The People's Republic of China

08/1998

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

The contract area as of the date of signature of the contract comprises, in part, 3 blocks, covering a total of 50.2 square kilometers, as marked out by the geographic location and the coordinates of the connecting points of the boundary lines in Annex I attached. The total area of the contract area shall be reduced in accordance with Art. 4, 5, 11 and 18.

XCL Cathay Ltd

Zhang Dong block

Zhang Dong Block

Petroleum

China National Petroleum Corporation

The term of the contract shall not go beyond 30 consecutive contract years from the date of commencement of the implementation of the contract, unless otherwise stipulated. The term of the contract shall include an appraisal period, a development period and a production period. The development of any oil field and/or gas field within the contract area shall begin on the date of approval by the department or unit of the overall development program of the said oil field and/or gas field, and end on the date of the entire completion of the development operations set forth in the overall development program, excluding the time for carrying out additional development projects in the production period in accordance with Art. 11.9. XCL Cathay and China National Petroleum Corporation will commence preparation of the overall development program when appraisal of any potential oil field and/or gas field indicates by reinterpretation of seismic and mapping and integrated reservoir study that such field is commercial. The overall development program will be submitted for approval by the department or unit as soon as approved by the joint management committee. The production period of any oil field and/or gas field within the contract area shall be a period of 20 consecutive production years beginning on the date of commencement of commercial production unless otherwise provided. Under such circumstances as where the overall development of an oil field and/or gas field is to be conducted on a large scale, and the time span required is long, or where separate production of each of the multiple oil or gas producing zones of an oil field and/or gas field is required, or under other special circumstances, the production period shall, when it is necessary, be appropriately extended with the approval of the department or unit. The appraisal period will last 5 consecutive contract years.

Production Sharing Agreement

Before the commencement of appraisal operations, the operator shall provide China National Petroleum Corporation (CNPC) with documentation on the possible impact by the appraisal operations on the environment and the adopted measures to prevent pollutions. Before the development operations the operator shall provide CNPC with an environment impact statement as an integral part of the overall development program of the oil field and/or gas field.

When competent authorities under the Chinese government assign any person to inspect environmental protection and safety within the scope of the petroleum operations according to the laws, decrees, rules and regulations, the operator shall provide all necessary facilities and assistance to enable the inspectors to carry out such inspection smoothly.

XCL Cathay shall abide by the laws, decrees, and other rules and regulations with respect to environmental protection and safety of the People's Republic of China and shall endeavor in accordance with international petroleum industry practice to minimize the damage and destruction to environment, community and ecology and prevent land, forests, crops, buildings and other installations from being damaged and destroyed. In the performance of the petroleum operations, XCL Cathay shall be strictly subject to the laws, decrees and regulations on environmental protection and safety promulgated by the Chinese government and make its best efforts to prevent pollution and damage to the atmosphere, oceans, rivers, lakes, ground water, harbors, land and ecology and secure the safety and health of the operating personnel. XCL Cathay shall use all reasonable endeavors to eliminate promptly any pollution occurring in the performance of the petroleum operations and minimize its consequences. Economic loss caused by any pollution shall be charged to the joint account, unless otherwise provided.

XCL Cathay shall be permitted to use for the purpose of petroleum operations any water source located within the contract area, subject to government rules any payment of reasonable charges at the rates not more than rates charged to other users of similar water sources in the area.

Any non-operator party to the contract shall have the right to audit all the operator's joint account accounting books and records after the end of each calendar year and to give the operator a written notice of the auditing results. The audit of any calendar year shall be completed within 24 months after the end of such calendar year. If written notice of the auditing results and exceptions are not given by the non-operator party within such period or if the annual joint account accounting books and records of the operator are not audited by any non-operator party within such period, the operator's joint account accounting books and records shall be deemed correct. A special auditing of the operator's joint account accounting books and records may be made due to some special requirements during a calendar year. If the auditing referred to is conducted, the operator shall be given 30 days notice prior to the date of commencement of such auditing. There shall be no impediment to normal petroleum operations during any audit. The auditors shall be entitled to access to all relevant joint account records, files and other information and may inspect such sites and facilities as are necessary. Upon receipt of a notice of the non-operator party's exceptions to the auditing results, the operator shall resolve these matters in due time (no later than 60 days)

XCL Cathay shall pay China National Petroleum Corporation a signature fee of U.S.$300,000 within 30 days from the effective date of the contract; and U.S.$ 200,000 payable within 30 days of the date of approval of the overall development program of the first oil field and/or gas field by the department or unit. Such signature fee shall, in no case, be charged to the joint account, nor be deemed recoverable costs.

