The text of the contract, annexes and supplementary documents attached shall be written in both Chinese and English, 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 operations including work programs and budgets shall, in general, be written in English except for technical documents and information available previously and received from third parties. Unless otherwise agreed by the government, in consultation with Pacific Asia Petroleum, 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 covers a total area of 708.076 square kilometers, as marked out by the geographic location and the coordinates of the connecting points of the boundary lines shown on Annex I.
The production period of any oil field and/or gas field within the contract area shall be a period of 20 consecutive years. The exploration period shall consist of 5 consecutive years.
The term shall not go beyond 30 consecutive contract years from the date of commencement.
Environmental impact assessment and management plan
Before the commencement of exploration operations, Pacific Asia Petroleum shall provide China United CBM Corporation (CUCBM) with report on the possible impact of the exploration operations on the health, safety and environment and measures to be adopted. Before the end of exploration operations, Pacific Asia Petroleum shall submit an assessment report to CUCBM on the impact of health, safety and environment by the results of the exploration operations. The two reports shall be submitted to the relevant Chinese authorities for their review and approval according to the Chinese laws.
Pacific Asia Petroleum shall establish and implement plans and procedures on health, safety and environment protection during operations, and shall carry out the strict management on its subcontractors with respect of the health, safety and environment. Pacific Asia Petroleum shall establish the emergency procedure and report to the joint management committee in a prompt and accurate manner any accident relating to health, safety and the environment. The above plans and procedures on health, safety and environment protection shall form an integral part of overall development program.
When competent authorities under the Chinese government assign a person to inspect environmental protection, health and safety within the scope of the operations according to the laws, decrees, rules and regulations of the People’s Republic of China, Pacific Asia Petroleum shall provide all necessary facilities and assistance to enable the inspectors to carry out such inspection smoothly.
In the course of performing the petroleum operations, Pacific Asia Petroleum 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 the international petroleum industry practice to:
- Minimize the damage and destruction to marine organisms and their living oceanic environments;
- Control blowouts promptly and prevent or avoid waste or loss of petroleum discovered in or produced from the contract area;
- Prevent petroleum from flowing into low pressure formations or damaging adjacent petroleum-bearing formations;
- Prevent water from flowing into petroleum-bearing formations through dry holes or other wells, except for the purpose of secondary recovery;
- Prevent land, forests, crops, buildings and other installations from being damaged and destroyed.
Pacific Asia Petroleum shall make its best efforts to protect farmland, aquatic resources, forest reserves and other natural resources, and prevent pollution and damage to the atmosphere, rivers, lakes, groundwater, harbors, other land environments and ecological environment and secure the safety and health of the operating personnel. Pacific Asia Petroleum shall use all reasonable endeavors to eliminate promptly any pollution occurring as a direct result of and in the performance of the operations and minimize its consequences. Economic losses caused by any pollution shall be charged to the joint account.
Any non-operator party to the contract shall have the right to audit all the Pacific Asia Petroleum’s joint account accounting books and records after the end of each calendar year and shall give Pacific Asia Petroleum a written notice of the auditing results. The auditing shall be completed within 24 months after the end of each calendar year. In the absence of any written notice of the exception in the auditing results given by the non-operator party within such period or if the annual joint account accounting books and records of Pacific Asia Petroleum are not audited by any non-operator party within such period, Pacific Asia Petroleum’s joint account accounting books and records shall be deemed correct.
A special auditing of Pacific Asia Petroleum’s joint account accounting books and records may be made due to some special requirements during a calendar year.
If the auditing is conducted, Pacific Asia Petroleum shall be given 30 day notice prior to the date of commencement of such auditing. There shall be no impediment to normal operations during the period of 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 necessary.
Pacific Asia Petroleum shall pay China United CBM Corporation a signature fee of US$ 300,000 in accordance with the following schedule, and such signature fee shall, in no case, be charged to the joint account, nor be deemed recoverable costs.
(a) US$ 150,000 within 30 days from the effective date of the contract;
(b) US$ 150,000 within 30 day of commencement of the first development period entered into by Pacific Asia Petroleum.
