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AGREEMENT ON THE EXPLORATION,

REHABILITATION, DEVELOPMENT AND PRODUCTION

SHARING FOR THE BLOCK INCLUDING THE BAHAR

FIELD AND GUM-DENIZ FIELD IN THE AZERBAIJAN

SECTOR OF THE CASPIAN SEA





BETWEEN







THE STATE OIL COMPANY OF THE REPUBLIC OF

AZERBAIJAN,





BAHAR ENERGY LIMITED



AND



SOCAR OIL AFFILIATE



















BAKU 2009





TABLE OF CONTENTS

ARTICLES PAGE

ARTICLE 1

PARTICIPATING INTERESTS 13



ARTICLE 2

GRANT OF RIGHTS AND SCOPE 14

2.1 Grant of Exclusive Right

2.2 Exception from Contractor's Right to Cost Recovery



ARTICLE 3

WARRANTIES AND GENERAL RIGHTS AND OBLIGATIONS OF THE

PARTIES 15

3.1 Warranties of SOCAR

3.2 General Obligations of SOCAR

3 .3 Warranties and Rights of Contractor Parties

3.4 General Obligations of Contractor Parties

3.5 Special Provision for Carrying SOA's Participating Interest



ARTICLE 4

CONTRACT AREA 23



ARTICLES 5

REHABILITATION AND PRODUCTION PROGRAMME 25



ARTICLE 6

DEVELOPMENT AND PRODUCTION PERIOD 28

6.1 Development and Production Period for the Contract Rehabilitation Area

6.2 Development and Production Period for the Contract Exploration Area



ARTICLE 7

SPECIAL PROVISION GOVERNING CONTRACTOR OBLIGATIONS FOR

EXPLORATION WORK IN THE CONTRACT EXPLORATION AREA 29

7.1 Exploration Period

7.2 Minimum Exploration Work Programme

7.3 Additional Exploration Period

7.4 Discovery

7.5 Development Programme

7.6 Termination of the Agreement Caused by Failure to Commence Commercial

Production of Petroleum



ARTICLE 8

STEERING COMMITTEE FOR PROJECT MANAGEMENT AND ANNUAL

WORK PROGRAMMES 40

8.1 Steering Committee for Project Management

8.2 Steering Committee Procedure

8.3 Annual Work Programmes and Budgets

8.4 Emergency Measures



ARTICLE 9

OPERA TING COMPANY, PERSONNEL AND TRAINING 48

9.1 Operating Company

9.2 Responsibilities of Operating Company

9.3 Organisation

9.4 Decisions

9.5 Procedures

9.6 Status of Operating Company

9.7 Personnel

9.8 Training



ARTICLE 10

REPORTS AND ACCESS TO PETROLEUM OPERATIONS 55

10.1 Reports and Records

10.2 Access to Petroleum Operations



ARTICLE 11 59

USE OF LAND



ARTICLE 12 60

USE OF FACILITIES

12.1 SOCAR Facilities

12.2 SOCAR Assistance

12.3 Contractor Facilities

ARTICLE 13

CONTRACTOR'S RECOVERY OF PETROLEUM COSTS AND PRODUCTION SHARING 65

13.1 General Provisions

13.2 Use of Petroleum for Petroleum Operations

13.3 Cost Recovery for Petroleum Operations related to the Contract Rehabilitation Area

13.4 Cost Recovery for Petroleum Operations related to the Contract Exploration Area

13.5 Transfer of Title

13.6 Profit Petroleum

13.7 Title to Profit Petroleum



ARTICLE 14 COMPENSATORY PETROLEUM 72



ARTICLE 15 TAXATION 73

15.1 General Provisions

15.2 Profit Tax

15.3 Profit Tax Accounting and Returns

15.4 Taxation of Foreign Sub-contractors

15.5 Taxation of Payments to Foreign Persons

15.6 Taxation of Employees and Physical Persons

15.7 Tax Exemptions

15.8 Other

15.9 Share Transfer Profit Tax

15.10 Survival



ARTICLE 16 VALUATION OF PETROLEUM 111

16.1 General Provisions

16.2 Value of Crude Oil and Non-associated Natural Gas lifted from the Contract Exploration Area

16.3 Value of Petroleum lifted from the Contract Rehabilitation Area

16.4 Measurement



4

ARTICLE 17

OWNERSHIP, USE AND ABANDONMENT OF ASSETS 119

17.1 Ownership and Use

17.2 Abandonment, General Terms

17.3 Formation of Abandonment Fund for the Contract Exploration Area

17.4 Formation of Abandonment Fund for the Contact Rehabilitation Area

17.5 Parties Relationship with respect to Abandonment of Assets

17.6 Lease of Equipment





ARTICLE 18

NATURAL GAS 128

18.1 Associated Natural Gas

18.2 Non-associated Natural Gas

18.3 Flaring or Venting of Natural Gas





ARTICLE 19

FOREIGN EXCHANGE 131



ARTICLE 20

ACCOUNTING METHOD 133



ARTICLE 21

IMPORT AND EXPORT 134

21.1 Import and Export Rights

21.2 Petroleum Export

21.3 Custome Laws

21.4 Foreign Trade Regulations

21.5 SOCAR Assistance



ARTICLE 22

DISPOSAL OF PRODUCTION 139

22.1 Title to Petroleum

22.2 Overlift and Underlift

22.3 SOCAR Option to Purchase Crude Oil

22.4 Marketing of Crude Oil for SOCAR

22.5 Maximum Efficient Rate







5



[signature]



ARTICLE 23

INSURANCE, LIABILITIES AND INDEMNITIES 144



23.1 Insurance

23.2 Liability for Damages

23.3 Indemnity for Personnel

23.4 Indemnity Prior to Effective Date

23.5 Indemnity for Surrendered Areas and SOCAR Operations

23.6 Joint and Several liability

23.7 Consequential Losses



ARTICLE 24

FORCE MAJEURE 154

24.1 Force Majeure

24.2 Extension of Time

24.3 Post-Production Force Majeure



ARTICLE 25

VALIDITY, ASSIGNMENT AND GUARANTEES 157



25.1 Validity

25.2 Assignment

25.3 No Tax on Assignment

25.4 Conditions on Assignment

25.5 Ultimate Parent Company Guarantees, SOCAR Guarantee

25.6 Government Guarantee



ARTICLE 26

APPLICABLE LAW, ECONOMIC STABILIZATION AND ARBITRATION 163

26.1 Applicable Law

26.2 Economic Stabilisation

26.3 Arbitration



ARTICLE 27

NOTICES 166



6

ARTICLE 28

EFFECTIVE DATE 168

28.1 Effective Date

28.2 Pre-Effective Date Petroleum Operations



ARTICLE 29 ENVIRONMENTAL PROTECTION AND SAFETY 170

29.1 Environmental Standards

29.2 Conduct of Operations

29.3 Emergencies

29.4 Compliance

29.5 Environmental Protection Strategy 175

29.6 Environmental Damage



ARTICLE 30 CONFIDENTIALITY

30.1 General Provisions

30.2 Trading of Data

30.3 Corporate Disclosure



ARTICLE 31 BONUS PAYMENTS AND ACREAGE FEES 179

31.1 Bonus Payments

31.2 Acreage Fees

31.3 Miscellaneous



ARTICLE 32 TERMINATION 182

32.1 Material Breach

32.2 Termination by SOCAR

32.3 Termination/Relinquishment by Contractor

32.4 Other Remedies

32.5 Partial Relinquishment



ARTICLE 33 MISCELLANEOUS 189



7

APPENDICES



APPENDIX 1

DEFINITIONS (1)



APPENDIX 2

CONTRACT AREA AND MAP (15)



APPENDIX 3

ACCOUNTING PROCEDURE (19)

1. General Provisions

2. Charges and Expenditures

3. Material and equipment

4. Accounting Reports



APPENDIX 4

FORM OF CONTRACTOR PARTY’S ULTIMATE PARENT

COMPANY GUARANTEE (37)



APPENDIX 5

GUARANTEE AND UNDERTAKING OF THE GOVERNMENT OF THE

AZERBAIJAN REPUBLIC (39)



APPENDIX 6

ARBITRATION PROCEDURE (48)



APPENDIX 7

CRUDE OIL AND NATURAL GAS MEASUREMENT AND EVALUATION

PROCEDURE (52)

1.1 General

1.2 Crude Oil Measurement

1.3 Timing of Crude Oil Measurement

1.4 Natural Gas Measurement

1.5 Petroleum Measurement procedures



APPENDIX 8

DESIGN STANDARDS AND SPECIFICATIONS (56)



8

[Signature]

APPENDIX 9

EXPLORATION WORK PROGRAMME (58)



APPENDIX 10

ENVIRONMENTAL STANDARDS AND PRACTICES (61)



ADDENDUM RELATING TO THE FORMATION OF SOCAR OIL

AFFILIATE (72)



9

AGREEMENT ON THE EXPLORATION, REHABILITATION,

DEVELOPMENT AND PRODUCTION SHARING FOR THE

BLOCK NCLUDING THE BAHAR FIELD AND GUM-DENIZ

FIELD IN THE AZERBAIJAN SECTOR OF THE CASPIAN

SEA (hereinafter referred to as “Block”)





THIS AGREEMENT, made and entered into in Baku, Republic of Azerbaijan, this_22nd day of December, 2009 by and between:



THE STATE OIL COMPANY OF THE REPUBLIC OF AZERBAIJAN (“SOCAR”) Government body on the one hand; and



BAHAR ENERGY LIMITED (“BAHAR ENERGY”) a company incorporated in Jebel Ali Free Zone, Dubai, UAE; and



SOCAR OIL AFFILIATE ("SOA") a company to be fully owned and formed by SOCAR, on the other hand,



(SOCAR, BAHAR ENERGY and SOA are collectively referred to herein as the “Parties” and individually referred to as a “Party”.)



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



WITNESSETH:



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





10

authorisations the authority to control and manage said Petroleum has been vested in SOCAR; and

WHEREAS, pursuant to Presidential Edict No 200 concerning the creation of the State Oil Company of the Republic of Azerbaijan dated 13 September 1992, and Presidential Edict No 844 concerning restructuring of the State Oil Company of the Republic of Azerbaijan dated 24 January 2003, and Presidential Edict No 340 dated 22 December 2005 concerning the amendments and changes to the afore- mentioned Presidential Edict No 844 dated 24 January 2003, and its Charter, SOCAR owns all Petroleum produced and is vested with the authority to carry out the exploration and development of all Petroleum in the Republic of Azerbaijan, and pursuant to Presidential Decree No 607 "On the Exploration, Rehabilitation, Development and Production Sharing of the Block Including the Bahar Field and Gum- Deniz Field in the Azerbaijan Sector of the Caspian Sea" dated 25th of November, 2009, SOCAR is authorised to prepare and execute the Agreement on behalf of the Republic of Azerbaijan, and represent interests of the Republic of Azerbaijan as the Party to the Agreement throughout the entire term thereof; and



WHEREAS, SOCAR being the owner and operator of the Block has carried out certain work in the Contract Area and now the Parties wish to promote the exploration for, and subsequent development and production as well as rehabilitation of Petroleum existing in its natural state in, on or under the Contract exploration and development of the Contract Area in order to increase produc of Petroleum existing in its natural state in, on or under the Contract Area; andWHEREAS, SOCAR and BAHAR ENERGY have agreed and entered into the Agreement on the Basic Commercial Principles and Provisions of Exploration, Rehabilitation, Development and Production Sharing Agreement for the Block including the Bahar Field and Gum-Deniz Field in the Azerbaijan Sector of the Caspian Sea dated 18th December, 2009, and such principles and provisions have constituted the framework of this Agreement; and



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



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

ARTICLE 1



PARTICIPATING INTERESTS



1.1 The rights and obligations under this Agreement of

each of the Contractor Parties shall be held in the

following respective percentage participating

interests (the “Participating Interests”) as of the

Execution Date:



CONTRACTOR PARTIES PERCENTAGE



SOA 20.0%



BAHAR ENERGY 80.0%



1.2 The Parties agree that from the Effective Date the

respective percentage Participating Interest shares

replace any rights and obligations which may exist

regarding the Contract Area by virtue of any prior

agreement or contract between any of the Contractor

Parties or their Affiliates on the one hand, and any

Governmental Authority or SOCAR on the other hand. The

Parties agree that, from the Execution Date, this

Agreement constitutes the sole and complete

understanding between SOCAR and the Contractor Parties

regarding the Contract Area.









13ARTICLE 2

GRANT OF RIGHTS AND SCOPE



2.1 Grant of Exclusive Right

SOCAR hereby grants to Contractor the sole and exclusive right to conduct Petroleum Operations within and with respect to the Contract Area in accordance with the terms of this Agreement and during the term hereof. Except for the rights expressly provided for herein, this Agreement shall not include rights for any activity other than Petroleum Operations with respect to surface areas or to any other natural resources.



2.2 Exception from Contractor's Right to Cost Recovery

Except as expressly provided elsewhere herein, in the event production resulting from Petroleum Operations, upon completion of commercial production from the Contract Area at the end of the terms of this Agreement, inclusive of all extensions provided in Article 6 is insufficient for full recovery of Contractor's Capital Costs and Operating Costs as provided hereunder, then Contractor shall not be entitled to any reimbursement or compensation for any of its costs not recovered. ARTICLE 3



WARRANTIES AND GENERAL RIGHTS

AND OBLIGATIONS OF THE PARTIES





3.1 Warranties of SOCAR



SOCAR represents and warrants that:



(a) it is duly organised and validly existing in accordance with the terms of its Charter; and





(b) it has full authority under the laws of the Republic of Azerbaijan to execute and perform this Agreement, to grant the rights and interests to Contractor as provided under this Agreement and to fulfil its obligations under this Agreement.





3.2 General Obligations of SOCAR



(a) Upon the request of Contractor for the implementation of Petroleum Operations, SOCAR within the full limits of its authority shall use its best lawful endeavours with respect to Governmental Authorities to assist Contractor to obtain the following:



(i) any necessary Governmental Authority approvals,

including but not limited to customs clearances,

visas, residence permits, access to communication

facilities, licenses to enter land, import and

export licenses, the opening of bank accounts,

the acquisition of office space and employee

accommodation, as may be necessary for efficient





15Implementation of Petroleum Operations; and



(ii) all geological, geophysical, geochemical and technical data (including well data and any other information) of relevance to the Contract Area not in SOCAR’s possession or under is control.



(b) SOCAR within the full limits of its authority shall also use its best lawful endeavours to assist Contractor in all other relevant matters as may be necessary for the efficient implementation of Petroleum Operations.



(c) Contractor shall reimburse SOCAR for any lawful reasonable actual direct costs incurred with respect to the provision of the foregoing, provided such costs are supported by appropriate documentary evidence.

(d) Upon request of Contractor, SOCAR shall provide to

Contractor all geological, geophysical, geochemical

and technical data and information in the possession

or control of SOCAR or its Affiliates of relevance to

the Contract Area including all kinds of well data.

Contractor shall pay the actual direct costs incurred

by SOCAR in the implementation of this Agreement in

gathering together, handling and delivering any such

data or information to Contractor, which costs will be

invoiced to Contractor by SOCAR on the basis that

SOCAR is to suffer no loss and obtain no gain. Cost

envisaged in this Article 3.2 (d) as well in Article

3.2 (c) invoiced by SOCAR and paid by Contractor shall

be considered as Operating Costs and shall be Cost

Recoverable. If Contractor does not accept that any

items as invoiced by SOCAR satisfy this requirement,

Contractor shall notify SOCAR of any such objections

and SOCAR and Contractor shall take all necessary

steps to mutually resolve all objections raised by

Contractor. SOCAR makes no warranties as to the

accuracy or completeness of any such data or

information in connection with the performance of such

obligation.















173.3 Warranties and Rights of Contractor Parties

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



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



3.4 General Obligations of Contractor Parties

(a) Subject to Article 3.5, the Contractor Parties shall provide the necessary funds to explore, appraise, evaluate and develop the Petroleum resources within the Contract Area in accordance with the terms and conditions set forth in this Agreement.



18(b) Contractor shall conduct Petroleum Operations in accordance with the terms of this Agreement in a diligent, safe and efficient manner and in accordance with generally accepted principles of the international Petroleum industry. As regards design standards and specifications for facilities and equipment the Design Standards shall apply. No Contractor Party shall be required to act or refrain from acting if to so would make such Contractor Party or its Ultimate Parent Company liable to such Contractor Party or its Ultimate Parent Company notwithstanding anything to the contrary in this Agreement.



3.5 Special Provision for Carrying SOA's Participating Interest



(a) The Other Contractor Parties shall have obligation to carry, in proportion to their Participating Interests, one hundred (100) percent of SOA's Petroleum Costs attributable to SOA's Participating Interest as follows:



(i) for Petroleum Operations in the Contract Rehabilitation Area: from the Effecting Date and until the end of the Calendar Quarter during which the Petroleum production from the Contract Rehabilitation Area shall exceed at least two (2) times the volume of the 2008 Petroleum Production ("Carry 1").



19 Commercial Production from the Contract Exploration Area (Carry 2).



(b) SOA shall have the obligation to reimburse to the Other Contractor Parties Carry 2:



(i) out of the Petroleum produced from the Contract Rehabilitation Area which is allocated to SOA for Cost Recovery in accordance with the mechanism set out in to Article 13.3 of this Agreement;



(ii) Transfer of title to the Other Contractor Parties of volumes of Petroleum from the Contract Rehabilitation Area to reimburse Carry 1, as defined in Article 3.5(b)(i), shall be made at the Delivery Point. The value of the said volumes of Petroleum shall be calculated in accordance with the provisions of Article 16.3;



(iii) Notwithstanding Article 3.5(b)(i) above to the contrary, SOA shall reimburse all or a part of the unrecovered balance of Carry 1 ("Unrecovered Balance 1") out of its share of Profit Petroleum or otherwise. The Unrecovered Balance 1 means all funds advanced by the Other Contractor Parties to carry SOA's Participating Interest under Article 3.5(a)(i), less the amounts compensated out of Petroleum under Article 3.5(b)(i).



(c) From the Commencement Date of Commercial Production from the Contract Exploration Area, Carry 2 shall be reimbursed to the Other Contractor Parties as



20follows:



(i) Only out of the Petroleum allocated for cost recovery pursuant to Article 13.4 of this Agreement and attributable to SOA's Participating Interest.



(ii) From the Commencement Date of Commercial Production, an annual interest rate equal to LIBOR plus two (2) percent shall be applied to unrecovered balance of Carry 2 on a Calendar Quarter basis ("Unrecovered Balance 2").



(iii) Transfer of title to the Other Contractor Parties of volumes of Petroleum to reimburse Carry 2, as defined in Article 3.5(c)(i), shall be made at the Delivery Point. The value of the said volumes of Petroleum shall be calculated in accordance with the provisions of Article 16.2.



(iv) Notwithstanding Article 3.5(c)(i) above to the contrary, SOA shall have the right to reimburse in advance all or a part of the Unrecovered Balance 2 out of its share of Profit Petroleum or otherwise.



(d) The forgiving provisions related to reimbursement of Carry 1 and Carry 2 plus interest accrued to the Unrecovered Balance 2 shall be valid until Carry 1 and Carry 2 (plus interest accrued to the Unrecovered Balance 2) shall have been reimbursed in full.



(e) If SOA assigns all or a part of its Participating Interest to any Third Party or Contractor Party, the obligations of the



21Other Contractor Parties provided for in Article 3.S(a) of

this Agreement shall be reduced in proportion to the

Participating Interest assigned to such Third Party or

Contractor Party. SOA and/or SOA's assignee shall be

liable to reimburse in full and in cash to the Other

Contractor Parties a portion of the Unrecovered Balance 1

and Unrecovered Balance 2 corresponding to the

Participating Interest assigned, with such

reimbursement to occur at the date of the assignment.

The acceptance by SOA and/or SOA's assignee of the

said obligation for reimbursement shall be a binding

provision of such assignment.



(f) In no event shall an increase by SOA of its Participating

Interest under this Agreement increase the obligation of

the Other Contractor Parties to carry SOA' s Participating

Interest in accordance with Article 3.S(a).



(g) If one of the Other Contractor Parties assigns all or a

part of its Participating Interest to a Third party or

Contractor Party, the obligations of such Contractor

Party under Article 3.5(a) of this Agreement shall be

reduced in proportion to the Participating Interest

assigned. The assignee of such Contractor Party shall

remain liable for obligations set out in Article 3.S(a)

in proportion to the Participating Interest assigned.

The acceptance by such Third Party or Contractor

Party of the said obligations shall be a binding

provision of such assignment. ARTICLE 4 CONTRACT AREA



For purposes of this Agreement the Contract Area shall be provisionally divided into the Contract Rehabilitation Area and the Contract Exploration Area.



(a) The Contract Rehabilitation Area means the area inside the perimeter constituted by the geographical co-ordinates set forth in Appendix 2 to this Agreement, which includes the Bahar 1 and Gum-Deniz fields, being on SOCAR's book; and includes all subsurface reservoirs and horizons within such perimeter, Petroleum resources discovered by SOCAR and/or Petroleum resources being produced or not being produced both above and below the currently identified and produced zones in the subsurface (from the surface to any and all depths accessible to drilling technology as may be developed at any time during the term of the Agreement) by SOCAR at the Effective Date.



If a new reservoir has been encountered in the course of Petroleum Operations indicating that the boundaries of a geological structure of such reservoir extends horizontally to areas outside of the Contract Rehabilitation Area, Contractor has the right to apply to SOCAR for a grant of the additional areas to the Contractor for inclusion in the Contract Rehabilitation Area, and in this case SOCAR shall be entitled (but not obligated) to grant the additional areas to Contractor and if granted such additional areas shall become subject to this Agreement.



(b) The Contract Exploration Area includes the Bakhar 2 and



23means the area (from the surface to any and all depths accessible to drilling technology as may be developed at any time during the terms of Agreement and as may be extended) as described and delineated on the map attached hereto as Appendix 2 to this Agreement.

ARTICLE 5

REHABILITATION AND PRODUCTION PROGRAMME



At least ninety (90) days from the Effective Date, Contractor shall prepare and submit to SOCAR for its approval the draft rehabilitation and production plan for the Bahar 1 and Gum-Deniz field (the “Rehabilitation and Production Programme”) which shall specify Contractor’s obligation to achieve not later than the expiry of three (3) years from the date of SOCAR’s approval of the Rehabilitation and Production Programme an average daily rate of Petroleum production from the Contract Rehabilitation Area during ninety (90) consecutive days to be one point five (1.5) times the average daily rate of the 2008 Petroleum Production. In this regard, if Contractor fails to perform such obligation which shall be deemed to be a Material Breach, SOCAR shall have the right to terminate this Agreement in relation to the Contract Rehabilitation Area pursuant to Article 32.1(b) of this Agreement, and any unrecovered costs incurred by Contractor with respect to the Contract Rehabilitation Area from the Effective Date to the date of termination of this Agreement shall not be Cost Recoverable.



SOCAR shall approve or disapprove the Rehabilitation and Production Programme within sixty (60) days after receipt thereof. Unless SOCAR requests in writing to Contractor any changes to the Rehabilitation and Production Programme within sixty (60) days of receipt thereof, the Rehabilitation and Production Programme shall be deemed approved by SOCAR. If SOCAR requests changes to the Rehabilitation and Production Programme, Contractor and SOCAR shall discuss a revised Rehabilitation and Production Programme. In the event that the Rehabilitation and Production Programme has not been approved by SOCAR within sixty (60) days of the commencement of such discussion, Contractor may within a further



25



[signature]forty (40) days commence arbitration under the Arbitration Procedure on the question as to whether or not SOCAR's approval of the Rehabilitation and Production Programme has been unreasonably withheld. If the decision of the arbitrators is that approval was withheld by SOCAR unreasonably, Contractor shall be entitled to commence operations in accordance with the Rehabilitation and Production Programme in all respects as if the Rehabilitation and Production Programme had been approved by SOCAR. Until the Rehabilitation and Production Programme is approved (or decided by arbitration), Contractor may conduct Petroleum Operations in accordance with good practice in the international Petroleum industry.



If the arbitrators' decision is that SOCAR resonably withheld approval of the Rehabilitation and Production Programme submitted by Contractor, the Contractor shall have the right in writing either (i) to accept the changes to the Rehabilitation and Production Programme requested by SOCAR and to commence operations in accordance with such amended Rehabilitation and Production Programme in all respects as if the Rehabilitation and Production Programme had been approved by SOCAR, provided that recovery, of costs incurred by Contractor before the date of the arbitators' decision with respect to elements of Contractor's Rehabilitation and Production Programme differing from such amended Rehabilitation and Production Programme shall depend on SOCAR's approval, or (ii) to terminate this Agreement within sixty (60) days after the date of the decision of the arbitrators.



In the event other than Force Majeure Contractor does not submit to SOCAR the Rehabilitation and Production Programme or does not achieve the average daily rate of Crude Oil production pursuant to the Rehabiliation and Production Programme in the said time and amount as defined in this Article, which shall be deemed to be a Material Breach, SOCAR shall have the right to terminate this Agreement in relation to the Contract Rehabilitation Area pursuant





26

to Article 32.1(b) of this agreement, and any unrecovered costs incurred by the contractor with respect to the Contact Rehabilitation Area from the Effective Date to the date of termination of this Agreement shall not be Cost Recoverable.



Implementation of petroleum operations by contractor shall be through Annual Work Programmes and Budgets the approval of which shall be deemed to amend the Rehabilitation and production programme to the extent necessary.



Contractor may additionally undertake such exploration activities in the Contract Rehabilitation Area as the Parties may agree pursuant to an appropriate Annual Work Programme and Budget.