XCL Cathay shall pay taxes to the Chinese government subject to the tax laws and regulations of the People's Republic of China.

The remainder of the annual gross production of crude oil after the allocation of value added tax, royalty and cost recovery oil shall be deemed as "remainder oil". Such "remainder oil" shall be divided into "share oil" of the Chinese side and "allocable remainder oil." The "allocable remainder oil" of each oil field in each calendar year shall be equal to the "remainder oil" of that calendar year multiplied by the factor (x) for each oil field within the contract area in that calendar year. The factor (x) of each oil field in each calendar year shall be determined in accordance with the following successive incremental tiers on the basis of the annual gross production of crude oil from such oil field. Annual gross production of crude oil from each oil field in thousands of metric tons (Annual Gross Production) Factors in % applicable to each production tier of each oil field each oil field within the contract area (Factors) Annual Gross Production equal to or less than 300, Factors x1 = 96% Annual Gross Production over 300 to 600, Factors x 2 = 92% Annual Gross Production over 600 to 1,200, Factors x 3 = 90% Annual Gross Production over 1,200 to 1,800, Factors x 4 = 86% Annual Gross Production over 1,800 to 2,400, Factors x 5 = 82% Annual Gross Production over 2,400 to 3,500, Factors x 6= 78% Annual Gross Production over 3,500, Factors x 7 = 73 % The "allocable remainder oil" of each oil field in each calendar year shall be shared by the parties in proportion to their respective participating interests in the development costs, 51% for China National Petroleum Company and 49% for XCL Cathay. In the event that China National Petroleum Company does not participate in the development of an oil field within the contract area, XCL Cathay shall obtain 100% of the "allocable remainder oil" of that field. In the event that China National Petroleum Company participates to an extent less than 51% in the development of an oil field within the contract area, the "allocable remainder oil" of such field in that calendar year shall be shared by the parties in proportion to their actual respective participating interests in such oil field.

The operating costs for any given calendar year actually incurred by China National Petroleum Company (CNPC) and the XCL Cathay in each oil field shall be recovered in kind by the parties out of the crude oil produced from the said oil field during that calendar year in accordance with Annex II-accounting procedure, after the operating costs have been converted into a quantity of crude oil on the basis of the crude oil price determined in accordance with Art. 14. Unrecovered operating costs shall be carried forward to the succeeding calendar year. 60% of the annual gross production of crude oil shall be deemed as the "cost recovery oil" and shall be used for payments for cost recovery in the following sequence: (1) Payment in kind for the operating costs actually incurred but not yet recovered by the parties after the price of the "cost recovery oil" has been determined. (2) The remainder of the "cost recovery oil" shall, after payment for operating costs be deemed as "investment recovery oil." Such "investment recovery oil" shall be used for the recovery of the appraisal costs in respect of the contract area which were incurred and not yet recovered by the parties, and shall be used for the recovery of the development costs in respect of the oil field itself which were incurred and not yet recovered by CNPC and XCL Cathay.

The parties' participating interests are: 51% by China National Petroleum Company and 49% by XCL Cathay. If China National Petroleum decides to participate at a level less than 51% of the participating interest, or not to participate in the development of the oil field and/or gas field, XCL Cathay shall pay the remaining development costs necessary for the development of the oil field and/or gas field.

XCL Cathay shall give preference to the employment of China National Petroleum Company (CNPC) personnel in the performance of the petroleum operations. For this purpose, XCL Cathay shall submit in advance to CNPC and the joint management committee, respectively, all plans for the employment of CNPC personnel listing all the posts and the number of persons involved. CNPC shall, in accordance with the plan, provide or assist in recruiting Chinese employee candidates for such employment. For the performance of petroleum operations, XCL Cathay shall have the obligation to employ competent CNPC personnel and to employ those who have become qualified after being trained in accordance with the training program. XCL Cathay shall, in the employment, give preference to the CNPC personnel who have participated in the training program provided by XCL Cathay.

