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 SG











Registration No


2007

















CONTRACT








for oil and gas exploration within Zharkamys West-I blocks


XXIII-18 (partially), 19 (partially); XXIV-18 (partially), 19 (partially); XXV-19


(partially) in Aktubinsk Oblast of the Republic of Kazakhstan





between


the Ministry of Energy and Mineral Resources





of the Republic of Kazakhstan


(Competent Authority)


and





“Falcon Oil and Gas Ltd.”


(Contractor)















































V Astana, 2007





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TABLE OF CONTENTS





Page


PREAMBLE....................................................................................................................................3


Section!.DEFINITIONS.................................................................................. 3


Section 2. CONTRACT GOAL......................................................................................................8


Section 3. TERM OF CONTRACT................................................................................................8


Section 4. CONTRACT TERRITORY...........................................................................................8


Section 5. TITLE OF PROPERTY AND INFORMATION...........................................................8


Section 6. STATE RIGHT FOR ACQUISITION AND REQUISITION OF HYDROCARBONS..........9


Section 7. GENERAL RIGHTS AND OBLIGATIONS OF THE PARTIES.........„.....................9


Section 8. WORK PROGRAM.....................................................................................................13


Section 9. EXPLORATION PERIOD........................................................... 15


Section 10. COMMERCIAL DISCOVERY................................................... 15


Section 11. RECORD KEEPING AND REPORTING................................................................16


Section 12. OIL MEASURING....................................................................................................17


Section 13. SUBCONTRACTED OPERATIONS.......................................................................16


Section 14. FINANCING..............................................................................................................17


Section 15. TAXES AND OTHER MANDATORY FEES..........................................................17


Section 16. BUSINESS ACCOUNTING......................................................................................18


Section 17. INSURANCE................................... IS


Section 18. LIQUIDATION AND LIQUIDATION FUND.........................................................18


Section 19. PROTECTION OF SUBSOIL AND ENVIRONMENT...........................................19


Section 20. POPULATION AND PERSONNEL SAFETY......................... 20


Section 21. CONTRACTOR'S LIABILITIES ..........!.................................i...............................22


Section 22. FORCE MAJEURE...................................................................................................22


Section 23. CONFIDENTIALITY............................. 22


Section 24. ASSIGNMNET OF RIGHTS AND OBLIGATIONS...............................................23


Section 25. APPLICABLE LAW..................................................................................................23


Section 26. PROCEDURE FOR DISPUTES SETTLEMENT.....................................................23


Section 27. GUARANTEES OF CONTRACT STABILITY................................!......................23


Section 28. CONDITIONS FOR CONTRACT CHANGES AND TERMINATION................24


Section 29. LANGUAGE OF CONTRACT................................................................................24


Section 30. ADDITIONAL PROVISIONS...................................................................................25


Exhibits:


#1 - Geological allotment


# 2 - Agreement # 1397 as of 10.02.2006 on Purchase of the information


# 3 - Work Program


Attached documents:


- A notification letter of the Ministry of Energy and Mineral Resources about the tender award of


“Falcon Oil & Gas Ltd.”


- Tender proposal


- Minutes # 172/2006 of the meeting of the Technical Committee of the TM “Zapkaznedra”


- Expert conclusions of ministries and departments


# Minutes of the meeting of the Work Group








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This Contract for oil and gas exploration within Zharkamys West • 1 blocks:


XXIII-18 (partially), 19 (partially); XXTV-18 (partially), 19 (partially); XXV-19 (partially) in


Aktubinsk Oblast of the Republic of Kazakhstan is made \hisf-7 th day of , 2007,


between the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan, acting as the


Competent Authority on behalf of the Government of the Republic of Kazakhstan (hereinafter


referred to as “Competent Authority”), represented by Minister of Energy and Mineral Resources


B. S. Izmukhambetov and ‘Talcon Oil and Gas Ltd.” represented by B.U. Akchulakova acting as


Director (hereinafter referred to as “Contractor3*), in accordance with Minutes # 3 of the tender


commission meeting for. obtaining of rights for subsoil use as of December 1,2005.








PREAMBLE





Whereas:


1. In accordance with the Constitution of the Republic of Kazakhstan the Subsoil, including


Hydrocarbon materials, is the property of the State;


2. In accordance with the Law of the Republic of Kazakhstan ^Concerning Subsoil and


Subsoil Use» including amendments and supplements, authorities for negotiations and signing


contracts concerning Subsoil Use operations in the territory of the Republic of Kazakhstan are


vested to the Competent Authority;


3. In accordance with decree # 108 of the Government of the Republic of Kazakhstan


«Conceming approval of Rules for Granting Subsoil Use Rights in the Republic of Kazakhstan»,


dated January 21, 2000, the Ministry of Energy and Mineral Resources of the Republic of


Kazakhstan exercises powers of the Competent Authority in respect of signing and execution of


contracts; - '•


4. The Republic of Kazakhstan wishes to use Mineral Resources in a rational and efficient


way including exploration for Hydrocarbon materials;


5. The Contractor wishes and has financial resources for rational and efficient oil and gas


exploration in accordance with the Contract;


6. The Government of the Republic of Kazakhstan has vested the Competent Authority with


the right of signing and executing of the Contract’


7. The Competent Authority and the Contractor have agreed that this Contract shall regulate


their mutual rights and obligations during exploration for Hydrocarbon materials,


The Competent Authority and the Contractor hereby agree on the following:











Section 1. DEFINITIONS


Terms and definitions not defined herein shall have the meaning conforming to terms and


definitions, as found in Law of the Republic of Kazakhstan “Concerning Subsoil and Subsoil Use”


as of Jan.27,h 1996 # 2828 including amendments and supplements, Law of the Republic of


Kazakhstan # 2350 «Conceming Oil» as of June 28"1 2 1995, including amendments and


supplements and other normative documents concerning subsoil use.


Other terms and definitions not defined herein shall have the meaning conforming to terms and


definitions, as found in the current Legislation of the Republic of Kazakhstan.


1. Affiliated parties shall mean affiliate companies of the Contractor, and organizations


having shares or interests in the Charter Capital of the organization, which is the Contractor,


executing petroleum operations in the Republic of Kazakhstan;


V*


2. Safe Subsoil Use shall mean ensuring of technical, ecological and sanitary-and-epidemiologic








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security during Subsoil Use operations;


3. Compensated expenses - means certain (determined) according to conditions of the Contract


and the legislation of the State of an expense for carrying out of investigation of oil and the gas,


subject to a deduction according to the tax laws of the Republic of Kazakhstan.


4. High technologies shall mean universally recognized new achievements in techniques and


engineering processes, realized in the form of product innovation and advanced production and


highest possible environmentally appropriate technology, applied with the purpose of integration of


products, manufactured in the territory of the Republic of Kazakhstan into the world market;


5. Geological Allotment shall mean an exhibit to this Contract for exploration, constituting its


integral part and containing graphical and descriptive definitions of the subsoil plot where a


Contractor may carry out exploration;


6. Annual program of goods, work and services purchase shall mean nomenclature and amounts


of goods, work and services, including those of Kazakhstani origin, means and terms of their


purchasing planned by the Contractor;


7. Annual Work Program shall mean the Contractor’s plan of activities for a calendar year


including a scope and guidelines of exploration activities and financial expenditures;


8.State (Republic) shall mean the Republic of Kazakhstan;


9.Producti9n shall mean any operations related to'extraction of oil to the surface and shall include


the following:


construction and exploitation of subsurface and surface industrial equipment and facilities


including the ones from the Contractor’s pipeline for oil transportation from production places to


trans-shipment to the main pipeline and/or other type of vehicles;


oil extraction to the surface, management of the operations in production wells;


oil refining and separation from mechanical substances and formation waters;


- extraction of associated components from oil and utilization of natural and associated gases;


lO.Investment Law shall mean Law of the Republic of Kazakhstan #373-11 "Concerning


Investments", dated January 8, 2003, including amendments and supplements;


ll.Legislation shall mean the Constitution of the Republic of Kazakhstan, International agreements


• and conventions, ratified or passed by the Republic of Kazakhstan, regulations of the President of


the Republic of Kazakhstan, the Parliament of the Republic of Kazakhstan, the Government and


other State authorities of the Republic of Kazakhstan;


12.Subsoil Use Legislation shall be Law of the Republic of Kazakhstan “Concerning Oil” as of


28.06,95 # 2350 with amendments and additions, Law of the Republic of Kazakhstan “Concerning


subsoil and subsoil use” as of 27.01.96 # 2828 with amendments and additions and other normative


and legislative documents concerning subsoil use.