ARTICLE 6



DEVELOPMENT AND PRODUCTION PERIOD





6.1 Development and Production Period for the Contract Rehabilitation Area



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



6.2 Development and Production Period for the Contract Exploration Area



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





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ARTICLE 7

SPECIAL PROVISION GOVERNING CONTRACTOR OBLIGATIONS FOR EXPLORATION WORK IN THE CONTRACTOR EXPLORATION AREA

7.1 Exploration Period

The Exploration Period shall be three (3) years from the Effective Date.

7.2 Minimum Exploration Work Programme

(a) During the Exploration Period, notwithstanding any provision of Article 5 to the contrary, Contractor shall carry out the Minimum Exploration Work Programme (“MEWP”) including the following work:

(i) Shoot, process and interpret a minimum of sixty (60) square kilometers of three-dimensional seismic in the Contract Exploration Area and carry out site survey in the Contract Exploration Area planned for drilling operations to ensure a safe and environmentally sound basis for drilling;

(ii) Drill in the Contract Exploration Area at least one (1) exploration well which depth and other parameters as well as methods and list of analyses, including core sampling, in the process of drilling and completion of the exploration well; also, types volumes, and deadlines for provision



29



[signature]of information on such work by Contractor to SOCAR shall be described in the Exploration Work Program.

(b) During the Exploration Period, Contractor shall provide SOCAR with all information on operations specified in Article 7.2(a), both routine and final, after completion of seismic, drilling of exploration wells and all other work.

(c)Types, methods, and scope of work, as defined in Article 7.2(a); methods and list of analyses, including core samplings, in the process of drilling and completion of the exploration wells; also, types, volumes, and deadlines for provision of information on such work by Contractor to SOCAR shall be described in Exploration Work Programme.

(d) Contractor's failure to perform all or a portion of its obligations under the MEWP set out in Article 7.2(a), during the Exploration Period shall constitute a Material Breach by Contractor of its obligations. In this case, SOCAR shall have the right at its sole discretion to terminate this Agreement with respect to the Contract Exploration Area pursuant to Article 32.1, and any costs incurred by Contractor in relation to the Contract Exploration Area from the Effective Date which have not been recovered by the date of termination of this Agreement by SOCAR shall not be Cost Recoverable. Termination of this Agreement by SOCAR pursuant to this Article 7.2(d) shall be SOCAR's sole remedy

30

against Contractor for Material Breach under this Article 7.2(d). Such termination shall be without prejudice to any claims either SOCAR or Contractor may have which arose prior to such termination.

Lack and/or unavailability of any rigs, facilities, infrastructure, etc., and any other circumstances caused by the need to co-ordinate infrastructural requirements with the work programmes of Petroleum operators in the Republic of Azerbaijan shall not continue a basis for Contractor to modify and change any work set out in the MEWP to perform during the Exploration Period or the Additional Exploration Period or for their extension; provided, however, the Exploration Period may be extended for a period agreed by the Parties as necessary for the construction, upgrade and refurbishment of a drilling rig.

(e) The sole excuse for the failure to carry out operations under the MEWP during the Exploration Period set out in Article 7.2(a), or the additional work, as set out in Article 7.3 during the Additional Exploration Period, may be the occurrence of Force Majeure circumstances.



7.3 Additional Exploration Period

(a) Subject to complete and timely fulfillment by Contractor of the exploration work under the MEWP as set out in Article 7.2(a) to be performed during the Exploration Period, Contractor may, at least ninety (90) days prior to the end of the Exploration Period, notify SOCAR in writing of its desire to carry out additional exploration work and provide a list of types and scope of work and justification of such additional exploration work.



31



[signature]Such notice shall request SOCAR's written approval of the performance by Contractor of the proposed additional exploration work during the Additional Exploration Period and SOCAR shall notify in writing of its approval or disapproval (such approval not to be unreasonably withheld) within ninety (90) days of receipt of such written request from Contractor and the Exploration Period shall automatically be extended until such approval has been given by SOCAR. Contractor shall have the right to proceed to the Additional Exploration Period which period shall be no longer than one (1) year from the end of the Exploration Period or receipt of SOCAR's approval whichever is later. During the Additional Exploration Period Contractor shall drill at least one (1) well.



(b) Contractor's failure to perform the additional exploration work (or any portion thereof) to be performed during the Additional Exploration Period other than as a result of Force Majeure shall constitute a Material Breach by Contractor of its obligations under this Agreement. In this case, SOCAR shall have the right to terminate this Agreement in relation to the Contract Exploration Area pursuant to Article 32.1 hereof, and any unrecovered costs incurred by Contractor from the Effective Date during the Exploration Period and the Additional Exploration Period shall not be Cost Recoverable. Termination of this Agreement by SOCAR pursuant to this Article 7.3(b) shall be SOCAR's sole remedy against Contractor for Material Breach under this Article 7.3(b). Such termination shall be without prejudice to any claims either SOCAR or Contractor may have which arose prior to such termination.

Discovery

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Before the end of the Exploration Period or if Contractor enters the Additional Exploration Period then before the end of the Additional Exploration Period, Contractor shall notify SOCAR in writing of a Discovery and its commerciality, summarising relevant information relating to said Discovery, including but not limited to the following, to the extent same are available: location plan, geological maps and interpretations, seismic and other geophysical data; and in the event of drilling operations - drilling reports, well logs, core samplings, lithologic maps and description of formations, drill-stem tests, completion reports, production tests including quantities of fluids produced, build­ up/draw-down tests and pressure analyses, and analyses of oil, gas and water samples and other information consistent with generally accepted international Petroleum industry practice ("Notice of Discovery and its Commerciality").



In the event Contractor does not submit a Notice of Discovery and its Commerciality before the end of the Exploration Period or if Contractor proceeds to the Additional Exploration Period, before the end of the Additional Exploration Period, as the case may be, this Agreement in relation to the Contract Exploration Area shall terminate and any unrecovered costs incurred by Contractor shall not be Cost Recoverable.



In the event the appraisal of existing pool/pools and/or a Discovery indicates that the natural boundary of the existing pool/pools and/or a Discovery extends to areas outside the Contract Exploration Area SOCAR shall be entitled (but not obligated) to grant the additional areas to Contractor and if granted such additional areas shall become subject to this



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[Signature]

Agreement.



7.5 Development Programme



(a) In the event Contractor submits to SOCAR a Notice of

Discovery and its Commerciality, Contractor shall no

later than six (6) months after the date of such Notice of Discovery and its Commerciality submit for SOCAR

approval the Development Programme for such

Discovery, provided that the Development Programme

shall include Contractor’s commitments to start

commercial production of Petroleum from the Contract

Exploration Area no later than forty eight (48) months

from the date of SOCAR’S written approval of

Contractor’s Development Programme. SOCAR shall

not unreasonably withhold its approval of the

Development Programme.



In the event Contractor does not submit the Development

Programme within the six (6) months period referred to

above, SOCAR shall have the right to terminate this

Agreement in relation to the Contract Exploration Area

by giving written notice to Contractor within thirty (30) days following expiry of the said six (6) month period, and any unrecovered costs incurred by Contractor shall not be Cost Recoverable.



(b) In the event of Non—associated Natural Gas Discovery, the six (6) months period provided for in Article 7.5 (a) above shall be extended for an additional period of four (4) years necessary to conduct any necessary marketing studies to pursue markets for Non-associated Natural Gas sales and enter into agreements with all the concerned parties (including without limitation, potential buyers, authorities and sub-contractors) covering the elements necessary for the development



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and production of the Non-associated Natural Gas Discovery.



Such agreements shall be based on terms and conditions which reflect those generally accepted in the international Petroleum industry for the development of such Discovery and which render such development economically and commercially acceptable in the view of the Parties. Contractor together with SOCAR shall use full and reasonable endeavors to rapidly conclude agreements acceptable to the Parties to develop such Discovery and with Third Parties to enter into the necessary long term Non-associated Natural Gas export sales and pipeline contracts. Contractor shall pursue markets for Non-associated Natural Gas both within and outside the Republic of Azerbaijan.



The Parties acknowledged that marketing studies, as well as negotiations for long term Non-associated Natural Gas export sales and pipeline contracts, shall be conducted jointly by SOCAR and Contractor. The results of such studies and agreed terms of commercial development of Non-associated Natural Gas Discovery shall be considered by Contractor while drafting the Development Program. In the event of delay in completion of obligations referred to above, the Parties may agree to extend the said period of four (4) years.



(c) The Development Programme shall be a long range plan for the efficient and prompt development and production of Petroleum from the Contract Exploration Area in accordance with generally accepted international



35



[signature]Petroleum industry standards and shall include but not be limited to the following:

(i) proposals relating to the spacing, drilling and completion of all types of wells; and

(ii) proposals relating to the production and storage installations, and the transportation and delivery facilities required for the production, storage and transportation of Petroleum; and

(iii) proposals relating to necessary infrastructure investments and use of Azerbaijan materials, products and services in accordance with Article 21.1(a); and

(iv) production forecasts for formation fluids for the entire Contract Exploration Area by reservoir derived from individual well forecasts and estimates of the investment and expenses involved; and

(v) an environmental impact and health and safety assessment and a plan for preventing environmental pollution and any environmental accident, and for steps to clean-up any pollution related to such accident; and

(vi) estimates of the time required to complete the phases of the Development Programme.

(d) Within thirty (30) days of receipt of the Development



36



[signature]Programme SOCAR may request Contractor to provide such further information as is readily available to Contractor and as SOCAR may reasonably need to evaluate the Development Programme.



(e) (i) In the event that SOCAR requests any changes to the Development Programme then the Parties shall meet within thirty (30) days of receipt by Contractor of SOCARs written notification of requested changes and shall discuss such request. Any agreed revision to the Development Programme shall be incorporated into the Development Programme, and such revised Development Programme shall be deemed approved by SOCAR.



(ii) In the event that the Parties do not agree on changes requested by SOCAR within sixty (60) days of the commencement of such discussion, or any extended period mutually agreed by the Parties in written, either Party may within a further forty (40) days commence arbitration under the Arbitration Procedure on the question as to whether or not SOCAR's approval of the Development Programme has been unreasonably withheld.



If the decision of the arbitrators is that approval was withheld by SOCAR unreasonably, Contractor shall be entitled to commence operations in accordance with the Development Programme in all respects as if the Development Programme had been approved by SOCAR. If Contractor fails to commence operations within one (1) year of the



37

[Signature]date of the arbitrators' decision in accordance with corresponding Annual Work Program and Budget SOCAR shall have the right to terminate this Agreement in relation to the Contract Area by giving Contractor notice in writing within sixty (60) days after expiry of the said period of one (1) year and any unrecovered costs incurred by Contractor shall not be Cost Recoverable.



If the arbitrators' decision is that SOCAR reasonably withheld approval of the Development Programme submitted by Contractor, the Contractor shall have the right in writing either (i) to accept the changes to the Development Programme requested by SOCAR and to commence operations in accordance with such amended Development Programme in all respects as if the Development Programme had been approved by SOCAR, provided that recovery of costs incurred by Contractor before the date of the arbitrators' decision with respect to elements of Contractor's Development Programme differing from such amended Development Programme shall depend on SOCAR's approval, or (ii) to terminate this Agreement with respect to the Contract Exploration Area within sixty (60) days after the date of the decision of the arbitrators and any unrecovered costs incurred by Contractor up to such date shall not be Cost Recoverable.



(f) Implementation of Petroleum Operations by Contractor shall be through Annual Work Programmes and Budgets, the approval of which shall be deemed to amend the Development Programme to the extent necessary.



(g) Contractor may at any time submit to the Steering Committee proposals to revise the Development



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[Signature]

Programme, including the event of further Discoveries and Contractor’s decision to develop such Discoveries which shall not constitute a basis for contractor to extend the Development and Production Period. These proposals shall be consistent with the principles of efficient and optimum development and production of Petroleum in accordance with international Petroleum industry standards and shall be subject to the approval of the Steering Committee, such approval not to be unreasonably withheld.



7.6 Termination of the Agreement Caused by Failure to Commence Commercial Production of Petroleum



If within forty eight (48) months from the date of approval by SOCAR of the Development Programme the commercial production of Petroleum pursuant to the Development Programme has not been commenced by Contractor, then unless otherwise agreed, SOCAR shall be entitled by giving written notice to terminate this Agreement in relation to the Contract Exploration Area, and any unrecovered costs incurred by Contractor with respect to the Contract Exploration Area to the date of such notice shall not be Cost Recoverable.ARTICLE 8



STEERING COMMITTEE FOR PROJECT MANAGEMENT AND ANNUAL WORK PROGRAMMES



8.1 Steering Committee for Project Management



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



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



(a) overseeing Petroleum Operations;



(b) examination, revision and approval of Contractor’s Annual Work Programmes and Budgets;



(c) supervising the accounting of costs and expenses in accordance with the Accounting

Procedure;



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



(e) reviewing, revising and approving training programmes;



(f) reviewing and approving the abandonment plan and cost of abandonment operations pursuant to Article 17.2(g).



8.2 Steering Committee Procedure



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[Signature]

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



(a)The Steering Committee shall be comprised of an equal number of members from SOCAR and Contractor. Initially the Steering Committee shall consist of two (2) representatives appointed by SOCAR and two (2) representatives appointed by Contractor (one (1) representative from each Contractor Party). A person cannot represent both SOCAR and SOA. If at any time the number of Contractor Parties increases or decreases the number of representatives to be appointed by each of SOCAR and Contractor shall be increased or reduced, as the case may be, to equal the number of Contractor Parties, provided, however, that the number of representatives to be appointed from each of SOCAR and Contractor shall never be Jess than two (2). SOCAR and Contractor shall each be entitled to appoint an alternate for each of their representatives, who shall be entitled to attend in place of the designated representatives, such alternate to be considered a representative for all purposes at such Steering Committee meetings. SOCAR and Contractor shall each advise the other of the names of its representatives and their alternates within twenty (20) days following commencement of the Development and Production Period for the Contract Rehabilitation Area. Such representatives and their alternates may be replaced by SOCAR and Contractor, respectively, upon written notice to the other.



(b) SOCAR and Contractor shall each have one (1) vote to cast on any matter submitted for approval by the Steering Committee. For this purpose, each of SOCAR and Contractor shall give written notice to the other specifying the identity of the individual representative (and, if desired, his alternate), who shall be authorised to



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[Signature]

cast such vote on its behalf. Such designated individuals may be changed from time to time upon written notice by SOCAR or Contractor, as the case may be. No vote cast or purported to be cast by any representative other than said designated individuals (or, in the absence of either, his designated alternate) shall be considered as the official vote of either SOCAR or Contractor, as the case may be.



With respect to the Contract Exploration Area, the Steering Committee shall not take any decisions during the Exploration Period and/or the Additional Explorations Period and until the date of approval of the Development Programme.



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



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



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

SOCAR and Contractor; and



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



(e) Subject to Article 8.2(b) decisions of the Steering Committee



42

[Signature]Committee shall require the affirmative vote of both SOCAR and Contractor.



(f) SOCAR and Contractor shall each be entitled to send advisors and experts to meetings of the Steering Committee. Unless the Steering Committee agrees, the cost of such advisors and experts in attending the meetings shall not be Cost Recoverable.



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



(h) The Steering Committee will meet at least two (2) times in a Calendar Year. Meetings shall be held in Baku, unless otherwise agreed. In the event that SOCAR and Contractor agree, the Steering Committee can take decisions without holding an actual meeting; provided that in the event of a teleconference or video conference the quorum requirements set forth in Article 8.2(g) have been complied with and in the event of a meeting via exchange of letters, faxes, or telexes, such letters, faxes and telexes are copied to all Parties. Such decisions shall be recorded in writing promptly thereafter and signed by the representatives of SOCAR and Contractor who are authorised to cast the respective votes of SOCAR and Contractor. Except in an emergency, all Parties shall be given not less than fifteen (15) days advance notice of each meeting, regardless of whether the meeting is in person, by teleconference, by letter, by fax, or otherwise, so that each Party may have the opportunity to contribute to the decision-making process.



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



8.3 Annual Work Programmes and Budgets



(a) Subject to Article 8.2(b) not more than thirty (30) days following the formation of the Steering Committee and thereafter at least three (3) months before the beginning of each Calendar Year, Contractor shall prepare and submit, or cause to be prepared and submitted, to the Steering Committee for approval a single Annual Work Programme together with the related Budget in respect of the Petroleum Operations Contractor proposes to be carried out in such Calendar Year. Such single Annual Work Programme and Budget shall include the petroleum operations related both to the Contract Rehabilitation Area and Contract Explorations (when applicable). The Steering Committee shall meet within thirty (30) days of receipt of the Annual Work Programme and the Budget to consider same and any revisions thereto and to approve the Annual Work Programme and the Budget in its final form subject to Article 8.2(b) with respect to the Contract Explorations Area. It is agreed by SOCAR and Contractor that knowledge acquired as the work proceeds or from certain events may justify changes to the details of the Annual Work Programme and budget; thus Contractor may at any time propose to the Steering Committee an amendment to the Annual Work Programme and Budget. Except as provided in this Article 8.3 and in Article 8.4, Contractor shall not conduct any operations which deviate materially from the applicable Annual Work Programme and Budget without the prior consent of the Steering Committee. If necessary to carry out an Annual Work Programme and budget, Contractor is authorised to make expenditures during the



44

[Signature]

relevant Calendar Year that are not in excess of ten (10) percent of the Budget approved, unless such expenditures exceeding ten (10) percent are approved by the Steering Committee which approval shall not be withheld where the expenditures have been demonstrated to be reasonable and necessary. In accordance with the other provisions of this Agreement, after approval of an Annual Work Program, Contractor shall conduct the Petroleum Operations in accordance therewith.



(b) In the event the Annual Work Programme and Budget has not been approved by the Steering Committee in the case of the first Annual Work Programme and Budget within sixty (60) days following the formation of the Steering Committee and in the case of each subsequent Annual Work Programme and Budget by the first day of the Calendar Year to which it relates, Contractor shall be entitled (but not obligated) to carry out Petroleum Operations in accordance with some or all of its proposed Annual Work Programme and Budget until such time as the Annual Work Programme and Budget is agreed by the Steering Committee or any dispute relating to the Annual Work Programme and Budget has been resolved by reference to arbitration in accordance with the Arbitration Procedure.



As soon as agreement on an Annual Work Programme and Budget is reached by the Steering Committee or the decision of the arbitrators is rendered, Contractor shall amend the then current and/or next following Annual Work Programme and Budget, as appropriate, to conform



45



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



(i)

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



(ii)

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



(iii)

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

8.4 Emergency Measures

Notwithstanding any provision of this Agreement to the contrary, in the case of an accident or other emergency (or anticipated emergency), Contractor shall take all measures reasonably considered necessary by Contractor for the



46



[signature]

protection of life, health, the environment and property. The costs of taking such measures shall be included automatically as an approved addition to the then current Budget and shall be deemed to be Petroleum Costs subject to Cost Recovery under this Agreement, unless such accident or other emergency (or anticipated emergency) was the result of Contractor's Wilful Misconduct.



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[Signature] ARTICLE 9





OPERATING COMPANY, PERSONNEL

AND TRAINING





9.1 Operating Company



(a)

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



(b)

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



(c)

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



48



[signature]Company.



9.2 Responsibilities of Operating Company



(a)

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



(b)

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



9.3 Organisation



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



9.4 Decisions



(a)

Decisions regarding the conduct of Petroleum

Operations shall be made by the Contractor Parties participating in voting at the Contractor management committee in accordance with the voting mechanism agreed among them in the Joint Operating Agreement and the Parties agree that during the Development and Production Period the decisions of the Contractor management committee shall at the time of voting require the affirmative vote of the Contractor Parties owning collectively eighty (80) percent of the Participating Interest under the Agreement and



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[signature]

participating interest under the JOA, provided that the Contractor Parties shall develop special provisions for decisions to be taken on the matters regarding the implementation of the work to be to be financed by the Other Contractor Parties only under Article 3.5 of this Agreement.





(b)

SOA as a Contractor Party shall participate at all

decision levels in the same way as the Other Contractor Parties, including but not limited to Joint Operating Agreement, committees and/or sub committees and the Contractor management committee.



9.5 Procedures



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





9.6 Status of Operating Company



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



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[signature]







Zero(0).













9.7 Personnel





(a)

Notwithstanding the provisions of this Article 9.7 and Article 9.1 and 9.3 of the Agreement to the contrary, Contractor shall ensure that the Joint Operating Company will employ personnel of the "Gum Adasi" Oil and Gas Production Division (OGPD), being a structural unit of SOCAR, dismissed as the result of a liquidation of the OGPD at the Effective Date. Such employment shall be in accordance with the existing law of the Republic of Azerbaijan.



(b)

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



(c)

Contractor shall, to the extent reasonably practical, require the Operating Company to give preference, as far as is consistent with efficient operations, to employing citizens of the Republic of Azerbaijan in the performance of Petroleum Operations, provided that such citizens have the required knowledge, qualifications and experience to meet the requirements of the Operating Company. Such citizens shall be eligible for training in





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[signature]



accordance with Article 9.8. With respect to the employment of citizens of the Republic of Azerbaijan, Contractor agrees as follows:



(i) the Operating Company shall provide SOCAR from time to time with a list showing the numbers and job specifications for citizens of the Republic of Azerbaijan which it estimates that it may require. In addition, the Operating Company shall require its Sub-contractors to provide SOCAR from time to time with a list showing the numbers and job specifications for its employees that they estimate they may require;



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



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



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



52

citizens of the Republic of Azerbaijan as the Operating Company or such Sub-contractors choose;





(v)

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



(vi)

overall target manning levels of citizen employees of the Republic of Azerbaijan pertaining to Petroleum Operations shall be as follows:





Citizens of the

Republic of Azerbaijan



From the Effective Date





Professionals not less than 70%

Non-professionals not less than 90%





Five (5) years after

the Effective Date



Professionals not less than 90%

Non-professionals not less than 95%



(d)

Subject to Article 9.7(c), Contractor, Operating Company and any Subcontractors are hereby authorized and shall be free, throughout the term of this Agreement, to determine the number and selection of all employees to be hired by them in connection with the conduct of Petroleum Operations.







53



All citizens of the Republic of Azerbaijan hired by Contractor, the Operating Company and any Sub-contractors shall be hired pursuant to written employment contracts which shall specify the hours of work required of the employee, the compensation and benefits to be paid or famished by the employer and all other terms of employment. Such employees may be located wherever Contractor, the Operating Company or Sub-contractors deem appropriate in connection with the Petroleum Operations in accordance with such written employment contracts entered into with them. Contractor, the Operating Company and Sub-contractors shall be free to implement recruitment, dismissal, performance review and incentive compensation programs and practices (both with respect to foreign expatriate employees and citizens of the Republic of Azerbaijan) that are customary in international Petroleum operations and in Contractor's, the Operating Company's and Sub¬contractor's experience and judgment are best able to promote all efficient and motivated workforce.





9.8 Training



Contractor shall provide training (including retraining) for personnel-citizens of the Republic of Azerbaijan with respect to the Petroleum Operations. Expenditures by Contractor pursuant to this Article 9.8 shall be approved as part of the relevant Annual Work Programme and Budget and shall be included as Petroleum Costs, however the aforesaid expenditures less than two hundred thousand (200,000) Dollars in any year shall not be Cost Recoverable. Expenditures in excess of two hundred thousand (200,000) Dollars in any year shall be included as Petroleum Costs and shall be Cost Recoverable.





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[signature]

ARTICLE 10



REPORTS AND ACCESS TO PETROLEUM OPERATIONS



10.1 Reports and Records



Contractor shall keep and submit reports and records of Petroleum Operations as follows:



(a) Contractor shall record, in an original or reproducible form of good quality and on tape or other media where relevant, all geological and geophysical information and data relating to the Contract Area obtained by Contractor in the course of conducting Petroleum Operations thereon and shall deliver a copy of all such information and data, including the interpretation thereof and logs and records of wells, and any other information obtained by Contractor consistent with generally accepted international Petroleum industry standards, to SOCAR as soon as practicable after the same has come into the possession of Contractor.



(b) Contractor shall keep logs and records of the drilling, deepening, plugging or abandonment of wells consistent with generally accepted international Petroleum industry practice and containing particulars of:



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



(ii) the casing, drill pipe, tubing and down-hole equipment run in the well and modifications

and



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[Signature]

alterations thereof;



(iii) Petroleum, water and valuable mineral resources encountered;



and any other information consistent with generally accepted international Petroleum industry standards.



(c) The information required by Article 10.1(b) above shall be submitted to SOCAR in the form of well completion reports within ninety (90) days from completion of the well in question.



(d) Contractor may if necessary remove from the Republic of Azerbaijan, for the purpose of laboratory examination or analysis, petrological specimens (including cores and cuttings) or samples of Petroleum found in the Contract Area and characteristic samples of the strata or water encountered in a well and seismic data on tape or other media. Upon request, Contractor will provide SOCAR with copies or equivalent samples and specimens of the materials which the Contractor proposes to remove from the Republic of Azerbaijan.



(e) Contractor shall supply to SOCAR:



(i) daily reports on drilling operations and weekly reports on field geophysical surveys as soon as they are available;



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



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[Signature]

Calendar Quarter, a report on the progress of Petroleum Operations during the preceding Calendar Quarter covering:



(1) description of the Petroleum Operations carried out and the factual information obtained including Petroleum production data from the Contract Area overall and on a well by well basis; and



(2) a description of the area in which Contractor has operated; and



(3) a map indicating the location of all wells and other Petroleum Operations;



(iii) within three (3) months of the end of each Calendar Year, an annual report summarising the matters specified in paragraph (ii) above for the preceding Calendar Year;



(iv) reports on completion of major elements of Petroleum Operations or unforeseen events and other reports requested by the Steering Committee. Additionally Contractor will inform SOCAR of all discoveries other than of Petroleum, such as discoveries of non-Petroleum natural resources.



The daily and weekly reports required to be submitted to SOCAR pursuant to Article 10.1(e)(i) shall be submitted in the original language of the reports and all other reports and records required to be submitted to SOCAR pursuant to this Article 10.1 shall be submitted to SOCAR in the English and Azeri languages.



