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TIMOR SEA DESIGNATED AUTHORITY FOR THE

JOINT PETROLEUM DEVELOPMENT AREA



PRODUCTION SHARING CONTRACT

JPDA 03-13



Date: 2nd April 2003, 12:30PM



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PRODUCTION SHARING CONTRACT

JPDA 03-13

This production sharing contract, which has been approved by the Joint Commission established

under the Timor Sea Treaty (hereinafter called the Treaty), is made and entered into on this 2 day

of April 2003 by and between the Designated Authority established under the Treaty, party of the

first part, and ConocoPhillips JPDA Pty Ltd ABN 17 054 424 109, a corporation organised and

existing under the laws of Australia, ConocoPhillips (91-13) Pty Ltd ABN 77 099 996 782, a

corporation organised and existing under the laws of Australia, Phillips Petroleum Timor Sea Pty

Ltd ABN 39 000 751 59, a corporation organised and existing under the laws of Australia and

Agip Australia 91-13 Limited ARBN 054 729 930 a corporation existing and organised under the

laws of England hereinafter collectively called the “contractor”, parties of the second part, both

hereinafter sometimes referred to either individually as the “Party” or collectively as the

“Parties”.

WITNESSETH

WHEREAS, petroleum existing within the Joint Petroleum Development Area established by the

Treaty is a resource to be exploited by the Contracting States;

WHEREAS, the Designated Authority, with the approval of the Joint Commission, has an

exclusive authority to contract for petroleum activities in and throughout the area described in

Appendix A of this contract and outlined on the map which is Appendix B of this contract, which

area is hereinafter referred to as the “contract area”;

WHEREAS, the Designated Authority wishes to promote petroleum activities in the contract area

and the contractor desires to join and assist the Designated Authority in accelerating the

exploration and development of the potential petroleum resources within the contract area;

WHEREAS, the contractor has the necessary financial capability, and technical knowledge and

ability to carry out the petroleum activities hereinafter described;

WHEREAS, in accordance with the Treaty, including the Petroleum Mining Code as referred to

in Article 7(b) of the Treaty, a cooperative agreement in the form of a production sharing contract

may be entered into between the Designated Authority and corporations for the purpose of

petroleum activities; and

WHEREAS, by Annex F of the Treaty, a contract shall be offered to those corporations holding,

immediately before entry into force of the Treaty, contract numbered 91-13 in the same terms as

that contract, modified to take into account the administrative structure under the Treaty, or as

otherwise agreed by Timor-Leste and Australia, and this is that first mentioned contract;



NOW, therefore, in consideration of the mutual covenants herein contained, it is agreed as

follows:



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SECTION 1

SCOPE AND DEFINITIONS

SCOPE

1.1

This contract is a production sharing contract subject to the Treaty, including the

Petroleum Mining Code. The Designated Authority shall be responsible for the management of

the activities contemplated hereunder in accordance with its management functions defined under

the Treaty, including the Petroleum Mining Code. The contractor appoints and authorises

ConocoPhillips JPDA Pty Ltd, being one of the contracting corporations, to be the contract

operator who, on behalf of the contractor, shall be responsible to the Designated Authority for the

execution of petroleum activities in accordance with the provisions of this contract, and is hereby

appointed and constituted as the exclusive corporation to conduct petroleum activities.

The contractor shall provide all human, financial and technical resources required for the

performance of petroleum activities authorised by this contract, and shall therefore have an

economic interest in the development of the petroleum pools in the contract area and be entitled

to share in petroleum produced from the contract area in accordance with the provisions of

Section 7 of this contract.

1.2

Except for expenditures on capital costs for the development of petroleum pools, the

contractor shall not incur interest expenses to finance petroleum activities.

DEFINITIONS

1.3

Words and terms used in this contract shall have the same meaning as those defined in

the Treaty, including the Petroleum Mining Code, as referred to in Article 7(b) to the Treaty,

except where a new definition is expressly provided for in this contract.

“affiliated corporation or affiliate” means a corporation or other entity that controls, or is

controlled by a Party to this contract, it being understood that control shall mean

ownership by one corporation or entity of at least fifty (50) per cent of:

(i)

(ii)



the voting stock, if the other corporation is a corporation issuing stock; or

the controlling rights or interests, if the other entity is not a corporation.



“barrel” means a quantity or unit of oil, having a volume of forty-two (42) United States

gallons at the temperature of sixty (60) degrees Fahrenheit.

“contract area” means the area, not relinquished or surrendered, constituted by the blocks

which are the subject of this contract and which are specified in Appendices A and B of

this contract.



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“contract year” appearing before or in relation to a calendar year means the period

commencing on 17 December of that calendar year and ending on 16 December of the

following calendar year, except that when appearing before or in relation to the calendar

year 2002 it means the period commencing on 20 May 2002 and ending 16 December

2003.

“crude oil” means crude mineral oil and all liquid hydrocarbons in their natural state or

obtained from natural gas by condensation or extraction.

“development plan” means a description of the proposed petroleum reservoir

development and management program, details of the production facilities, the

production profile for the expected life of the project, the estimated capital and noncapital expenditure covering the feasibility, fabrication, installation and pre-production

stages of the project, and an evaluation of the commerciality of the development of the

petroleum from within a discovery area.

“exploration and appraisal strategy” means a brief description of the

exploration/geological play concepts for, the extent to which the leads and prospects are

identified in, and the data reviews, seismic surveys and exploration wells planned for the

contract area.