13. Historical costs shall mean total past expenses of the State for geological surveys of the


Contract territory, fields prospecting and exploration;


14. Kazakhstani manufacturer shall mean natural persons and legal entities of the Republic of


Kazakhstan manufacturing goods, executing works and rendering services of Kazakhstani origin;


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15. Kazakhstani origin (goods, work and services of Kazakhstani origin) shall mean direct





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manufacture of goods, execution of worics and rendering services in the territory of the Republic of


Kazakhstan by physical persons and /or legal entities of the Republic of Kazakhstan;


16. Kazakhstani content shall mean percentage of the annual amounts of the following:


Kazakhstani employees hired during execution of the Contract with categorization of the staff and


indication of the percentage of each category in relation to expatriates, whose number shall decrease


year by year subject to realization of compulsory training programs and professional development


of the Kazakhstani staff;


cost of goods, work and services of Kazaldistani origin, being purchased both directly and by


means of subcontracts against total cost of goods, work and services of the Contractor;


17. Calendar year shall mean a period equal to twelve (12) consecutive months by Gregorian


calendar, which begins from the date of signing of the Contract and ends after 365 days after this


date;


18. Calendar quarter shall mean a period equal to three (3) consecutive months by Gregorian


calendar, which begins on the lsl of January, on the 1st of April, on the lsl of July and on the 1st of


October;


19. Calendar Month shall mean a period equal to one (1) month of a Calendar year by Gregorian


calendar;


20. Commercial Discovery shall mean a discovery in the Contract territory of one or more fields,


being economically feasible for extraction; \


21. Competent Authority shall mean the Ministry of Energy and Mineral Resources of the


Republic of Kazakhstan acting on behalf of the Republic of Kazakhstan exercising the rights related


to signing and execution of Contracts;


22. Contract shall mean this Contract including all annexes hereto between the Ministry of Energy


and Mineral Resources of the Republic of Kazakhstan and “Falcon Oil and Gas Ltd.” for oil and


gas exploration within Zharkamys West - I blocks XXIII-18 (partially), 19 (partially); XXIV-18


(partially), 19 (partially); XXV-19 (partially) in Aktubinsk Oblast;


23. Contract Territory shall mean a territory defined by the Geological Allotment where the


Contractor may carry out subsoil use operations according to the Contract;


24. Concentration of rights in the framework of the Contract shall mean a size of the share of a


consortium member in the Contract with the Republic of Kazakhstan, which enables this member to


make an independent decision on the Subsoil user's activity in accordance with the Contract;


25. Concentration of rights for Subsoil Use Operations shall mean possession of such a share in


the Contract for Subsoil Use Operations in the territory of the Republic of Kazakhstan by an


individual or group of individuals of a single State, or such share of the Charter Capital of


companies being Subsoil Users in the Republic of Kazakhstan, which may pose or posing a threat to


economic interests of the Republic of Kazakhstan;


26. Liquidation Fnnd shall mean a fund formed by the Contractor for elimination of consequences


of subsoil use operations in the Republic of Kazakhstan;


27. Field shall mean one or several natural accumulations of hydrocarbons in a geological


reservoir of any type;





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28. Subsoil user shall mean a physical person or a legal entity haying the right for subsoil use


operations according to the Law “ Concerning subsoil and subsoil use”;


29. Oil shall mean crude oil, gas condensate and natural gas, as well as hydrocarbons, received


after crude oil and natural gas refining, and processing of shale oil or resinous sands;


30. Tax laws - means the Code of the republic of Kazakhstan «About taxes and other obligatory


payments in the budget» from June 12, 2001 # 209-11, with the subsequent changes and additions


(further- the Tax Code) and other normative legal certificates (acts), which acceptance is stipulated


by the Tax Code;





31. Subsoil shall mean a portion of the earth crust below topsoil, and in case of absence of topsoil -


below earth surface and bottoms of seas, lakes, rivers and other water bodies, extending to the


depths accessible by Petroleum Operations and taking into account scientific and technological


progress;


32. Subsoil Use Operations shall mean work associated with exploration;





33. Conservation of mineral resources shall mean a system of measures stipulated by the


legislation of the Republic of Kazakhstan on subsoil and subsoil use and for prevention of subsoil


pollution during subsoil use operations and reduction of their deleterious effects on the


environment;


' 34. Contractor shall mean “Falcon Oil & Gas Ltd.”;' '





35. Prospect surveys shall mean a stage of exploration works aimed at detection and delineation of


promising units and evaluation of probable reserves, their interim geological and economical


evaluation and justification of further geological exploration;


36. Prospecting and evaluation work shairmean a stage of exploration work aimed at





determination of total reserves of a discovered unit, evaluation, of its commercial significance and


feasibility study of exploitation practicability;


37. A Mineral shall mean hydrocarbon materials in the subsoil;





38. Good practices of field development shall mean worldwide practices usually employed during


subsoil use operations as rational, safe, necessary and economically efficient ones;


39. Subsoil Use Right shall mean the right for possession and use of the Subsoil within the


Contract Territory rendered to the Subsoil User in accordance with the Law “Concerning Subsoil


and Subsoil Use”;


40. Test Production of the field shall mean work on specification of available information and


obtaining additional data on geological and geophysical characteristics of formations, mode of


occurrence of hydrocarbons, well productivity, testing of new or previously known oil and gas


extraction technologies;


41. Natural gas shall mean hydrocarbons which are in gaseous state at normal atmospheric


temperature and pressure including fat gas, net gas, associated gas, which is left after extraction or


separation of liquid hydrocarbons from fat gas and non-hydrocarbon gas produced together with


liquid or gaseous hydrocarbons;





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42. Work shall mean paid activities, such as production (manufacture) of goods, installation of


equipment, construction of buildings and other facilities necessary for both direct use during subsoil


operations and for activities defined as auxiliary ones by the Contract;


43. Work Program shall mean a set of plans of the Contractor for the entire term of the Contract


including actions taken to fulfill the tender proposals;


44. Exploration shall mean any operations related to prospecting and exploration for oil and gas,


and include the following:


geological and geophysical surveys;


formation drilling;


drilling of prospecting holes and exploration wells, as well as test production of the exploration


field;


45. Efficient and integrated use of minerals shall mean economically effective use of all types of


subsoil reserves, based on use of advanced technologies and good practices of field development;


46. Sanitary-epidemic well-being of the population shall mean a state of population health when


no environmental factors have adverse health effect and favorable life conditions are provided;


47. Goods of Kazakhstani origin shall mean goods, having certificates of origin confirming their


manufacture in the territory of the Republic of Kazakhstan; \


48. Goods shall mean equipment, finished products and other materials and technical valuables


acquired both for direct use during subsoil use operations, and for activities defined by the Contract


as auxiliary ones;


49. Utilization of natural and associated gases-shall mean provision of field gathering of natural


and associated gases aimed at their use for technological purposes and/or their end product


preparation;


50. Authorized Body for Subsoil Research and Use shall mean a state authority controlling


geological research, rational and integrated subsoil use;


51. Authorized Body for Environmental Protection shall mean the central executive authority of


the Republic of Kazakhstan and its territorial authorities performing realization of the State policy


for environmental protection;


52. Services shall mean performance of paid activities necessary for both direct use during the


subsoil use operations, and for activities defined by the Contract as auxiliary ones, not aimed at


production (manufacture) of goods or some other material objects;


53. Approved reserves shall mean estimated geological and recoverable reserves of Hydrocarbons


in the field approved by the State Committee for Mineral reserves of the Republic in the order


established by the Legislation;


54. Subsoil plot shall mean a geometrized portion of subsoil within contour boundaries allocated


for subsoil use;


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55. Environmental safety shall mean a condition of protection of vitally important interests and


rights of individuals, community and the State from threats arjsing in the result of human


intervention and other environmental impacts.


Section 2. CONTRACT GOAL


2.1. The goal of this Contract is to define contractual relations between the Competent Authority


and the Contractor and legal registration of them as per the State Legislation in force as of the


effective date of the Contract.


Section 3. TERM OF THE CONTRACT


3.1. The Contract shall come into force on the moment of its state registration by the Competent


Authority and obligatory issuing of the Contract Registration Act.


3.2. The period of the Contract shall be 4 years and shall be valid till


“^-7 "cLuyixL 20//.


3.3. The Contract term may be extended upon agreement of the Sides as per the legislation of the


State.


£ 3.4. When extending the Contract period, the Contract terms must be changed upon a written


consent of the Parties.


Section 4. CONTRACT TERRITORY


4.1. The Contractor shall perform Exploration for oil and gas within the Contract Territory with the


total Geological allotment area of two thousand six hundred and ten (2610) sq.km in accordance


with the terms of the Contract.


4.2. If in the course of Exploration for oil and gas it becomes apparent that geographical boundaries


of the Field go beyond the Contract Territory specified by the Geological allotment, the issue of its


expansion shall be solved by the Competent Authority without involving a tendering process if it


does not infringe other Subsoil users'interests.


4.3. The Contractor at its own discretion shall have the right to return unpromising Contract areas


to the State during Exploration work at any moment of the Contract by the following schedule:


by the end of the third year of the Contract -15 %


by the end of the forth year of the Contract-15 %


by the end of the Exploration period, including all extensions periods, to return all the remaining


territory except for the area of a commercial discovery.


Section 5. TITLE OF PROPERTY AND INFORMATION


5.1. All tangible and intangible assets purchased by the Contractor for Exploration for oil and gas


shall be the Contractor’s property.


5.2. Title of property defined in clause 5.1 herein may be pledged or encumbered in any other way


to the benefit of a Third party at the Contractor’s discretion, in order to secure financing of


exploration for oil and gas in accordance with the legislation of the State.


5.3. Information on geology of the Subsoil and Mineral resources contained there, geological


characteristics of Fields, sizes of reserves, development conditions and other features of the Subsoil,


which are found in geological reports, maps and other data shall remain the State property in case it


has been obtained through budget assignments, or the Contractor’s property if obtained through the


Contractor’s own funds.


5.4. Information on the Subsoil within the Contract Territory owned by the State shall be purchased


by the Contractor from an Authorized body for Subsoil Research and Use in the manner prescribed











8


by the legislation.