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10.2 Access to Petroleum Operations



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



58ARTICLE 11



USE OF LAND AND SEA BEDS



Subject to Article 32.2 of this Agreement, SOCAR shall make available to Contractor, at no cost to Contractor, the use of any land which SOCAR utilises and sea beds under its control as necessary to carry out Petroleum Operations throughout the term of the agreement, (provided such use by Contractor does not interfere unreasonably with SOCAR's use thereof and further provided that if such use by Contractor results in expense for SOCAR, Contractor shall reimburse SOCAR for such expense, without creating any profit directly or indirectly for SOCAR), and SOCAR shall within the full limits of its authority use its best lawful endeavours to make available, at no cost to Contractor, all other land owned by the state and located beyond the land which SOCAR utilises legally and sea beds necessary to carry out Petroleum Operations including, but not limited to, the construction, laying, operating and maintaining, both onshore and offshore, of pipelines, cables and equipment. Contractor shall have the right to construct and maintain, above and below any such lands and sea beds, the facilities necessary to carry out Petroleum Operations. Land allocation (including inter alia such land allocation is transferred by SOCAR to Contractor under this Article 11) and location of facilities constructed by Contractor on such land shall be in accordance with Azerbaijan legislation regarding land use restrictions, except as may be modified by this Agreement.

ARTICLE 12

USE OF FACILITIES

12.1 SOCAR Facilities

Contractor and the Operating Company shall be granted the exclusive right to use for Petroleum Operations, without charge by SOCAR, the capital assets (including but not limited to production equipment, vehicles, wells, pumps, storage facilities, tools, generators, compressors, pipelines, offices, warehouses, buildings, rigs, yards, roads, infrastructure, radios, tubular goods, supplies, materials, facilities) used by SOCAR and OGPD before its liquidation in and for the purposes of carrying out Petroleum Operations in the Bahar 1 and Gum-Deniz field, provided that SOCAR shall retain the right of ownership to such capital assets and on the condition that the said capital assets shall not be used by SOCAR in their internal operations.

Contractor shall have the right to use, at no cost to Contractor, pre-drilled wells in the Bahar 2 at the Effective Date if deemed by Contractor to be necessary for the conduct of Petroleum Operations.

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



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



12.2 SOCAR Assistance



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





(b) SOCAR shall within the full limits of its authority use all lawful reasonable endeavours, with respect to Governmental Authorities and Third Parties, to assist Contractor in obtaining such rights, privileges, authorisations, approvals and other agreements from authorities and jurisdictions, outside the territory of the Republic of Azerbaijan as Contractor shall reasonably deem necessary for Petroleum Operations and/or as may be required by such authorities and jurisdictions, but shall not be responsible if such rights, privileges, authorisations and approvals are not obtained. Such agreements may include, but need not be limited to, such





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matters as export pipeline rights of way and operation rights, permits and undertakings with respect to the transhipment, storage or staging of Petroleum produced and saved from the Contract Area, materials, equipment and other supplies destined to or from the territory of the Republic of Azerbaijan, and exemptions from national, local and other taxes, transit fees, and other fees and charges on Petroleum Operations being conducted in such other jurisdictions.



(C)SOCAR shall within the full limits of its authority use all reasonable lawful endeavours with respect to Governmental Authorities and Third Parties, and shall be obligated with respect to its Affiliates, joint ventures or enterprises in which it has an interest and the right to control, manage or direct the action of such companies, ventures or enterprises, to ensure that Contractor has access to inter alia construction and fabrication facilities, offshore infrastructures, supply bases and vessels, warehousing, goods, services and means of transportation in the Republic of Azerbaijan provided that those items are not subject to prior obligations to Third Parties and that Contractor's use thereof does not interfere with the existing operations of SOCAR and/or any Third Party. As used herein, "control" shall mean the ownership of more than fifty (50) percent of the shares authorised to vote at a general meeting of shareholders, or the ability to pass or procure the passing of a decision (whether by casting of votes or otherwise) at a general meeting of shareholders, or at any meeting of the executive or management body, of



62the company, venture or enterprise. Such access shall be:

(i) with respect to facilities and services of Third Parties, on terms which are no less favourable to Contractor than those granted or agreed with any other bona fide arm's length user of such facilities and services; and



(ii) with respect to facilities and services of SOCAR and such Affiliates, joint ventures or enterprises in which SOCAR has an interest and the right to control, manage or direct the action thereof, at rates commensurate with the quality and efficiency of such facilities and services, which rates shall be the same as are available to SOCAR and/or such Affiliates, joint ventures or enterprises and as regard other terms no less favourable to Contractor than those granted to or agreed with SOCAR and/or such Affiliates, joint ventures or enterprises.



12.3 Contractor Facilities



Contractor shall be responsible for the maintenance and repair of all facilities controlled and operated by Contractor in connection with the Petroleum Operations ("Contractor Facilities"). Fees from Third Parties' access to Contractor Facilities shall be credited to the Petroleum Operations Account. SOCAR shall have the right to use excess capacity in Contractor Facilities provided such use does not interfere with or adversely affect Petroleum Operations. Third Parties may



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use such excess capacity on terms agreed with Contractor. Prior to Zero Balance the priority of such use of the Contractor Facilities shall be first Contractor, second Third Parties, and finally SOCAR. SOCAR shall pay a mutually agreed fee for such use to be credited to the Petroleum Operations Account. After Zero Balance the priority shall be first Contractor, second SOCAR and finally Third Parties. SOCAR’s use after Zero Balance shall be free of charge, except that maintenance of Contractor Facilities, for the time being not used by Contractor and being utilised exclusively by SOCAR, shall be on terms to be mutually agreed. Notwithstanding anything to the contrary in this Agreement, Contractor shall have the right to dispose of equipment and facilities which are either obsolete or are nearing the end of their useful economic life. Contractor shall notify SOCAR of its intention to dispose of any such equipment and facilities (except in the case of fixed assets to which the provisions of Article 17.5(a) shall apply). Unless SOCAR elects, within thirty (30) days to assume responsibility for and take delivery thereof, Contractor shall be free to dispose of any such equipment and facilities at the best price obtainable. Funds from such sales prior to Zero Balance will be credited to the Petroleum Operations Account and after Zero Balance will be credited to SOCAR’s account. Notwithstanding any provision herein to the contrary, SOCAR and Contractor shall have equal priority to capacity in Contractor Facilities to transport Petroleum produced from the Contract Area in proportion to their rights to take Petroleum under this Agreement.



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[signature]ARTICLE 13



CONTRACTOR'S RECOVERY OF PETROLEUM COSTS AND PRODUCTION SHARING



13.1 General Provisions

Contractor's Cost Recovery and Profit Petroleum share shall be made separately for Petroleum Operations performed in and related to the Contract Rehabilitation Area and for Petroleum Operations performed in and related to the Contract Exploration Area. In this regard, any reference to Total Production, Petroleum, Crude Oil or Non-associated Natural Gas means such portion of Total Production, Petroleum, Crude Oil or Non-associated Natural Gas lifted from the Contract Rehabilitation Area or from the Contract Exploration Area respectively. Any reference to Petroleum Costs, Operating Costs and Capital Costs means such Petroleum Costs, Operating Costs and Capital Costs which have been incurred in connection with the Petroleum Operations performed in and related to the Contract Rehabilitation Area or the Contract Exploration Area respectively.



13.2 Use of Petroleum for Petroleum Operations

Contractor shall have the right to use free of charge Petroleum produced from the Contract Area for Petroleum Operations in accordance with generally accepted international Petroleum industry practice, including but not limited to reinjection to preserve the pressure of Petroleum reservoirs in the Contract Area. Contractor shall endeavour to minimise use of Petroleum for Petroleum Operations. For planning purposes Contractor shall provide in the Annual Work Programme an estimate of



65

the amount of Petroleum it anticipates will be used for the optimum implementation of Petroleum Operations. Without prejudice to the said above, if during the implementation of the Annual Work Programme Contractor estimates that it will use more than ten (10) percent over and above the amount estimated, Contractor shall submit its proposals for the revised estimate to the Steering Committee for its review and approval.

13.3 Cost and Recovery for Petroleum Operations related to the Contract Rehabilitation Area

(a) Contractor shall be entitled to the recovery of its Petroleum Costs related to the Contract Rehabilitation Area as follows:

(i) all Operating Costs shall first be recovered from Total Production;

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

(b) Accounting of costs to be recovered in accordance with Article 13.3(a) shall be in a manner consistent with the Accounting Procedure.

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



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



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



(e) Notwithstanding the foregoing, Finance Costs shall not be applied to any unrecovered Capital Costs before the Calendar Quarter following such Calendar Quarter in which the average level of daily rate of Petroleum produced from the Contract Rehabilitation Area within ninety (90) consecutive days is at least one point five (1.5) times the average level of daily rate of the 2008 Petroleum Production.



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



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



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13.4 Cost Recovery for Petroleum Operations related to the Contract Exploration Area



(a) Contractor shall be entitled to the recovery of Petroleum Costs related to the Contract Exploration Area as follows:



(i) all Operating Costs shall first be recovered from Total Production;



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



(b) Accounting costs to be recovered in accordance with Article 13.4(a) shall be in a manner consistent with the Accounting Procedure.



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



(d) At the end of each Calendar Quarter:



(i) At the end of each Calendar Quarter, Finance Costs shall be applied to any unrecovered Capital Costs and/or Operating Costs, including any unrecovered Capital Costs and Operating Costs carried forward from any previous Calendar Quarter, which have not been recovered in such current Calendar Quarter;



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



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



(e) Notwithstanding the foregoing, Finance Costs shall not be applied to any unrecovered Petroleum Costs before the commencement Date of Commercial Production.



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



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



13.5 Transfer of Title

Cost Recovery by Contractor shall be achieved by transferring



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[Signature]

from SOCAR to Contractor title at the Delivery Point to quantities of Crude Oil and Non-associated Natural Gas of equivalent value (as determined pursuant to Articles 162 and 16.3) to the Petroleum Costs to be recovered in accordance with Articles 13.3 and 13.4.



13.6 Profit Petroleum

The balance of Total Production from the Contract Rehabilitation Area and the Contract Exploration Area respectively, remaining after deducting the quantities of Crude Oil and Non-associated Natural Gas necessary to enable recovery of Operating Costs and the portion of Capital Costs Recovery Petroleum used to recover accumulated Capital Costs for the Contract Rehabilitation Area (as provided in Article 13.3), and for the Contract Exploration Area (as provided in Article 13.4 above) ("Profit Petroleum"), shall be calculated on a Calendar Quarter basis and shall be shared between SOCAR and Contractor according to the R Factor model below.

Beginning at the Effective Date the value of the R Factor in respect of Calendar Quarter (n+1) shall be determined at the end of Calendar Quarter (n) separately for Petroleum Operations performed in and related to the Contract Rehabilitation Area and for Petroleum Operations performed in and related to the Contract Exploration Area in accordance with the procedure below:

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

Where:

CCRn means Contractor's Capital Costs recovered in the nth

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Calendar Quarter;



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



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



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



n means the index number of the relevant Calendar Quarter;



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



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



Profit Petroleum Sharing Table

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

0.00< R < 1.25 40.0 60.0

1.25 < R ≤ 2.00 50.0 50.0

2.00 < R ≤ 2.75 70.0 30.0

2.75 < R ≤ 3.00 80.0 20.0

3.00 ≤ R 90.0 10.0



13.7 Title to Profit Petroleum

Title to Contractor's share of Profit Petroleum shall be out of Crude Oil and Non-associated Natural Gas and shall be transferred to Contractor at the Delivery Point.



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[Signature]

ARTICLE 14

COMPENSATORY PETROLEUM

Contractor shall have the obligation:

(a) within three (3) years following the Effective Date to deliver at no charge to SOCAR five (5) percent of Total Production of Petroleum produced from the Contract Rehabilitation Area in the relative Calendar Quarter; and

(b) commencing from fourth (4) year following the Effective Date to deliver at no charge to SOCAR ten (10) percent of Total Production of Petroleum produced from the Contract Rehabilitation Area in the relative Calendar Quarter,

until the amount so delivered is the equivalent of one hundred seventy (170 000) tons of Crude Oil and six hundred thirty million (630 000 000) cubic meters of Non-associated Natural Gas (“Compensatory Petroleum”).

Any costs associated with transportation of Compensatory Petroleum beyond the Delivery Point shall be considered as Operating Costs.



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[signature]ARTICLE 15

TAXATION

15.1 General Provisions

(a) It is a condition to the obligations of each Contractor Party under this Agreement that, except for the Profit Tax obligation described in this Article 15, the Contractor Parties shall not be subject to any Taxes of any nature whatsoever arising from or related, directly or indirectly, to Hydrocarbon Activities.

(b) It is hereby acknowledged that Double Tax Treaties shall have effect to give relief from Taxes.

(c) For the purposes of this Article 15 the following expressions shall have the meaning ascribed to them below:

(i) “State Budget” means consolidated Republican and local budgets or such other budgets as may be created by Governmental Authority pursuant to the applicable law of the Republic of Azerbaijan for the purposes of collection of Taxes.

(ii) “Fixed Assets” shall include all assets which it is usual to include in the Contractor Party’s tax balance sheet under the heading of fixed or intangible asset, the total value of each of which exceeds a limit and has an anticipated useful life of more than one (1) year. This limit for the



73



[signature]Calendar Year in which this Agreement is executed shall be five thousand (5,000) Dollars. For each subsequent Calendar Year, the limit shall be increased by four (4) percent straight line basis respectively.

(iii) “Hydrocarbon Activities” means all Petroleum Operations carried out in connection with this Agreement by Contractor Party, directly or through the Operating Company, whether such activities are performed in the Republic of Azerbaijan or elsewhere. Each Contractor Party shall maintain separate books and accounts for the above Hydrocarbon Activities.

(iv) “Tax Authority” means the Ministry of Taxes of the Republic of Azerbaijan or any successor thereto appointed by the Ministry of Taxes of the Republic of Azerbaijan.

(v) “Fraud” means any illegitimate and repeated action or omission of the Contractor Party expressed in deliberate, intended and premeditated cases of failures for the purpose of evasion from Taxes by means of concealing information on Taxes or prevention of submission or collection thereof.

(vi) “Profit Tax Rate” is a rate of twenty two (22) percent which is the applied Profit Tax Rate existing in Republic of Azerbaijan on the day of execution of this Agreement and which shall remain fixed for the entire term of this Agreement.



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[signature]15.2 Profit Tax

(a) Each Contractor Party shall be severally liable for Profit Tax in respect of its Hydrocarbon Activities in accordance with the legislation which is generally applicable and existing in the Republic of Azerbaijan on the day of execution of this Agreement and as amended by the provisions of this Agreement. In the even of any conflict between the provisions of such internal legislation of the Republic of Azerbaijan and those of this Agreement, the provisions of this Agreement shall govern. Each Contractor Party shall be liable for payment of the Profit Tax in connection with it’s business activities in the Republic of Azerbaijan that are not related to Hydrocarbon Activities, under the applicable laws and normative acts of the Republic of Azerbaijan.

(b) It is specifically acknowledged that the provisions of this Article 15 shall apply individually to each Contractor Party and regulate individual liability of every Contractor Party for the Profit Tax. Profit Tax shall be based on such Contractor Party’s separate share of the items of Sales Income, Other Income and in accordance with provisions related to deductions, as written in separate books and accounts as provided in Article 15.1(c)(iii).

(c) SOCAR shall in respect of each Calendar Year pay out of its funds on behalf and in the name of each of the Contractor Party such Contractor Party’s Profit Tax to the State Budget in Dollars including estimated Profit Tax, and any interest, fines or penalties with respect thereto which is attributable to the failure to pay any such Profit Tax or estimated Profit Tax when it is due (except interest resulting from a Contractor Party’s failure to



75



[signature]prepare a required return by the due date therefor). SOCAR hereby guarantees to Contractor Parties that payment of each of Contractor Parties Profit Tax to the State Budget including any interest, fines or penalties as aforesaid, shall have first priority upon the proceeds of sale of Petroleum to which SOCAR is entitled under this Agreement. SOCAR shall cause the Tax Authority to issue each Contractor Party official receipts as provided for in Article 15.3(f). Upon request of any Contractor Party, SOCAR shall provide to such Contractor Party within ten (10) days of such request a document (in a form acceptable to all Contractor Parties) confirming actual transfer of funds to the State Budget in satisfaction of SOCAR's obligation as described in the preceding sentence. For purposes of computing the liability, if any, of SOCAR for Taxes assessed on SOCAR's income or profits, SOCAR shall not be entitled to credit against its tax liability the Profit Tax paid by SOCAR on behalf and in the name of each of the Contractor Parties pursuant to this Article 15.2(c). SOCAR shall be entitled to receive and retain any Profit Tax refunds (other than refunds of Profit tax and penalty sanctions paid by a Contractor Party) on behalf and in the name of each of the Contractor Parties and shall provide to the appropriate Contractor Parties a statement showing that any such refund has been received.



(d) (i) On not less than thirty (30) days prior written notice each Contractor Party shall have the right at any time to have the performance by SOCAR of that Contractor Party's Profit Tax liability from funds generated by SOCAR's share of Profit Petroleum for any Calendar Year audited by a firm of internationally recognised independent accountants



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[Signature]selected by the Contractor Party. Contractor Party shall bear the costs of such audit and such cost shall not be Cost Recoverable. Such audit may not relate to a Calendar Year, which has been finally, and conclusively determined in accordance with the procedure set out in article 15.3(d). Such audit shall be conducted in such a fashion that it does not cause unreasonable inconvenience to SOCAR. SOCAR shall accord to the auditor reasonable access to such evidence as the auditor may require to satisfy the auditor as to full payment of Contractor Party's Profit Tax for any Calendar Year from funds generated by SOCAR's Share of Profit Petroleum.



(ii) It is specifically acknowledged that Profit Petroleum sharing as set out in Article 13.6 shall be so determined to include Contractor Party’s Profit Tax in SOCAR’s share of Profit Petroleum from which SOCAR must pay such Contractor Profit Tax to the State Budget as provided in Article 15.2 (c). Therefore, the payment of the Profit Tax by SOCAR on behalf and in the name of the contractor party under Article 15.2(c) shall be treated by SOCAR and the tax authority as having been paid by the Contractor and as a complete satisfaction and release of the Contractor obligations to pay Profit Tax related to its Hydrocarbon activities as set forth in Articles 15.2(a) and 15.2(b). Notwithstanding contractor’s obligation to pay Profit Tax, the Tax Authority shall look solely to SOCAR for the payment of the Contractor’s, Profit Tax, unless Contractor elects to make any Profit Tax payments according to the provision of Articles 15.2(d)(iii).



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[Signature](iii) Nevertheless, if SOCAR fails to make timely payments of the Profit Tax, including estimated Profit Tax on behalf of the Contractor Parties to the State Budget as provided for in Article 15.2(c) or becomes so unable from time to time, each Contractor Party shall have the right, to decide, to pay the Profit Tax, including estimated Profit Tax, any interest, fines or penalties with respect thereto, individually directly to the State Budget. In such case, the Contractor Party's future entitlement to lift Profit Petroleum shall be increased, and SOCAR's entitlement shall be correspondingly dismissed, by a volume of equivalent value to such amount of Profit Tax, including estimated Profit Tax, any interest, fines or penalties with respect thereto, paid by the Contractor Party. In the event that the non-payment by SOCAR of a Contractor Party's Profit Tax, including estimated Profit Tax, continues for a period exceeding thirty (30) days from the due date for payment, the Contractor Party shall have the option of discharging its liability for all future payments of Profit Tax, including estimated Profit Tax, and there shall be made a special agreement for the reestablished of the initial economic equilibrium between the Parties and, thereupon, SOCAR and such Contractor Party shall notify the Tax Authority of the terms of a transfer to such Contractor Party of the liability to pay the Profit Tax as provided for in Article 15.2(c). (e) Taxable Profit, or if such sum is negative Taxable Loss, of a Contractor Party for a Calendar Year shall be equal to the sum of the Sales Income, the Other Income received by the Contractor Party during the Calendar Year and Profit Tax Gross Up less Deductions. The terms Taxable Profit, Taxable Loss, Sales Income, Other Income, Profit Tax Gross Up and Deductions shall have the meaning ascribed to them in this Article 15.2.



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



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



(h) Sales Income shall be defined as the amount of income derived during the Calendar Year by the Contractor Party from sales of Petroleum produced in the conduct of Hydrocarbon Activities. In the event such Petroleum is exchanged or swapped, then Sales Income shall be defined as the amount of income derived during the Calendar Year by such Contractor Party from sales of the Petroleum received in the exchange or swap. For purposes of this Article 15.2(h), Sales Income shall be determined by applying, in the case of arm's length sales (as defined in Article 16.1(d)(v)), the actual price



79

[Signature]realized by such Contractor Party, and, in the case of non arm's length sales, the principles of valuation as set out in Article 16.1 for such non arm’s length sales.





(i) Other Income shall be defined as any amounts of cash received by a Contractor Party in the carrying on of Hydrocarbon Activities and such amounts shall include all other income received by the Operating Company and allocated to the Contractor Party under Article 9.6, including but not limited to the following:



(i) insurance proceeds;



(ii) realised exchange gains;



(iii) amounts received under Article 17.5(a) and (b) from the Abandonment Fund; and



(iv) amounts received under Article 17.5(b) for distributions of excess funds in the Abandonment Fund; and



(v) interest income; and



(vi) amounts received from suppliers, manufacturers or their agents in connection with defective materials and equipment; and



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[Signature](vii) amounts received for the use of facilities or intellectual property, compensation for

services, sales of materials or charter hire; and



(viiI)refunds of Profit Tax originally paid by SOCAR, and refunded to a Contractor Party, in the event SOCAR is not compensated by such Contractor Party. SOCAR shall be entitles to deduct such amount of Profit Tax in computing its own taxable profit.



Provided, however, Other Income shall not include the following amounts received by a Contractor Party:



(1) amounts received from sales of Petroleum;



(2) except as otherwise provided in Article 15.2(n) and (o) amounts received from sales of Fixed Assets;



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



(4) amounts received from sales of any of the Contractor Party's rights and obligations arising under this Agreement;



(5) amounts received as refunds of Taxes (except as provided in Article 15.2(i)(viii) above) or as dividends received by a Contractor Party from an Affiliate of such Contractor Party;



(6) amounts received in reimbursement of or



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[Signature]

otherwise in connection with expenditures incurred by a Contractor Party (or an Affiliate thereof) in excess of the amounts of such expenditures that have been treated as Deductions by the Contractor Party for purposes of computing Taxable Profit or Taxable Loss (in which case the amounts of any such excess shall not thereafter be treated as Deductions by the Contractor Party for such purposes and corresponding adjustments shall be made to the balance in Article 15.2(m));



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



(8) income which was before subject to Profit Tax.



(j) Profit Tax Gross Up shall be defined as an amount equal to the total amount of a Contractor Party's Profit Tax liability for a Calendar Year which is payable on behalf of the Contractor Party by SOCAR pursuant to Article 15.2(c) above; such Profit Tax liability is equal to the value of the Profit Tax Rate multiplied by Contractor Party's Taxable Profit for such Calendar Year. This Article 15.2(j) shall be used to calculate the tax SOCAR should pay on behalf of the Contractor Party. If SOCAR fails to pay such Profit Tax and the Contractor Party pays such Profit Tax instead of SOCAR, then Profit Tax Gross Up shall equal to zero (0).



(k) For purposes of determining the amount of the Taxable Profit or Taxable Loss of a Contractor Party for a Calendar Year, Deductions shall include all costs documentary supported and incurred by the Contractor Party in accordance with the practice in connection with the conduct of Hydrocarbon Activities and such amount



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shall include all Deductions incurred by the Operating Company and allocated to the Contractor Party under Article 9.6, whether incurred in the Republic of Azerbaijan or elsewhere, including but not limited to the following:



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



(ii) all costs of state social insurance of the Republic of Azerbaijan, including, but not limited to contributions to the pension fund, the social insurance fund, employment fund and to the medical insurance fund and all the other social payments for the employees; and



(iii) all rehabilitation, exploration and appraisal costs related to the Contact Area; and



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



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



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brokerages; and





(vi) all payments made under a lease agreement for the

current year of the lease; and



(vii) all insurance costs; and



(viii) all personnel training costs; and





(ix) all costs connected with the activities of the

offices or other places of business of each

Contractor Party including management, research

and development, and general administration

expenses related to the Contract Area; and



(x) the cost of any item of equipment or asset which is

not a Fixed Asset; and



(xi) all amounts of interest, fees and charges paid in

respect of any debt incurred in carrying out the

Hydrocarbon Activities and any refinancing of

such debts, excluding (1) in the case of Affiliate

debt, interest in excess of a rate which would have

been agreed upon between independent parties in

similar circumstances, and (2) additional interest

which becomes payable because the debt is repaid

after its due date for repayment; and



(xii) all allocable portion covering costs of general

administrative support provided by a Contractor

Party's Affiliates outside of the Republic of

Azerbaijan or by SOA and its Affiliates (in

accordance with section 2.14 of the Accounting





procedure) which results in an indirect benefit to

Hydorcarbon Activites. Such support will include

the services and related office costs of personnel

performing administrative, legal, treasury, tax and

employee relations, services, provision of

expertise and other non technical functions which

cannot be specifically attributed to particular

projects. The allocable portion of such costs with

respect to this Agreement for each Contractor

Party for the Calendar Year shall be equal to the

amount determined using the following formula:



a=(b/c)d



where:



A = the allocable portion for a Contractor Party

for the Calendar Year;



b = the percentage Participating Interest of that

Contractor Party at the end of the Calendar

Year;



c = the sum of the Participating Interest of that

Contractor Parties at the end of the Calendar

Year; and



d = the sum of the general and administrative

overhead of the Contractor Parties for the

Calendar Year.