“first tranche petroleum” means the quantity of petroleum production defined in

subsection 9 of Section 7.

“force majeure” means circumstances beyond the control and without the fault or

negligence of the contract operator and the Designated Authority including but not

restricted to acts of God or the public enemy, perils of navigation, fire, hostilities, war

(declared or undeclared), blockade, labor disturbances, strikes, riots, insurrections, civil

commotion, quarantine restrictions, epidemics, storms, earthquakes, or accidents.

“natural gas” means all gaseous hydrocarbons, including wet mineral gas, dry mineral

gas, casinghead gas and residue gas remaining after the extraction of liquid hydrocarbons

from wet gas.

“previous contract” means contract numbered 91-13 as mentioned in the Recitals.



SECTION 2

TERM OF THIS CONTRACT

2.1

Subject to the provisions of this Section and Section 13, the term of this contract shall

commence on the effective date of the Treaty, being 20 May 2002, (the effective date) and shall

expire on the last moment of 16 December 2021 (the expiration date). Notwithstanding the

foregoing, all work programmes, expenditures and approvals, including but not limited to

decisions, notices, returns and audits related thereto and all correspondence (written or oral),

results and submissions in support of such work programmes, expenditures, approvals, decisions,

notices, returns and audits under the previous contract shall be deemed to have occurred under

this contract and the contractor shall be entitled to rely upon such. Information supplied by the

Contractor under the previous contract is deemed to have been supplied under this contract.

Date: 2nd April 2003, 12:30PM



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[2.2 – paragraph deliberately omitted]

[2.3 – paragraph deliberately omitted]

2.4

If petroleum is discovered in any block or blocks of the contract area which the

Designated Authority and the contract operator agree can be produced commercially, based on

the consideration of all pertinent operating and financial data, then as to that particular block or

blocks of the contract area the Designated Authority shall declare a discovery area and the

contract operator shall commence development. In other blocks in the contract area, the contract

operator shall continue exploration.

2.5

If petroleum production has not ceased permanently in and from the contract area by the

expiration date, the Designated Authority shall give sympathetic consideration to extending the

term of this contract until production ceases permanently. In the case of a natural gas project, the

contract term shall be automatically extended to the end of the term of the natural gas sales

contract.

2.6

If petroleum production has ceased permanently in and from the contract area before the

expiration date, then this contract shall be terminated upon the permanent cessation of production.

SECTION 3

RELINQUISHMENT OF BLOCKS

[3.1 – paragraph deliberately omitted]

[3.2 – paragraph deliberately omitted]

[3.3 – paragraph deliberately omitted]

[3.4 – paragraph deliberately omitted]

3.5

Upon thirty (30) days written notice to the Designated Authority prior to the end of any

contract year, the contract operator shall have the right to surrender some, but not all, of the

blocks in the contract area, provided the conditions of the contract have been met to the

satisfaction of the Designated Authority.

3.6

The contract operator shall advise the Designated Authority in advance of the date of

relinquishment of the blocks to be relinquished. For the purpose of relinquishments, the contract

operator and the Designated Authority shall consult with each other regarding which blocks are to

be relinquished. So far as is reasonable, such blocks shall form an area of sufficient size and

convenient shape to enable petroleum activities to be conducted thereon.

[3.7 - paragraph deliberately omitted]

SECTION 4

WORK PROGRAM AND EXPENDITURES

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4.1

The contract operator shall continue with petroleum activities being carried out on the

effective date.

The Designated Authority and the contract operator shall agree to an exploration work program

and expenditures for each contract year.

[4.2 – paragraph deliberately omitted]

[4.3 – paragraph deliberately omitted]

[4.4 – paragraph deliberately omitted]

[4.5 – paragraph deliberately omitted]

[4.6 – paragraph deliberately omitted]

4.7

At least two (2) months prior to the beginning of each contract year, the contract operator

shall prepare and submit, for approval by the Designated Authority, an exploration and appraisal

strategy to be adopted for the ensuing contract year for the contract area.

4.8

At least one (1) month prior to the beginning of each calendar year, the contract operator

shall prepare and submit, for approval by the Designated Authority, a work program and budget

of operating costs to be carried out during the ensuing calendar year for the contract area.

4.9

Before work can commence on the development of a petroleum discovery, the contract

operator shall prepare and submit, for approval by the Designated Authority, a development plan.

4.10

Should the Designated Authority wish to propose a revision to specified aspects of the

work program and budget of operating costs, the Designated Authority shall specify its reasons

for requesting those changes but shall not require the contract operator to undertake more

petroleum activities than the minimum work program and expenditure commitments specified in

this contract. The Parties shall reach agreement on any changes before they become effective.

4.11

It is recognised by the Designated Authority that the details of the work program and

budget of operating costs, and the development plan may require changes in the light of existing

circumstances and nothing herein contained shall limit the rights of the contract operator to make

such changes, provided they do not change the general objective, quantity and quality of the

petroleum activities.

4.12

The Designated Authority shall ensure that every effort is made to avoid delays in

approving the exploration and appraisal strategy, the work program and budget of operating costs,

and the development plan.