5.5. Geological and other information on Subsoil acquired by the Contractor in the course of


Exploration for oil and gas must be submitted as per established standards without fail, free of


charge for storage, classification and summarizing to an Authorized body for Subsoil Research and


Use.


5.6. Use of geological information on Subsoil acquired through the funds of Contractor and


submitted in accordance with clause 5.5 hereof for educational, scientific, commercial or other


purposes shall be determined on the basis of a separate agreement between the Contractor and the


Authorized body for Subsoil Research and Use of the Republic of Kazakhstan.


5.7. Upon the Contract termination all geological information shall become the State property. The


Contractor must submit all documents and other physical media containing geological information,


including source information, free of charge to the Authorized body for Subsoil Research and Use


of the Republic of Kazakhstan.


Section 6. STATE RIGHT FOR ACQUISITION AND REQUISITION OF HYDROCARBON


MATERIALS


6.1. In case of war, natural disasters and in other cases, prescribed by emergency laws of the State,


the Government shall have the right for requisition of a part or all Minerals belonging to the


Contractor. The requisition shall be done in amounts as required for the State needs during the


whole term of an emergency situation.


6.2. The State shall guarantee compensation for requisitioned Minerals in physical or monetary


terms at world market prices as of the date of requisitioning in the national currency of the State.


6.3. The Parties have agreed that the State shall have preferential right to purchase hydrocarbon


materials from the Contractor including for the purpose of execution of Government programs.


The purchase shall be possible both vfor the State and for its specially authorized bodieSy and


organizations. The purchase shall be made at prices no higher than world market prices.


Hydrocarbon materials shall be priced in US dollars per one (1) ton, but if in the World Market of


Oil other currency instead of US$ prevails as a monetary unit for Hydrocarbon materials financial


operations, the Parties must use such a currency.


Amounts, prices and terms of purchase shall be defined by another agreement of the Parties.


Section 7. GENERAL RIGHTS AND OBLIGATIONS OF THE PARTIES


7.1. The Contractor shall be entitled to:


7.1.1. Carry out exclusive exploration for oil and gas in the Contract Territory.


7.1.2. Construct production and social sphere facilities required for normal operation processes in


the Contract Territory and in case of necessity in other territories allocated for use by die


Contractor in accordance with the applicable procedure, and to share common purpose objects and


communications both within the Contract territory and outside it, on the basis of agreements with


respective owners. The Contractor shall have the right for the access to all gas and oil pipelines and


other transportation systems necessary for transportation of hydrocarbon materials on the territory


of the Republic of Kazakhstan on non-discriminatory basis.


7.1.3. Hire subcontractors to perform certain oil and gas Exploration activities, mainly from among


organizations of the Republic of Kazakhstan..


7.1.4. Negotiate extension of the Contract term in top priority order as per item 3.3.


7.1.5. Independently perform any legal Subsoil use operations within the boundaries of the


designated Contract Territory in accordance with the terms indicated in the Contract.


7.1.6. Terminate its activities subject to conditions stipulated by the Contract and the State


legislation,


7.1.7. In case of the Contract termination, the Contractor may independently dispose of the property





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in its possession, except for equipment and instruments of processing cycles which may result in


negative technologic and ecological consequences, or upon an agreement between the Parties,


7.1.8. Transport or move hydrocarbons at its own discretion by any mode of transport not restricted


by the Legislation of the Republic of Kazakhstan.


7.1.9. Have free access to railways, highways, air and other communication lines, directly and


indirectly possessed and controlled by the Republic, under reasonable commercial terms and at


reasonable commercial prices, on conditions no less favorable than for other third parties carrying


out Subsoil Use Operations in the territory of the Republic of Kazakhstan.


7.1.10. Have preferential right in the process of Exploration or on completion of it for executing a


Contract for production of Hydrocarbons in accordance with the legislation.





7.2. The Contractor shall have to:


7.2.1. Start implementing Work Program agreed by the Authorized body for the Subsoil research





and use within 60 days upon registration of die Contract.


7.2.2. Choose the most efficient methods and technologies during the Exploration of hydrocarbon


materials based on worldwide accepted standards.


7.2.3. Use the Contract Territory only for the purposes stipulated by the Contract.


7.2.4. Conduct Subsoil Use operations within the Contract area in strict accordance with the State


legislation and the Work Programme, observing the requirements of environmental and subsoil


protection.


7.2.5. Not to prevent other entities from: free travel within the Contract Territory, share common


purpose objects and communications or conducting any kinds of work, including Exploration and


production of other Mineral resources but oil and gas, unless it is related to special safety conditions


arid these activities do not hinder Exploration for oil and gas. '


7.2.6. Follow process flowsheets and plans of exploration for oil and gas approved in accordance


with the procedures, established by the legislation of the Republic of Kazakhstan, ensuring


personnel and population safety, efficient and integrated use of the subsoil and environment


protection.


7.2.7. Mandatory use of equipment, materials and finished goods manufactured in the Republic of


Kazakhstan in the amount of no less than 50% of the total cost of goods, necessary for


implementing the works under the Contract, "on the basis of tenders held in the Republic of


Kazakhstan in the order, established by the Government of the Republic of Kazakhstan, if they


meet the requirements of the legislation of the Republic of Kazakhstan concerning technical


regulations, if they are certified and allowed for the industrial use in the way established by the





legislation of the Republic of Kazakhstan .


7.2.8. Mandatory involvement of Kazakhstani companies and enterprises for implementing works


and rendering services during Petroleum operations in the amount of no less than 70 % of the total


cost of works and services necessary for the fulfillment of the works under the Contract, including


use of air, railroad, water and other transportation services, if they meet standards and other


requirements involving tender procedures in the Republic of Kazakhstan, according to the


procedures defined by die Government of the Republic of Kazakhstan.


In case a service is not available in the Republic of Kazakhstan the Contractor may use services


of foreign companies upon a permission of an authorized governmental body.


7.2.9. During Exploration of Hydrocarbons it is obligatory to use Kazakhstani staff. To provide


Kazakhstani staff as follows.


Staff breakdown (percentage) versus total number of employment


Exploration period Top managers Line managers Specialists Skilled workers


First two years of Exploration


Kazakhstani 50 70 90 100


Expatriates 50 30 10 0








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Third and fourth years of Exploration


Kazakhstani 60 80 100 100


Expatriates 40 20 0 0





Addition: percentage breakdown during the first two years of the Contract term:


Citizens of Kazakhstan involved in the project -80%, expatriates -20%;


Third and fourth years: Kazakhstani specialists -85%, expatriates -15%.


7.2.10. Submit the Work program approved by an Authorized body for Subsoil Research and Use


and a complete progress report on the Work program to the Competent Authority.


7.2.10.1. Submit geological and geophysical reports on the results of activities in the Contract


territory to the an Authorized body for Subsoil Research and Use.


7.2.11. Allocate no less than 1% of the total investment funds for professional training of


Kazakhstani personnel involved in the Contract works during the term of the Contract


And if total amount of money allocated for Kazakhstani staff training exceeds the actual demand of


employees training, the Contractor shall use the remaining amount to finance top priority projects


of secondary education projects in accordance with the Cooperation Agreement between the


Ministry of Education and Science of the Republic of Kazakhstan and the Ministry of Energy and


Mineral Resources of the Republic of Kazakhstan. Information on the remaining education funds


shall be submitted to the Competent Authority after the Annual Work Program and the budget for


the next year of the Contract term have been approved.


7.2.12. Provide State control agencies with required documents, information and access to operation


places when such agencies fre in the course of implementing their official responsibilities, and


timely eliminate all discovered violations.


7.2.13. Disclose information regarding exploration for Hydrocarbon materials to Third parties, if


needed, only upon mutual agreement of the Sides if otherwise is not stipulated by the Contract.


7.2.14. Timely pay taxes and other mandatory payments as well as penalties for unpractical use of


Subsoil and for contamination of the environment including violation of the liabilities for


Kazakhstani content in accordance with the legislation of the State and this Contract.


7.2.15. In the course of his activities preserve objects of cultural and historical significance found


in the Contract territory.


7.2.16. Forecast long-term environmental impact of the Contract fulfillment activities. The


Contractor shall submit a forecast of long-term environmental impact along with detailed reports on


measures undertaken to minimize long-term negative environmental consequences of his Contract


fulfillment activities to the Competent Authority and state environmental authorities upon their


written requests no later than in 2 years after the beginning of operations hereunder. The Contractor


at his own expense shall take such measures to minimize long-term negative environmental


consequences, as the Competent Authority and state environmental authorities may reasonably


require.


7.2.17. Leave the Contract territory in a state conforming to mining and sanitation control and


environmental protection requirements,


7.2.18. Restore land plots and other objects of nature, which were affected by the Contractor’s


activities hereunder to the state useable in the future in accordance with State legislative


requirements.


7.2.19. To accept all the previously drilled oil and gas wells onto his balance and keep monitoring


of them.


7.2.20. Sign a contract for blow-up safety maintenance with an emergency company having an


appropriate license of the Republic of Kazakhstan.


7.2.21. All the oil produced within Exploration period during test production should be delivered to


Kazakhstani oil refineries.*





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7.2.22. Ensure full utilization of associated gas in accordance with the legislation requirements.