The sum of the general and administrative

overhead of the Contractor Parties for the

Calendar Year shall be the amount determined

using the following formula:



d = w+x+y+z





85where:



d = the sum of the general and administrative overhead of

the Contractor Parties for the Calendar Year;



w = three (3) percent of the sum of the Contractor

Parties Capital Costs for the Calendar Year, if any,

up to fifteen million (15,000,000) Dollars;



x = two (2) percent of the sum of the Contractor Parties'

Capital Costs for the Calendar Year from fifteen

million (15,000,000) Dollars to thirty (30,000,000)

million Dollars, if any;



y = one (1) percent of the sum of the Contractor Parties

Capital Costs for the Calendar Year in excess of

thirty million (30,000,000) Dollars, if any; and



z = one point five (1.5) percent of the sum of the

Contractor Parties' Operating Costs for the Calendar

Year; and



(xiii) all payments into the Abandonment Fund; and



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



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











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

(xvii) amounts stipulated in Article 31.2;

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

(xix) all liabilities and related costs charged to the Contractor Party which are in excess of such Contractor Party's Participating Interest share of such liabilities and related costs and which shall only be entered in the books and accounts of such Contractor Party (provided that in such case, a Contractor Party holding the Participating Interest associated with such financial liabilities and related costs shall not be entitled to include Deductions into the same amount);

(xx) amortization calculated as hereinafter provided in Article 15.2(1).



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



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





(bb) Bonus Payments referred to in Article 31.1 ten (10) percent per Calendar Year straight line basis



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(cc) Office buildings, two point five (2.5)

warehouses and similar percent per Calendar

constructions Year straight line

("Buildings") basis



The amount of amortisation for expenditure on a Fixed Asset shall be computed on the cost of the Fixed Asset exclusive of VAT on goods purchased in Republic of Azerbaijan. Any item which is treated as Deduction under Article 15.2 (k) shall not be amortised under Article 15.2(1).





(ii) All expenditures on Fixed Assets described in Article 15.2 (l)(i)(aa) incurred during the Calendar Year shall be deemed to have been incurred on first (1st) July with the result that fifty (50) percent of the expenditure shall be added to the balance of the unamortised amounts brought forward from the preceding Calendar Year. The balance shall then be reduced by any amounts received from the disposal of Fixed Assets to give an adjusted balance ("Adjusted Balance") which will then be amortised as follows:





Balance brought forward from

preceding Calendar Year x



Add fifty (50) percent of the

expenditure incurred on Fixed

Assets during Calendar Year x



Less the full amount of the

actual proceeds from sales of

Fixed Assets during Calendar Year (x)





88Adjusted Balance x



Less amortisation:

twenty five (25) percent

of the Adjusted Balance (x)



Add excluded fifty (50) percent

balance of expenditure incurred

on Fixed Assets during the

Calendar Year



Balance to carry forward to

following Calendar Year x





(iii) If in any Calendar Year, all Fixed Assets in the

Republic of Azerbaijan used in Hydrocarbon

Activities for the purposes of this Agreement are

disposed of (including but not limited to a

transfer pursuant to Article 17) then:



(aa) if the Adjusted Balance plus the "excluded

fifty (50) percent balance of expenditure

incurred on Fixed Assets during the Calendar

Year" is positive, the full amount shall be

treated as a Deduction in that Calendar Year,

or



(bb) if the Adjusted Balance plus the "excluded

fifty (50) percent balance of the expenditure

incurred on Fixed Assets during the Calendar

Year" is negative, the full amount shall be

treated as Other Income in that Calendar

Year.



(iv) There shall be treated as Other Income or







89Deductions the amount of gains or losses recognized by a Contractor Party during the Calendar Year from the sale, disposition or abandonment ("Disposition") of a Building

computed as follows:



Proceeds (if any) from Building



Disposition x



Less: Adjusted Basis of Building (x)



Gain/(Loss) on Building Disposition x



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



Original Cost of the Building x



Add cost of capitalised improvements x



Less accumulated amortization

Deductions (x)



Adjusted Basis of Buildings x



(m) For purposes of computing a Contractor Party's Taxable Profit or Taxable Loss, all costs incurred by the Contractor Party in connection with Hydrocarbon Activities (including but not limited to costs incurred directly or indirectly in connection with technical work in the Republic of Azerbaijan or elsewhere and costs incurred by representative offices in the Republic of Azerbaijan of the Contractor Party) shall be deemed to have been incurred on such date. Notwithstanding the foregoing, direct or indirect costs of conducting the





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negotiation of this Agreement and in supporting medical, cultural or charitable activities shall not be included in computing the Contractor Party's Taxable Profit or Taxable Loss.



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



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



15.3 Profit Tax Accounting and Returns



(a) Each Contractor Party shall:



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



(ii) recognize items of Sales Income, Other Income and Deductions in accordance with the cash receipts and disbursements basis applicable in the Republic of Azerbaijan as of the Effective Date.



(iii) draw up its financial statements and Profit Tax returns in Dollars and submit one set of accounts



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for the Calendar Year consisting of a tax balance sheet and profit and loss account, together with one Profit Tax computation for the Calendar Year reflecting its Hydrocarbon Activities.

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

(V)submit tax financial statements and Profit Tax returns for each Calendar Year together with an appropriate opinion from the auditor to the Tax Authority no later than the fifteenth (15th) March of the following Calendar Year. In the case of preliminary Profit Tax return filing, Contractor shall have the right to file the final Profit Tax return until June 30th of the current year.

(VI)beginning in the first Calendar Year in which it estimates it will earn a Taxable Profit, be liable based upon its estimate of its Taxable Profit for estimated Profit Tax for such Calendar Quarter, as well as for estimated Profit Tax for previous Calendar Quarters in that Calendar Year. Estimated Profit Tax shall be paid in accordance with Article 15.2(c) or Article 15.2(e) to the State Budget not later than within twenty five (25) days following the end of the relevant Calendar Quarter. Along with the payment, computations prepared in accordance with the agreed form shall

92be submitted to the Tax Authority. In calculating the estimated Profit Tax for a Calendar Quarter, each Contractor Party may utilize the Annual Work Program along with any other information, which it deems appropriate.



(b) Upon filing the final Profit Tax return for a Calendar Year, estimated Profit Tax paid with respect to the Calendar Quarters during such Calendar Year shall be credited against the final Profit Tax as calculated on the refunded by the State Budget within forty-five (45) days following the date the Contractor Party’s final Profit Tax return is submitted (or, upon election of the Contractor Party, shall be offset against any advance payment amounts of the Profit Tax for such Calendar Quarter or the following one (Calendar Quarters)). Any underpayment shall be paid by SOCAR to the state Budget in accordance with Article 15.2(c) or Article 15.2€ within ten (10) days following the date such final Profit Tax for a Calendar Year as calculated in the Profit Tax return shall be payable no later than twenty-fifth (25th) March of the following Calendar Year.



(c) All estimated and final payments (and refunds of overpayments) of Profit Tax and any interest and penalty sanctions thereon as described in Article 15.3(d) below shall be made in Dollars.



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



(ii) The Tax Authority shall have the authority to conduct an audit of each Contractor Party’s Profit Tax return for each Calendar Year. Upon completing such audit, the Tax Authority shall discuss any proposed adjustments with the Contractor Party and, where appropriate, issue a notice of additional Profit Tax due or a notice of refund. Any agreed underpayments or overpayments of Profit Tax shall be paid following receipt by the Contractor Party of the appropriate notice in accordance with Article 15.2(c) or, as the case may be, Article 15.2(d). If the Contractor Party and the Tax Authority are unable to agree upon the amount of Profit Tax underpaid or overpaid, the issue shall be submitted to arbitration applying the principles contained in Article 26.3.



(iii) Upon a final determination that there has been either an underpayment or overpayment of Profit Tax on the Contractor Party’s final Profit Tax return for a Calendar Year, SOCAR as provided in Article 15.2(c) or the Contractor Party as provided in Article 15.2(d) shall pay to the State Budget interest on the amount of the underpayment or



94



overpayment at the rate of LIBOR prevailing on

the day before payment plus four (4) percent. Such

interest shall be computed from twenty-fifth (25th)

March in the Calendar Year the final Profit Tax

return was filed until the date the Profit Tax is

paid or refunded.



(iv) In addition to interest payable as computed under

(iii) above, a Contractor Party shall be subject to

only the following penalty sanctions with respect

of Taxes:



(aa) if a Contractor Party fails to file a final

Profit Tax return on dates defined in Article

15.3 or delays filing thereof, it shall be

liable for a penalty of one hundred and ten

(110) percent of the Profit Tax required to

be paid with such Profit Tax return;



(bb) if the amount of Profit Tax due as shown on

the final Profit Tax return for a Calendar

Year was understated due to deliberate and

wilful Fraud by the Contractor Party, it shall

be liable for a penalty of two hundred

(200%) percent of the amount of the

understatement;





(cc) a Contractor Party shall be liable for interest

and penalties in accordance with Article

15.4(a)(i) in connection with taxation of its

payments to Corporate Foreign

Subcontractor;









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(dd) a Contractor Party shall be entitled to raise

objection to the application of penalties

referred to herein and if necessary any

dispute shall be settled by arbitration in

accordance with the principles of Article

26.3;



(ee) In the event that after audit it is determined

that a Contractor Party, the Operating

Company or a Subcontractor has failed to

withhold the correct amount of tax from

payments made to a Foreign Subcontractor,

the amount of such underpayment or

overpayment shall be paid by the

withholding party to the State Budget, or by

the State Budget to the withholding party

upon the final determination in accordance

with the applicable provisions. Along with

such payment, interest shall be payable at a

rate of LIBOR prevailing on the day before

payment plus four (4) percent. Such interest

shall be calculated from the date on which

the tax or refund should have been paid until

the date it is actually paid.









(e) Each Contractor Party shall submit its financial

statement and Profit Tax returns to the Tax Authority.

Estimated and final Profit Tax payments shall be made to

the State Budget by SOCAR, for and on behalf of each

Contractor Party.



(f) The Tax Authority will issue to each Contractor Party

official tax receipts evidencing the payment of estimated

or final Profit Tax within ten (10) days of any such

payment. Such tax receipts shall state the date and





96amount of such payment, the currency in which such payment was made and any other particulars customary in the Republic of Azerbaijan for such receipts.



15.4 Taxation of Foreign Sub-contractors



(a) A Corporate Foreign Sub-contractor, being a legitimately created or incorporated legal entity (“Corporate Foreign Subcontractor”), shall be taxed as follows:



(i) Corporate Foreign Subcontractors shall be deemed to earn a taxable profit of twenty five (25) percent of the payments received in respect of work and services performed within the Republic of Azerbaijan in connection with Hydrocarbon Activities and they shall be further deemed to be subject to tax rate of twenty two (22) percent resulting in a total tax obligation of five point five (5.5) percent of such payments. Any person making such payments shall withhold such tax from such payments, at a rate of five point five (5.5) percent and shall pay such withheld taxes to the State Budget within thirty (30) days from the date of payment. Such taxes withheld shall fully satisfy such Corporate Foreign Subontractor’s tax compliance, including filing obligations and liability for all Taxes.



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(ii) Any Corporate Foreign Subcontractor which sells goods to a Contractor Party, the Operating Company or any other Subcontractor within the Republic of Azerbaijan in connection with the Hydrocarbon Activities and receives payment of an amount in excess of the actual documented costs of the goods sold within the Republic of Azerbaijan being extra charges, fees for the producing of documents for supplies, brokerage fees, documentation fees, valuation or other similar payments (“Mark-up”), which excess amount is not connected with work or services provided within the Republic of Azerbaijan, shall be subject to tax on the full amount of such Mark-up paid to such Corporate Foreign Subcontractor at a rate of twenty two (22) percent. Any legal entity making such payments to the Corporate Foreign Subcontractor shall withhold the Tax at a rate of twenty two (22) percent from the Mark-up included into the payments to such Corporate Foreign Subcontractor and shall pay such withheld taxes to the State Budget within thirty (30) days from the end of the calendar month when the payment to the Corporate Foreign Subcontractor was made. Notwithstanding any other provisions of this Article 15, where the Corporate Foreign Subcontractor fails to produce documents related to the Mark-up or the value of the goods sold before or on receipt of the payment for such goods, such Corporate Foreign Subcontractor shall be liable to tax at a rate of five point five (5.5) percent upon full amount of receivable from such sale (without deducting the expenses).



(aa) Each Corporate Foreign Subcontractor shall be responsible for filing each Calendar Year a









98Profit Tax return and tax reports (returns) reporting all income earned in the Republic of Azerbaijan during the Calendar Year, including but no limited to the payments received in connection with Hydrocarbon Activities. Each Corporate Foreign Subcontractor shall include with this return a statement provided by a firm of internationally recognized independent accountants of international standing that costs and profits incurred in connection with its activities in the Republic of Azerbaijan have been fully and fairly reported.



(bb) Each Corporate Foreign Subcontractor shall also file

all other Tax returns, reports and financial

statements in accordance with the applicable law

(including, but not limited to personal income Tax

withholding reports, customs documentation fee

statements and social fund contribution returns).





(cc) The failure of any Corporate Foreign Subcontractor to

file any Tax return, report or financial statement

pursuant to (aa) or (bb) above shall not result in

any interest, fines or penalties against any Party

withholding such Taxes due.













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



(b) A subcontractor being a physical person shall be subject to the personal income Tax of Azerbaijan in accordance with Article 15.6.



(c) Notwithstanding the foregoing, Double Tax Treaties shall provide for application upon relevant Foreign Subcontractors of the Tax benefits provided thereby.



Notwithstanding any other provisions of this Agreement to the contrary:



(i) Article 15.5(b) shall apply to all terms of this Agreement.



(ii) Except as provided for by Article 15.4, no Profit Tax or income tax or any other Tax shall be imposed upon or withheld from payments made to Corporate Foreign Subcontractors.



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



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Azerbaijan



15.5 Taxation of Payments to Foreign Entities



(a) Except as provided by Article 15.4(a), no Taxes shall be withheld or imposed on payments made by a Contractor Party to any person organized outside the Republic of Azerbaijan. Notwithstanding the preceding sentence, in accordance with the generally accepted laws and normative acts of the Republic of Azerbaijan, Taxes may be withheld at a rate of five point five (5.5) percent on the flowing and such Tax shall satisfy Tax obligations, reporting obligations and all liability of such legal entity for the Taxes:



(i) interest paid by a Contractor Party related to a loan to the Contractor Party received in connection with Petroleum Operations from a bank or other financial institution without a presence in the Republic of Azerbaijan:



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



(b) Notwithstanding the foregoing, entities organized outside the Republic of Azerbaijan shall be entitled to



101

The provisions of an applicable Double Tax Treaty, or if there is no such treaty, the benefits that would have been available if a treaty equivalent to the OECD Model Tax Convention on Income and Capital updated as of November 1, 1997, were in force. In either event, no further administrative action shall be necessary to enable the foreign person to take advantage of such benefits.



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



15.6 Taxation of Employees and Physical Persons



(a) All Tax Residents, employees of each Contractor Party, the Operating Company, their Affiliates, Foreign Sub-contractors, including any physical persons acting as Foreign Sub-contractors, shall be liable to pay Azerbaijan personal income Tax only on their income earned as a direct result of their employment in the Republic of Azerbaijan. Employees who are not Tax Resident shall not be liable to pay Azerbaijan personal income Tax. For purposes of this Article 15.6, and subject to any applicable Double Tax Treaty and of a non discriminatory nature, "Tax Resident" shall be defined as any physical person who satisfies either of the following requirements for a specific period:



102

(i) any person who stays in the Republic of Azerbaijan on a business trip for a period which shall exceed thirty (30) consecutive days, provided that such person shall be liable for Azerbaijan personal income Tax only on his or her income earned as a result of his or her employment in the Republic of Azerbaijan for any period which shall exceed thirty (30) consecutive days. A person whose presence in the Republic of Azerbaijan shall not exceed thirty (30) consecutive days in any Calendar Year, but whose presence in the Republic of Azerbaijan shall cumulatively exceed ninety (90) days in such Calendar Year shall be liable for Azerbaijan Personal income Tax only on his or her taxable income earned after the ninetieth (90th) day of the presence in the Republic of Azerbaijan as a direct result of employment in the Republic of Azerbaijan;



(ii) any person who is present in the Republic of Azerbaijan on a routine basis for periods cumulatively exceeding ninety (90) days in any Calendar Year for regularly scheduled periodic employment as his or her primary place of employment (and which employment is not incidental to the exercise of that primary employment outside of the Republic of Azerbaijan), including those persons being on rotation in accordance with the schedule of rotation. Such a person shall be liable for Azerbaijan personal income Tax on all income earned as a direct result of his or her employment in the Republic of Azerbaijan during the Calendar





103

[signature]



Year, including income earned during the ninety

(90) days of employment in the Republic of Azerbaijan before such person has become Tax Resident.





(b)

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



(c)

Each Contractor Party, its Affiliates, the Operating Company and Sub-contractors shall withhold from payments to persons who are citizens of the Republic of Azerbaijan and do not have permanent employment relationships with such Party person income tax of the Republic of Azerbaijan.



(d)

Before any Contractor Party, the Operating Company, an Affiliate, a Subcontractor or a Foreign Employee becomes burdened with the liability for the above mentioned, or in the case of failure to submit information on any such Taxes withheld, before any Government Authority imposes any such Tax, interest, penalty or fines for any event of failure to pay a Tax or submit an information, rate of such Tax to be withheld in the Republic of Azerbaijan, period of payment and procedure for the submission of information stipulated in Articles 15.6(a), (b) and (c) shall be determined by a Protocol to be signed in accordance with Article 15.8(c).



15.7 Tax Exemptions



104



[signature]

Each Contractor Party, the operating Company and their Sub-contraotors shall be exempt with oredit (zero (0) percent rate) from Value Added Tax in c with onnection Hydrocarbon Activities. This will apply to the following:



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



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



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



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



(c) Where in accordance with Article 15.7 (a) above a person should pay the Value Added Tax at a zero (0) percent and is charged and pays input VAT at a rate more than zero (0) percent on the supply to that person of goods works or services, that person shall be entitled to receive a refund or offset against the amount of any other Taxes payable by that person (including Taxes withheld by that person on payments to its employees or sub-contractors)



(d) Except as provided by Article 15.4 and Article 15.5 no Taxes shall be withheld or imposed on payments madeby each Contractor Party or its permanent establishments to any entity incorporated, legally created or organised outside the Republic of Azerbaijan.



(e) The Tax Authority or other appropriate Tax or customs body shall provide each Contractor Party, Operating Company and their Sub-contractors with certificates confirming the exemptions and/or VAT zero (0) percent rate as provided in Article 15.7(a) of this Agreement within thirty (30) days of the Contractor Party, Operating Company, or their Sub-contractor requesting such certificate.



15.8 Other



(a) Every Contractor Party, its Affiliates, Operating Company and Sub- contractors shall pay registration or similar fees imposed by Governmental Authority to the extent they are nominal and of a non-discriminatory nature.



(b) Due to the establishment of the Operating Company in accordance with Article 9, it always has its Taxable Profit at the level of zero (0), such Operating Company shall not be treated as a legal entity subject to the Profit Tax and therefore shall be exempt from the submission of Profit Tax returns, reports and financial statements. In accordance with the applicable laws every Operating Company shall remain liable for the submission of returns, reports and statements on all other Taxes (including, but not limited to personal income Tax reports, customs documentation fee statements and



106

reports on contributions to the social insurance fund).



(c) There shall be established a Commission for the purpose of conducting negotiations with the Contractor upon the Effective Date and signing Protocols for the determination of the rules required for the administration and interpretation of Tax related provisions of this Agreement. Such Protocols shall correspond to all provisions of this Agreement and shall have the force equivalent to the force of any other Decisions or Instructions being issued or published by the Governmental Authorities in connection with interpretation of the Tax related provisions of this Agreement.



15.9 Share Transfer Profit Tax



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



(a) For the purposes of this Article 15.9, the following expression shall have the meaning assigned to them herein below:



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



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



107

to Cost Recovery.



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



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



(bb) any exchange of Participating Interests in projects where no profit is generated; or



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



(dd) any involuntary transfer.



(iv) "Net Income" means the difference between the Gross Income and the total amount of established deductions (tax which shall of



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



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

(cc) Costs incurred for such assignment.



(b) Profit Tax Rate defined in Article 15.1(c00vi) shall be applied to the Net Income of Sale and Permanent Assignment. Upon receipt of Gross Income, an assigning Contractor Party shall compute the Net Income, and shall apply to the Net Income the computed Profit Tax Rate indicated above.



(c) The amounts set forth in Article 15.9 (aXiii)(aa) shall be certified by the statutory auditor of the Operating Company and the amounts set forth in Article 15.9(a) iii) bb) shall be certified by the statutory auditor of the Contractor Party or Affiliate of a Contractor Party which incurred the costs.



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



(e)An assigning Contractor Party shall for the Cal dar Year when it makes an assignment submit a report in the form and during the period of time specified by the legislation of the Republic of Azerbaijan.15.10 Survival



Notwithstanding any other provisions of this Agreement to the contrary, the provisions of this Article 15 shall survive the termination of this Agreement until such time as all matters pertaining to Contractor Parties’ liabilities for Taxes are finally and conclusively determined.



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ARTICLE 16



VALUATION OF PETROLEUM



16.1 General Provisions



The valuation of Petroleum lifted from the Contract

Rehabilitation Area and the Contract Exploration

Area, respectively, for the purposes of Cost

Recovery, sharing of Profit Petroleum and as

otherwise specifically provided in this Agreement,

shall be made separately. In this regard, any

reference to Petroleum, Crude Oil or Non-associated

Natural Gas means such Petroleum, Crude Oil or Non-

associated Natural Gas which have been lifted from

the Contract Rehabilitation Area or the Contract

Exploration Area respectively.



16.2 Value of Crude Oil and Non-associated Natural Gas

lifted from the Contract Exploration Area



(a) The valuation of Crude Oil for purposes of Cost

Recovery pursuant to Article 13.4, and sharing

of Profit Petroleum pursuant to Article 13.6

and as otherwise specifically provided in this

Agreement in any Calendar Quarter shall be the

net back value calculated as follows:



(i) for each export route where there have been

export sales of Crude Oil from the Contract

Exploration Area (or such other Crude Oil

obtained through exchanges or swap

agreements which is exchanged or swapped

for Crude Oil from the Contract Exploration

Area) by any Party in arm’s length

transactions during the Calendar Quarter

(as per bill





111

of lading date), the weighted average per unit price realized in all such sales (after deducting commissions and brokerages), at the Point of Sale, adjusted for costs incurred by the Parties of transporting the Crude Oil to the Point of Sale, including but not limited to pipeline tariffs, transit fees, insurances, demurrages, quality and/or quantity losses by blending, terminal fees, tanker costs and pipeline taxes to arrive at a value of the Crude Oil at the Delivery Point ("Net Back Value"); provided that the total volume of such arm's length sales made by all Parties exceeds thirty-three and one-third (33 1/3) percent of the total volume of all sales made by all Parties during the Calendar Quarter; or









(ii) for each export route where the total volume of arm's

length export sales does not exceed the percentage of

sales referred to in Article 16.2(a)(i) above, the

weighted average per unit price of: (A) Crude Oil

sold in arm's length sales (determined as provided in

Article I6.2(a)(i) above) and (B) Crude Oil sold in

non-arm's length sales at the average price quoted

for such Crude Oil in Platt's Oilgram during the

Calendar Quarter, but if no such price is quoted then

the average of per unit F.O.B. price quotations for

three (3) representative crude oils to be agreed by

the Parties, as published in Platt's Oilgram in the

Calendar Quarter, adjusted for quality, grade,

quantity, costs of transporting the Crude Oil to the

Point of Sale as provided in (i) above, to arrive at

a Net Back Value of the Crude Oil. In the event that

Platt's Oilgram ceases to be published or is not

published for fifteen (15) days in the period

required for its use in this Article 16.2(a)(ii)

then the required data shall be taken from an

available alternative publication internationally

recognized by the Petroleum industry. If the

Parties cannot agree the three (3) representative

crude oils by the Commencement Date of Commercial

Production or fail to agree on any alternative

publication the matter shall be referred for final

decision to an internationally recognized expert in

accordance with the provisions of Article 16.2(c)

below.





(iii) where export sales of Crude Oil during any Calendar

Quarter are conducted through several export routes,

the value of Crude Oil for such Calendar Quarter

shall be determined as weighted average of Net Back

Values for all export routs.





(b) The value of Non-associated Natural Gas in any

Calendar Quarter for the purposes of Cost Recovery,

sharing of Profit Petroleum, and as otherwise

specifically provided in this Agreement shall be the

actual arm’s length sale price realised under a gas

sales agreement less costs incurred by the Contractor

Parties of transporting such Non-associated Natural

Gas to the Point of Sale including but not limited to

pipeline tariffs, Transit Losses and pipeline taxes

("Net Back Value”).









113Where Non-associated Natural Gas is sold by Contractor in non-arm's length sales, such Non-associated Natural Gas shall be valued at a price to be determined by agreement between SOCAR and Contractor based on pricing principles prevailing internationally. taking into account market, grade, quality and quantity, transportation and other relevant considerations ("Net Back Value")



For the purposes of this Article 16, all sales of Non-associated Natural Gas to SOCAR, any affiliate of SOCAR or any Government Authority shall be deemed an arm's length transaction.