XCL Cathay shall give preference to China National Petroleum Company (CPNC) and/or local goods, equipment and service when procuring necessary goods, and leasing equipment as well as entering into subcontracts or other service contracts for the performance of the petroleum operations provided that they are competitive in terms of price, quality, term of delivery, technology and service. The engineering design corporations under CNPC shall have the right to participate in the master designs and engineering designs made by the XCL Cathay for the purpose of the implementation of the Contract. Engineering design companies within the territory of the People's Republic of China shall be given preference in entering into the subcontracts for the master designs and engineering designs, provided that their technical level, price and delivery time are competitive. After the XCL Cathay signs equipment leasing contracts, service contracts or subcontracts with CNPC or its affiliates in accordance with Art. 15.1, the XCL Cathay shall endeavor to provide technical assistance to CNPC or its affiliates, at the request of CNPC so as to enable them to meet the needs of operations to be undertaken. The expenses so incurred shall be borne by CNPC or its affiliates.

XCL Cathay shall train, in planned, systematic and various ways, the Chinese personnel relating to the implementation of the contract, for the purpose of improving their knowledge and skill, so that such Chinese personnel shall gradually reach the level of knowledge and skill as that possessed by XCL Cathay's employees. Within 90 days following the date of commencement of the implementation of the contract, the XCL Cathay shall, after consultation with China National Petroleum Company (CNPC), complete and submit a training and technology transfer program for the Chinese personnel in the appraisal period and the corresponding budget to joint management committee for review and approval, and upon approval by joint management committee, put it into practice. The XCL Cathay shall, after the consultation with CNPC, complete and submit training programs and corresponding budgets for the Chinese personnel in the development period and production period, respectively, to joint management committee for its review and approval before the commencement of development operations and production operations, and upon approval by joint management committee, put them into practice in time so as to have ample time in advance for such training and technology transfer.

All assets purchased, installed and constructed under the work program and budget for an oil field and/or gas field within the contract area shall be owned by China National Petroleum Company from the date on which all the development costs actually incurred by XCL Cathay in the development period of such oil field and/or gas field have been fully recovered or from the date on which the production period expires, even though the aforesaid costs have not been fully recovered. XCL Cathay shall be responsible for the acceptance inspection or testing of the said assets and China National Petroleum Company may, as it deems necessary, send its experts to participate in such acceptance inspection or testing. In the production period, the operator may use the China National Petroleum Company -owned assets free of charge for performing the petroleum operations. Such assets shall not be used in any operations other than the petroleum operations or any operations by third parties without the consent of the parties.

XCL Cathay, shall fulfill the minimum appraisal work commitment and expected minimum appraisal expenditures for each phase of the appraisal period in accordance with the following provisions: During the first phase of the appraisal period, XCL Cathay shall: (a) reprocess and reinterpret a minimum of approximately 300 kilometers of existing 2-D seismic data and 70 square kilometers of existing 3-D seismic data, provided necessary support data is available. XCL Cathay will have access to additional seismic data outside the contract area as needed to make geological and geophysical evaluations of the contract area; (b) drill 1 appraisal well with the footage of 3,000 meters; (c) spend a minimum of US$ 1 million upgrading the artificial island and to recondition the causeway and causeway drilling pad in preparation of petroleum operations; and (d) spend a minimum of US$ 4 million (including the expenditures described in (c) for the appraisal operations. During the second phase of the appraisal period, the XCL Cathay shall: (a) drill 2 appraisal wells, one with the footage of 3,000 meters, and one with the footage of 3,500 meters; (b) if the decision is made to drill from the artificial island, the XCL Cathay will spend a minimum of an additional US$1 million upgrading the drilling rig and other facilities on the artificial island; (c) If XCL Cathay concludes and the joint management committee agrees that it is feasible from an engineering, geological and economic viewpoint to reevaluate the 9 existing wellbores on the contract area, XCL Cathay will commit to re-evaluate a minimum of 3 of the existing wells. (d) spend a minimum of US$ 6 million as its expected minimum appraisal expenditures for such appraisal operations. (e) Formulate the overall development program if appraisal of any potential oil field and/or gas field indicates that such a field is commercial. During the third phase of the appraisal period, the XCL Cathay shall: (a) drill 2 appraisal wells with the footage of 3,000 meters each; and (b) spend a minimum of US $6 million as its expected minimum appraisal expenditures for such appraisal operations.