7.2.23. The Contractor shall use Natural gas, produced during test production, for internal needs,


such as electricity generation at gas-turbine power stations, for oil heating in grouped gauging


facilities, oil preparation facilities and boiler houses.


7.2.24. The Contractor shall participate in realization of regional social programs investing three


(3) million USD by equal parts for each year during the whole Exploration period upon an


agreement with the oblast Akimat (governor’s office).


7.2.25. Transfer the sum equal to I 000 000 (one million) USD to the Fund of Astana city in the


second year of the Contract term.


7.2.26. The Contractor shall use only advanced ecologically safe high technologies during


realization of the Project. In case of necessity and economic efficiency of projects the pipeline


infrastructure shall be used jointly with other petroleum companies.


7.2.27. Submit to the central executive body of the Republic of Kazakhstan for emergency


situations and local executive authorities declarations on industrial objects safety in the order and


the due form, approved by the Government of the Republic of Kazakhstan.


7.2.28. To follow the terms of the Memorandum on mutual understanding in relation to realization


of the Initiative of openness of activities of producing industries in the Republic of Kazakhstan.


7.2.29. In the process of subsoil use operations to ensure safety to lives and health of people and


safety to the environment.


7.2.30. Annually, no later than thirty calendar days after approval of the annual program of works,


to submit to an authorized state body, which is in charge of regulating trade and industrial policy,


an annual program of purchasing goods, work and services for the next year in accordance with the


form approved by an authorized state body, which is in charge of regulating trade and industrial


policy. ' ^


72.31. Each quarter, no later than 15 days after the reporting period, to submit to an authorized


state body, which is in charge of regulating trade and industrial policy, a report for the purchased


goods, work and services in accordance with the form approved by the an authorized state body,


which is in charge of regulating trade and industrial policy.


7.2.32. To ensure reporting confirmed by auditing reports in accordance with the requirements of


Initiative of openness of activities of producing industries in the manner approved by the


Government of die Republic of Kazakhstan.


7.2.33. To ensure equal conditions and equal payment for Kazakhstani personnel as regards to the


involved expatriates, including personnel of subcontractors.


7.2.34. Allocate 1 to 1,5% of investments for the development of industrial infrastructure f the


contract territory.


7.3. The Competent Authority shall have the right to:


7.3.1. Represent the State in negotiating the terms of the Contract with the Contractor.


7.3.2. Require periodic and sampling reports on the Contract performance. To require any other


information related to the terms of die Contract.


7.3.3. The Competent Authority shall have the right to inspect oil and gas Exploration activities of


the Contractor including documentation, related to the activities under the Contract.


7.3.4. Access to any operations in the Contract Territory, related to exploration of oil and gas.


7.3.5. The Competent Authority shall have the right, taking into account requirements and


limitations stipulated by the legislation of the Republic of Kazakhstan, to inspect Exploration


activities of the Contractor including documentation, related to the activities under the Contract.


7.4. The Competent Authority shall have to :


7.4.1. Ensure Contract execution and termination according to the procedures and on grounds


stipulated by the State legislation.











12


 €9











Section 8. WORK PROGRAM


8.1. The Contractor shall conduct Exploration for oil and gas in accordance with the Work program





approved by the Authorized body for Subsoil Research and Use. During the planned year the


Contractor shall submit for approval Annual Work program and budget for the planned year to the


Authorized body for Subsoil Research and Use or its territorial division. The Authorized body for


Subsoil Research and Use shall approve them in accordance with established procedures subject to


their conformity with the Work program, this Contract, Good practices of field exploration and


development and the legislation of the State.


8.2. The Work Program shall be based on feasibility studies and justifications, subsoil portions


(blocks) and other data taking into consideration good practices of field development.


8.3. The Contractor may propose amendments and/or supplements to the approved Work Program.


Amendments and supplements to the Work Program shall be made in writing upon mutual consent


of the Parties,


8.4. Scope and cost of worics according to the Work Program in the Contract Territory.


In accordance with the terms of this Contract, the amount of investments for geological exploration


during the exploration period shall be fifty three million five hundred thousand (53 min. 500


thousand) USD arranged in the following way:





Year of the Exploration work Volume, Cost,


Contract running km thousand USD


Purchasing of geological and geophysical 20,


V information \


Reinterpretation of seismic data 100 25


running km


Design works: ecological audit, environment


impact assessment, 90


Exploration project, Drilling project, etc.


Payment of subscription bonus - 8 000





Payment of Historical Costs 31


First year


Office expenses, contmgences, indirect costs 334





Total expenses for GEW (geological


exploration works) 8500





Training of Kazakhstani specialists 85





Social transfers to Aktubinsk Oblast, other 750


payments


Total within 1-st year: 9335


Geological & geophysical justification: well


Second Year surveys, geological ami seismic data 150


interpretation





Design works: environment impact


assessment (EIA), Drilling project, etc. 100





2D seismic operations 500 3 550


running km





13


 69








Reinterpretation of seismic data 400 200


running km


Drilling of test holes 4 500





Office expenses, contingences, indirect costs 1500





Total expenses for GEW (geological


exploration works) 10 000


Training of Kazakhstani specialists 100


Transfers to the infrastructure development


of Astana city 1000


Social transfers to Aktubinsk Oblast 750


Total within 2-nd year: 11850


Drilling of 2 test holes 2 500 m deep 5550


3D seismic operations 50 sq.km 1000





Seismic data processing 50 sq. km 600


Design works including: Project of Test


Production of the field, Project of 250


construction of surface field facilities


Expenses for the field development 2 600





Drilling of appraisal wells 4 000


Third Year


Office expenses, contingences, indirect cost





1 000


\ Total expenses for GEW (geological 15 000


exploration works)


Training of Kazakhstani specialists 150





Social transfers to Aktubinsk Oblast, other 750


payments


Total within 3-rd year: 15,900


Drilling of wells 2500 m deep .


3 10 500


7500m


Development of the field production


infrastructure 1950


Approval of reserves by the State


Reserves Committee of the Republic of 100


Kazakhstan


Test Production of the field


400





Fourth Year Expenses for the field development 4 850





Office expenses, contingences, indirect costs 1500





Total expenses for GEW (geological 20 000


exploration works)


Training of Kazakhstani specialists





200


Social transfers to Aktubinsk Oblast 750





Total within 4-th year. 20,950








14


 ?0








In all for the GEW 53,500


>,


Total expenses 58,035











8.4.1. All operations performed by the Contractor and costs related thereto in excess of the


requirements of the Work program during any year within the Contract term shall be carried


forward to the Contractor’s obligations under the Work Program of the next year.


8.4.2. In accordance with the tender proposal the Contractor shall accumulate funds for


development of operational and social infrastructure of the contract territory in the amount of three


(3) million USD,


8.4.3. Indirect costs, anticipated in the Contract and incurred by the Contractor during execution of


works in the Contract territory, administrative expenses, particularly managerial staff salary,


offices construction and maintenance, entertainment expenses, payments for consulting, audit and


other expenses, planned in the total amount of expenses for the whole period of Exploration, should


not exceed the amounts, approved by the Work program.





Section 9. EXPLORATION PERIOD


9.1. According to the Contract the Exploration period shall consist of four (4) consecutive years,





and may be extended twice each time for no longer than two years upon mutual consent of the


Parties and in accordance with subsoil use legislation. In such cases the Parties shall first define the


portion of the Contract Territory to be kept by the Contractor for further exploration and majce


respective amendments to the Work Program. v


9.2. The Contractor must start Exploration activities within 60 days after the Contract has come


into force.


9.3. During the Exploration the Contractor shall undertake, as per the provisions of the Contract and





the Work program, to return the Contract territory except areas where a commercial discovery has


been made.


9.4. According to the provisions of the Contract the contractor shall determine subsoil plots to be


returned and shall inform the Competent body about it no later than 30 days before the date of


return.


9.5. The sites to be returned should meet all requirements of the legislation of the State related to


protection of the environment The contractor shall restore at its own expense territories that are to


be returned and other natural objects affected in the course of exploration operations to conditions,


suitable for direct purposes use.


9.6 The Contract shall be terminated upon the expiration of the exploration period in the contract


territory, if no Commercial Discovery has been made, or no decision has been made to enter the


Production period. Should the Contractor refuse to continue works hereunder, it then shall forfeit all


rights for Contract territory and may not claim any future reimbursement of his costs, incurred


under this Contract.


Section 10. COMMERCIAL DISCOVERY





10.1. If the Contractor makes a decision that the field is of a sufficient interest for evaluation tests,


he shall promptly inform about it the Competent Authority and within 180 days shall submit to the


State Mineral Reserves Committee (GKZ) a complete report with calculation of reserves and their


evaluation.


10.2. The State Committee for mineral reserves of the Republic of Kazakhstan shall facilitate State


expert evaluation of the field reserves in the order established by the Subsoil use legislation.


10.3. A Commercial Discovery shall grant an exclusive right to the Contractor to pass to the





15


Production stage by means of signing an appropriate contract on the basis of direct negotiations


with the Competent Authority.


10.4. In case of a Commercial Discovery the Contractor shall have the right for full or partial


reimbursement of costs, incurred in the course of the Commercial Discovery.


10.5. If during the Exploration there was no commercial discovery the Contractor shall have no


right for reimbursement of his costs incurred by him during the Exploration period.


Section 11. RECORD KEEPING AND REPORTING


11.1. The Contractor shall keep records and store record documentation related to exploration for


oil and gas hereunder during the stipulated period in accordance with the State legislation.