SECTION 5

RIGHTS AND OBLIGATIONS OF THE PARTIES

5.1

The contract operator shall have the rights accorded to it under the Treaty, including the

Petroleum Mining Code and the taxation code, and in particular shall:

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(a)



subject to paragraph (k) of subsection 2 of this Section, have the right to enter

and leave the contract area and move to and from the contract operator’s facilities

wherever located at all times;



(b)



have the right to have access to and use all geological, geophysical, drilling, well

(including well location maps), production and other information held by the

Designated Authority relating to the contract area; and



(c)



in accordance with the provisions of the Petroleum Mining Code, have the right

to have access to and use all geological, geophysical, drilling, well, production

and other information now or in the future held by the Designated Authority

relating to the blocks in the Joint Petroleum Development Area adjacent to the

contract area.



5.2

The contract operator shall comply with all of the obligations imposed on it by the

Treaty, including the Petroleum Mining Code and the taxation code, and the regulations and

directions issued under the Petroleum Mining Code and, in particular, shall:

(a)



provide all human, financial and technical resources required for the performance

of the petroleum activities;



(b)



carry out petroleum activities in a proper and workmanlike manner and in

accordance with good oilfield practice;



(c)



take the necessary precautions to avoid interference with navigation and fishing;



(d)



develop an environmental management plan to be approved by the Designated

Authority, prevent pollution of the marine environment, and pay for the costs

associated with clean-up of any pollution from any petroleum activities within

the contract area;



(e)



upon the termination of this contract, clean-up the contract area and remove all

structures, equipment and other property brought into the contract area;



(f)



submit to the Designated Authority copies of all original geological, geophysical,

drilling, well, production and other data (including cores, cuttings and samples

taken in connection with petroleum activities in the contract area) and reports

compiled during the term of this contract;



(g)



appoint and authorise a person to represent the contract operator and

communicate with the Designated Authority, and that person shall have an office

in either Dili or Darwin or both;



(h)



give preference to goods and services which are produced in Australia or TimorLeste, or provided by subcontractors operating out of Australia or Timor-Leste,

provided they are offered on competitive terms and conditions compared with

those available from other countries;



Date: 2nd April 2003, 12:30PM



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(i)



give preference to the employment of Timor-Leste nationals and permanent

residents, having due regard to safe and efficient activities and good oilfield

practice;



(j)



take out and maintain, to the Designated Authority’s satisfaction, from the

effective date of this contract, insurance cover to the value of not less than

US$40 million in accordance with Article 25 of the Petroleum Mining Code;



(k)



except as otherwise approved by the Designated Authority, ensure that all

persons, equipment and goods do not enter structures in the contract area without

first entering Australia or Timor-Leste, and notify the Designated Authority of all

persons, vessels, aircraft and structures entering or leaving the contract area, and

of movements within the contract area; and



(l)



make secure and safe all structures in the contract area, including the installation

of warning lights, radar and other appropriate equipment.



5.3

The contractor shall have the rights accorded under the Treaty, including the Petroleum

Mining Code and the taxation code, and in particular shall:

(a)



have the right to appoint a new contract operator subject to prior approval by the

Designated Authority;



(b)



have the right to transfer all or part of its undivided participating interest in this

contract to any affiliated corporation or any other corporation with the approval

of the Designated Authority. Such approval shall not be unreasonably withheld

provided the corporation taking up those rights and obligations under this

contract has, in the opinion of the Designated Authority, the necessary financial

capability and technical knowledge and ability, in accordance with Article 11 of

the Petroleum Mining Code.



(c)



have the right during the term of this contract to lift, dispose of and export its

share of petroleum production, subject to Section 7 of this contract, and retain

abroad the proceeds obtained therefrom; and



(d)



have the right to retain ownership and control of all property purchased or leased

for the purposes of complying with the conditions of this contract, and be entitled

to freely remove the same from the contract area, Australia or Timor-Leste

provided the conditions of this contract have been met.



5.4

The contractor shall comply with all of the obligations imposed on it by the Treaty,

including the Petroleum Mining Code and the taxation code, and the regulations and directions

issued under the Petroleum Mining Code and, in particular, shall:

(a)



be jointly and severally liable to meet the obligations imposed on the contract

operator; and



(b)



be subject to the taxation law of the Contracting States, in accordance with

Article 5 of the Treaty and Annex (G) of the Treaty.



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5.5

The Designated Authority shall comply with all of the obligations imposed on it by the

Treaty, including the Petroleum Mining Code and, in particular, shall be responsible for the

management of the petroleum activities contemplated hereunder having regard to the contract

operator’s responsibilities for undertaking the petroleum activities.

SECTION 6

OPERATING COSTS

GENERAL PROVISIONS

6.1

The accounting procedures in this Section shall be followed and observed in the

performance of the contractor’s obligations under the contract.

6.2

The contractor’s books and accounts shall be prepared and maintained in accordance with

a generally accepted and recognised accounting system consistent with modern petroleum

industry practices and procedures. Books and accounts shall be available for the use of the

Designated Authority in order that it may carry out its auditing responsibilities under this

contract.

6.3

“Operating costs” means the sum of the following costs incurred in petroleum activities

undertaken before or at the point of tanker loading:

(a)



current calendar year exploration costs;



(b)



current calendar year non-capital costs;



(c)



current calendar year depreciation of capital costs; and



(d)



allowable operating costs incurred in previous calendar years which have not

been recovered in accordance with subsection 2 of Section 7 of this contract;



less

(e)



miscellaneous receipts as defined in subsection 8 of this Section.



6.4

All calculations required to determine operating costs shall be done in United States

dollars. Where costs are denoted in any other currency, they shall be translated into United States

dollars at the exchange rate set, on the day the cost was incurred, by a bank designated by the

Designated Authority.