Except for the taxes and duties for which Pacific Asia Petroleum has the statutory obligation to file and pay for the operations, each of the companies comprising Pacific Asia Petroleum shall pay taxes measured by income to the government subject to the tax laws and regulations of the People’s Republic of China applicable to the contract.
Production Share - "Profit Oil features (triggers for variations in split - IRR, factor, production, etc .)
The remainder of the annual gross production of coalbed methane and liquid hydrocarbons after allocations shall be deemed as “remainder coalbed methane and liquid hydrocarbons” and shall be divided into “coalbed methane and liquid hydrocarbons” of the Chinese side and “allocable remainder coalbed methane and liquid hydrocarbons”. The “allocable remainder coalbed methane and liquid hydrocarbons” of each coalbed methane field in each calendar year shall be equal to the “remainder coalbed methane and liquid hydrocarbons” of that calendar year multiplied by the factor (X) for each field within the contract area in that calendar year. The factor (X) of each 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 coalbed methane and liquid hydrocarbons from such field during that calendar year.
Annual Gross Production Factors (X) in Percentage
of Applicable to Each
CBM and Liquid Hydrocarbons Production Tier of
From Each CBM Field Each CBM Field Within
(Million Cubic Meters) the Contract Area
equal to or less than 500 Xl = 99 Percent ( 99%)
over 500 to 800 X2 = 99 Percent ( 99%)
over 800 to 1,200 X3 = 98 Percent ( 98%)
over 1,200 to 1,800 X4 = 97 Percent ( 97%)
over 1,800 to 2,500 X5 = 96 Percent ( 96%)
over 2,500 to 5,000 X6 = 93 Percent ( 93%)
over 5,000 X7= 90 Percent ( 90%)
An example of application in calculating the factor (X):
Assuming that there are 2 producing commercial fields A and B within the contract area and the annual gross production of coalbed methane and liquid hydrocarbons from Field A in a calendar year is 3,064 million cubic meters, and that from Field B is 4,590 million cubic meters, the factor (X) of Field A in that calendar year shall be:
X= ((500X1 + 300X2 +400X3 + 600X4 + 700x5 + 564X 6) / 3,0640) x 100%
and the factor (X) of Field B in that calendar year shall be
X= ((500X1 + 300X2 + 400X3 + 600X4 + 700X5 + 2090X6) / 4,590) x 100%
The “allocable remainder coalbed methane and liquid hydrocarbons” of each field in each calendar year shall be shared by the parties in proportion to their respective participating interests in the development costs, 40% for China United CBM Corporation (CUCBM) and 60% for Pacific Asia Petroleum. In the event that CUCBM does not participate in the development of a field within the contract area, Pacific Asia Petroleum shall obtain 100% of the “allocable remainder coalbed methane and liquid hydrocarbons” of that field. In the event that CUCBM participates to an extent less than 40% in the development of a field within the contract area, the “allocable remainder coalbed methane and liquid hydrocarbons” of the field in that calendar year shall be shared by the parties in proportion to their actual respective participating interests in the field.
Production Share - Cost Oil features (basis of calculation, limits on cost recovery - e.g. as % of revenue or production, capex uplift, etc.)
The operating costs for any given calendar year actually incurred by China United CBM Corporation (CUCBM) and Pacific Asia Petroleum in respect of each field, shall be recovered in kind by the parties out of the coalbed methane and liquid hydrocarbons produced from the field during that calendar year in accordance with Annex II. Unrecovered operating costs shall be carried forward to the succeeding (subsequent) calendar year(s).
70% of the annual gross production of coalbed methane and liquid hydrocarbons shall be deemed as the “cost recovery coalbed methane and liquid hydrocarbons”.
Pacific Asia Petroleum shall bear all the exploration costs required for the exploration operations. In the event that any field is discovered within the contract area, the development costs of the field shall be borne by the parties in proportion to their participating interests: 40 % by China United CBM Corporation and 60% by Pacific Asia Petroleum In the event that China United CBM Corporation opts to participate at a level less than 40% of the participating interests, or not to participate in the development of the field, Pacific Asia Petroleum shall bear the remaining development costs necessary for the development of the field.