11.2. The Competent Authority or its authorized representatives shall have tree access to all


original documents concerning the Contractor’s activities under the Contract, including reports on


geological, geophysical and engineering-geological works, well construction, test production of the


Field, financial and business accounting and reports, etc.


11.3. The Contractor shall submit quarterly to the Competent Authority complete reports on its


activities before the 25th day of a month after the end of a quarter including reports of Form # 2


LKU (a report on fulfillment of license -contractual terms).


11.4. The Contractor shall submit reports on his activities to State authorities within terms and


manners established by the State Legislation.


11.5. The Competent Authority shall have the right to inspect the Contractor’s fulfillment of the


Contractual terms, may attend oil and gas Exploration operations via its representatives.





Section 12. OIL MEASURING J


\ \ v


12.1. The Contractor shall measure and weigh oil and gas, produced in the Contract Territory in


accordance with methods and practices applied in the State.


12.2. The Contractor shall conduct annual tests of equipment and instrumentation used for oil and


gas measuring and weighting attended by representatives of an Authorized body for metrology and


standardization.


12.3. If it is found during a test or examination tHat equipment or instrumentation has defects, then


if it is not possible to determine how long the defects have existed, such period shall be determined


as half of the time from the previous measurement until the date when the defects were found.


12.4. If the Contractor deems necessary to introduce modifications to the applied methods or


replace installed instrumentation, he shall notify the Competent Authority no later than 30 days in


advance, in order to give its representatives an opportunity to attend at such modifications or


replacement.


Section 13. SUBCONTRACTED OPERATIONS


13.1. The Contractor shall provide an Authorized body for State regulation of trade and industrial


policy, on the basis of the Work program, with a plan of purchasing goods, works and services, a


list of main contracts for delivery of materials, equipment and services supply to be signed next


calendar year indicating estimated costs of Subcontracts as well as a list of potential Kazakhstani


and foreign subcontractors.


13.2. Subcontractors as usual are involved by the Contractor on a competitive basis as per the


legislation of the Republic of Kazakhstan.


13.3. Contractor shall be liable for performance of subcontracts in accordance with the State


legislation.














16


 •«








Section 14. FINANCING





14.1. The Contractor shall undertake to fully finance his activities under the Contract in accordance


with the Work program approved by the Parties, The Contractor shall use leveraged and equity


financing, the latter meaning use of the company’s funds, obtained in the result of commercial


activities of the Contractor.


14.2. The Contractor shall be free to obtain loans in any currency in and outside the State for


financing his activities, if it does not conflict with the State legislation.


14.3. The Contractor may maintain bank accounts both in domestic and foreign currency in banks


within and outside the State for the purpose of Contract performance and receiving funds which


shall deem receipts and proceeds under the Contract.


14.4. All settlements under the Contract shall be made in the order stipulated by the State


legislation.


14.5. The Contractor and Subcontractors shall carry out their currency transactions in accordance


with the State legislation on currency regulation.


Section 15. TAXES AND OTHER MANDATORY PAYMENTS


15.1. Taxation of the Subsoil Use Contract shall comply with the first tax regime model, according


to which the Contractor shall undertake to pay taxes and other mandatory payments to the budget as


per the current legislation at the time when these liabilities arise.


15.1.1. Subscription bonus.


The Contractor shall pay the Subscription bonus in the amount of US $ 8 000 000 (eight million)


US dollars no later than in 30 (Thirty) calendar days after the effective Date of the Contract.


15.2. Customs payments. v* %


The Contractor shall pay all customs payments in compliance with the Customs legislation of the


Republic of Kazakhstan in force as of the day of the customs declaration acceptance.


15.3. Transfer pricing.


Should the price used in the course of a transaction execution vary from the market price, the state


bodies which control use of transfer prices, shall have the right to adjust units to be taxed in


compliance with the legislation on state control of transfer prices use.


15.4. Provision of pensions, social deductions.


The Contractor shall withhold and transfer mandatory pension fees of its employees to accumulative


pension funds in compliance with the provisions of pension legislation, and shall undertake


liabilities for full calculation and timely social transfers to the State social insurance funds in


compliance with the mandatory social insurance law in force as of the date when such liabilities


arise,


15.5. Punitive sanctions


15.5.1. Punitive sanctions for violation of Tax legislation shall be applied in accordance with the


legislation in force as of the date of commitment of such violation.


15.5.2. Fines for payments other than taxed shall be applied at rates stipulated by the law in force as


of the date of commitment of such violation.


Section 15-1. PAST COSTS REIMBURSEMENT.


15-I.I. The Contractor shall pay past costs to the budget in accordance with the provisions of the


Agreement on geological information purchase dated February 10, 2006 #1397 between the


Committee of Geology and subsoil use of the Ministry of energy and mineral resources of the RK


and “Falcon Oil & Gas Ltd.” (hereinafter “Agreement’*)-


15-1.1.1. Value of past costs of the Contract territory amounts to two million sixty two thousand six


hundred and forty- four (2 062 644) US dollars.


15-1.1.2, The Contractorvshall undertake to pay within thirty days after signing the Agreement thirty


thousand nine hundred and forty ( 30 940) US dollars for the right to use geological information.








17


 73








15-1.1.3. The remaining sum of the historical costs in the amount of US$ two million thirty one


thousand seven hundred and four (2 031 704) shall be reimbursed to the'budget as per a Contract for


Production.


Section 16. BUSINESS ACCOUNTING


16.1. The Contractor shall undertake to maintain full and accurate accounting of all income and


expenses with regard to his activities hereunder, in accordance with the order of accounting,


stipulated by the current State legislation.


16.2. All Contractor's accounting books and records shall be available for inspection by the


Competent Authority and State agencies in accordance with their competence as defined in the


current State legislation.


Section 17. INSURANCE


17.1. Within one hundred eighty (180) days following the Effective Date, the Contractor shall


develop and present for approval of the Competent authority a program for insurance of business


risks, property and liability, related to Exploration for oil and gas in the Contract Territory.


17.2. Insurance shall be provided for property and liability risks, related to:


17.2.1. Transportation and storage of goods delivered to the site of exploration, works;


17.2.2. Contractor's property used in the process of Exploration, including rented or leased


property;


17.2.3. Environmental and land pollution and costs for liquidating consequences of damage, caused


to the environment, including land improvement and reclamation


17.2.4. General civil liability to third parties including damage caused to health and life of the


personnel and population.


17.3. The Contractor shall have to insure its employees against work accidents and occupational


diseases, including coverage of costs related to treatment of employees of consequences of work


accidents and occupational diseases.


17.4. The Contractor at his own discretion shall choose insurance companies in accordance with the


State legislation.


Section 18. LIQUIDATION AND LIQUIDATION FUND


18.1. No later than two (2) years after the Contract commencement the Contractor shall present the


Competent authority for approval a program for liquidation of consequences of the activities under


the Contract, including estimation of liquidation costs.


18.2. The liquidation plan should include removal or liquidation of facilities and equipment used in


the Contractor’s activities in the Contract territory.


18.3. For full financial security for implementation of liquidation program the Contractor shall


establish a liquidation fund of 1% (one percent) of investment amount, which shall be entered in a


special deposit account.


18.4. Payments to the liquidation fund in the amount of 1 % of the investments shall be made by the


Contractor once a year to the special deposit account in any bank in the territory of the Republic of


Kazakhstan and shall be included in the Exploration expenditures.


Management of the liquidation fund shall be made by the Contractor upon a permit of the


Competent Authority and approval of an Authorized Agency for subsoil research and use.


18.5. If actual liquidation costs exceed the amount of the Liquidation fund, the Contractor shall


provide additional financing for liquidation purposes.


18.6. If actual liquidation costs are less than the amount of the Liquidation fund, the surplus shall


be transferred to the Contractor and be taxed as income.








18


18.7. If the State takes a decision on continuation of operating all or some of the facilities handed


over by the Contractor after expiration of the Contract at its own responsibility, then the Contractor


shall be free of any responsibilities for implementing liquidation program and vest upon the State


all rights for all accumulated assets in the Liquidation fund.


Section 19. PROTECTION OF SUBSOIL AND ENVIRONMENT


19.1. In the course of the Contract performance the Contractor shall comply with the State


legislation related to protection of the Subsoil and environment and take all necessary measures


with the purpose of:


- Protection of people’s lives and health;


- Provision with rational and integral utilization of Mineral resources;


- Preservation of natural landscapes and reclamation of mined-land and other


geomorphologic structures;


- Preservation of properties of energetic condition of upper sections of the Subsoil for the


purpose of prevention of earthquakes, landslides, underflooding and soil subsidence.