(c) Within thirty (30) days after the end of the relevant Calender Quarter, all Parties shall notify the Operating Company of the volumes, dates, prices, and Point of Sale for all arm's length sales of Crude Oil and/or Non-associated Natural Gas during such Calender Quarter, and the Operating Company shall notify SOCAR of valuations of Crude Oil and/or Non-associated Natural Gas for the purposes of Article 16.2(a) and Article 16.2(b) above, which notice shall specify volumes, dates, prices, and Points of Sale for all arm's length sales. If any Party does not accept any valuation notified by the Operating Company pursuant to Article 16.2(a) or Article 16.2(b) and SOCAR and Contractor cannot reach agreement on the value of Crude Oil and/or Non-associated Natural Gas within thirty (30) days of receipt of notice by SOCAR of Contractor's valuation of Crude Oil and/or Non-associated Natural Gas, such determination shall be made by an internationally recognised expert appointed by Contractor and SOCAR, but if they fail to agree within thirty (30) days from the end of the thirty (30) days referred to above on the appointment of such expert, then such appointment shall be made by the President of the Stockholm Chamber of Commerce, Sweden on the application of SOCAR or



114Contractor. Such expert shall be a person internationally recognised as having expertise in the marketing of Petroleum. The English language text of this Agreement will be utilised by the expert. The expert shall in writing, report his determination within thirdy (30) days of his appointment and his determination shall be final and binding upon SOCAR and Contractor.



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



(d) Transit Loss (other than losses for which Contractor has been reimbursed from any insurances taken out by Contractor and losses for which Contractor has been reimbursed from pipeline owners or operators) shall be deducted from Total Production. Insurance premiums paid by Contractor for insurance taken out by Contractor covering Transit Losses shall not be Cost Recoverable. Any insurance reimbursements for such losses shall not be credited to Cost Recovery. Contractor shall be responsible for the insurance of Transit Losses, pursuant to Article 23.1.(e) In determining the applicable Net Back Value of Crude Oil and/or Non-associated Natural Gas pursuant to Articles 16.2(a) and (b) the following shall apply:



(i) provisions in this Article 16.2 dealing with "sales" shall equally apply to a single sale and shall be interpreted accordingly; and



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



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



(iv) "Transit Losses" - shall mean losses incurred during the pipeline transport of Crude Oil and Non-associated Natural Gas from the Delivery Point to the terminus of the export transportation systems, (including, if applicable, any pipeline utilized for transshipment of the Crude Oil to exit the Black Sea area or in the case of Non-associated Natural Gas to the Point of Sale) in excess of the normal internationalpipeline loss allowance of one-tenth of one (0.1) percent; and



(v) an "arm's length sale" is a sale or exchange of Petroleum between a willing and non-affiliated buyer and seller on the international market in exchange for payment in Foreign Exchange, excluding a sale involving barter, sales from government to government and other transactions motivated in while or in part by considerations other than the usual economic incentives involved in Petroleum sales on the international market.





16.3 Value of Petroleum lifted from the Contract Rehabilitation Area





The valuation of Petroleum for purposes of Cost Recovery pursuant to Article 13.3, sharing of Profit Petroleum pursuant to Article 13.6 and as otherwise specifically provided in this Agreement in any Calender Quarter shall be calculated in the same manner as for Article 16.2, provided that the three (3) representative crude oils referred to in Article 16.2(a)(ii) shall be agreed by the Effective Date.





16.4 Measurement



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



117

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



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



(d) Petroleum produced from the Contract Area and not used by Contractor pursuant to Article 13.2 shall be measured at the Delivery Point.ARTICLE 17



OWNERSHIP, USE AND ABANDONMENT OF ASSETS



17.1 Ownership and Use



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



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



(b) Title to fixed and moveable assets employed by Contractor in the performance of Petroleum Operations and the cost of which is claimed as Petroleum Costs shall be transferred to SOCAR upon the earlier to occur of (i) the end of the Calendar Quarter following the achievement of Zero Balance ot (ii) the termination of this Agreement. In this latter case, without prejudice to Contractor's right under Articles 26.3(b) and 32, title to fixed assets will pass to SOCAR irrespective of whether the costs thereof have been Cost Recovered. Except in respect of items which have limited residual economic life, fixed and moveable assets the title to which i transferred to SOCAR following the achievement of Zero Balance shall be in reasonable working order and shall comply with generally accepted international technical standards, subject too wear and tear.



119

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



(d) With respect to any fixed asset Contractor shall, upon agreement of partial relinquishment pursuant to Article 32.5, give notice of abandonment of such assets in the area to be relinquished which Contractor does not intend to use or relocate elsewhere in connection with Petroleum Operations. Subject to Article 17.1(f), SOCAR may, within sixty (60) days of receipt of such notice, elect to assume ownership, possession and custody of such fixed assets.



(e) Data and other information collected and generated by Contractor in the course of Petroleum Operations shall, during the term of this Agreement, be jointly owned by SOCAR and Contractor. Following the termination of this Agreement ownership of all such data and information shall revert to SOCAR. Thereafter, each Contractor Party shall be entitled to continue to use such data and information in relation to its other Petroleum related activities in the Republic of Azerbaijan. Contractor shall be entitled to trade such data and information in accordance with the principles set out in Article 30.2 of this Agreement during the terms of this Agreement.



120

(f) Except as otherwise provided in Article 17.3 of this Agreement, owndership of leased equipment shall not transfer to SOCAR at the end of this Agreement, and Contractor shall at such time be free to export such equipment.



(g) For purposes of this Article 17, "fixed assets" means structures and facilities essential to the conduct of Petroleum Operations that are located within the Contract Area, such as wells, flowlines, pipelines, oil, gas and water seperation facilities, oil pump stations, loading terminals, gas compression stations and the like.





17.2 Abandonment, General Terms



In order to finance abdonment of all fixed assets employed in Petroleum Operations within the Contract Area by Contractor, the Parties shall open a joint escrow account at a bank of good international repute to be agreed between SOCAR and Contractor. This account shall be known as the "Abandonment Fund" and shall be administered by the Operating Company in coordination with SOCAR for a maximum value. The structure of the escrow account and the terms for the administration of the Abandonment Fund monies shall be mutually agreed between SOCAR and Contractor. All monies allocated to the Abandonment Fund shall be recoverable as Operation Costs. In no event shall the Abandonment Fund exceed fifteen (15) percent of all Capital Costs incurred int he Contract Exploration Area of the Contract Rehabilitation Area, respectively.





17.3 Formation of Abandonment Fund for the ContractExploration Area



(a) Contractor shall commernce making contributaions to the Abandonment Fund in the first Calender Quarter following the Calender Quarter when fifty (50) percent of Petroleum reserves identified in the Development Programme have been recovered from the Contraxt Exploration Area. Should the point be reached at which payments into the Abandonment Fund have commenced and a Discovery is made subsequent thereto which increased the total remaining Petroleum reserves in the Contract Exploration Area to a level where less than fifty (50) percent of overall combined reserves have been recovered, then payments into the Abandonment Fund shall be suspended. Contractor shall resume payments into the Abandonment Fund when the point is reached where fifty (50) percent of Petroleum reserves (as increased by such Discovery) have been recovered. The formula for determining the amount of such payments as set forth in Article 17.3(b) shall be revised to take into account the revised Petroleum reserves of the Contract Exploration Area. Contractor shall recieve; however, full credit for all payments previously paid into the Abandonment Fund, plus accrued interest thereon.





(b) Contractor shall transfer funds on a Calender Quarter basis to the Abandonment Fund according to the following formula:



QAT=((COA/ARES)xPARES)-CAF



where:



QAT is the amount of funds to be transferred to the Abandonment Fund in respect of the relevantCalendar Quarter;

COA is the estimated cost of abandonment operations established pursuant to Article 17.50d), up to the limit established in Article 17.2;



ARES is the estimated Petroleum reserves remaining to be recovered from the end of the Calendar Quarter in which the Abandonment Fund was opened;



PARES is the cumulative production of Petroleum from the end of the Calendar Quarter in which the Abandonment Fund was opened;



CAF is the Abandonment Fund balance at the end of the previous Calendar Quarter.



17.4 Formation of Abandonment Fund for the Contract Rehabilitation Area



The Parties shall no later than twelve (12) months from the Effective Date agree and accept the mechanism of making contributions to an Abandonment Fund for the Contract Rehabilitation Area.



17.5 Parties Relationship with respect to Abandonment of Assets

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



(b) Upon termination of this Agreement, Contractor shall notify SOCAR of all fixed assets employed in Petroleum Operations within the Contract Area, which Contractor intends to abandon. SOCAR shall, within thirty (30)days of receipt of Contractors Contractor notice, notify of such fixed assets which SOCAR elects to continue to use, as well as whether SOCAR elects to abandon all other fixed assets or have Contractor abandon such other fixed assets. A portion of the Abandonment Fund commensurate with and attributable to any fixed assets shall be transferred to Contractor or SOCAR, as the case may be, who is responsible for abandoning such fixed assets. If SOCAR elects to continue to use or to abandon any fixed assets, SOCAR may abandon such fixed assets as and when it decides. Abandonment of any fixed assets shall be in accordance with generally accepted international Petroleum industry practice, provided, however, in the event there are insufficient funds in the Abandonment Fund to enable Contractor to complete abandonment operations for which Contractor is responsible, Contractor shall expend all amounts available in the Abandonment Fund in the performance of its abandonment operations and shall thereupon cease any further abandonment operations and have no further liability or obligation to abandon such remaining fixed assets. Any unabandoned fixed assets shall as part of the abandonment operations be left in a safe condition.



(c) Upon SOCAR electing to abandon any fixed assets in the Contract Area or electing pursuant to Article 17.5(a) above, to continue using any such fixed assets Contractor shall be released from all responsibility and liability of every kind pertaining to such fixed assets and abandonment thereof as well as payment of any further funds should there be in sufficient funds in the Abandonment Fund. SOCAR shall indemnify Contractor form and against any loss, damage and liability of any nature whatsoever, as well as any claim, action or proceeding instituted against Contractor, or any Contractor Parties, by any person or entity, including, but not limited to any Governmental Authority, arising from, or in any way connected with, the continued use of such fixed assets and their ultimate abandonment, as well as any failure by SOCAR to properly abandon, any such fixed assets.



(d) Not later than one/(1) year prior to the Calendar Year in which fifty(50) percent of the petroleum reserves identified in the Development Programme for the Contractor Exploration Area and in a time frame defined in accordance with the mechanism of making contributions to the Abandonment Fund due to the Contract Rehabilitation Area pursuant to Article 17.4, are expected to be recovered, Contractor shall prepare an abandonment plans for each of the Contractor exploration Area and Contractor Rehabilitation Area and an estimate of the cost of abandonment operations for approval by steering committee.Annually thereafter Contractor shall examine the estimated costs of abandonment operations, revise the estimate.



(e) In the event that there are excess funds in the Abandonment Fund following completion of the abandonment operations, then such excess shall be distributed between SOCAR and Contractor in proportion to the cost of abandonment operations undertaken by Contractor and SOCAR, but in no event





126shall Contractor's share exceed an amount it would have received had the excess funds been distributed in the ration of the weighted average of the last ten(10) years. Profit Petroleum distribution between SOCAR and contractor under the provisions of article 13.6 prior to termination of this Agreement.



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



17.6 Lease of Equipment



Each Contractor Party shall have the right to use equipment leased from its Affiliated or Third Parties in the course of Petroleum Operations. In the case of any equipment, which is on long-term lease(which for purpose 17 of this Article shall mean a lease in excess of ten (10) years) to Contractor, Contractor shall, with respect to such leases from such Affiliates of equipment owned by such Affiliates, ensure, and with respect to such leases from Third Parties, use reasonable lawful efforts to procure, that any such lease is transferable to SOCAR when Contractor no longer wishes to use such equipment for petroleum and that such lease includes an option to purchase excercisable by SOAR.









127 ARTICLE 18



NATURAL GAS



18.1 Associated Natural Gas



Contractor shall have the right to produce Hydrocarbon liquids found within the Contract Area and to process Associated Natural Gas produced with any such liquids in order to extract such liquids for sale, provided that such processing can be conducted in a manner that is economically justified for Contractor. Liquids saved shall be treated as Crude Oil. Subject to Contractor's rights pursuant to Article 13.2 and Article 18.3, residue Associated Natural Gas from such processing shall be delivered free of charge to SOCAR at the Delivery Point.



18.2 Non- Associated Natural Gas



In the event of a Non-associated Natural Gas Discovery in the Contractor Exploration Area additional terms for commercial development of such Non-associated Natural Gas shall be agreed between SOCAR and Contractor, and, upon reching such agreement the applicable Development Programme shall be submitted by Contractor in accordance with the provisions and deadlines set out in Article 7.5.



Return on Contractor's investment in the Non-associated Natural Gas Discovery and development shall be through marketing of Non-associated Natural Gas in accordance with the mechanism describe in Articles 13.4 and 13.6, In the case of Non-associated Natural Gas Discovery, profit Petroleum shall be shared through marketing of Non-associated Natural Gas in accordance with the mechanism described in Article 13.6.





If the Parties have not come to agreement on the results of marketing studies and terms of commercial development of Non-associated Natural Gas Discovery within the period set forth in Article 7.5(b) or any agreed extended period, SOCAR and/or its Affiliates shall have the right by giving written notice to Contractor to develop at its sole risk and cost such Non-associated Natural Gas Discovery in accordance with the international Petroleum industry practice subject to reimbursement in full by SOCAR to Contractor of costs incurred by Contractor in accordance with the mechanism described in Articles 13.4 and 13.6.

SOCAR and/or its Affiliates shall conduct Petroleum Operations in a diligent, safe and efficient manner and in accordance with generally accepted principles of the international Petroleum industry and otherwise in accordance with the terms of this Agreement. SOCAR and/or its Affiliates and Contractor shall conduct Petroleum Operations in the Contract Exploration Area in a manner that does not interfere or hinder the conduct of Petroleum Operations of each other and also in a manner which shall not directly or indirectly damage the overall reservoir performance.

Articles 7.5 (e) and (f Articles 8.3 and 8.4 shall apply to SOCAR's conduct of Petroleum Operations in all respects as if each reference therein to Contractor were a reference to SOCAR.



At any time prior to the expiry of forty eight (48) months from the date of approval by SOCAR of a Development Programme, Contractor shall be entitled to assume responsibility for and take over operation from SOCAR and/or its Affiliates and develop on-associated Natural Gas and SOCAR shall thereafter be reimbursed for its costs incurred in connection



with such development in accordance with the mechanism described in Article 13.4.



18.3 Flaring or Venting of Natural Gas



(a) Contractor shall have the right to flare or vent

the necessary amount of Associated Natural Gas in

the event of emergencies, equipment malfunctions,

repairs or maintenance of any facilities,

including delivery systems, or SOCAR's failure to

take delivery of Associated Natural Gas to be

delivered to it by Contractor as provided in

Article 18.1.



(b) In the case of Non-associated Natural Gas if a

buyer fails to take delivery, then Contractor

shall first offer such Non-associated Natural Gas

to SOCAR on the same terms agreed with such buyer

and if SOCAR refuses or fails to take delivery

thereof, then Contractor shall reduce the

production of Non-associated Natural Gas by the

volumes not taken by any buyer or SOCAR. In the

event of Contractor's failure to market its

entitlement of Non-associated Natural Gas for any

reason Contractor shall reduce the production of

Non-associated Natural Gas by the applicable

volumes and shut in Non-associated Natural Gas

well or restrict its production rate.













130 ARTICLE 19



FOREIGN EXCHANGE



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



(a) Open, maintain and operate Foreign Exchange bank

accounts both in and outside the Republic of

Azerbaijan* and local currency bank accounts in the

Republic of Azerbaijan;



(b) Import into the Republic of Azerbaijan funds

required for Petroleum Operations in Foreign

Exchange;



(c) Purchase local currency with Foreign Exchange at

the most favorable exchange rate legally available

to it (and in any event at a rate of exchange no

less favorable than that granted by the National

Bank of the Republic of Azerbaijan to other foreign

investors), without deductions or fees other than

usual and customary banking charges, as may be

necessary for conduct of the Petroleum Operations

and performance of other obligations of Contractor

hereunder;



(d) Convert local currency available for use in, or

earned in connection with, Petroleum Operations

exceeding their immediate local requirements into

Foreign Exchange at the most favorable exchange

rate legally available to it (and in any event at a

rate of exchange no less favorable than that

granted by the National Bank of the Republic of

Azerbaijan to other foreign investors), without

deductions or fees other than usual and customary

banking charges;





131

(e) Export, hold and retain outside the Republic of

Azerbaijan, and dispose of all proceeds obtained

under this Agreement, including without limitation

all payments received from export sales of Contractor

Parties share of Petroleum;



(f) Transfer outside the Republic of Azerbaijan any

Foreign Exchange in excess of their immediate local

requirements;



(g) Be exempt from all legally required or mandatory

conversions of Foreign Exchange into local or other

currency;



(h) Pay in Foreign Exchange partly or wholly outside the

Republic of Azerbaijan any salaries, allowances and

other benefits due to their expatriate employees

assigned to work in the Republic of Azerbaijan for

Petroleum Operations; and



(i) Pay directly outside the Republic of Azerbaijan in

Foreign Exchange their Foreign Sub-contractors

working on Petroleum Operations.



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













132



ARTICLE 20



ACCOUNTING METHOD



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













133 ARTICLE 21



IMPORT AND EXPORT



21.1 Import and Export Rights



(a) Contractor, its agents and Sub-contractors,

shall have the right to import into, and re-

export from the Republic of Azerbaijan free of

any Taxes and restrictions in their own name

the following: all equipment, materials,

machinery and tools, vehicles, spare parts,

goods and supplies (excluding foodstuff,

alcohol and tobacco products) necessary in

Contractor's reasonable opinion for the proper

conduct and achievement of Petroleum

Operations, provided, however, that with

respect to the purchase thereof Contractor

shall give preference to Azerbaijani Suppliers

in those cases in which such Azerbaijani

Suppliers are in all material respects

competitive in price, quality and availability

with those available from other sources, even

if the contract price of such an Azerbaijani

Supplier is higher by not more than ten (10)

percent than the contract price of the

potential winning foreign supplier. For

purposes of this Article 21.1 Azerbaijani

Suppliers shall mean business entities

registered and incorporated in the Republic of

Azerbaijan, regardless of ownership, legally

operating in the Republic of Azerbaijan

and possessing and/or having access to certain

land areas, infrastructure, technical

facilities, advanced technology, manpower,

technical and commercial knowledge, management

skills and experience, financial resources,

license and other rights for activity in the

Republic of Azerbaijan including business

entities established with participation of





134foreign investors.



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





(b) Each Contractor Party, Operating Company, their Affiliates, agents, and Sub-contractors, and all of their employees and family members, shall have the right to import into and re-export from the Republic of Azerbaijan, free of Taxes and restrictions and at any time, all furniture, clothing, household appliances, vehicles, spare parts and all personal effects (excluding foodstuff, alcohol and tobacco products) for personal use by the foreign employees and their families assigned to work in, or travel to, the Republic of Azerbaijan. Private sales of imported goods by Contractor and/or its Subcontractors and their employees in the Republic of Azerbaijan to any Third Party will be taxable in accordance with Azerbaijan legislation (subject to Article 15).





(c) Any purchase of goods, works and services where the value exceeds one hundred fifty thousand (150,000)











135Dollars shall be made on a competitive tender basis (except when only one supplier is available). The threshold value of one hundred fifty thousand (150,000) Dollars shall be escalated annually in line with increases in the GDP Deflator Index. SOCAR shall participate at every bid stage. In that regard, SOCAR will send to the Operating Company an appropriate number of its personnel, ("SOCAR Representatives"), whose responsibility shall include monitoring the contracting and procurement process from initial preparation of the pre-qualification lists; to the ultimate selection of contractors; and through to implementation. The SOCAR Representatives shall have responsibility to report to SOCAR and the Operating Company their findings and to give timely input to the Operating Company as to SOCAR's position on relevant matters prior to each contract award. The SOCAR Representative(s), shall not have the right to vote on any matters before the Operating Company's contract committee; provided however, the SOCAR Representatives may express their opinion and that of SOCAR with regard to any bids, awards, and/or subsequent implementation for the Operating Company to duly consider and take account of.





21.2 Petroleum Export



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



21.3 Customs Laws







136

Subject to Articles 15, 21.1 and 21.2, all imports and exports carried out in connection with this Agreement shall be subject to the procedures and documentation required by applicable customs laws and regulations, and each Contractor Party, the Operating Company, their Affiliates, agents and Subcontractors shall pay any customs service/documentation fees to the extent they are nominal and consistent with the actual costs of providing such customs service/documentation and are of a non-discriminatory nature, but in no event shall the service/documentation fees exceed the following:





Declared Value of

Shipment in Dollars Duty



0- 100,000 0.15% of value



100,001 - 1,000,000 $150.00 plus 0.10% of value

over $100,001



1,000,001 - 5,000,000 $1,050 plus 0.07% of value

over $ 1,000,001



5,000,001 - 10,000,000 $3,850.00 plus 0.05% of

value over $ 5,000,001



more than 10,000,000 $6,350 plus 0.01% of value

over $10,000,000



21.4 Foreign Trade Regulations



Each Contractor Party, the Operating Company, their

Affiliates,





137

agents and Sub-contractors shall also be exempt from the provisions of Republic of Azerbaijan foreign trade regulations concerning the prohibition, limitation and restriction of import and export and country of origin of those items indicated in Article 21.1 and with respect to the Petroleum allocated to Contractor pursuant, to this Agreement.





21.5 SOCAR Assistance



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













138 ARTICLE 22



DISPOSAL OF PRODUCTION





22.1 Title to Petroleum



Except as expressly provided in Article 16.2(d)(iv) concerning the risk of loss of Petroleum production, the transfer of title and possession to each Contractor Party and SOCAR of the share of the Petroleum production to which such Contractor Party and SOCAR is entitled shall be made at the Delivery Point.





22.2 Overlift and Underlift



Each of SOCAR and Contractor Parties shall have the right and obligation to lift and dispose of the share of Petroleum to which it is entitled under this Agreement. Such share shall be lifted on as regular a basis as possible, it being understood that each of SOCAR and Contractor Parties, within reasonable limits, shall be authorised to lift more (overlift) or less (underlift) than its share of Petroleum produced and unlifted by the lifting day, to the extent that such overlift or underlift does not infringe on the rights of the other and is compatible with the production rate and the storage capacity. SOCAR and Contractor shall establish the rules and procedures to govern the lifting programme on the basis of the principles described above.





22.3 SOCAR Option to Purchase Crude Oil



(a) During each Calendar Quarter SOCAR shall be

entitled







139Come as soon as the contractor on the basis of crude oil has h üququna is sasini and the purchase of crude oil for delivery mantaqasinda commerce istadiyi to the start of the calendar quarter percent raise the ninety (90) days before the writing of this Report concerning the contractor is working taqdi m. AvvaJca the contractor and the price of oil or gOndarma tar ixindan defined before the end of the calendar quarter Galan 6.2, paragraph three of the n 1 in the face of certain purchased e dil earnings from the Summit of the price of crude, which has called neItin receipt. Those Crude oil


SOCAR exports of crude oil, or any other alternative versions of Sales noqtasinda latest export

noqtasinda due to the contractor's share of crude oil in addition to the existing ten (10) percent shall have the right to obtain a qadarini. Those price of crude oil before the beginning of the relevant calendar quarter profit mutual Speed ​​Agree raised (international neIt industries muayyanlasdirilarkan fair market price to be applied generally by the use of elements) and in case of crude oil, the raw tax neIta each of hans

to purchase a portion of the Crude Oil allocated to Contractor from the Contractor under the provisions hereof, at the Delivery Point, by giving ninety (90) days written notice to the Contractor of such preceding Calendar Quarter in which SOCAR elects to purchase the crude oil purchase . SOCAR invoice for Cont actor such Crude Oil purchased hereunder shall initially at the determined price per Tonne for the last of the Accordance with Article 16.2 of the Calendar Quarter preceding the date in which the price has been established lifting. At such time that the price per Tonne for the Calendar Quarter in which such Crude Oil is determined in Accordance with Article 15.2 lifted as is known, Contractor shall issue an amended invoice indicating any monies owed to Contractor or SOCAR, as the case may be. In no event shall the Proportion of crude oil so purchased fTOm Contractor exceed the Proportion purchased from Third Parties under similar circumstances and in no event shall such QUANTITIES exceed more than ten (10) percent of Contractor's entitlement at the Delivery Point During that Calendar Quarter. In the event any Taxes are levied on such Crude Oil, the company shall be solely responsible for the payment thereof to the relevant Governmental Authority and Contractor shall indemnify and hold harmless from any liability with respect thereto.



SOCAR shall have the additional right to purchase up to an additional ten (10) percent of Contractor's share of Crude OU available in any Calendar Quarter at the Point of Sale or at any other export point Located at the terminus when marketing Crude Oil through any other alternative export. The price for such Crude Oil shall be mutually agreed (using those factors normally utilised by the International Petroleum Industry in determining a fair market price) prior to the relevant Calendar Quarter, and in the event any Taxes are levied on such Crude Oil, the company shall be solely responsible for the payment



140thereof to the relevant Governmental Authorities and shall indemnify and hold harmless Contractor from any liability with respect thereto. In the event of any failure to agree on the sales price as provided above, SOCAR's right to purchase such additional Crude Oil from Contractor shall lapse with respect to the relevant Calendar Quarter.





(c) The quantity of Crude Oil for which SOCAR may exercise its option to purchase pursuant to Article 22.3(a) and (b) shall be specified in a written notice to Contractor at least ninety (90) days preceding each Calendar Quarter. SOCAR shall pay for any Crude Oil purchased under this Article 22.3 in Dollars within thirty (30) days of Contractor's invoice to be issued no earlier than the date of lifting such Crude Oil. In the event that SOCAR fails to make timely payment of sums due to Contractor then its right to purchase Crude Oil under this Article 22.3 shall be suspended until all outstanding sums have been paid. If payment so due is not paid within said thirty (30) day period, Contractor shall be entitled to lift and export from Crude Oil to which SOCAR is entitled a quantity of Crude Oil, as is necessary to satisfy sums due to Contractor. The volume of Crude Oil to which Contractor shall be entitled shall be determined in accordance with the valuation procedure set forth in Article 16.2 applicable on the date Contractor lifts such Crude Oil from SOCAR's entitlement.