The parties shall make their best efforts to settle amicably through consultation any dispute arising in connection with the performance or interpretation of any provision. Any dispute that has not been settled through such consultation within 90 days after the dispute arises may be referred to arbitration at the request of and by either party to the contract. The dispute shall be referred to arbitration conducted by the China International Economic and Trade Arbitration Commission ("CIETAC") in accordance with the provisional arbitration proceeding rules. If the parties fail to reach an agreement on the arbitration arrangement the parties shall establish an ad hoc arbitration tribunal to conduct arbitration in accordance with the following provisions: The ad hoc arbitration tribunal shall consist of 3 arbitrators. The place of arbitration shall be determined by the parties through consultations or, failing the agreement of the parties by a majority of arbitrators of the ad hoc arbitration tribunal. The ad hoc arbitration tribunal shall conduct the arbitration in accordance with the arbitration rules of United Nations Commission on International Trade Law ("UNCITRAL") of 1976. However, if the above-mentioned arbitration rules are in conflict with the provisions of Art. 26 including the provisions concerning appointment of arbitrators, the provisions of this Art. 26 shall prevail. Both the Chinese and English languages shall be official languages used in the arbitration proceedings. All hearing materials, statements of claim or defence, award and the reasons supporting them shall be written in both Chinese and English. Any award of arbitration shall be final and binding upon the parties. The right to arbitrate disputes under the contract shall survive the termination of the contract.

China National Petroleum Company (CNPC) shall, in conformity with applicable laws and regulations of the government of the People's Republic of China on confidentiality and by taking into account the international practice, determine the confidentiality periods for which the contract and all documents, information, data and reports related to the petroleum operations within the contract area shall be kept confidential. Without the written consent of the other party, no party to the contract shall disclose, in the confidentiality periods, the contract, documents, information, data and reports or any other information regarded by the joint management committee as confidential, to any third party except the third parties in Art. 22.5 and to any affiliates not directly connected with the implementation of the contract. No party to the contract shall otherwise transfer, present, sell or publish them in any way within the confidentiality periods. However, if the department or unit decides to invite any third party to conduct cooperative exploration for and development of petroleum in the sedimentary basin in which the contract area is located and/or other adjacent areas, CNPC may furnish the following original data and information or the interpretation with respect to the contract area to the relevant third parties: (a) original data and information held by CNPC for over 2 years. (b) interpretation of original data and information, which has been held by CNPC for over 5 years CNPC shall require relevant third parties to undertake to keep confidential the aforesaid data, information, and interpretation thereon furnished to them by CNPC. During the term of the contract and after termination of the contract, CNPC shall not disclose to any third party any patent, know-how or proprietary technology transferred to CNPC by XCL Cathay without the written consent of XCL Cathay except for any technology, the patent of which has expired and any proprietary and confidential technology which have entered the public domain. After the termination of the contract or after any assignment of rights and/or obligations of the contract under Art. 23, XCL Cathay and any assignee shall, within the confidentiality periods, continue to be obliged to keep confidential documents, information, data and reports except for official documents and information published with the consent of the parties. For the implementation of the contract, the operator may, after review by joint management committee and CNPC, furnish the necessary documents, information, data and reports to third parties and affiliates related to the petroleum operations. The third parties and affiliates include: - Banks or other credit institutions from which finance is sought by any party to the contract for the implementation of the contract; - Third parties and affiliates which provide services for the petroleum operations, including subcontractors and other service contractors; and - An assignee or assignees to whom the rights and obligations under the contract are intended to be assigned. Necessary information, documents, data and reports may be furnished by XCL Cathay in accordance with the laws of its home country to the government and stock exchange provided that the contractor reports to joint management committee in advance. CNPC and each company comprising XCL Cathay, when furnishing the documents, information, data and reports to third parties and affiliates, shall require them to assume the confidentiality obligations under this contract, or shall bear full responsibility for any violation.

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

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