates this Agreement pursuant to the above provisions, such termination shall be without prejudice to Contractor's or SOCAR's entitlement to sue the other for damages, or to any other remedy Contractor or SOCAR (as the case may be) may have in law.



31.5 Partial Relinquishment



Contractor shall have no unilateral right to relinquish a part of the Contract Area. In the event Contractor decides not to develop any portions of the Contract Area, the Parties will discuss the possibility of partial relinquishment on mutually agreed terms. In the event of partial relinquishment pursuant to this Article 31.5, Contractor shall have no right to recover out of the production from the remainder of the Contract Area not relinquished, any amount of Petroleum Costs incurred during the Development and Production Period in connection with the portion of the Contract Area relinquished which has not been recovered at the date of such relinquishment.



126 ARTICLE 32



MISCELLANEOUS



33.1 This Agreement is executed in the English, Azeri and Russian languages and, subject to the Arbitration Procedure and Article 16.2(c) all three languages shall have equal force.



33.2 The headings in this Agreement are inserted for convenience only and shall be ignored in construing this Agreement.



33.3 Unless the context otherwise requires, references to the singular shall include a reference to the plural and vice-versa; and reference to any gender shall include a reference to all other genders.



33.4 The Appendices to this Agreement and the attached Addendum Relating to the Formation of the SOCAR Oil Affiliate (the "Addendum") form part of this Agreement. In the event of any conflict between the provisions of the main body of this

Agreement and the Appendices (other than Appendix 1 which shall be considered part of the main body of the Agreement), then the provisions of the main body shall prevail.



IN WITNESS WHEREOF the Parties have executed this Agreement as of the date first above written by their duly authorised representatives.



127

STATE OIL COMPANY OF THE AZERBAIJAN REPUBLIC



By: ______________________________________________



Title:____________________________________________



By: ______________________________________________



Title:____________________________________________





RUSSNEFT APSHERON INVESTMENTS LIMITED



By: ______________________________________________



Title:____________________________________________



By: ______________________________________________



Title:____________________________________________





SOCAR OIL AFFILIATE



By: ______________________________________________



Title:____________________________________________



By: ______________________________________________



Title:____________________________________________



128WITNESSED



By: ______________________________



Title:____________________________



By: ______________________________



Title:____________________________



129 130













































































































130