Pacific Asia Petroleum may give preference to the employment of Chinese personnel in the performance of the operations in accordance with relevant regulations. For this purpose, Pacific Asia Petroleum may submit in advance to China United CBM Corporation (CUCBM) and joint management committee respectively a plan for the employment of Chinese personnel listing all the posts and number of the persons involved.
CUCBM shall, at the request of Pacific Asia Petroleum and in accordance with the plan, provide or assist in recruiting Chinese employee candidates for such employment. For the performance of operations, Pacific Asia Petroleum shall have the obligation to employ competent Chinese personnel and to employ those who have become qualified after being trained in accordance with the training program. Pacific Asia Petroleum shall give preference in employing the Chinese personnel who have participated in the training program provided by Pacific Asia Petroleum.
It is agreed between CUCBM and Pacific Asia Petroleum that total Chinese personnel employment levels, including the costs, for the purpose of conducting operations, including training therefore, shall always be consistent with conducting such operations in an efficient and economic manner in accordance with good and generally accepted international oil field practices.
For the performance of the operations, Pacific Asia Petroleum’s procurement of necessary goods, leasing equipment and signature of subcontracts or other service contracts shall be subject to relevant regulations. Pacific Asia Petroleum shall give preference to Chinese goods, equipment and service, provided that they are competitive in terms of price, quality and term of delivery.
The engineering design corporations under or entrusted by China United CBM Corporation shall have the right to participate in the master designs and engineering designs made by Pacific Asia Petroleum 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 aforesaid master designs and engineering designs, provided that their technical level, quality, price and delivery time are competitive.
During the performance of the operations, Pacific Asia Petroleum shall, as far as practicable and appropriate, transfer its technology used in operations to allow the China United CBM Corporation (CUCBM) personnel to utilize said technology and to train such personnel.
Pacific Asia Petroleum agrees, in the course of the implementation of the contract, to transfer to CUCBM and its affiliates, the advanced technology and managerial experience including proprietary technology e.g. patented technology, know-how or other confidential technology, used in the performance of the operations and the necessary data and/or information for mastering such technology and experience, provided, however, such technology to be transferred shall be proprietary to Pacific Asia Petroleum and if the transfer of any of such technology is restricted in any way during the term of the contract, Pacific Asia Petroleum shall, to the extent reasonably possible, endeavor to obtain permission for the transfer of such restricted technology. Pacific Asia Petroleum agrees to train the CUCBM personnel including workers, technical, economic, managerial, legal and other professional personnel, in order to improve their technical and/or managerial capabilities relating to operations.
Pacific Asia Petroleum shall, after consultation with CUCBM, complete and submit a training and technology transfer program for a reasonable number of the CUCBM personnel in the exploration period and the corresponding budget to joint management committee for review and approval, and upon approval, put it into practice. Pacific Asia Petroleum shall, after consultation with CUCBM, complete and submit training and technology transfer programs and corresponding budgets for a reasonable number of the CUCBM personnel in the development period and production period, respectively, for review and approval before the commencement of the development operations and production operations, and upon approval, put them into practice in time so as to have ample time in advance for such training and technology transfer.
The expenses and costs incurred for performing the training and technology transfer program shall be charged to the exploration costs if such costs are incurred before the date of approval of the overall development program of the first field, and shall be charged to the development costs if such costs are incurred after the date of approval of the overall development program of the first field, and before the date of commencement of commercial production of the first field, or shall be charged to the operating costs if such costs are incurred after the date of commencement of commercial production of the first field.
In the course of the implementation of the contract, the parties shall have scientific and technical cooperation and academic exchange in connection with the operations. The relevant provisions concerning the program, participating personnel and type related to the scientific and technical cooperation and academic exchange shall be determined by the parties.
All assets purchased, installed and constructed under the work program and budget for each field within the contract area shall be owned by China United CBM Corporation from the date on which all the development costs actually incurred by Pacific Asia Petroleum In the development period of the 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.
Pacific Asia Petroleum shall fulfill the minimum exploration work commitment and expected minimum exploration expenditures for each calendar year of each phase of the exploration period in accordance with the regulations of relevant government departments and the provisions of this contract:
During the first phase of the exploration period, Pacific Asia Petroleum shall:
(a) carry out a minimum 50 kilometers of 2-D seismic data acquisition and drill 3 exploration wells; and
(b) spend US$2.8 million as its expected minimum exploration expenditures for such exploration operations.