EXPLORATION COSTS

6.5

“Exploration costs” means those operating costs incurred which relate directly to the

current calendar year’s exploration activities in the contract area and include but are not limited to

the following:

(a)



costs of exploratory and appraisal drilling in the contract area including labor,

materials and services used in the drilling of wells with the object of finding

unproven reservoirs of petroleum;



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(b)



costs of surveys in the contract area including labor, materials and services

(including desk studies and analysis of survey data) used in aerial, geological,

geochemical, geophysical and seismic surveys, and core hole drilling; and



(c)



costs of other exploration directly related to petroleum activities in the contract

area, including the cost of auxiliary or temporary facilities used in exploration.



NON-CAPITAL COSTS

6.6

“Non-capital costs” means those operating costs incurred that relate directly to the current

calendar year’s activities in the contract area, excluding exploration costs and capital costs. Noncapital costs include, but are not limited to the following:

(a)



costs of labor, materials and services used in day to day well activities, field

production facilities activities, secondary recovery activities, storage handling,

transportation and delivery activities, gas processing auxiliaries and utilities, and

other operating activities, including repairs and maintenance;



(b)



costs of office, services and general administration directly related to the

petroleum activities carried out in the contract area including technical and

related services, office supplies, office rentals and other rentals of services and

property, and personnel expenses;



(c)



costs of production drilling in the contract area including labor, materials and

services used in drilling wells with the object of penetrating a proven reservoir

such as the drilling of delineation wells as well as redrilling, deepening or

recompleting wells;



(d)



costs of feasibility studies and environmental impact assessments directly related

to petroleum activities in the contract area;



(e)



application fees, contract service fees, and registration fees directly related to

petroleum activities in the contract area;



(f)



premiums paid for insurance normally required to be carried for the petroleum

activities carried out by the contract operator under this contract;



(g)



closing down costs, being those expenditures incurred at the end of the

production life of a petroleum pool in the contract area which could include the

costs of:



(h)



(i)



removal of all production facilities including the removal of platforms

and associated facilities;



(ii)



environmental restoration including any feasibility studies; and



costs of purchased geological and geophysical information.



CAPITAL COSTS



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6.7

“Capital costs” means expenditures made for items directly related to petroleum activities

in the contract area and which normally have a useful life of more than one (1) year. Capital costs

include but are not limited to the following:

(a)



costs of construction utilities and auxiliaries, workshops, power and water

facilities, warehouses, site offices, access and communication facilities;



(b)



costs of production facilities including offshore platforms (including the costs of

labor, fuel hauling and supplies for both the offsite fabrication and onsite

installation of platforms, and other construction costs in erecting platforms),

wellhead production tubing, sucker rods, surface pumps, flow lines, gathering

equipment, delivery lines, storage facilities, all other equipment, facilities and

modules on platforms, oil jetties and anchorages, treating plants and equipment,

secondary recovery systems, gas plants and steam systems;



(c)



costs of pipelines and other facilities for the transporting of petroleum produced

in the contract area to the point of tanker loading;



(d)



costs of movable assets and subsurface drilling and production tools, equipment

and instruments, and miscellaneous equipment used for production in the

contract area;



(e)



costs of floating craft, automotive equipment, furniture and office equipment; and



(f)



if approved by the Designated Authority, costs of employee and welfare housing,

recreational, educational, health and meals facilities, and other similar costs

necessary for petroleum activities in the Joint Petroleum Development Area.



MISCELLANEOUS RECEIPTS

6.8

“Miscellaneous receipt” means the value of property defined in paragraph (c) below and

all monies received by the contractor, other than for the disposal of petroleum produced from the

contract area, which are directly related to the conduct of petroleum activities in the contract area.

Miscellaneous receipts include, but are not limited to, the following:

(a)



any amounts received from the sale or disposal of petroleum produced from

production testing activities undertaken in exploration and appraisal wells;



(b)



any amounts received for the disposal, loss, or destruction of property the cost of

which is an operating cost;



(c)



the value of property, the cost of which is an operating cost, when that property

ceases to be used in petroleum activities in the contract area;



(d)



any amounts received by the contract operator under an insurance policy, the

premiums of which are operating costs, in respect of damage to or loss of

property;



(e)



any amounts received as insurance, compensation or indemnity in respect of

petroleum production lost or destroyed prior to the point of tanker loading;



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(f)



any amounts received from the hiring or leasing of property, the cost of which is

an operating cost;



(g)



any amounts received from supplying information obtained from surveys,

appraisals, or studies the cost of which is an operating cost;



(h)



any amounts received as charges for the use of employee amenities, the cost of

which is an operating cost; and



(i)



any amounts received in respect of expenditures which are operating costs, by

way of indemnity or compensation for the incurring of the expenditure, refund of

the expenditure, or rebate, discount or commission in respect of the expenditure.