19.2. During Exploration for oil and gas the Contractor shall observe the following in preferential


order:


19.2.1. Ecological requirements:


• environment preservation, prevention of man-caused desertification of lands, prevention


of water and wind soil erosion, isolation of freshwater and lost circulation horizons to


avoid their pollution, prevention of desiccation and pollution of underground waters and


other requirements according to the legislation related to the subsoil use and


environment;


• Keeping of industrial monitoring of environment in accordance with programs agreed


with an authorized agency in charge of protection of environment;


• Provision of ecological requirements during warehousing and storage of industrial and


domestic wastes for prevention of accumulation thereof in water collection areas and


underground water areas;


19.2.2. Subsoil protection requirements:


• provision of completeness of oil and gas extraction;


• a reliable record keeping of recoverable and left in the Subsoil general and commonly


occurring Mineral resources and associated components, products of reprocessing of


raw materials and industrial wastes during exploration of Fields;


• utilization of the Subsoil in accordance with requirements of State environment


protection legislation, which preserves the Subsoil from development of dangerous


man-caused processes during oil and gas extraction; prevention of the Subsoil


contamination during Exploration;


• ensuring completeness of outstripping geological study of Subsoil for a reliable


estimation of structures and sizes of hydrocarbon reserves in the Contract Territory;


• observance of changes and the order of ceasing Hydrocarbons Exploration provided for


in Section 28 of the Contract and the order of liquidation of the deposit objects


development, stipulated in Section 18 herein.


19.3. The Contractor shall ensure completeness and reliability of geological, hydro - geological,


ecological, sanitary-epidemiologic, engineering- geological and technological study of oil and gas


exploration units.


19.4. During its activities hereunder the Contractor shall take into consideration that positive


conclusions of the state ecological, sanitary-epidemiological expertise on such operations shall be


justifications for Subsoil^Use Operations, as well as permissions, issued on this basis, for Subsoil








19


Use Operations, given by executive bodies that are in charge of environmental protection and


people's health.


19.4.1. The Subsoil User shall submit to the state ecological, sanitary-epidemiological commission


of experts all preliminary design and project documentation containing the ’’Environmental Impact


Assessment" and "Environmental Protection" sections setting out the measures planned for the


period of implementation and termination of Subsoil Use Operations or suspension of the Field


development.


19.5. The Contractor shall monitor the Subsoil and environment with the purpose of studying the


impact of its activities hereunder and taking measures for prompt elimination of any adverse


impact. The data of industrial monitoring and environmental impact assessment reporting shall be


submitted to regional agencies for environmental protection.


19.5.1. The Contractor shall establish operational laboratory control of work conditions and


influence of industrial facilities on the environment and health of the population.


19.6. The Contractor shall remediate the disturbance of the status of the environment, implement


recovery works and compensate in full the damage caused to the environment. In case of emissions


of polluting substances to the environment above the allowable levels, emergency and extraordinary


situations, as a result of the Contractor’s activities, the Contractor shall promptly inform of such


circumstances authorized bodies for environment protection and state authorities of sanitary-


epidemiologic supervision and take measures for eliminating the consequences and reimbursement


of damage.


19.7. Environment protection authorized state agencies shall keep control of compliance with the


legislation related to protection of the Subsoil and the environment and sanitaiy-epidemiologic


welfare of the population.


19.8. The Contractor shall perform the work on ensuring protection of the environment in the


Contract Territory.


19.9. Upon termination of the Contract or in case of a stage-by-stage return of the Contract


Territory, the Contractor shall transfer the Contract Area in the state suitable for its further direct


use in accordance with the legislation of the State.


19.10. Any violations (deteriorations) of the environmental conditions and the Contract Territory


itself, occurred during the Contract term, shall be restored at Contractor’s own expense to


conditions suitable for its further use;


19.11. In the event of discovering rare geological formations and archeological items, the


Contractor shall suspend its operations in the place of the discovery and notify the Competent


Authority and supply with information.


19.12. The Contractor shall be obliged to keep monitoring of the wells drilled earlier on the


Contract Territory.


Section 20. POPULATION AND PERSONNEL SAFETY


20.1. During Exploration for oil and gas in accordance with the Contract the Contractor shall ensure


compliance with the sanitary standards, work safety rules stipulated by the legislation of the State,


and also arrangements for prevention and remediation of emergencies and occupational diseases


shall be ensured.


20.1.1. The Contractor shall provide employees with necessary work conditions and sanitation and


housekeeping support in compliance with sanitary-epidemiological standards, including living


conditions (in the event of work on a rotational basis) and catering at the facilities.


20.1.2. The Contractor shall control work conditions jn accordance with the current legislation.


20.1.3. In accordance with the current legislation the Contractor shall establish periodical medical


examinations of specialists who work in hazardous conditions.


20.1.4. The Contractor shall establish a sanitary protection zone (SPZ) according to the sanitary


qualification and calculations of atmospheric dispersion of harmful substances.


20.1.5. The Contractor shall provide accomplishment of the sanitary protection zone.





20


 w








20.1.6. The Contractor shall ensure surface contamination levels within the boundary of the sanitary


protection zone to be not exceeding maximum permissible rates (PDK) for populated areas taking


into consideration background pollution.


20.2. Exploration for oil and gas shall be prohibited if it poses hazard to people's lives and health.


20.3. Special Authorized State bodies shall keep control of technical safety and industrial sanitation


standards observance during exploration of hydrocarbons.


20.4. The main requirements for safe oil and gas exploration are:


20.4.1. Admission to operations of personnel who has received appropriate education and


passed special training-and qualification examination on the knowledge of technical exploitation of


equipment and the rules of industrial safety in the oil industry, preliminary medical examinations in


accordance with the decree of the Ministry of Health protection of the RK;


20.4.2. Provision of people engaged in exploration works for oil and gas with special


clothing and personal and collective protective tools;


20.4.3. Use of machinery, equipment and materials which meet safety requirements and


sanitary standards;


20.4.4. Implementation of sanitary-epidemiological arrangements aimed at maintenance of


proper sanitary- epidemiological conditions of the facilities, prevention of industrial diseases and


injuries;


20.4.5. The State sanitary-epidemiological surveillance agencies shall control observance


of the Legislation with regard to provision of sanitary-epidemiological well-being of population;


20.4.6. Record-keeping, proper storage and consumption of explosives as well as then


proper and safe use;


20.4.7. State control of observance of the Legislation on subsoil and environment


protection shall be performed by an Authorized body for environment protection.


x 20.4.8. Conducting a variety of geological and mine surveying and other observations


required for technological cycles of operations and prediction of dangerous situations; hazardous


zones shall be timely mapped on layouts;


The Subsoil Users shall use rescue services in accordance with the regulation issued by the


Government of the Republic of Kazakhstan;


20.4.9. Timely update technical documentation and emergency liquidation plans, defining


the limits of safe operation areas more precisely;


20.4.10. Observance of projects and technological schemes of Fields Development and


Facilities construction approved by an Authorized body for industrial safety and emergency


situations;


20.4.11. Measures on gas utilization shall be obligatory;


20.4.12. Establishment of laboratory control over air condition in work areas and hazardous


adverse technological workplaces (noise, vibration, etc.);


20.4.13. Establishment of preliminary and periodical medical examinations of personnel


who work in hazardous and adverse work conditions;


20.4.14. Provision of radiation safety;


20.4.15. Workers shall be provided with pure drinking water in normative amounts as well


as hot meals;


20.4.16. Workers shall be provided with necessary sanitary facilities;


20.4.17. The development project shall be approved by a State Regional Authority of


sanitary-epidemiological surveillance before the beginning of commercial operations on the field


development.


20.5. In case of direct hazard to life and health of employees and/or population, the Contractor’s


officials shall.immediately suspend the operations and ensure transportation of people to a safe


place and inform about the situation the Competent Authority, Regional Authorities of state


sanitary-epidemiological inspection agencies of the State and local executive agencies.














21


20.6. The Contractor shall indemnify the damage caused to health of a citizen, in the course of his


fulfillment of the Contract and labor liabilities, in accordance with the legislation of the Republic of


Kazakhstan.








Section 21. THE CONTRACTOR’S LIABILITY FOR VIOLATION OF THE PROVISIONS


HEREOF


21.1. Transactions made by the Contractor with violations of the terms of the Contract may be


deemed invalid on the* grounds provided by the Legislation of the State.


21.2. The Contractor shall bear full responsibility to the Competent Authority and Third parties for


consequences of activities, stipulated in clause 21.1. of this Contract


21.3 Persons, guilty in consummation of such transactions and also other violations of the State


Legislation, shall bear disciplinary, material, administrative and criminal liability as established by


the Law.


Section 22. FORCE-MAJEURE


22.1. Neither of the Parties shall bear responsibility for non-fulfillment or improper fulfillment of


obligations under the Contract, if such non-fulfillment or improper fulfillment were caused by force


majeure circumstances.


22.2 The force majeure events shall include emergency or unexpected in these conditions


circumstances, such as war conflicts, natural calamities, disasters (fires).


22.3. In case of force-majeure circumstances the Party, affected by them, shall promptly inform the


other Party either by handing in or by mail a y/ritten notification specifying the start of the force


majeure circumstance and its description.


22.4. In case of force-majeure the Parties shall immediately have a meeting foT seeking an impartial


solution to the situation and use all available means to minimize consequences of such


circumstances.


22.5. Upon full or partial suspension of works hereunder, caused by force-majeure circumstances,


duration of these works shall be extended to the period of duration of force-majeure and/or shall


resume from the moment of cessation of force-majeure circumstances.


Section 23. CONFIDENTIALITY


23.1. Information received or acquired by any of the Parties in the course of Contract fulfillment


shall remain confidential. The Parties can use confidential information to compose required reports


as specified in the State legislation.


23.2. The Parties shall not have a right to transfer confidential information to Third parties without a


prior written consent of the other Party with the exception of the following cases:


23.2.1. If such information is used in the course of legal or arbitration proceeding;


23.2.2. When such information is provided to Third parties, which render services to die Contractor,


on the condition that such Third party shall be liable to treat such information as confidential, and


to use it only for die purposes established by the Parties and for the term determined by the Parties;


23.2.3. When information is submitted to a bank or any other financial organization, from winch the


Contractor receives funding, provided that such bank or other financial institution, undertakes to


treat such information as confidential and to use it only for specified purposes.