(d) To the extent that Contractor Parties (or their Affiliates) incur any fees, charges or penalties under contracts with Third Parties (including but not limited to pipeline and terminaling agreements) as a result of SOCAR's exercise of its rights pursuant to Article 22.3(a), SOCAR shall be







141

liable for and shall reimburse Contractor Parties in Foreign Exchange for such fees, charges and penalties. SOCAR shall have no liability to Contractor Parties for penalties Contractor Parties (or their Affiliates) may incur under contracts with Third Parties as a result of SOCAR's exercise of its rights under Article 22.3(b). Contractor to the extent practicable will from time-to-time notify SOCAR of any anticipated fees, charges and penalties.







22.4 Marketing of Crude Oil for SOCAR



If a marketing agreement has been mutually agreed between SOCAR and Contractor, Contractor shall market for SOCAR, if SOCAR so requests pursuant to the terms of such separate marketing agreement, all or a portion of SOCAR's share of Crude Oil. The amount of Crude Oil which will be subject to the foregoing obligation to market shall be stated in a written notice from SOCAR to Contractor no later than ninety (90) days prior to the beginning of the applicable Calendar Quarter. Any marketing undertaken by Contractor pursuant to this Article 22.4 shall not affect title to and risk of loss of SOCAR's share of Total Production which shall remain with SOCAR.





22.5 Maximum Efficient Rate



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





142

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











143

ARTICLE 23

INSURANCE, LIABILITIES AND INDEMNITIES



23.1 Insurance

(a) Contractor (which for purposes of clarification with respect to this Article 23 shall include the Operating Company) shall provide the annual insurance program included to an Annual Work Program for the approval of the Steering Committee. Such annual insurance program shall include purchase of insurance coverage for and in relation to Petroleum Operations for such amounts and against such risks as listed below and/or may be specifically agreed by Contractor and SOCAR. Contractor shall also furnish SOCAR with policies/certificates of insurance confirming the effectiveness of such coverage and waiver by Contractor's insurers of their rights of subrogation against SOCAR in relation to SOCAR's property managed by Contractor. Contractor shall appoint a reputable and internationally recognised insurance and reinsurance broking company registered in the Republic of Azerbaijan in order to arrange insurance specified in Article 23.1 (a)(i) — (vii) and (e) below and make sure that specified insurances comply with the legislation of Republic of Azerbaijan and international standards. Such appointment shall be approved and agreed by Contractor and SOCAR. Insurance specified in Article 23.1(i) to (vi) below, shall be obtained through the appointed broker from a reputable insurance company established in the Republic of Azerbaijan, so long as risks covered by such company are comparable with customary insurance practice of international Petroleum industry. Without prejudice to the

144

generality of the foregoing, the said insurance shall cover:



(i) Loss or damage to any installation, equipment or other assets of Contractor used in or in connection with Petroleum Operations; however, if Contractor fails to insure any such installation, equipment or assets used in or in connection with Petroleum Operations, Contractor shall be liable for any loss or damage arising therefrom, except if such insurances are not available at a reasonable cost;





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





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





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





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







145(vi) Contractor’s liability to its employees engaged in Petroleum Operations, to the extent that such insurances are available at a reasonable cost;



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



(aa) unlimited redrilling;



(bb) subsurface blowout;



(cc) evacuation expenses;



(dd) making well safe.



(b) Unless specifically agreed by SOCAR, minimum limits for the above coverages specified in this Article 23.1 shall be as follows:



pursuant to Article 23.1 (a)(i) - replacement value of the installation/property insured;



pursuant to Articles 23.1 (a)(ii) - a combined single limit of ten million (10,000,000) Dollars or according to requirements of the local legislation, whichever is greater;



pursuant to Articles 23.1 (a)(iii) and 23.1(a)(iv) - ten million.









146(10,000,000) Dollars for any one occurrence;





pursuant to Article 23.1(a)(v) - twenty five (25) percent of the value of property insured up to twenty five million (25,000,000) Dollars for any one accident or occurrence;



pursuant to Articles 20.1(a)(vi) - a combined single limit of ten million (10,000,000) Dollars or according to requirements of the local legislation, whichever is greater.



(c) Unless otherwise agreed between the Parties, maximum insurance deductible for any one accident or occurrence shall be two million (2,000,000) Dollars.



(d) Costs and/or expenses incurred by Contractor’s failure to provide insurance under Articles 23.1(a)(i) - (vii) above, shall not be Cost Recoverable.



(e) Contractor shall provide medical insurance to respective employees and shall take out compulsory insurances in accordance with applicable law of the Republic of Azerbaijan.



(f) Except as provided in Article 16.2 (d)(iv), the premiums for all insurance (excluding premiums for insurance covering the marketing of Petroleum) obtained by Contractor for Petroleum Operations pursuant to this Article 23.1, shall be Cost Recoverable. Insurance cover may be denominated in Foreign Exchange.









147(g) Upon Contractor’s request, local insurance company, as insurer to Contractor, shall reinsure its own liability by internationally accepted reinsurance mechanisms. The reinsurance arrangement between the local insurance company and the reinsurance company shall be approved by SOCAR and Contractor. Insurance company shall submit to SOCAR and Contractor the evidence of reinsurance cover in the form of certificates, cover notes or other legal documents of reinsurance.





(h) Each Contractor Party will be provided the opportunity to have any or all of the insurance to be obtained under Articles 23.1(a) (i) — (vii) reinsured by local insurance company through such Contractor Party’s Affiliate or preferred insurance company up to its Participating interest; provided that the security and credit worthiness of such Affiliate insurance company are satisfactory to SOCAR and Contractor.





(i) Sub-contractors, or if agreed between Contractor and Subcontractors, Contractor on behalf of Sub-contractors, shall insure the work performed for Contractor within the Republic of Azerbaijan in accordance with applicable law of the Republic of Azerbaijan and pursuant to Article 23.1 above. All deductibles shall be covered by Sub-contractors.





(j) Upon written request, Contractor shall furnish SOCAR with certificates and/or cover notes confirming the insurance coverage of Subcontractor.







14823.2 Liability for Damages



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



23.3 Indemnity for Personnel



Notwithstanding the other provisions of this Agreement:



(a) Contractor shall indemnify and hold harmless SOCAR against all losses, damages and liability arising under any claim, demand, action or proceeding brought or instituted against SOCAR by any employee of any Contractor Party (or any Affiliate thereof, provided that such Affiliate, at the time of the injury or damage, is not acting in the capacity of a Sub-contractor) or dependent thereof, for personal injuries, industrial illness, death or









149



Damage to personal property sustained in connection with, related to or arising out of the performance or non performance of this Agreement regardless of the fault or negligence in whole or in part of any entity or individual.



(b) SOCAR shall indemnify and hold harmless Contractor against all losses, damages, and liability arising under any claim, demand, action or proceeding brought or instituted against Contractor by any employee of SOCAR (or any Affiliate thereof, which shall include any Governmental Authority, provided that such Affiliate, at the time of the injury or damage, is not acting in the capacity of a Sub- Contractor) or dependent thereof, for personal injuries, industrial illness, death or damage to personal property sustained in connection with, related to or arising out of the performance or non-performance of this Agreement regardless of the fault or negligence in whole or in part of any entity or individual. Contractor shall, if so requested by SOCAR, use its reasonable lawful endeavours to assist SOCAR in its obtaining insurance with respect to its liability under this Article 23.



23.4 Indemnity Prior to Effective Date



SOCAR shall indemnify each Contractor Party and its Affiliated from and against all losses, damages and liabilities, arising under any claim, demand, action or proceeding instituted against any Contractor Party and/or any of its











150Affiliates by any person or entity, including but not limited to Governmental Authorities, arising out of or in any way connected with any injury, death or damage of any kind sustained in connection with or arising from the Contract Area or any operations of SOCAR or any of its predecessors, prior to the Effective Date, including but not limited to damage to the environment, regardless of when such claim, deman, action or proceeding is instituted.



23.5 Indemnity for Surrendered Area and SOCAR Operations



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



(i) SOCAR's operations pursuant to Article 18.2 and 24.3, or as the result of SOCAR access pursuant to Article 10.2; and



(ii) Any portion of the Contract Area surrendered by Contractor pursuant to Articles 32.3 and 32.5 and/or any continued use of any assets, and/or the abandonment of any assets, for which SOCAR has assumed control and responsibility from Contractor pursuant to Article 17 and accruing after the date of





151Such surrender and/or SOCAR’s assumption of the use of any such assets and abandonment of any assets, including but not limited to damage to the environment (but excluding any claim, action or proceeding which results from Contractor’s Wilful Misconduct whether occurring before or after the date of surrender).



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



23.6 Joint and Several Liability

Except as provided under Articles 15, 30.1 and 31.2, the liability of the Contractor Parties shall be joint and several with respect to all of the obligations of Contractor under this Agreement.



23.7 Consequential Losses

With respect to indirect or consequential loss arising out of or in connection with this Agreement or any activities thereunder, notwithstanding anything to the contrary elsewhere in the Agreement, the Parties shall not be liable











152whether in contract, tort or otherwise and regardless of any negligence under any circumstances whatsoever for any indirect or consequential loss. For the purpose of this Article 23.7 the expression "indirect or consequential loss" shall mean any indirect or consequential loss or damage including but not limited to inability to produce Petroleum loss of or delay in production of Petroleum or loss of profits.





































153ARTICLE 24



FORCE MAJEURE



24.1 Force Majeure



Non- performance or delays in performance on the part of any Party of its obligation (or any part thereof) under this Agreement, other than the obligation to pay money, shall be excused if occasioned or caused by Force Majeure. "Force Majeure" means any event which prevents, hinders or impedes Petroleum Operations and is beyond the ability of the affected Party to control such event or its consequences using reasonable efforsts, including without limitation, extraordinary events, natural disasters (for example lightning and earthquake), wars (declared or undeclared) or other military activity, fire, labour disputes, insurrections, rebellions, acts of terrorism, riot, civil commotion, and laws, treaties, rules, regulations, decrees, orders, actions or inactions of any governmental authority (inside or outside of the Azerbaijan Republic) which prevent hinder or impede Contractor's rights under this Agreement; provided, however, that laws, treaties, rules, regulations, decrees, orders or other acts of any entity or agency acting on behalf of, under the auspices of, or at the direction of any Governmental Authority within the territory of the Republic of Azerbaijan shall not constitute Force Majeure with respect to delay or non-performance on the part of SOCAR. Each Party shall use its reasonable lawful efforts to prevent the occurrence of Force Majeure events. Upon the occurrence of any Force Majeure event, the Party affected shall give prompt notice to the other Parties specifying the event of Force Majeure (and providing evidence thereof) and shall do all things possible using reasonable lawful efforts to remove or mitigate the effect of such Force Majeure event. If the government within whose







154









jurisdiction a Contractor Party or its Ultimate Parent Company is incorporated or is subject takes actions which preclude such Contractor Party from fulfilling its obligations under this Agreement, the remaining Contractor Parties may not claim such an event as Force Majeure and shall, consistent with the principles set forth in Article 23.6, continue to fulfil their obligations under this Agreement.



Notwithstanding any provision in this Agreement to the contrary, Finance Costs shall not be applied to any unrecovered Petroleum Costs during the period of Force Majeure.



24.2 Extension of Time



If Petroleum Operations are delayed, curtailed or prevented by Force Majeure, then the time for carying out the obligations affected thereby, the duration of the relevant phase of Petroleum Operations, the term of the appropriate period under this Agreement (including any extension period hereof) and all rights and obligations hereunder shall be extended for a period equal to the delay caused by the Force Majeure occurrence plus such period of time as is necessary to re-establish operations upon removal or termination of Force Majeure.







15524.3 Post-Production Force Majeure



If at any time during the Development and Production Period for the Contract Rehabilitation Area and/or after Commencement Date of Commercial Production from the Contractor declares Force Majeure and such Force Majeure situation has continued for a period of not less than ninety (90) consecutive days and such Force Majeure did not arise as a result of events within the Republic of Azerbaijan or as a result of any action on the part of a Governmental Authority and as a result of such Force Majeure Contractor has been unable to produce Petroleum under this Agreement then SOCAR and Contractor shall meet within fifteen (15) days following the expiry of the said period of ninety (90) days to discuss how best to continue production. Failing agreement on satisfactory arrangements within ninety (90) days thereafter SOCAR shall have the option of itself or its Affiliate assuming operations hereunder and continuing production of Petroleum during the period of Force Majeure at its risk and cost with the possible participation of subcontractors until Contractor declares the cessation of the Force Majeure circumstance when Contractor shall resume its full responsibilities for production of petroleum under this Agreement.



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

ARTICLE 25



VALIDITY, ASSIGNMENT AND GUARANTEES





25.1 Validity



(a) Except as otherwise provided under Article 25.1(b), this Agreement shall constitute a valid and binding legal obligation enforceable in accordance with its terms among the Parties and their respective successors and assigns as of the Effective Date. SOCAR guarantees that as of the date of execution no other agreement exists with respect to the right to explore for, develop or produce Petroleum with respect to the Contract Area. SOCAR further guarantees that between the Execution Date and the Effective Date it shall not enter into any negotiations or arrangements with any Third Party for the granting of rights to rehabilitate and develop the Contract Area (or any part thereof). From and after the Effective Date this Agreement shall not be cancelled, amended or modified except in accordance with its terms or by written agreement between the Parties. The Parties acknowledge the necessity of continuing to work in good faith to resolve any matters not presently covered by this Agreement.





(b) In recognition by the Parties that certain obligations have to be performed on or before the Effective Date, it is agreed that the provisions of Article 28.1(b), and SOCAR's guarantees under Article 25.1(a) shall come into force on the Execution Date.





157(c) In the event this Agreement is finally rejected by the Parliament of the Republic of Azerbaijan and Contractor has notified SOCAR that any further revisions to this Agreement, if any, necessary for ratification are unacceptable to Contractor, this Agreement shall not become effective, and the rights and obligations of the Parties under this Agreement and any previous agreements pertaining to the Contract Area shall be extinguished.



25.2 Assignment



(a) Restriction. No assignment, mortgage, pledge or other encumbrance shall be made by a Contractor Party of its rights and obligations arising under this Agreement other than in accordance with the provisions of this Article 25.2. Any purported assignment made in breach of the provisions of this Article 25.2 shall be null and void. For purpose of this Article 25 change in the structure of ownership of an Other Contractor Party (other than for the purposes of internal reconstruction, financing, or amalgamation of an Ultimate Parent Company of such Other Contractor Party) shall be deemed an assignment under this Agreement. Except in the case of a Contractor Party assigning all of its percentage Participating Interest without SOCAR's approval.







158(b) By a Contractor Party

(i) Assignments to Third Parties. Subject to the provisions of this Article 25.2(b) a Contractor Party shall be entitled to assign all or part of its rights and obligations arising under this Agreement to any Third Party which:

(aa) has the technical and financial ability commensurate with the responsibilities and obligations which would be imposed on it hereunder;

(bb) as to the interest assigned, accepts and assumes all of the terms and conditions of this Agreement: and

(cc) is an entity with which SOCAR can legally do business.



(ii) Encumbrance by Contractor Party. Without prejudice to its obligations hereunder, each Contractor Party shall have the right to freely mortgage, pledge or otherwise encumber its interests in the Agreement or any property in or outside the Republic of Azerbaijan which is used for Petroleum Operations, provided that any such mortgage, pledge or other encumbrance shall be made expressly subject to the terms of this Agreement.

(iii) Approval of SOCAR. Any proposed assignment, mortgage, pledge or other encumbrance by a Contractor Party to a Third Party shall require the









159prior approval of SOCAR which approval shall not be unreasonably withheld, If within ninety (90) days following notification to SOCAR of a proposed assignment accompanied by the relevant information and the draft deed of assignment , mortgage, pledge or other encumbrance, SOCAR has not given its decision, such assignment, mortgage, pledge or other encumbrance shall be deemed to be approved by SOCAR.



(iv) Obligations of Assignee, In the event a Contractor Party assigns all or a portion of its rights and obligations arising under this Agreement, and the assignment has been approved or deemed approved by SOCAR, the assignor shall, to the extent of the interest assigned, be released from all further obligations and liabilities arising under this Agreement after the effective date of such assignment. The assignee with the remaining Contractor Parties shall thereafter be jointly and severally liable for the obligations arising from this Agreement, except to the extent otherwise provided under this Agreement.



(v) Assignments to Affiliated and Contractor Parties.

A Contractor Party shall be entitled at any time to assign all or part of its rights and obligations arising from this Agreement to one or more of its Affiliates or to any of the Contractor Parties without the prior consent of SOCAR, provided however that SOCAR shall be promptly advised of any such assignment. Additionally, with respect to an Affiliate, any such Affiliate must satisfy the





160requirements of Article 25.2(b)(i) above, and further, provided that the assigning party shall remain liable for its Affiliates obligations under this Agreement in the same manner as though no assignment had been made to such Affiliate unless and until said assignment is approved or deemed approved by SOCAR, in the manner provided under Article 25.2(b)(iii)



25.3 No Tax on Assignments



Any assignment or transfer pursuant to Article 25.2 shall be free of Taxes, except the Profit Tax as per Article 15.9, and shall be free of any cost or charge to Contractor Parties.



25.4 Conditions on Assignment



Any Assignment by a Contractor Party shall be expressly conditioned upon the assignee providing to SOCAR ab Ultimate Parent Company Guarantee similar to the guarantee specified in Article 25.5



25.5 Ultimate Parent Company Guarantee, SOCAR Guarantee



Bahar Energy shall as soon as practicable after Execution Date but not later than the Effective Date, provide to SOCAR an Ultimate Parent Company Guarantee.



SOCAR here by guarantees to each Contractor Party other than SOA:



(a) all funds necessary for SOA to fulfil all of its obligations, financial or otherwise, under the Agreement; and(b) the rights granted and the obligations undertaken by

SOA.



25.6 Government Guarantee



Upon the Execution Date but not later than the Effective Date SOCAR shall procure the execution of the Government Guarantee. An executed original of the Government Guarantee shall be provided to each Contractor Party and shall be included in the executed copy of this Agreement to be submitted to Milli Mejlis of the Republic of Azerbaijan. Upon ratification and approval of this Agreement by Milli Mejlis of the Republic of Azerbaijan and publication in the customary manner the Government Guarantee shall have the force of law of the Republic of Azerbaijan.















162

ARTICLE 26



APPLICABLE LAW, ECONOMIC STABILIZATION

AND ARBITRATION





6.1 Applicable Law



This Agreement shall be governed and interpreted in accordance with principles of law common to the law of the Republic of Azerbaijan and English law, and to the extent that no common principles exist in relation to any matter then in accordance with the principles of the common law of Alberta, Canada (except for laws regarding conflicts of laws). This Agreement shall also be subject to the international legal principle of pacta sunt servanda (agreements must be observed). Upon approval by Milli Mejlis of the Republic of Azerbaijan of this Agreement, this Agreement shall constitute a law of the Republic of Azerbaijan and shall take precedence over any other current or future law, decree or administrative order (or part thereof) of the Republic of Azerbaijan which is inconsistent with or conflicts with this Agreement except as specifically otherwise provided in this Agreement.





6.2 Economic Stabilisation



The rights and interests accruing to Contractor (or its assignees) under this Agreement and its Sub-contractors under this Agreement shall not be amended, modified or reduced without the prior consent of Contractor. In the event that any Governmental Authority invokes any present or future law, treaty, intergovernmental agreement, decree or administrative order which contravenes the provisions of this Agreement or adversely or positively affects the rights or interests of





163Contractor hereunder, including, but not limited to, any changes in tax legislation, regulations, or administrative practice, the terms of this Agreement shall be adjusted to reestablish the economic equilibrium of the Parties, and if the rights or interests of Contractor have been adversely affected, then SOCAR shall indemnify Contractor (and its assignees) for any disbenefit, deterioration in economic circumstances, loss or damages that ensue therefrom, SOCAR shall within the full limits of its authority use its reasonable lawful endeavors to ensure that the appropriate Government Authorities will take appropriate measures to resolve promptly in accordance with the foregoing principles any conflict or anomaly between any such treaty, intergovernmental agreement, law, decree or administrative order and this Agreement.







26.3 Arbitration

(a) Except for any matter to be referred to an expert pursuant to Articles 16.2(a) (ii) and 16.2(c), in the event of a dispute arising between SOCAR and any or all of the Contractor Parties (including matters which are not resolved at the Steering Committee), the disputing Parties shall meet in an attempt to resolve the dispute to their mutual satisfaction by reference to the terms of this Agreement. If satisfactory mutual agreement is not achieved within thirty (30) days after receipt by a Party of notice of such dispute shall be settled in accordance with the Arbitration Procedure and the applicable law provisions of Article 26.1.











164(b) Nothing in this Agreement shall limit the rights of the Contractor Parties under the existinge law of the Republic of Azerbaijan on protection of foreign investment, which rights shall apply in addition to any other rights Contractor may have under this Agreement notwithstanding any other law, both current and future, in the Republic of Azerbaijan. If any of Contractor's rights, interests or property are expropriated, nationalised or otherwise taken by reason of any act or failure to act of any Governmental Authority, then the arbitrators shall apply the principle of indemnification (including prompt, full and effective compensation in Dollars) at the full market value, on the basis of an on-going concern utilising the discounted cash flow method, assuming a willing buyer and seller in a non-hostile environment, and disregarding the unfavourable circumstances under which or following which Contractor shall be deprived of its rights, interest (including its interest in undeveloped reserves) or property. The arbitrators shall select an investment bank of good international reputation for purpose of appraising the full market value of said rights, interest (including its interest in undeveloped reserves) or property of Contractor.





(c) The rights and obligations under this Article 26.3 shall survive the termination of this Agreement.













165

ARTICLE 27



NOTICES



All notices required to be given pursuant to this Agreement shall be in writing in English and Azeri and may be given by facsimile or letter to the address set out below for each Party (or such other address as a Party may notify to the other Parties from time to time) provided, however, that following the Effective Date and formation of the Operating Company any notices required to be given to Contractor Parties hereunder by SOCAR (except any notice of breach pursuant to Article 32, any notice pursuant to Article 25.2(b)(iii), Article 28.1(a), and any notice of termination of this Agreement and any notice of arbitration pursuant to Article 26.3) shall be considered effective as to all Contractor Parties if given to the Operating Company in accordance with this Article 27. Contractor shall advise SOCAR of details of the name and address of the Operating Company (and of any changes thereto) as soon as practicable after its formation. A notice given by facsimile shall be deemed to be received on the first working day following the date of dispatch. A notice sent by letter shall not be deemed to be delivered until received. Notices of termination of this Agreement and notices of Material Breach shall be given only by letter.





SOCAR: State Oil Company of the Republic of Azerbaijan

73 Neftchilar Prospecti

Baku AZ 1000 Republic of Azerbaijan









166Facsimile: (+994 12) 493 64 92

Telephone: (+994 12) 492 07 45

Attention: The President





BAHAR ENERGY: BAHAR ENERGY LIMITED

24, M.Aliyev str.,

Baku, Republic of Azerbaijan

____________________________



Facsimile: (+99412) 497 10 05

Telephone: (+99412) 497 88 66

Attention: The President



SOA: SOCAR Oil Affiliate

73 Neftchilar Prospecti

Baku AZ 1000 Republic of Azerbaijan



Facsimile: (+994 12)493 64 92

Telephone: (+994 12) 492 07 45

Attention: The President



















167 ARTICLE 28



EFFECTIVE DATE



28.1 Effective Date



(a) The Effective Date shall be the date upon which SOCAR delivers to Contractor written evidence of the enactment by the legislature of the Republic of Azerbaijan in full compliance with the Constitution of the Republic of Azerbaijan and all requisite legal formalities and procedures and publication in the customary manner of legislation giving this Agreement (including the Government Guarantee), the full force of law in the Republic of Azerbaijan, provided, however, that the Effective Date shall not occur until the following conditions precedent have been satisfied:



(i) authorisation to enter into this Agreement by the

Boards of Directors of each of the Parties (if

applicable under foundation documents of such Party);



(ii) execution by the Parties of the instruments in the

order specified by the legislation of the Republic of

Azerbaijan justifying acceptance by the Operating

Company of the OGPD capital assets used in the

Petroleum Operations within and/or for the Contract

Area at the Effective Date;



(iii) delivery to SOCAR of the Ultimate Parent Company

Guarantee of each of the Contractor Parties (except

SOA);









168

(iv) delivery to each of the Contractor Parties

(except SOA) of the Government Guarantee; and



(v) execution by the Parties of a gas sales

contract(s) for the Contract Rehabilitation

Area.



(b) The Parties shall use their best endeavours to

obtain as soon as possible (1) satisfaction of the

conditions referred to in Article 28.1 (a)(i) - (v)

and upon satisfaction thereof (2) the enactment as

aforesaid by the legislature of the Republic of

Azerbaijan giving this Agreement and the said

Government Guarantee the full force of law in the

Republic of Azerbaijan.





28.2 Pre-Effective Date Petroleum Operations



Notwithstanding the provisions of Article 28.1, in

the event that, from the Execution Date and prior

to the Effective Date, Contractor, with prior

written consent of SOCAR, does conduct Petroleum

Operations, the costs incurred by Contractor in

relation to such Petroleum Operations shall be Cost

Recoverable.