INELIGIBLE COSTS

6.9



The following expenditures are not eligible as operating costs:

(a)



payments of principal or interest on a loan or other borrowing costs unless

approved by the Designated Authority under paragraph (c) of subsection 10 of

this Section;



(b)



payments of interest components of credit-purchase payments;



(c)



payments of dividends or the cost of issuing shares;



(d)



repayments of equity capital;



(e)



payments of private override royalties;



(f)



payments associated with a farm-in agreement;



(g)



payments of taxes under the taxation law of either Contracting State made in

accordance with Article 5 of the Treaty and Annex (G) of the Treaty;



(h)



payments of administrative accounting costs, and other costs indirectly associated

with petroleum activities in the contract area;



(i)



costs incurred once petroleum production has passed the point of tanker loading;



(j)



costs incurred as a result of non-compliance by the contract operator with the

provisions of this contract, the Petroleum Mining Code or the regulations and

directions issued under the Petroleum Mining Code; and



(k)



unless otherwise approved by the Designated Authority, costs incurred by

contractors other than the contract operator.



ACCOUNTING METHODS TO BE USED TO CALCULATE RECOVERY OF OPERATING

COSTS

6.10



The following methods shall be used to calculate the recovery of operating costs.



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(a)



Depreciation

Depreciation shall be calculated beginning in the calendar year in which the asset

to be depreciated is placed into service. A full year’s depreciation shall be

allowed in that calendar year. In each calendar year the allowable recovery of

capital cost depreciation shall be twenty (20) per cent of the individual asset’s

initial capital cost (calculated using the straight line method of depreciation).



(b)



Allocation of overhead costs

General and administration costs, such as those listed in paragraph (b) of

subsection 6 of this Section, but other than direct charges, allocable to petroleum

activities in the contract area shall be determined by a detailed study, and the

method determined by such a study shall be applied each year consistently. The

method determined shall require agreement of the Designated Authority and the

contractor.



(c)



Interest Recovery

Interest on loans obtained by a contractor at rates not exceeding prevailing

commercial interest rates on loans for capital investments in development of

petroleum pools may be recoverable as an operating cost provided the

Designated Authority has given its approval. The Designated Authority may give

its approval if it is satisfied that recovery of interest is necessary to ensure the

financial viability of the project.



(d)



Gas Costs

The following procedures shall be used to allocate operating costs related to

natural gas production.

(i)



Operating costs directly related to the production of natural gas shall be

directly chargeable against natural gas revenues in determining the

entitlements of the Designated Authority and the contractor under

Section 7.



(ii)



Operating costs incurred for the production of both natural gas and crude

oil shall be allocated to natural gas and crude oil revenues based on the

relative value of the products produced for the current calendar year.

Common support costs shall be allocated on an equitable basis agreed to

by both Parties.



(iii)



If after commencement of production, the natural gas revenues do not

permit full recovery of natural gas costs, as outlined above, then the

excess costs shall be recovered from crude oil revenues. Likewise, if

there are excess crude oil costs (crude oil costs less crude oil revenues),

this excess shall be recovered from natural gas revenues.



(iv)



If production of either natural gas or crude oil has commenced while the

other has not, the allocable production costs and common support costs

shall be allocated on an equitable basis agreed to by both Parties.

Propane and butane fractions extracted from natural gas but not spiked in

crude oil shall be deemed as natural gas for the purpose of accounting.



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(e)



Inventory Accounting

Inventory levels shall be based on normal good oilfield practice. The value of

inventory items used outside the contract area or sold, the cost of which has been

recovered as an operating cost, shall be treated as miscellaneous receipts in

accordance with subsection 8 of this Section. The costs of items purchased for

inventory shall be recoverable as operating costs at such time as the items are

landed in the Joint Petroleum Development Area.



(f)



Insurance and Claims

Operating costs shall include premiums paid for insurance normally required to

be carried for the petroleum activities relating to the contractor’s obligations

conducted under the contract, together with all expenditures incurred and paid in

settlement of any and all losses, claims, damages, judgements and other

expenses, including fees relating to the contractor’s obligations under the

contract.



(g)



Apportioning of Costs and Miscellaneous Receipts

Where property, or any other thing, for which an operating cost is allowable or a

miscellaneous receipt is assessable, is only used partially in conducting

petroleum activities in the contract area, only that proportion of the cost or the

receipt which relates to the conduct of petroleum activities in the contract area

shall be allowed as an operating cost or assessed as a miscellaneous receipt.



SECTION 7

RECOVERY OF OPERATING COSTS AND SHARING OF PETROLEUM PRODUCTION

7.1

The contractor is authorised by the Designated Authority and obliged to market all

petroleum produced and saved from the contract area subject to the following provisions.

7.2

Subject to subsections 9 and 10 of this Section, to recover operating costs, the contract

operator shall be entitled to a quantity of petroleum production, which is produced and saved

hereunder and not used in petroleum activities, equal in value to those costs. If in any calendar

year, the operating costs exceed the value of petroleum produced and saved hereunder and not

used in petroleum activities, then the unrecovered excess of operating costs shall be carried

forward and recovered in succeeding years.

7.3

In each calendar year in which petroleum is produced from the contract area, if the

investment credit and operating costs recoverable under subsections 10 and 2 of this Section

respectively are less than the value of the quantity of petroleum produced from the contract area,

then of the petroleum production remaining after deducting the quantity of petroleum production

equal in value to the investment credit and operating costs, the Parties shall be entitled to take and

receive the following:

(a)



the Designated Authority fifty (50) per cent and the contractor fifty (50) per cent

for the tranche of 0 to 50,000 barrels daily average of all crude oil production

from the contract area for the calendar year;



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(b)



the Designated Authority sixty (60) per cent and the contractor forty (40) per cent

for the tranche of 50,001 to 150,000 barrels daily average of all crude oil

production from the contract area for the calendar year; and



(c)



the Designated Authority seventy (70) per cent and the contractor thirty (30) per

cent for the tranche of more than 150,000 barrels daily average of all crude oil

production from the contract area for the calendar year.