23.3. The Parties shall define the term of confidentiality for all documents, information and reports


concerning Exploration in the Contract Territory in accordance with the State legislation.


Section 24. ASSIGNMENT OF RIGHTS AND OBLIGATIONS











22


24.1. Partial or full assignment of the Subsoil Use right by the Subsoil User to other person either


for a fee or free of charge along with alienation of a share (share holding) in the legal entity which


is a subsoil user, including assignment as an installment to the charter capital of a legal entity to be


established, assigning of rights of Subsoil Use as a part of a property complex to be sold ( alienation


of a share ( share holding of a legal entity, which is a subsoil user) in the course of bankruptcy


proceedings of a subsoil user either in the course of privatization of Subsoil Users which are - state


enterprises along with pledge of Subsoil Use right shall be made upon permit of the Competent


Authority.


24.2. Expenses related to the assignment of rights and obligations under the Contract shall be borne


by the Contractor and shall not be reimbursed by the State.


24.3. As long as the Contractor retains any participation in the Contract, he and the Party to which


the Contractor will assign his rights and obligations hereunder shall bear joint liability under the


Contract.


24.4. The State has a preferential right before the other side of the Contract or sharers of the legal


entity having subsoil use rights and other persons for obtaining the alienable right (or its part) for


subsoil use and/or a share (share holding) in the legal entity having the subsoil use right, as well as


in a legal entity, which has a possibility directly and/or indirectly determine resolutions and/or


influence the decisions taken by subsoil users, if the legal entity's main activity is related to subsoil


use in the Republic of Kazakhstan under terms which are not worse than those offered by other


purchasers. ‘


24.5. The right for subsoil use may not be assigned to anybody within two years from the effective


date of the Contract, except for the cases of assignment when a legal entity is wound up, in case of


charging the right for subsoil use, pledged, as well as assignment of the right for subsoil use in the


manner of inheritance, or reorganization of a legal entity. .


Section 25. APPLICABLE LAW


25.1, This Contract and other agreements executed on the basis hereof shall be governed by the law


of the State unless otherwise stipulated by international agreements to which the State is a party.


25.2, The Contractor shall have to observe the Existing Legislation of the State;


25.3, The Contractor shall undertake to fulfill international obligations assumed by the State in the


sphere of environmental protection within the Contract Territory and the adjacent areas.


Section 26. PROCEDURE FOR DISPUTES SETTLEMENT


26.1. All disputes and disagreements, as well as other issues shall be settled by way of negotiations.


26.2. If within 90 days from the moment of its origin a dispute cannot be settled by means of


negotiations, then the Parties hereby agree to submit the dispute to the arbitration courts of the


State, authorized to consider such disputes in accordance with the legislation.


Section 27. GUARANTEES OF CONTRACT STABILITY


27.1. Contract provisions shall remain unchanged during the full term of the Contract


27.2. Protection of the rights of the Contractor is guaranteed by the Legislation of the Republic of


Kazakhstan. Changes and amendments to the national and local legislation that make the


Contractor’s position worse shall not be applied to the Contract executed prior to such


amendments.


27.3. The Law of the Republic of Kazakhstan “Concerning investments” Ns 373-11 dated January


08,2003, shall guarantee protection of interests of the Contractor.


27.4. If amendments and supplements are introduced to the Legislation which make it impossible or


limit to perform furtherV;activities under the Contract, appropriate amendments may be introduced to


the Contract by a written agreement of the Parties to restore the Parties' interests.








23


 *9








27.5. The guarantees, stipulated in this Section, shall not be applied to amendments in Legislation


of the Republic of Kazakhstan related to defense capacity, national security, environmental security


and health protection services and taxation.


Section 28. CONDITIONS FOR CONTRACT AMENDMENTS AND TERMINATION


28.1. The Competent Authority shall have the right to terminate unilaterally the Contract in the


following cases:


- when the Contractor refuses to eliminate the reasons which caused the decision to suspend


Exploration, either the reasons for that are not eliminated within the given period sufficient for


their elimination;


- when the Contractor violates the Contract obligations;


- in case of non-fulfillment of requirements of a notification concerning violation of the Contract


obligations within the term prescribed by the Competent Authority;


- if it is impossible to eliminate the reasons which caused the suspension of the operations for


subsoil use;


- in case of a serious violation by the Contractor his liabilities, prescribed either by the Contract,


or the Work program;


- in case of the Contractor’ bankruptcy in accordance with the current legislation of the Republic


of Kazakhstan, except for a case when subsoil use right is subject to pledge as per the Law “


Concerning Subsoil and Subsoil Use";


- in case of non-fulfillment of item 3 of Article 71 of the Law "Concerning Subsoil and Subsoil


Use" in reference to the preferential right of the State.


28.2. The Competent Authority shall have the right, before taking an appropriate decision about thev


termination of Contract, to demand an immediate termination of operations for subsoil use by


means of sending a notification to the Contractor and the Contractor must without delay fulfill such


a demand.


28.3. The Parties may stop actions or change the Contract terms only on the basis and in the maimer


specified by legislative acts of the Republic of Kazakhstan and the Contract.


28.4. The Parties shall not be released of fulfillment of the current liabilities, which have not been


implemented by the moment of termination of the Contract or change of its terms.


28.5. Termination of the Contract shall not release the Contractor from the fulfillment of his


liabilities to restore the contract territory to the state, safe for health and lives of the population and


the environment in accordance with the liquidation plan, approved in the manner established by the


legislation of the Republic of Kazakhstan.


Section 29. LANGUAGE OF THE CONTRACT


29.1. The text of this Contract is made in three counterparts in the official, Russian and English


languages and all counterparts are identical and have equal legal effect.


29.2. In the event of any discrepancy or conflict between the language versions, the Russian version


shall prevail.


29.3. The Parties hereby agree that the official and the Russian languages shall be used for


communication purposes. Starting from the Effective Date technical documents and all data


concerning exploration shall be prepared in the official and the Russian Languages.


29.4. Documents and information relating to administrative activities shall be prepared in the


official and the Russian languages.


Section 30. ADDITIONAL PROVISIONS





V











24


 So








30.1. All notifications and other documents required in connection with the Contract


implementation shall be deemed duly delivered or handed in to each of the Contractual Parties only


upon receipt.





30.2. Notifications and documents shall be handed in personally or sent by mail, registered airmail,


fax, telex or by wire to the following addresses:


Competent Authority’s address: Contractor’s address:








Astana, 010000 Almaty, 050091


22, Kabanbay Batyr Str. 86, Gogol Str.,


Tel.: +7 (3172) 97-68-01 office # 609


Fax:+ 7 (3172) 97-68-65 Tel./fax: +7 (327) 250- 99- 98








Ministry of Energy and Mineral Resources “Falcon Oil and Gas Ltd.”


of the Republic of Kazakhstan





Minister Alternate Director


B. Izmukhambetov B. Akchulakova


30.3. In case of changes of the addresses as listed in the present Contract each Party shall notify the


other Party in writing.





30.4. All annexes to the Contract shall be deemed its integral parts. Upon discrepancy between


annexes and tbe Contract provisions, the Contract shall prevail. ,





30.5 Amendments and additions to die Contract, which do not contradict with the Contract tenns


and conditions, shall be executed as written agreements between the Parties. Such an agreement


shall be deemed an integral part of the Contract.





30.6 This Contract is made in three counterparts all having equal legal effect.





30.7 This Contract is executed on “27 2007 in the city of Astana of the Republic of


Kazakhstan by the authorized representatives of the Parties.





Competent Authority: Contractor:











signature signature





B. Izmukha B. Akchulakova





Mintsfer of Energy and Acting as Director of “Falcon SiT&Gas Ltd.”


Mineral Resources of the


Republic of Kazakhstan





























25


 TRANSLATION CERTIFICATE








Reference is made to an English Language translation of Addendum No. 1, dated March 4,2009,


to the exploration contract, dated August 27, 2007, between the Ministry of Energy and Mineral


Resources of the Republic of Kazakhstan and Falcon Oil and Gas Ltd. LLP (the “Addendum”)*


a copy of which is attached hereto at Schedule “A”.


The undersigned, Askhat Tynbayev, hereby certifies that the English language translation


referenced above is, in all material respects, a complete and accurate translation of the original


Russian language version of the Addendum.


Holders of securities of the Corporation may request a copy of the original Russian language


version of the Addendum. To request a copy of the Addendum, please contact:


Sandy Quilty


Chief Financial Officer


Tel: +1 (403)201-9694


DATED as of the 23^day of February, 2011.








Nakie: Askhat Tyj :v


SCHEDULE“A”


 State Registration No. 3079 as of March 4, 2009



































ADDENDUM Jfe 1





To Contract ,N*®2459 dated 27.08.2007 for Oil and Gas Exploration within


Zharykamys West-1 Blocks XXIII-18 (partially), 19 (partially); XX1V-18


(partially), 19 (partially); XXV-19 (partially) in the Aktubinsk Oblast of the Republic


of Kazakhstan








between


THE MINISTRY OF ENERGY AND MINERAL RESOURCES





(Competent Authority)





and


Falcon Oil and Gas Ltd.