169





ARTICLE 29



ENVIRONMENTAL PROTECTION AND SAFETY



29.1 Environmental Standards



Contractor shall develop jointly with SOCAR and the Ministry of Ecology and Natural Resources of the Republic of Azerbaijan (MENR) safety and environmental protection standards and practices appropriate for the regulation of Petroleum Operations. The safety and environmental protection standards shall take account of the specific environmental characteristics of the Caspian Sea and draw, as appropriate, on (i) international Petroleum industry standards and experience with their implementation in exploration and production operations in other parts of the world, (ii) existing Azerbaijan safety and environmental legislation, and (iii) existing Azerbaijan safety and environment protection standards and practices developed for neighboring exploration and production operations. In compilation of such standards and practices account shall be taken of such matters as environmental quality objectives, technical feasibility and economic and commercial viability. Subject to the first sentence of Article 29.4 the standards, which shall apply to Petroleum Operations from Effective Date shall be the standards and practices set out in part II of Appendix 10 until substituted by new safety and environmental protection standards devised and agreed between Contractor, SOCAR and MENR. Such substitution shall take effect following the written agreement between Contractor, SOCAR and MENR on a date agreed between the Parties and MENR and from such date such agreed standards and practices shall have the force of law as if set out in full in the Agreement. In the event that safety and environmental protection standards and practices are imposed otherwise than with the agreement of Contractor it is agreed that the provisions of Article 26.2 shall apply. The Parties and MENR shall agree a separate protocol for the detailed implementation of the joint development and





170definition of the new standards and practices for safety and environmental protection. The cost to Contractor of such development and definition shall be Cost Recoverable.



29.2 Conduct of Operations



Contractor shall conduct the Petroleum Operations in a diligent, safe and efficient manner in accordance with the Environmental Standards and shall take all reasonable actions in accordance with the Environmental Standards to minimize any potential disturbance to the general environment, including without limitation the surface, subsurface, sea, air, lakes, rivers, animal life, plant life, crops and other natural resources and property. The order of priority for actions shall be the protection of life, environment and property. Contractor shall implement an integrated management system covering all health, safety and environmental aspects of the activities carried out in relation to the Petroleum Operations as outlined in part I of Appendix 10.



29.3 Emergencies



In the event of emergency and accidents, including but not limited to explosions, blow-out, leaks and other incidents which damage or might damage the environment, Contractor shall promptly notify MENR and SOCAR of such circumstances, including the volume of Hydrocarbons leaked, and of its first steps to remedy this situation and the



171results of said efforts. Contractor shall use all reasonable endeavors to take immediate steps to bring the emergency situation under control and protect against loss of life and loss of or damage to property and prevent harm to natural resources and to the general environment in both Azerbaijani and other affected pans of the Caspian Sea. Contractor shall also report to SOCAR, MENR and appropriate Governmental Authorities on the measures taken.



29.4 Compliance



Contractor shall comply with present and future Azerbaijani laws or regulations of general applicability with respect to public health, safety and protection and restoration of the environment, to the extent that such laws and regulations are no more stringent than the Environmental Standards. In the event any regional or multi­ governmental authority having jurisdiction enacts or promulgates environmental standards relating to the Contract Area, the Parties will discuss the possible impact thereof on the project. The provisions of Article 26.2 shall apply to any compliance or attempted compliance by Contractor with any such standards which adversely affect the rights or interests of Contractor hereunder.



29.5 Environmental Protection Strategy



An environmental protection strategy shall be developed which shall include:

(a) the establishment of an environmental management system, included in HSE Management System, as an integral port of Petroleum Operations and the



172

[Signature]

formation of an environmental sub-committee as

described in the Environmental Standards;



(b) an environmental work program carried out in

sequences appropriate to the normal phases of

Petroleum Operations as described in the

Environmental Standards (environmental study,

seismic survey, exploration drilling, field

development and production, well and fixed assets

abandonment).



29.6 Environmental Damage



(a) Contractor shall be liable for those direct losses

or damages incurred by a Third Party (other than

Governmental Authority) arising out of any

environmental pollution determined by the

appropriate court of the Republic of Azerbaijan to

have been caused by the fault of Contractor. In the

event of any environmental pollution or

environmental damage caused by the fault of

Contractor, Contractor shall reasonably endeavor,

in accordance with generally acceptable

international Petroleum industry practices, to

mitigate the effect of any such pollution or damage

on the environment.



(b) Contractor shall not be responsible and shall bear

no cost, expense or liability for claims, damages

or losses arising out of or related to any

environmental pollution or other environmental

damage, condition or problems which it did not

cause, including but not limited to those in

existence prior to the Effective Date and SOCAR

shall indemnify and hold harmless Contractor, its

Subcontractor and its and their consultants,

agents, employees, officers and directors from any

and all





173 costs, expenses and liabilities relating thereto.





Contractor shall conduct an environmental baseline

study and assessment in compliance with the programs

agreed with the MENR using an environmental consulting

firm, which shall be selected on a competitive basis

under the provisions of this Agreement, which study

shall describe the condition of the environment and

any environmental damage existing on the Effective

Date, costs of this study being recoverable as

Petroleum Costs. Once completed and reviewed, the

environmental baseline study shall be approved

according to the procedure provided for by SOCAR and

after that it shall be the sole evidence of the

condition of the environment in the contract Area as

of the Effective Date.





(c) Any damages, liability, losses, costs and expenses

incurred by Contractor arising out of or related to

any claim, demand, action or proceeding brought

against Contractor, as well as the costs of any

remediation and clean-up work undertaken by

Contractor, on account of any environmental pollution

or environmental damage (except for such pollution or

damage resulting from Contractor’s Wilful Misconduct)

caused by Contractor shall be included in Petroleum

Costs.









174ARTICLE 30



CONFIDENTIALITY



30.1 General Provisions



(a) Each Party agrees that all information and data of a technically, geologically or commercially sensitive nature acquired or obtained relating to Petroleum Operations and which on the Effective Date is not in the public domain or otherwise legally in the possession of such Party without restriction on disclosure shall be considered confidential and shall be kept confidential (subject to Contractor's right to use such data and information in accordance with Article 17.l(e) and to trade in such data and information in accordance with Article 30.2) and not be disclosed to any person or entity not a Party to this Agreement, except:



(i) To an Affiliate, provided such Affiliate maintains confidentiality as provided in this Agreement;



(ii) To a Governmental Authority when required by this Agreement;



(iii) To the extent such data and information is required to be furnished in compliance with any applicable laws or regulations, or pursuant to any legal proceedings or because of any order of any court binding upon a Party;





175

[signature](iv) Subject to (c) below, to potential Sub-

contractors, consultants and attorneys employed by

any Contractor Party where disclosure of such data

or information is essential to such Sub-

contractor's, consultants or attorney's work;



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

transferee of a Contractor Party's Participating

Interest (including an entity with whom a Contractor

Party is conducting bona fide negotiations directed

toward a merger, consolidation or the sale of a

majority of its or an Affiliate's shares);



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

institution to the extent appropriate to a Party

arranging for funding for its obligations under this

Agreement or general financing;



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

disclosed pursuant to any rules or requirements of

any government or stock exchange having jurisdiction

over such Contractor Party, or its Affiliates;



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

fault of a Contractor Party, becomes a part of the

public domain; and



(ix) To the arbitrators in accordance with Article 26 or

to any expert in connection with Article 16.2(c) of

this Agreement.













176(b) Each Party shall take customary precautions to ensure such data and information on Petroleum Operations is kept confidential by its respective employees.



(c) Disclosure pursuant to Article 30.l(a)(iv), (v), and (vi) shall not be made unless prior to each such disclosure the disclosing Party has obtained a written undertaking from the recipient party to keep the data and information strictly confidential from Third Parties (except for data which is or becomes in the public domain) and not to use or disclose the data and information except for the express purpose for which disclosure is to be made without the prior written permission of the other Parties.



(d) If any Contractor Party ceasing to own a Participating Interest in this Agreement during the term of this Agreement shall nonetheless remain bound by the obligations of confidentiality set forth above and any disputes shall be resolved in accordance with the Arbitration Procedure, and the confidentiality obligations of the Contractor Parties as set forth herein shall survive a period of five (5) years from the termination of this Agreement.





30.2 Trading of Data

Notwithstanding the foregoing, in accordance with Article 17.1(e), Contractor shall have the free right to trade with Third Parties all data relating to the Contract Area for other data relating to Lhc Republic of Azerbaijan with the approval of SOCAR, such approval not to be unreasonably withheld.



17730.3 Corporate Disclosure



Each Contractor Party, notwithstanding any other provisions in this Article 30 may make disclosures in annual reports, employee and stockholder newsletters, magazines and the like of summarisations of a general nature relating to Petroleum Operations, which are customarily or routinely described or reported in such publications.



178 ARTICLE 31



BONUS PAYMENTS



31.1 Bonus Payments



The Other Contractor Parties shall pay to SOCAR the

Bonus as follows:



(a) Two million (2,000,000) Dollars shall be paid

within thirty (30) days following the Effective

Date.



(b) One million (1,000,000) Dollars per each one

hundred million (100,000,000) Barrels of

Petroleum in Energy Equivalent specified to be

commercially recoverable in the Development

Program shall be paid within thirty (30) days

following SOCAR's approval or deemed approval

of the Development Programme.



(c) Five million (5,000,000) Dollars shall be paid

within thirty (30) days of the Commencement

Date of Commercial Production.



(d) Two million (2,000,000) Dollars within thirty

(30) days following the date upon which the

average daily rate of Crude Oil production from

the Contract Rehabilitation Area within ninety

(90) consecutive days exceeds one point five

(1.5) times the average daily rate of 2008

Petroleum Production.



If Contractor fails to perform the obligation provided in Articles 31.1(a)-(d) which shall be deemed to be a Material Breach,





179SOCAR shall have the right to termininate this Agreement pursuant to Article 32.1 (b) of this Agreement, and any unrecovered costs incurred by Contractor from the Effective Date to the date of termination of this Agreement shall not be Cost Recoverable.



If during the implementation of the Agreement, as the result of SOA's assignment of a part of its Participating Interest to any Third Party or Contractor Party the percentage share of the Other Contractor Parties by the time of the next tranche of Bonus payment exceeds eighty (80) percent, the total amount of Bonus payable by the Other Contractor Parties shall increase in proportion to the total increase of the Other Contractor Parties' Participating Interest.



For Bonus calculation purposes as referred to in (b) above, the determination of the volume of Natural Gas equivalent to one (1) Barrel of Crude Oil included in the Development Programme shall be based on the Energy Equivalent of a representative sample of Petroleum from the Discovery.



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



18031.2 Acreage Fees



The Other Contractor Parties shall pay annual acreage fees of two thousand (2,00) Dollars per square kilometer of the Contract Exploration Area during the Exploration Area during the Exploration Period and the Additional Exploration Period(if Contractor proceeds to the Additional Exploration Period pursuant to Article 7.3). Acreage fees shall be paid annually in arrears on each anniversary of the Effective Date.



31.3 Miscellaneous



Subject to Article 32.2(a)(i)each Other Contractor Party shall be liable in proportion to its relative percentage Participating Interest share of the Bonus.



The payments made pursuant to this Article 31 shall not be Cost Recoverable.







181ARTICLE 32

TERMINATION



32.1 Material Breach



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



(i) by SOCAR if Contractor commits, or



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



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



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







182such surrender and/or SOCAR's assumption of the use of any such assets and abandonment of any assets, including but not limited to damage to the environment (but excluding any claim, action or proceeding which results from Contractor's Wilful Misconduct whether occurring before or after the date of surrender).



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





23.6 Joint and Several Liability



Except as provided under Article 15, 30.1 and 31.2, the liability of the Contractor Parties shall be joint and several with respect to all of the obligations of Contractor under this Agreement.



23.7 Consequential Losses



With respect to indirect or consequential loss arising out of or in connection with this Agreement or any activities thereunder, notwithstanding anything to the contrary elsewhere in the Agreement, the Parties shall not be liable



152Articles 5, 7.2(a), 7.3(a), 7.5(a), 7.5(c), and 7.6 other than a result of Force Majeure, and Bonus payment obligation in accordance with Article 31.1(a) shall be deemed to constitute a Material Breach of the Agreement by Contractor whereupon SOCAR shall have the right to unilaterally terminate this Agreement as to the Contract Rehabilitation Area or Contract Exploration Area, as the case may be upon giving written notice to Contractor without Contractor being entitled to any period within which to cure or remedy such Material Breach as provided in Article 32.1 Termination of the Agreement as to the Contract Rehabilitation Area or Contract Exploration Area, as the case may be by SOCAR pursuant to Articles 5, 7.2(d), 7.3(b), 7.5(a), 7.5(e), 7.6 and this Article 32.1(b) shall be SOCARs sole remedy against Contractor for such Material Breach and Contractor shall have no claim for reimbursement of any costs incurred by Contractor with respect to the execution of the said activities.



32.2 Termination by SOCAR



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



(i) If any company issuing an Ultimate Parent Company Guarantee on behalf of any Contractor Party becomes insolvent or goes into liquidation(other than for the purposes of amalgamation or reorganisation), provided that such notice of termination shall take effect only if the other Contractor Parties because of their insolvency or liquidation, and subject to the provisions of joint







184liability, are not able to assume such Contractor party's rights and obligations under this Agreement and so notify SOCAR within such ninety (90) day period.





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



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



(b) SOCAR may terminate this Agreement by giving Contractor notice in writing as provided in Articles 7.5(a) and 7.5(e).



32.3 Termination/Relinquishment by Contractor



(a) Contractor may terminate this Agreement in relation to the Contractor Exploration Area with effect on or at any time after the expiry of the Exploration Period, or if Contractor enters the Additional Exploration Period then with effect on or at any time after the expiry of the Additional Exploration Period, and after fulfilment in full to the satisfaction of SOCAR of the work provided in Articles 7.2(a) and 7.3(a) as the case may be, by giving SOCAR ninety (9)days prior written notice. Upon such termination, Contractor shall have no further obligations of any kind whatsoever to SOCAR with respect to the Contractor Exploration Area except for the performance of its obligations under the then current Annual Work Programme and obligations





185

to abandon the wells drilled, if SOCAR so requests.



(b) subject to the remaining provisions of this Article 32.3, Contractor may at any time voluntarily relinquish all of the Contract Area by giving SOCAR not less than ninety (90) days prior written notice. Such notice shall specify the date upon which the relinquishment is to take effect and the manner in which Contractor will perform any remaining obligations pursuant to Article 32.3(c). Upon such relinquishment, the Agreement shall terminate. If SOCAR or Contractor requests, a meeting of the Steering Committee shall be convened to address any questions which may arise in connection with the relinquishment of the Contract Area.



(c) Termination of this Agreement or relinquishment of the entire Contract Area by Contractor pursuant to Article 32.3(a) or (b) shall not relieve Contractor of any remaining obligations under the then current Annual work Programme which Contractor upon the prior agreement with SOCAR may fulfill at its option:



(i) By performing in full in accordance with such Annual work Program; or



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



(d) In the event of termination of this Agreement or relinquishment of the entire Contract Area pursuant to







186 Article 32.3(a) or (b), without prejudice to any

rights which may have accrued, or claims which have

been made, prior to such termination, Contractor

shall have no further right to conduct Petroleum

Operations and to recover any Petroleum Costs not

Cost Recovered by the date of termination of the

Agreement.



32.4 Other Remedies



Except as specifically stated in the provisions of

this Agreement, in the event that Contractor or

SOCAR terminates this Agreement pursuant to the

above provisions, such termination shall be without

prejudice to Contractor's or SOCAR's entitlement to

sue the other for damages, or to any other remedy

Contractor or SOCAR (as the case may be) may have

in law.



32.5 Partial Relinquishment



Without prejudice to the provisions of Article

32.3(a), Contractor may at any time voluntarily

relinquish part of the Contract Area by giving

SOCAR not less than ninety (90) days prior written

notice. Such notice shall specify the date upon

which the relinquishment is to take effect and the

manner in which Contractor will perform any

remaining obligations.



In the event of partial relinquishment pursuant to

this Article 32.5, Contractor shall have no right

to recover out of the production from the remainder

of the Contract Area not relinquished, any amount

of Petroleum Costs incurred during the Development

and Production Period in connection with the

portion of the Contract Area relinquished which has

not been recovered at the date of such

relinquishment. All costs incurred by Contractor

during the Exploration Period and the Additional







187Exploration Period shall be Cost Recoverable from production from the remainder of the Contract Exploration Area which is not relinquished.



188Article 33



Miscellaneous



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



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



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



33.4 The Appendices to this Agreement and the attached Addendum Relating to the Formation of the SOCAR Oil Affiliate (the "Addendum") FORM part of this Agreement. In the event of any conflict between the provisions of the main body of this Agreement and the Appendices (other than Appendix 1 which shall be considered part of the main body of the Agreement), then the provisions of the main body shall prevail.



IN WITNESS WHEREOF the Parties have executed this Agreement as of the date first written by their duty authorised representatives.STATE OIL COMPANY OF THE REPUBLIC OF AZERBAIJAN



By: “Signed”

Title: President

By: [signature]

Title: Sr General Manager



BAHAR ENERGY LIMITED

By “Signed”

Title:

By: “Signed”

Title:



SOCAR OIL AFFILIATE

By: “Signed”

Title: President

By: [signature]

General Manager



190

APPENDIX 1



DEFINITIONS



In this Agreement the following words and expressions shall have the following meanings unless the context otherwise requires:



"Abandonment Fund" shall have the meaning given to it in Article 17.2.



"Accounting Procedure" shall mean the accounting principles, practices and procedures set forth in Appendix 3.



"Additional Exploration Period" shall have the meaning given to it in Article 7.3.



"Affiliate" means,



(a) in relation to any Party, either



(i) a company, corporation or other legal entity in which such Party holds directly or indirectly shares carrying at least fifty (50) percent of the votes at a general meeting of such company, corporation or other legal entity; or



(ii) a company, corporation or other legal entity holding directly or indirectly shares carrying at least fifty (50) percent of the votes at a general meeting of such Party; or



(1)(iii) a company, corporation or other legal entity of which shares

carrying at least fifty (50) percent of the votes at a general

meeting of such company, corporation or other legal entity are

held directly or indirectly by a company, corporation or other

legal entity which also holds directly or indirectly shares

carrying at least fifty (50) percent of the votes at a general

meeting of such Party;



(b) and, furthermore, in relation to SOCAR, any venture or

enterprise in which SOCAR has an interest and the right to

control (as defined in Article 12.2(c)) manage or direct the

action thereof;



(c) and, furthermore, in relation to Bahar Energy - Baghlan Group

FSCO, Greenfields Petroleum International Company, Ltd.

and Rafi Oil FZE, and any of their respective successors and

permitted assignees.



"Agreement" means this instrument and its Appendices 1 to 10;

the Addendum Relating to the Formation of the SOCAR Oil

Affiliate; together with any written extension, renewals,

replacement or modification hereto which may be mutually agreed

and signed by the Parties.



"Annual Work Programme" means the document describing,

item by item, the Petroleum Operations to be carried out during a

Calendar Year, which has been approved by the Steering

Committee (when such approval is required).



"Arbitration Procedure" means the arbitration procedure set

forth in Appendix 6.



"Associated Natural Gas" means Natural Gas which exists in a

reservoir in solution with Crude Oil, such Crude Oil being

producible, as initially discovered, at a gas oil ratio of not greater

than 10,000 standard cubic feet per Barrel of Crude Oil as

measured at the point of separation of gas from oil.



(2) "Azerbaijani Supplier(-s)" shall have the meaning given to it in Article 21.1(a).

"Barrel" means U.S. barrel, i.e. 42 U.S. gallons (158.987 liters) measured at STP.

"Block" shall have the meaning given to it in Preamble.

"Bonus" shall have the meaning given to it in Article 31.1 and shall also mean a payment for the right to access Contract Area.

"Budget" means estimates of itemised expenditures of Petroleum Operations included in an Annual Work Programme.

"Calendar Quarter" means a period of three (3) consecutive months commencing on the 1st of January, the 1st of April, the 1st of July, or the 1st of October in any Calendar Year.

"Calendar Year" means a period of twelve (12) consecutive months beginning on the 1st of January and ending on the following 31st of December according to the Gregorian Calendar.

"Capital Costs" means Petroleum Costs, other than Operating

Costs incurred in, or in relation to, the Contract Area to acquire

and/or create any asset, including but not limited to wells,

flowlines, pipelines, oil, gas and water separation facilities, oil

pumping stations, loading terminals, gas compression stations and

the like. Capital Costs include costs (i) for Petroleum Operations

performed in and related to the Contract Exploration Area during

the Exploration Period or the Additional Exploration Period:

including without limitation costs related to the drilling and testing

of exploration wells and the upgrade, refurbishment or

construction of a drilling rig and/or other facilities and

infrastructure; and (ii) for Petroleum Operations performed in and

related to the Contract Rehabilitation Area and for Petroleum

Operations performed in and related to the Contract Exploration

Area after the approval of the Development Programme: including

without limitation Petroleum Costs incurred with respect to

reservoir study; acquisition and construction of assets, their

installation and commissioning; management, design and

technology; drilling of production wells.



"Capital Cost Recovery Petroleum" shall have the meaning

given to it in Articles I3.3(a)(ii) and 13.4(a)(ii) respectively.



"Carry 1" shall have the meaning given to it in Article 3.5(a)(i).



"Carry 2" shall have the meaning given to it in Article 3.5(a)(ii).



"Commencement Date of Commercial Production" means in

relation to the Contract Exploration Area, the earlier of the

following: (a) the date upon which commercial production

conducted by the Contractor Parties at a stable average daily rate of

six thousand (6000) Barrels of Crude Oil or oil equivalent has

been sustained for a period of sixty (60) consecutive days, or, (b)

the date upon which commercial production conducted by the

Contractor Parties from two (2) producing wells has been sustained

at a stable production rate for a period of sixty (60) consecutive

days.



(4)"Compensatory Petroleum" shall have the meaning given to it in Article 14.



"Contract Area" shall have the meaning given to it in Article 4 as described and delineated in Appendix 2.



"Contract Exploration Area" shall have the meaning given to it in Article 4.



"Contract Rehabilitation Area" shall have the meaning given to it in Article 4.



"Contractor" means all of the Contractor Parties collectively.



"Contractor Facilities" shall have the meaning given to it m Article 12.3.



"Contractor Parties" means collectively BAHAR ENERGY and SOA and/or their successors and permitted assignees.



"Contractor Party" means any one of BAHAR ENERGY and SOA and/or their successors or permitted assignees.



"Corporate Foreign Sub-contractor" has the meaning found in Article 15.4.



"Cost Recovery" means the process by which Contractor is allocated a share of Petroleum produced from the Contract Area for the recovery of its Petroleum Costs. "Cost Recoverable" means such costs to be recovered in the future and "Cost Recovered" means such costs recovered in the past.



(5)“Crude Oil” means crude mineral oil, condensate, asphalt, ozocerite, and all kinds of hydrocarbons and bitumen regardless of gravity, either solid or liquid, in their natural condition or obtained from Natural Gas by condensation or extraction, including Natural Gas liquids at Standard Temperature and atmospheric Pressure and including products refined or processed from any of the foregoing.



“Delivery Point (s)” means the custody transfer meter at the outlet flange of the onshore Petroleum processing and storage terminal, or at the weighbridge of a rail loading system if Contactor elects to have it developed as part of the upstream facilities, or at the entry flange in an export system from Baku and any other place or places as may be decided upon by the Steering Committee from time to time based on recommendations made by Contractor.



“Design Standards” means the design standards and specifications set forth in Appendix 8.



“Development and Production Period” shall have the meaning given to it in Article 6.



“Development Programme” shall have the meaning given to it in Article 7.5.



“Discovery” means a discovery within the Contract Exploration Area of an accumulation of Petroleum.



“Dollars” or “$” means the currency of the United States of America.



“Double Tax Treaty” means any treaty or convention with respect to Taxes, which is applicable to the Republic of Azerbaijan for the avoidance of double taxations of income.



“Effective Date” shall have the meaning given to it in Article 28.1.



(6)"Energy Equivalent" is a conversion foetor of 5559 scf/boe have to be used for the purpose of Article 3 l.lof the Agreement and determining the value of Natural Gas equivalent to one (1) Barrel ofCrude Oil.



"Execution Date" means the date first above written in the Agreement on which duly authorised representatives of the Parties have executed the Agreement.



"Exploration Period" shall have the meaning given to it in Article 7.1.



"Exploration Work Programme" shall mean the exploration work set out in Appendix 9.



"Finance Costs" means a charge of annual interest rate equal to LIBOR plus four (4) percent which shall be applied to the unrecovered balances of Capital Costs and Operating Costs on a quarterly basis, as set out in Articles 13.3 and 13.4 respectively.



"Force Majeure" shall have the meaning given to it in Article 24.1.



"Foreign Exchange" means Dollars and/or other freely convertible foreign currency generally accepted in the international banking community.



"Foreign Sub-contractor" means a Sub-contractor which is (i) an entity or organization which is incorporated, legally created or organized outside the Republic of Azerbaijan, or (ii) a physical person or individual who is a citizen of a country other than the Republic ofAzerbiajan.



(7)"GDP Deflator Index" means the implicit price deflator index for

United States Gross Domestic Product issued by the Bureau of

Economic Analysis (BEA) of the United States Department of

Commerce, as reported in the quarterly publication "Survey of

Current Business". If this publication ceases to exist the Parties

shall use "International Financial Statistics" of the International

Monetary Fund, or other suitable publication as mutually agreed by

the Parties.

"Governmental Authority" or "Governmental Authorities"

means the government of the Republic of Azerbaijan and any

political or other subdivision thereof, including any local

government, or other representative, agency or authority,

which has the authority to govern, legislate, regulate, levy or

collect taxes or duties, grant licenses and permits, approve or

otherwise impact (whether :financially or otherwise), directly

or indirectly, any of SOCAR's and/or Contractor's rights,

obligations or activities under the Agreement. For the

purpose of Articles 23.2 and 29.6(a) only, it is agreed that

any state enterprise, as well as any municipal body, which is

engaged solely in the conduct of commercial or other

business activities, (and is not engaged in any act of

governing and does not possess any legislative, regulatory or

taxing functions), shall be excluded from the definition of

"Governmental Authority".



"Government Guarantee" means the Guarantee and Undertaking

of the Government of the Republic of Azerbaijan in the form set

forth in Appendix 5.



"Hydrocarbon Activities" shall have the meaning given to it in

Article 15.1(c)(iii).