During the second phase of the exploration period, Pacific Asia Petroleum shall:
(a) drill 4 pilot development wells; and
(b) spend US$ 2 million as its expected minimum exploration expenditures for such exploration operations.
The parties shall make their best efforts to settle amicably through consultation any dispute arising in connection with the performance or interpretation, or validity 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 arbitration shall be conducted in accordance with the following provisions:
If agreed upon by the parties, such dispute shall be referred to arbitration conducted by the China International Economic and Trade Arbitration Commission in accordance with the arbitration proceeding rules.
If the parties fail to reach an agreement on the arbitration arrangement within 60 days after a party has requested in writing that a dispute be referred to arbitration, 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 within 60 days after the appointment of the third arbitrator, by the 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 the United Nations Commission on International Trade Law (“UNCITRAL”) of 1976, as amended. However, if these arbitration rules are in conflict with the provisions of this Article the provisions of this article shall prevail.
Both the Chinese and English languages shall be official languages used in the arbitrage proceedings. All hearing materials, statements of claim or defense, awards and the reasons supporting them shall be written in both Chinese and English.
Any award of the arbitration tribunal shall be final and binding upon the parties. The right to arbitrate disputes under the contract shall survive the termination of the contract.
China United CBM Corporation (CUCBM) shall, in conformity with applicable laws and regulations of the government on confidentiality and by taking into account international practice, determine in consultation with Pacific Asia Petroleum the confidentiality periods for which the contract and all documents, information, data and reports related to the operations within the contract area shall be kept confidential.
Without the written consent of the other party, no party to the contract shall disclose, during such confidentiality periods, the contract, documents, information, data and reports or any other information regarded by joint management committee as confidential, to any third party except the third parties specified here and to any affiliate not directly connected with the implementation of the contract, and no party to the contract shall otherwise transfer, donate, sell or publish them in any way within the confidentiality periods. However, CUCBM may furnish the following original data and information or interpretation with respect to the contract area to the relevant third parties:
(a) original data and information held by CUCBM for over 2 years; and
(b) interpretations of original data and information, which have been held by CUCBM for over 5 years. CUCBM shall require relevant third parties to undertake to keep confidential the aforesaid data, information, and interpretations thereof furnished to them by CUCBM.
CUCBM shall, in conformity with relevant provisions of laws and regulations of China and requests of relevant government departments and units, provide them with all documents, information, data and reports.
During the term of the contract and after the termination of the contract, CUCBM shall not disclose to any third party any patent, know-how or proprietary technology transferred to CUCBM by Pacific Asia Petroleum Ltd. without the written consent of Pacific Asia Petroleum except for any technology, the patent of which has expired and any proprietary and confidential technology which has entered the public domain.
After the termination of the contract or after any assignment of rights and/or obligations of the contract, Pacific Asia Petroleum 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, CUCBM and each company comprising Pacific Asia Petroleum may furnish the necessary documents, information, data and reports to affiliates related to the operations. CUCBM and each company comprising Pacific Asia Petroleum may, after review, furnish the necessary documents, information, data and reports to the third party related to the operations. The third parties include:
- Banks or other credit institutions from which financing is sought by any party to the contract for the implementation of the contract;
- Third parties which provide services for the operations, including subcontractors and other service contractors; and
- An assignee or assignees to whom the rights and/or obligations under the contract may be assigned.
Necessary information, documents, data and reports may be furnished by the parties or an affiliate of the parties related to operations in accordance with the laws of their home countries to the governments and stock exchanges, provided that the parties report to the joint management committee in advance.
CUCBM and each company comprising Pacific Asia Petroleum when furnishing the documents, information, data and reports to third parties and affiliates shall require them to assume the confidentiality obligations as set forth herein, 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 coalbed methane resources countries acceptable to the parties shall be applicable.
If a material change occurs to Pacific Asia Petroleum’s economic benefits 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 of the People’s Republic of China, including any local governments, the parties shall consult promptly and make necessary revisions and adjustments to the relevant provisions of the contract in order to maintain Pacific Asia Petroleum’s normal economic benefits.