(Contractor)






































Astana, 2009


This Addendum # 1 to Contract JVe 2459 dated 27.08.2007 for Oil mid Gas Exploration within


Zharykamys West-1 Blocks XXIII-18 (partially), 19 (partially); XXIV-18 (partially), 19


(partially); XXV-19 (partially) in the Aktubinsk Oblast of the Republic of Kazakhstan was


made between the Ministry of Energy and Mineral Resources (Competent Authority) and


Falcon Oil and Gas LTD (Contractor) on March 4,2009.


Preamble


Whereas the Republic of Kazakhstan adopted a new Code on Taxes and Other Mandatory


Payments to the Budget as of December 10, 2008, cancelling stable tax regime conditions for


the Contract,


The Competent Authority and the Contractor have agreed to amend the Contract as follows:


1) To amend and restate Clause 30 of Section I of the Contract as follows: “Tax legislation


shall mean the Code of the Republic of Kazakhstan on Taxes and Other Mandatory


Payments to the Budget as of December 10, 2008”.


2) To amend and restate Section 15 of the Contract as follows:


“SECTION 15. TAXATION


15.1. The Contractor shall pay taxes and other mandatory payments to the budget as


per the Tax legislation of the Republic of Kazakhstan effective at the time when


such payment liabilities arise.


15.2. Subscription bonus.


The Contractor shall pay the Subscription bonus in the amount of US$8,000,000


(eight million US dollars) no later than 30 (Thirty) calendar days after the


Effective Date of the Contract.


15.3. Customs payments.


The Contractor shall pay all customs payments in compliance with the Customs


legislation of the Republic of Kazakhstan in force as of the day of the customs


declaration acceptance.


15.4. Transfer pricing.


Should the price used in the course of a transaction execution vary from the


market price, the state bodies which control application of transfer prices shall


have the right to adjust units to be taxed in compliance with the legislation on


state control of transfer prices application.


15.5. Provision of pensions, social deductions.


The Contractor shall withhold and transfer mandatory pension fees of its


employees to accumulative pension funds in compliance with the provisions of


pension legislation, and shall be responsible for full calculation and timely


payment of social deductions to the State social insurance fund in compliance


with the mandatory social insurance law in force as of the date when such


liabilities arise,


15.6. Punitive sanctions


15.6.1. Punitive sanctions for violation of the Tax legislation shall be applied in


accordance with the legislation in force as of the date of commitment of such


violation.


15.6.2. Fines for payments other than tax payments shall be applied at rates


stipulated by the laws in force as of the date of commitment of such violation."


3) The afore-mentioned tax regime comes into force effective January 1, 2009.


4) The remaining provisions of the Contract, including exhibits and addendums thereto not


covered by this Addendum shall remain unchanged and lawfully valid to the full extent.


5) This Addendum J'fel is an integral part of Contract 2459 dated 27.08.2007 and comes


into force on January 1,2009.


6) This Addendum Jfe 1 was signed in Astana by the authorized representatives of the


Parties on March 4, 2009.


COMPETENT AUTHORITY


CONTRACTOR


Executive secretary Falcon Oil and Gas LTD


of the Ministry of energy


and mineral resources General Director


of the Republic of Kazakhstan


Batalov A.B. Abishev A.G





[signed] [signed]





[seal] [seal]


 Registered date“ €> 11 V\o\.)fcw\W^ 2009
































ADDENDUM JVe 2


To Contract JVs2459 as of 27.08.2007 for Oil and Gas Exploration within


West Zharykamys -1 Blocks, Blocks XXIII-18 (partially), 19 (partially); XXIV-18


(partially), 19 (partially); XXV-19 (partially)


Situated in the Aktobe Oblast of the Republic of Kazakhstan








between


THE MINISTRY OF ENERGY AND MINERAL RESOURCES


(Competent Agency)


and


“Falcon Oil and Gas LTD” Limited Liability Partnership


(Contractor)
































Astana, 2009.


This Addendum M>2 to Contract N<>2459 as of 27.08.2007 for Oil and Gas Exploration





within West Zharykamys -1 Blocks, Blocks XXlil-18 (partially), 19 (partially); XX1V-18


(partially), 19 (partially); XXV-19 (partially) in the Aktobe Oblast of the Republic of


Kazakhstan was concluded between the Ministry of Energy and Mineral Resources


(Competent Agency) and “Falcon Oil and Gas LTD” Limited Liability Partnership


(Contractor) on “ fr 2009.





Preamble


Whereas





the Contractor applied to the Competent Agency with the request on amending the Work


Program as it pertains to the transfer of financial obligations and physical volumes under


Contract Me 2459 as of 27.08.2007 without changing the total amount of the financial


obligations under the Contract,


the Competent Agency passed the following resolution:


To allow amending the Work Program as it pertains to the transfer of financial obligations


and physical volumes in year 2009 - to change from 11.850 million US dollars to 5.850


million US dollars; in year 2010 - leave 15.9 million US dollars without change; in year


2011 - to change 18.950 million US dollars to 26.950 million US dollars, and amending


Contract N<*2459 as of 27.08.20 appropriately by July 9, 2009 (as per Protocol 8 of


April 9,2009).


Both the Competent Agency and Contractor agreed as follows:


1. To word Paragraph 1 in Section 30 “Definitions” of the Contract in the following


way: “30. Tax Legislation means the Code of the Republic of Kazakhstan on Taxes


and Other Mandatory Deductions to the Budget (Tax Code) as of December 10, 2008,


as well as regulations the adoption of which is covered by the Tax Code.


2. To change the table in Paragraph 7.2.9 Section 7 “General Rights and Obligations of


the Parties” of the Contract in the following way: in Column “Top Managers” Line 6


“Kazakhstani Staff’ - replace number “60” with “70” and in Line 7 “Foreign Staff’ -


replace number “40” with “30”.


3. To word Paragraph 8.4 Section 8 “Work Program” in the following way: “8.4. Work


Scope and Cost under the Work Program for the Contract Territory. According to the


terms of this Contract, the volume of investments into geological exploration during


exploration period shall equal 53 (fifty three) million 500 (five hundred) thousand US


dollars, to be spread in the following way:





Year of the Exploration Work Volume, Costs,


Contract running km thousand USD


Purchasing of geological and geophysical


; First year information 20


Reinterpretation of seismic data 100 running 25


_ km





 Project development works: Ecological Audit


Project, Environment Impact Assessment Project, 90


Exploration Proiect, Drilling Project, etc.


Payment of subscription bonus 8000


Compensation of Historical Costs 31





Office expenses, contingences, indirect costs 334


Total expenses for JEW (geological exploration 8500


works1


Training of Kazakhstani specialists 85


Social transfers to Aktyubinsk Oblast j 750


Total in Year 1: 9335








Geological & geophysical justification: 150


interpretation of geological and seismic data and


well logging data


Project development works: Ecological Audit 100


Project, Drilling Project, etc.


2D seismic exploration 350 running 2050


km


' Reinterpretation of seismic data 400 running


160


km


Testing of exploration well ;


©!


O;


i


Second Year _1


Office expenses, contingences, indirect costs 1100


Total expenses for JEW (geological exploration 4060


works)


Training of Kazakhstani specialists 40





Deductions for the development of Astana city 1000


Social transfers to Aktyubinsk Oblast 750


Total in Year 2: 5850





Drilling of 2 exploratory wells 2500 m deep 5550


3D seismic exploration 50 sq.km 1000





Seismic data processing 50 sq. km 600


Project development works including Field Pilot


Operation Project, Field Surface Facilities 250


Construction Project.


Expenses for Field development 2600


Third Year Drilling of appraisal wells 4000


Office expenses, contingences, indirect costs


1000


Total expenses for JEW (geological exploration 15 000


works)


Training of Kazakhstani specialists 150


Social transfers to Aktyubinsk Oblast , 750


Total in Year 3: 15 900








Drilling of wells 2500 m deep 15140


I Development of Field production infrastructure 1950


Approval of reserves by the State


Reserves Committee of the Republic of 600


Kazakhstan


1 Field pilot operation 1 400


Expenses for Field development 4 850





Office expenses, contingences, indirect costs 2 000


I : Total expenses for JEW (geological exploration : 25 940


works)


■ Training of Kazakhstani specialists 260


1 Social transfers to Aktyubinsk Oblast 750


Total in Year 4: 26 950


|





Bi all for geological exploration 53 500


Bosts, in all 58 035


 rju





1. Table 1 of the Work Program for the Contract Territory of West Zharykamys-1 within


Blocks XXI1I-18 (partially), 19 (partially); XXIV-18 (partially), 19 (partially); XXV-19


(partially) in the Aktobe Oblast of the Republic of Kazakhstan which is an Appendix to


the Contract shall be replaced with Table 1 given in Appendix X®1 appended to this


Addendum N®2 of the Contract.


5. This Addendum X® 2 is an integral part of Contract JVs 2459 as of 27.08.2007 and comes





into force as soon as the Competent Agency registers it.


6. This Addendum N® 2 to the Contract was prepared in 3 (three) counterparts in the


State Language, in the Russian and English languages and concluded on “ ”


V\oVJptfvW

representatives of the Competent Agency and Contractor.





The Signatures of the Parties:





Executive Secretary “Falcon Oil and Gas LTD” LLP


Ministry of Energy and Mineral Resources General Director