For the purposes of calculating the daily average of all crude oil production in the calendar year

when the first commercial production of crude oil from the contract area is produced, the daily

average production shall be calculated by reference to the number of days in the calendar year

from the day when commercial production commenced. In the calendar year when commercial

production of crude oil from a contract area is terminated, the daily average production shall be

calculated by reference to the number of days in the calendar year up to the day on which

production is terminated in the contract area.

7.4

The method of recovering investment credits and operating costs before the entitlements

are taken by each Party as provided under subsection 3 of this Section shall be subject to the

following proration method. For each calendar year, the recoverable investment credits and

operating costs shall be apportioned for deduction from the production of each of the tranches

defined in subsection 3 of this Section using the same ratios as the production from each such

tranche over the total production of that calendar year.

7.5

Of the amount of natural gas, including propane and butane fractions extracted from

natural gas but not spiked in crude oil, remaining after recovering investment credits and

operating costs associated with natural gas activities, the Designated Authority shall be entitled to

take and receive fifty (50) per cent and the contractor shall be entitled to take and receive fifty

(50) per cent.

7.6

Title to the contractor’s share of petroleum production under subsections 3, 5 and 9 of

this Section as well as to the shares of petroleum production exported and sold to recover

investment credits and operating costs under subsections 10 and 2 of this Section respectively

shall pass to the contractor at the point of tanker loading.

7.7

The contractor shall use its best reasonable efforts to market petroleum production to the

extent markets are available.

7.8

Any natural gas produced from the contract area and not used in petroleum activities

hereunder may be flared if the processing and utilisation of the natural gas is not considered by

the Parties to be economic. Such flaring shall be permitted to the extent that gas is not required to

enable the maximum economic recovery of petroleum by secondary recovery activities, including

repressuring and recycling.

7.9

Notwithstanding the other provisions of this Section, in the initial five (5) calendar years

of production from the contract area (such period to be determined without regard to whether

production commenced under this contract or the previous contract), the Parties shall be entitled

to take and receive a quantity of petroleum equal to ten (10) per cent of the petroleum production

in those years, called the “first tranche petroleum”, before any recovery of investment credits and

operating costs. In each subsequent calendar year, the first tranche petroleum shall be equal to

twenty (20) per cent of the petroleum produced in that year. The quantity of first tranche

petroleum from crude oil production for each calendar year shall be shared between the

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Designated Authority and the contractor in accordance with the sharing percentages as provided

under subsection 3 of this Section, by apportioning it as applicable to the respective production

tranches as therein defined, using the same ratios as the production from each such tranche over

the total production of that calendar year. The quantity of first tranche petroleum from natural gas

production for each calendar year, including propane and butane fractions extracted from natural

gas but not spiked in crude oil, shall be shared between the Designated Authority and the

contractor in accordance with the sharing percentages as provided under subsection 5 of this

Section. The initial five (5) calendar years of production is to commence on the day when the first

commercial production of petroleum is produced and shall end at midnight (2400 hours) local

time, being 1600 hours Greenwich Mean Time on the day preceding the fifth anniversary of this

first commercial production from the contract area.

7.10

Investment credits for exploration and capital costs defined in subsection 5 of Section 6

and paragraphs (b), (c) and (d) of subsection 7 of Section 6 shall be allowed to the contract

operator, and, in each calendar year, shall be recoverable by the contract operator after the sharing

of the first tranche petroleum but before the recovery of operating costs. The contract operator

shall recover the investment credits, as a quantity of petroleum production equal in value to one

hundred and twenty seven (127) per cent of such exploration and capital costs incurred.

Investment credits not recovered in the calendar year in which the exploration and capital costs

were incurred may be carried forward and recovered in subsequent years.

7.11

Notwithstanding the provisions of subsection 1 of this Section which oblige the

contractor to market all petroleum produced from the contract area, the Designated Authority may

market any or all petroleum when the Designated Authority secures a net realized price for the

petroleum, f.o.b. the contract area, which is greater than the price which can be realized by the

contractor. The Designated Authority’s right to market any or all of the petroleum shall continue

for such period as it can secure a net realized price, f.o.b. the contract area, greater than that

which can be realized by the contractor. The contract operator shall coordinate the efficient lifting

of the petroleum production, including tanker nomination and scheduling.

SECTION 8

VALUATION OF PETROLEUM PRODUCTION

8.1



Petroleum production sold to third parties shall be valued as follows:

(a)



all petroleum production to which the contractor is entitled under this contract

and which is sold to third parties, shall be valued at the net realized price, f.o.b.

the contract area;



(b)



all petroleum production to which the Designated Authority is entitled under this

contract which is sold to third parties shall be valued at the net realized price.

f.o.b. the contract area; and



(c)



where a contract of sale involves other than a net realized price f.o.b., the

Designated Authority shall determine a fair and reasonable net f.o.b. price for the

purposes of that sale.



8.2

Petroleum production sold to other than third parties shall be valued by the Designated

Authority as follows:



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(a)



by using the weighted average per unit price, adjusted as necessary for quality,

quantity, grade and specify gravity of the petroleum production, received by the

contractor and the Designated Authority from sales to third parties during the

three (3) months preceding such sale, excluding commissions and brokerages

incurred in relation to such third party sales; and



(b)



if there are no third party sales as defined in paragraph (a), at prevailing market

prices, adjusted to take account of quality, quantity, grade and specific gravity of

the petroleum production and taking into consideration any special circumstances

with respect to sales of such petroleum production.



8.3

For the purpose of this Section, 'third party sales' means sales by the contractor to

independent purchasers with whom, at the time the sale is made, the contractor has no direct or

indirect contractual relationship or joint interest.

8.4

Commissions or brokerages incurred in connection with sales to third parties, if any, shall

not exceed the customary and prevailing rate.

8.5

During any calendar year in which petroleum is produced from the contract area, the

contractor shall be liable to make provisional payments to the Designated Authority, equal to the

estimated value of petroleum to which the Designated Authority is entitled under Section 7 of this

contract. The provisional payments shall be made on a monthly basis unless the Designated

Authority and the contractor agree on alternate arrangements. The amount of each provisional

payment shall be calculated by the contractor using the estimates of operating costs contained in

the work program and budget of operating costs, and the contractor's estimate of the value of

quantities of petroleum sold. During the calendar year the provisional payments may be adjusted

having regard to actual operating costs and the actual value of sales of petroleum. Within

thirty(30) days after the end of the calendar year, adjustments and cash settlements between the

Designated Authority and the contractor shall be made on the basis of the actual amounts of the

operating costs and actual value of sales of petroleum made during the calendar year, in order to

comply with Section 7. Similarly, where the Designated Authority markets petroleum production

pursuant to subsection 11 of Section 7, the Designated Authority shall be liable to make

provisional payments to the contractor in a manner consistent with this subsection.

8.6

Petroleum production disposed of other than by sale or destruction shall be valued using

the method defined in subsection 2 of this Section.

8.7

The contractor shall notify the Designated Authority of quantities and sales prices of all

petroleum production sold or disposed of before the sales or disposals are made.



SECTION 9

PAYMENTS

9.1

The contract operator shall make all payments to the Designated Authority for which it is

liable under this contract in United States dollars or some other currency agreed between the

contract operator and the Designated Authority. Payments shall be made to a bank designated by

the Designated Authority. Where a payment is made in currency other than United States dollars,

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the exchange rate used to convert the United States dollars liability into that currency shall be the

exchange rate set down on the day of payment by a bank designated by the Designated Authority.

9.2

The Designated Authority shall make all payments to the contract operator in United

States dollars or some other currency agreed between the contract operator and the Designated

Authority. Where a payment is made in currency other than United States dollars, the exchange

rate used to convert the United States dollar liability into that currency shall be the exchange rate

set down on the day of payment by a bank designated by the Designated Authority.

9.3

Any payments required to be made pursuant to this contract shall be made within ten (10)

days following the end of the month in which the obligation to make such payments is incurred.

SECTION 10

TENDERS FOR PETROLEUM ACTIVITIES

10.1

The contract operator shall draw invitations to tender or sub-contracts to the attention of

Australian and Timor-Leste sub-contractors

10.2

Subject to subsection 4 of this Section, all tenders for petroleum activities called by the

contract operator shall be subject to approval by the Designated Authority.

10.3

The Designated Authority shall provide its approval or non-approval within thirty (30)

days of receipt of the tender details from the contract operator. The tender details to be provided

by the contract operator shall include a summary of the tenders received compared against the

tender criteria determined by the contract operator and the reasons for the selection of the

preferred tender.

10.4

Notwithstanding subsection 2 of this Section, the contract may enter into sub-contracts

without the approval of the Designated Authority where:

(a)



the tender for petroleum activities is expected to involved expenditure of less

than US$ two million (2,000,000);



(b)



the tender for petroleum activities is expected to involve expenditure of less than

US$ ten million (10,000,000) and those activities form part of a project for the

development of petroleum resources, the cost of which is expected to exceed

US$ one hundred million (100,000,000); or



(c)



the tender selected by the contract operator is the lowest cost tender and has been

submitted by an Australian or Timor-Leste corporation.



10.5

The contract operator shall provide the Designated Authority, for information, with full

financial details of the sub-contract, irrespective of the amount of the expenditure involved.

SECTION 11

TITLE TO EQUIPMENT



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11.1

Equipment purchased by the contract operator pursuant to the work program and budget

of operating costs remains the property of the contractor and shall be used in petroleum activities.

SECTION 12

CONSULTATION AND ARBITRATION

12.1

Periodically, the Designated Authority and the contract operator shall meet to discuss the

conduct of petroleum activities under this contract and shall make every effort to settle amicably

any problems arising therefrom.

12.2

Disputes, if any, arising between the Designated Authority and contractor relating to this

contract or the interpretation and performance of this contract which cannot be settled amicably

shall be submitted to arbitration.

12.3

Except as may be otherwise agreed by the Parties, arbitration shall be conducted in

accordance with the Rules of Arbitration of the International Chamber of Commerce.

12.4

The Designated Authority on the one hand and the contractor on the other hand shall each

appoint one arbitrator and so advise the other Party, and these two arbitrators shall appoint a third.

If either Party fails to appoint an arbitrator within thirty (30) days after receipt of a written request

to do so, such arbitrator shall, at the request of the other Party, if the Parties do not otherwise

agree, be appointed by the President of the International Chamber of Commerce. If the first two

arbitrators appointed as aforesaid fail to agree on a third within thirty (30) days following the

appointment of the second arbitrator, the third arbitrator shall, if the Parties do not otherwise

agree, be appointed, at the request of either Party, by the President of the International Chamber

of Commerce. If an arbitrator fails or in unable to act, that arbitrator's successor shall be

appointed in the same manner as the arbitrator who is replaced.

12.5

The decision of the majority of the arbitrators shall be final and binding upon the Parties

and an award may be enforced in any court having jurisdiction for that purpose. In accordance

with paragraph (b) of Article 4 of the Treaty, in the event that the Designated Authority cannot

meet an obligation under an arbitral award arising from a dispute under this contract, the

Contracting States shall contribute the necessary funds in the same proportion as set out in

paragraph (a) of Article 4 of the Treaty to enable the Designated Authority to meet that

obligation.

12.6

The place of arbitration shall be Singapore. The language of arbitration shall be the

English language.

SECTION 13

TERMINATION

[13.1 – paragraph deliberately omitted]

13.2

This contract may be terminated at any time by agreement of the Parties or in accordance

with Article 48 of the Petroleum Mining Code.



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SECTION 14

BOOKS, ACCOUNTS AND AUDITS

BOOKS AND ACCOUNTS

14.1

In addition to any requirements pursuant to paragraph (b) of subsection 4 of Section 5,

the contractor shall keep complete books and accounts recording all operating costs as well as

monies received from the sale or disposal of petroleum production.

AUDITS

14.2

The Designated Authority may require independent auditing of the contractor's books and

accounts relating to this contract for any calendar year and may require the independent auditor to

perform such auditing procedures as are deemed appropriate by the Designated Authority. The

contractor shall forward a copy of the independent accountant's report to the Designated

Authority within sixty (60) days following the completion of the audit. The Designated Authority

reserves the right to inspect and audit the contractor's books and accounts relating to this contract.

SECTION 15

OTHER PROVISIONS

NOTICES

15.1

Any notices required or given by either Party to the other shall be served in accordance

with Article 35 of the Petroleum Mining Code.

15.2



All notices to be served on the contract operator shall be addressed to:



ConocoPhillips JPDA Pty Ltd

Level3, 53 Ord Street

West Perth, WA 6872

Australia

Facsimile: +61 8 9423 6675

15.3

All notices to be served on the Designated Authority relating to matters for which the

office of the Designated Authority is responsible shall be addressed to:

Timor Sea Designated Authority for the Joint Petroleum Development Area

8th Floor, Northern Territory House

22 Mitchell Street, Darwin N.T

Australia 0800

Facsimile: +61 8 8981-7365

15.4

All notices to be served on the Designated Authority relating to matters for which the

Technical Directorate of the Designated Authority is responsible shall be addressed to:



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Timor Sea Designated Authority for the Joint Petroleum Development Area

8th Floor, Northern Territory House

22 Mitchell Street, Darwin N.T

Australia 0800

Facsimile: +61 8 8981-7365

15.5

Either Party may substitute or change the above such address by giving written notice to

the other.

APPLICABLE LAW

15.6

Subject to the provisions of the Treaty, including the Petroleum Mining Code, the law of

England shall apply to this contract.

SUSPENSION OF OBLIGATIONS

15.7

Any failure or delay on the part of either Party in the performance of its obligations or

duties under the contract shall be excused to the extent that such failure or delay is attributable to

force majeure.

15.8

If exploration is delayed, curtailed or prevented by force majeure the Designated

Authority shall agree to vary the work program and expenditure commitments or exempt the

contract operator from part or all of the work program and expenditure commitments during the

period of force majeure.

15.9

The Party whose ability to perform its obligations is so affected by force majeure shall

immediately notify the other Party in writing, stating the cause, and both Parties shall do all that

is reasonably within their power to discharge their obligations.

SECTION 16

EFFECTIVENESS

16.1



This contract shall be deemed to come into effect on 20 May 2002.



16.2

This contract shall not be amended or modified in any respect, except by the mutual

consent in writing of the Parties.



IN WITNESS WHEREOF, the Parties hereto have executed this contract, in five original copies

and in the English language, on this 2 day of April, 2003.



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APPENDIX A

Description of contract area

Commencing at the point of Latitude 10°59'00" South and Longitude 126 40'00" East; proceed

east to the point of Latitude 10°59'00" South and Longitude 126°46'00" East; then proceed south

to the point of Latitude 11°00'00" South and Longitude 126°46'00" East; then proceed east to the

point of Latitude 11°00'00" South and Longitude 126°47'00" East; then proceed south to the point

of Latitude 11°01'00" South and Longitude 126°47'00" East; then proceed east to the point of

Latitude 11°01'00" South and Longitude 126°48'00" East; then proceed south to the point of

11°02'00" South and Longitude 126°48'00" East; then proceed east to the point of Latitude

11°02'00" South and Longitude 126°51'00" East; then proceed south to the point of Latitude

11°07'00" South and Longitude 126°51'00" East; then proceed west to the point of Latitude

11°07'00" South and Longitude 126°50'00" East; then proceed south to the point of Latitude

11°09'00" South and Longitude 126°50'00" East; then proceed west to the point of Latitude

11°09'00" South and Longitude 126°42'00" East; then proceed south to the point of Latitude

11°10'00" South and Longitude 126°42'00" East; then proceed west to the point of Latitude

11°10'00 South and 126°40'00 East; then proceed north to the point of Latitude 10°59'00 South

and Longitude 126°40'00 East.



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APPENDIX B

Map of contract area



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