"Joint Operating Agreement" or "JOA" shall have the meaning

given to it in Article 9.1.(a)



"Joint Operating Company" shall have the meaning given to it in

Article 9.l(a). “LIBOR” means the rate of interest calculated from the arithmetic average over a Calendar Quarter period of the three(3) month Dollar London Interbank Offer Rate quoted daily in the London Financial Times(or in the event that the London Financial Times ceases to be published then such other publication as the Parties shall agree).

“Material Breach” shall have the meaning given to it in Article 32.1(a).

“Measurement Procedure” means the Crude Oil and Natural Gas Measurement and Evaluation Procedure set forth in Appendix 7.

“Minimum Exploration Work Programme” (“MEWP”) shall have the meaning given to it in Article 7.2.

“Natural Gas” means all hydrocarbons that are in a gaseous phase at STP including but not limited to casing head gas and residue gas remaining after the extraction or separation of liquid hydrocarbons from wet gas, and all non-hydrocarbon gas or other substances (including but not limited to carbon dioxide, Sulphur and helium) which are produced in association with gaseous hydrocarbons provided that this definition shall exclude condensed or extracted liquid hydrocarbons.

“Non-associated Natural Gas” means Natural Gas other than Associated Natural Gas.

“Notice of Discovery and its Commerciality” shall have the meaning given to it in Article 7.4.

“Operating Company” means the company appointed for the time being to conduct Petroleum Operations on behalf of Contractor in accordance with Article 9, including a Joint Operating Company.







(9)





"Operating Costs" means Petroleum Costs incurred in, or in relation to the Contract Area, including but not limited to the costs: (i) for Petroleum Operations performed in and related to the Contract Exploration Area during the Exploration Period or the Additional Exploration Period: Petroleum Costs incurred with respect to indirect overheads, health, safety and security of personnel, environmental baseline study; (ii) for Petroleum Operations performed in and related to the Contract Rehabilitation Area and Petroleum Operations performed in and related to the Contract Exploration Area after the approval of the Development Programme: Petroleum Costs directly or indirectly incurred, including but not limited to extraction, treatment, stimulation, injection, gathering, processing, storage, handling, lifting and transportation of Petroleum to the Delivery Point(s), maintenance, service, administration, and payments incurred in respect of abandonment including payments to the Abandonment Fund.



"Other Contractor Parties" means collectively BAHAR ENERGY and its successors and permitted assignees, SOA's non-Affiliated assignees aand their successors and permitted assignees.



"Participating Interest" shall have the meaning given to it in Article 1.1.



"Parties" means SOCAR, BAHAR ENERGY and SOA any of their respective successors and permitted assignees.



"Party" means any of the Parties.



"Petroleum" means Crude Oil and Natural Gas.



(10)"Petroleum Costs" means Operating Costs and Capital Costs and shall include all expenditures actually incurred by Contractor for the purposes of the Petroleum Operations. Petroleum Costs shall include, without limitation, (i) the amounts expressly identified in the Agreement as Petroleum Costs (including but not limited to the amounts identified in Article 21.3), and (ii) the amounts properly debited to the Petroleum Operations Account in accordance with the Accounting Procedure.



"Petroleum Operations" means all operations relating to the rehabilitation, exploration, appraisal, development, extraction, production, stabilization, treatment (including processing of Natural Gas), stimulation, injection, gathering, storage, building rail or roads for loading facilities, building connecting entry point to the rail network or to existing pipelines, handling, lifting, transporting Petroleum to the Delivery Point and marketing of Petroleum from, and abandonment operations with respect to the Contract Area.



"Petroleum Operations Account" shall have the meaning given to it in Section 1.2 of the Accounting Procedure.



"Point of Sale" shall have the meaning given to it in Article 16.2(e)(iii).



"Profit Petroleum" shall have the meaning given to it in Article 13.6.



"Profit Tax" shall have the meaning given to it in Article 15.2(a).



"Rehabilitation and Production Programme" shall have the meaning given to it in Article 5.



"Standard Temperature and Pressure" or "STP" means the standard temperature of 60° Fahrenheit (60°F or 15.56°C) and standard atmospheric pressure of 1.01325 bars.



(11)"State Budget" shall have the meaning given to it in Article 15.1(c)(i).



"Steering Committee" means the committee established pursuant to Article 8.1.



"Sub-contractor" means any natural person or juridical entity, contracted directly or indirectly by or on behalf of Contractor or by or on behalf of the Operating Company, to supply goods, work of services related to this Agreement.



"Tax Authority" shall have the meaning given to it in Article 15.1(c)(iv).



"Taxable Profit" shall have the meaning given to it in Article 15.2(e).



"Taxes" or "Tax" means all existing or future levies, duties, payments, fees, taxes or contributions payable to or imposed by any Governmental Authority.



"Third Party" means a natural person or juridical entity, other than a Party hereto or an Affiliate of a Party.



"Tonne" means metric ton, i.e. one thousand (1,000.00) kilograms as defined by the International Bureau of Weights and Measures, Sevres, France.



"Total Production" means, for any Calendar Quarter, the total production of Crude Oil and Non-associated Natural Gas obtained from the Contract Area, less the quantities used pursuant to Article 13.2 for Petroleum Operations.



"Transit Losses" shall have the meaning given to it in Article 16.2(e)(iv).



(12)"Ultimate Parent Company" mans in relation to BAHAR ENERGY, Baghlan Group FSCO, a company duly incorporated in Jebel Ali Free Zone, Dubai, UAE; Greenfields Petroleum International Company, Ltd., a company incorporated and operating under the laws of British Virgin Islands; and Rafi Oil FZE, a company duly incorporated in Jebel Ali Free Zone, Dubai, UAE; in relation to SOA, SOCAR, a company incorporated in the Republic of Azerbaijan; and in relation to any other Contractor Party, such Contractor Party's Ultimate Parent Company and the successor of any Ultimate Parent Company.



"Ultimate Parent Company Guarantee" means the guarantee given by an Ultimate Parent Company in the form set forth in Appendix 4.



"Unrecovered Balance 1" shall have the meaning given to it in Article 3.5(b)(iii).



"Unrecovered Balance 2" shall have the meaning given to it in Article 3.5(c)(ii).



"VAT" means the Republic of Azerbaijan value added tax.



"Wilfil Misconduct" means any unjustifiable act or omission which constitutes an intentional, deliberate and conscious disregard of good and prudent international oil field practices or the terms of this Agreement.



"Zero Balance" means the achievement after the commencement of the Development and Production Period of zero balance in the accounts maintained by Contractor with respect to Capital Costs in accordance with the Accounting Procedure. After the occurrence of the first Zero Balance for the purposes of Article 17.1, Capital Costs thereafter will be classified by main budget category.





(13)"2008 Petroleum Production" means the Petroleum production from the Contract Rehabilitation Area equivalent to Crude Oil of 62,100 tons and Natural Gas of 194.6 thousand cubic meters per year.



(14)

APPENDIX 2



CONTRACT AREA AND MAP



As of the Execution Date, the Contract Area is the area inside the perimeter constituted by the geographical co-ordinates set forth below and as separately identified on the map attached hereto.



The Contract Area is bounded by straight lines on a Gauss-Kruger projection which is referenced to Pulkovo 1942 geodetic datum, Krasovski 1940 ellipsoid, and with defining parameters of:



Latitude of Origin: 0 degrees North (of the equator)



Longitude of Origin: 51 degrees East (of Greenwich)



Scale Factor at Origin: 1.0



Grid co-ordinates at Origin: 500,000 meters East, 0 meters North



Grid units are meters.



Geographic co-ordinates for the nine (9) corners of the Contract Area area:





(15)Pulkovo 1942 Datum



Point Latitude Longitude

(North) (East)



1 40°20'07,76936" 49°56'41,81739"

2 40°20'07,93914" 50°02'33,10208"

3 40°09'05,72686" 50°06'18,13024"

4 40°04'34,10501" 50°07'50,22898"

5 40°01'22,90600" 50°13'45,74898"

6 39°56'45,78680" 50°07'29,12214"

7 40°02'37,88000" 50°03'17,38998"

8 40°08'49,57414" 50°03'08,88271"

9 40°15'40,23520" 49°58'29,75839"



The surface of the Contract Area above defined is approximately three hundred and nine point six hundred and eight seven (309,687) square kilometers, including



A. Geographic co-ordinates for the seven (7) corners of the Contract Rehabilitation Area are:



Pulkovo 1942 Datum



Point Latitude Longitude

(North) (East)



1 40°20'07,76936" 49°56'41,81739"

2 40°20'07,93914" 50°02'33,10208"

3 40°09'05,72686" 50°06'18,13024"

4 40°04'34,10501" 50°07'50,22898"

7 40°02'37,88000" 50°03'17,38998"

8 40°08'49,57414" 50°03'08,88271"

9 40°15'40,23520" 49°58'29,75839"



(16)B. Geographic co-ordinates for the four (4) corners of the Contract Exploration Area are:



Pulkovo 1942 Datum



Point Latitude Longitude

(North) (East)



4 40°04'34,10501" 50°07'50.22898"

5 40°01'22,90600" 50°13'45,74898"

6 39°56'45,78680" 50°07'29,12214"

7 40°02'37,88000" 50°03'17,38998"





(17)Bahar (Bahar-1, Bahar-2) vs Qum-Deniz

yataqiamin daxil oldugu biokun axemi

Miqyas 1:200000

Omumi sahasi 309,687 km



[MAP]



"Aznet" IB-nin Bas director muavini

Bas geoloq



[SIGNATURE]

A.B.Nerimanov



(18)





APPENDIX 3



ACCOUNTING PROCEDURE



1. General Provisions





This Appendix 3 establishes a frame work of accounting

principles as generally accepted within the international

Petroleum industry.



The purpose of this Accounting Procedure is to establish a fair

and equitable method for determining charges and credits

applicable to Petroleum Operations under the Agreement and to

provide a method for controlling expenditure against approved

budgets.



For purposes of this Accounting Procedure any reference to

Contractor shall be deemed to include the Operating Company,

Contractor Parties and their respective Affiliates, as the context

may imply. The Parties agree that if any of such methods prove

to be unfair or inequitable to any of the Parties then the Parties

will meet and in good faith endeavour to agree on such changes

as are necessary to correct any unfairness or inequity.









1.1 Definitions





For the purposes of this Accounting Procedure the following

terms shall have the following meanings:



(i) "Accounting Procedure" shall mean the accounting

principles , practices and procedures set forth in this

Appendix.

















(19)





































































(ii) “Accepted Accounting Practices” shall mean

accounting principles, practices and procedures

that are generally accepted and recognised in the

international Petroleum industry.



(iii) “Accruals” means amounts which are expected to be

paid or received after the end of an accounting

period as a result of events and transactions

prior to the end of the said accounting period.



(iv) “Accruals Basis” means the basis of accounting

which records the effect of transactions on

financial conditions and income when the

transactions take place, not merely when they are

settled in cash.



(v) “Cash Basis” means the basis of accounting which

records the cash flows as they are effected by

the issue of instructions for payment to a bank

or payments in cash and recorded in the cash

books of the Operating Company.



(vi) “Material and Equipment” means property (with the

exception of land), including without limitation

any exploration, appraisal and development

facilities together with supplies and equipment,

acquired and held for use in Petroleum

Operations.



(vii) “Controllable Materials” means Material and

Equipment which Contractor subjects to record

control and inventory. A list of types of such

Material and Equipment shall be furnished to

SOCAR upon request.



Words and phrases defined in the Agreement but not defined above shall have the same meaning in this Accounting Procedure as given to them in the Agreement.







(20)1.2 Accounts



Contractor shall maintain separate books and accounts for Petroleum Operations in accordance with this Accounting Procedure ("Petroleum Operations Account").



Contractor shall charge to the Petroleum Operations Account only those expenditures incurred for Petroleum Operations.



The Petroleum Operations Account shall be maintained by Contractor in Dollars. Costs incurred in currencies other than Dollars shall be converted into Dollars using currency exchange rates in accordance with Accepted Accounting Practices. Any gain or loss resulting from the exchange of currencies shall be charged or credited to the Petroleum Operations Account.



The Petroleum Operations Account shall be kept in accordance with Accepted Accounting Practice.



Accounting shall be carried out on an Accruals Basis, provided however that the Cash Basis principle shall be used for the purposes of Cost Recovery.



Contractor shall maintain separate accounts of Petroleum Operations in the Contract Rehabilitation Area and in the Contract Exploration Area. Expenditures relating to the Contract Rehabilitation Area as well as to the Contract Exploration Area shall be shared in proportion to the ratio of total Petroleum Costs incurred during the accounting period in connection with the Contract Rehabilitation Area and the Contract Exploration Area respectively.



1.3 Audits



(21)The accounts of the Petroleum Operations, together with the auditors' report thereon, shall be submitted to SOCAR by Contractor no later than seven (7) months following the end of each Calendar Year. SOCAR may, by giving notice to that effect to Contractor no later than twelve (12) months following the end of the subject Calendar Year, request an audit of the accounts for such Calendar Year. Such audits shall be carried out by a firm of internationally recognised independent accountants selected by SOCAR. The costs of such audit will be included into Petroleum Operation Account and shall be borne by Contractor. Any audit conducted on behalf of SOCAR shall be conducted in such a manner as not to interfere unduly with ongoing Petroleum Operations. Unless SOCAR notifies Contractor in writing before twenty-four (24) months following the subject Calendar Year either that it has an objection to the said accounts or that there is evidence of Contractor's Wilful Misconduct (details of which shall be deemed to have been approved as of that date. Any objection to the accounts raised by SOCAR, unless settled by agreement among the Parties, shall be submitted to arbitration in accordance with the Arbitration Procedure. In the event the arbitration in accordance with the Arbitration Procedure. In the event the arbitration award sustains any of SOCAR's objections to the account, the Petroleum Operating Account shall be adjusted accordingly.



Notwithstanding the aforesaid, the Parties have agreed as follows:



(a) SOCAR shall not carry out audit of accounts until the commencement of the Development and Production Period for the Petroleum Operations related to the Contract Exploration Area; and



(22)(by) By giving notice not later than twelve (12) months from the commencement of the Development and Production Period for the Petroleum Operations related to the Contract Exploration Area SOCAR shall have the right to carry out audit of accounts for the entire Exploration Period and Additional Exploration Period as the case may be.



All accounting records, returns, books and accounts relating to Petroleum Operations shall be maintained by Contractor for a minimum of seven (7) years following the end of the Calendar Year to which they relate or, in the case where SOCAR alleges Wilful Misconduct the later of (i) a minimum of seven (7) years following the end of the Calendar Year to which they relate and (ii) a minimum of one (1) year after resolution of the objections to the accounts made in respect of such Wilful Misconduct



2. Charges and Expenditures



Contractor shall charge to the Petroleum Operations Account all Petroleum Costs incurred in compliance with the terms of this Agreement or those necessary to conduct the Petroleum Operations; no cost shall be charged more than once. Chargeable costs shall include, but not be limited to:



2.1 Labour and Related Costs



(23)(a) Gross salaries, wages, (including amounts imposed by Governmental Authorities) in respect of employees of Contractor and its Affiliates (except when acting as Sub-contractor) who are engaged in the conduct of Petroleum Operations whether temporarily or permanently assigned within the Republic of Azerbaijan or located in Contractor's offices elsewhere, as well as personal expenses incurred in connection therewith.



(b) Costs of all holiday, vacation. sickness, disability, Income Tax, schooling, cars and other like benefits applicable to the salaries chargeable under paragraph 2.1(a) above.



(c) Expenses or contributions imposed under the laws of the Republic of Azerbaijan which are applicable to Contractor's cost of salaries and wages chargeable under paragraph 2.1(a) above or other costs chargeable under this paragraph 2.1.



(d) Cost of established plans for life insurance, hospitalisation, pensions, and other benefits of a like nature.



(e) Housing and living allowances and related expenses of the employees of Contractor assigned to Petroleum Operations.



(f) In the event that Contractor is unable to provide continued employment to an employee at the end of his or her assignment to Petroleum Operations, the proportionate share of termination payments relating to such employees' period of assignment to Petroleum Operations shall be Chargeable.



(24)2.2 Material and Equipment



Material and Equipment purchased or furnished by Contractor for use in Petroleum Operations as provided under Section 4 of this Accounting Procedure. So far as it is reasonably practical and consistent with efficient and economical operation, only such Material and Equipment shall be purchased or transferred for use in Petroleum Operations as may be required for immediate use or prudent contingent stock. The accumulation of surplus stocks shall be avoided.



2.3 Transportation and Employee Relocation Costs



(a) Transportation of Material and Equipment and other related costs such as expediting, crating, dock charges, inland, air and ocean freight, demurrage, transit fees and unloading at destination and any duties, license and other fees, taxes and any other charges with respect thereto.



(b) Costs incurred for transportation of employees as required in the conduct of Petroleum Operations.



(c) Relocation costs of employees permanently or temporarily assigned to Petroleum Operations to and from their point of origin. Such costs shall include travelling costs of employees' and their families and transportation costs of their personal and household effects.



2.4 Services



(25)(a) Contract services, professional consultants, and other services procured from outside sources other than services covered by paragraph 2.14.



(b) Technical services, such as, but not limited to, laboratory analysis, drafting, geophysical interpretation, supervision, petroleum engineering, commercial analysis and related computer services and data processing, performed by Contractor and its Affiliates (except when acting as Sub-contractor) for the direct benefit of Petroleum Operations. Such charges shall be computed in line with Contractor's usual accounting policy such that no gain or loss accrues to COntractor.



(c) Business support where the services provided are specifically attributable to Petroleum Operations, including, but not restricted to legal, purchasing, contracting , treasury, accounting, information and telecommunication, and administrative services.



(d) Services performed by COntractor and its Affiliates (except when acting as Sub-contractor) engineering division personnel, as computed and charged by such engineering division.



(26)(e) Marketing services; all costs, fees, commissions and

other charges related to the marketing of Nonassociated

Natural Gas produced from the Contract Area.



(f) Use of equipment and facilities furnished by Contractor Parties and their Affiliates at rates commensurate with the cost of ownership and operation if such use is economically viable. Rates shall include but not be limited to costs of maintenance, repairs, other operating expenses, insurance, taxes and interest.



Services performed by any of Contractor Party or its Affiliates (except when acting as Sub-contractor) shall be performed under a work order or service agreement issued by the Operating Company and shall be charged in accordance with such Contractor Party's and its Affiliates usual practice and accounting policies such that no gain no loss accrues to such Contractor Party.



2.5 Damages and Losses to Property.



All costs or expenses necessary for the repair or replacement of property resulting from damages or losses incurred by fire, flood, storm, theft, accident, or any other cause, not recovered from insurance except where caused by the Wilful Misconduct of Contractor.



Contractor shall furnish SOCAR with written notice of each

such damage or loss which is in excess of Dollars three

hundred and fifty thousand (350,000) as soon as reasonably

practicable.



(27)2.6 Insurance

(a) All premiums for insurance carried for the benefit of Petroleum Operations, as well as the equivalent amount of premiums quoted by an independent underwriter for the risks that are self-insured by Contractor.

(b) All expenditures incurred and paid in the settlement of any and all losses, claims, damages, judgements and any other expenses, not recovered from insurance except where caused by the Wilful Misconduct of Contractor.



2.7 Legal Expenses

All costs or expenses of handling, investigating and settling litigation or claims arising from Petroleum Operations or necessary to protect or recover property, including, but not limited to, lawyers’ fees, court costs, cost of investigation of procuring evidence and amounts paid in settlement or satisfaction of any such litigation or claims except where caused by the Wilful Misconduct of Contractor.



2.8 Duties and Taxes

All Taxes imposed by Governmental Authorities (except Profit Tax) which are not refunded to the Contractor.



2.9 Offices, Camps and Miscellaneous Facilities



(28)



[signature]The cost of maintaining and operating any offices,

sub-offices, camps, warehouses, housing and other facilities directly serving Petroleum Operations either within the Republic of Azerbaijan or elsewhere with respect to project groups which are not physically located within the Republic of Azerbaijan.



2.10 Training and Technology Transfer



The costs in excess of two hundred thousand (200,000)

Dollars per Calendar Year for the provision of training, in

accordance with Article 9.8, and the costs of agreed

technology transfer from Contractor to SOCAR.



2.11 Energy Expenses



All costs of fuel, electricity, heat, water or other energy used

for Petroleum Operations.



2.12 Communication Charges



The costs of acquiring, leasing, installing, operating,

repairing and maintaining communication systems and

computer systems.



2.13 Environmental Charges The costs of environmental programmes, including, but not limited to environmental baseline studies, ongoing monitoring programmes environmental and safety training, equipment and facilities for protection of safety or the environment, activities related to environment and safety required by this Agreement or by applicable law and remedial work undertaken with respect to Petroleum Operations (including but not limited to costs incurred to sustain flora and fauna).



2.14 Other Services

(a) Contractor shall charge an administrative overhead to the Petroleum Operations Account, covering general administrative support provided by Contractor Parties and their Affiliates for the indirect benefit of Petroleum Operations. Such support shall include the services and related office costs of personnel performing administrative, legal, treasury, tax and employee relations, provision of expertise and other non-technical functions, which cannot be specifically identified or attributed to particular projects.

(b) The charge under (a) above shall be charged at rates on total annual expenditures attributable to Petroleum Operations as follows:

(i) With respect to Contractor’s Capital Costs:



(30)



[signature] For the first Dollars fifteen million

(15,000,000) per Calendar Year - three (3)

percent;



For the amount between Dollars fifteen

million (15,000,000) and Dollars thirty

million (30,000,000) per Calendar Year -

two (2) percent;



For the amount in excess of Dollars thirty

million (30,000,000) per Calendar Year -

one (1) percent.



(ii) With respect to Contractor's Operating

Costs:



A flat rate of one and a half (1.5) percent

per Calendar Year.



(c) For the purposes of Cost Recovery, the charge

under Article 2.14(a) of this Accounting

Procedure shall be computed at the end of each

Calendar Quarter and shall become Cost

Recoverable from the following Calendar

Quarter.



2.15 Finance Costs and Interest



All Finance Costs.



2.16 Other Expenditures









(31)Any other expenditures not covered or dealt with in the

foregoing provisions which are incurred by Contractor and

its Affiliates (except when acting as Sub-contractor) for the

necessary and proper conduct of Petroleum Operations

(including other activities prior to the Effective Date). These

shall include but not be limited to any expenditures

necessary to acquire and maintain rights to the Contract

Area or to implement Petroleum Operations, costs for

decommissioning (abandonment) and reclamation of Assets

including payment to Abandonment Funds as referred in

Articles 17.3 and 17.4



3. Credits



Contractor shall credit to the Petroleum Operations Account the

net proceeds of the following transactions:





(a) The net proceeds of any successful insurance claim in

connection with Petroleum Operations where the claim is

with respect to operations or assets which were insured

and where the insurance premium with respect thereto

has been charged to the Petroleum Operations Account.



(b) Any adjustments received by Contractor from the

suppliers/manufacturers (or their agents) in connection

with defective Material and Equipment, the cost of which

was previously charged by Contractor to the Petroleum

Operations Account.



(c) The net proceeds of sale on disposal of assets used in

Petroleum Operations, provided the cost of such assets

was previously charged to the Petroleum Operations

Account. (d) The net proceeds actually received from Third Parties

and/or SOCAR in respect of the use of facilities pursuant

to Article 12 of the Agreement.



4. Material And Equipment



4.1 Acquisitions



(a) Material and Equipment purchased shall be

charged at net cost ("Net Cost") incurred by

Contractor. Net Cost shall include, but shall not be

limited to, such items as procurement cost,

transportation, duties, license fees and applicable

taxes.



(b) New Material and Equipment owned by any of the

Contractor Parties or any of their respective

Affiliates and transferred to Contractor for use in

connection with Petroleum Operations shall be

priced at new purchase Net Cost determined in

accordance with (a) above. Used Material and

Equipment shall be priced at a value commensurate

with its use, provided however that this price shall

not exceed seventy five (75) percent of the new

purchase Net Cost of such equipment.



(c) Material and Equipment not classified as

Controllable Material under Accepted Accounting

Practices shall be charged one hundred (100)

percent to Operating Costs.



4.2 Disposal

Subject to Article 12.3 Contractor shall have the right to

dispose of Material and Equipment it deems to be surplus

and shall advise the Steering Committee of any proposed

disposal having a value in the Petroleum Operations

Account of two hundred and fifty thousand (250,000)

Dollars or more.



4.3 Inventories

(a) Periodic inventories shall be taken by Contractor of

all Controllable Material. Contractor shall give

sixty (60) days written notice of its intention to

take such physical inventory to allow SOCAR to

be represented. Failure of SOCAR to be

represented shall bind SOCAR to accept the

inventory taken by Contractor.



(b) Reconciliation of inventory with the Petroleum

Operations Account shall be made. Inventory

adjustments shall be made by Contractor to the

Petroleum Operations Account, based on the

inventory report as required by the Parties.

5. Accounting Reports

5.1 Quarterly Reports

Not later than forty five (45) days after the end of each

Calendar Quarter, Contractor shall supply to SOCAR a

Calendar Quarter report reviewing Petroleum Costs,

incurred during the preceding Calendar Quarter, in a

form which permits their comparison with the

corresponding budgets. Costs which are common to two

or more activities shall be allocated in an equitable

manner.

5.2 Annual Reports During the first Calendar Quarter of each Calendar Year Contractor shall supply lo SOCAR an annual report Petroleum Costs incurred during the preceding Calendar Year.



5.3. Cost Recovery And Profit Petroleum Reports



Not later than forty five (45) days after the end of the Calendar Quarter in which the Commencement Date of Commercial Production occurs and not later than forty five (45) days after the end of each succeeding Calendar Quarter. Contractor shall supply to SOCAR a Calendar Quarter Cost Recovery report and Calendar Quarter Profit Petroleum division report showing :



(a) Unrecovered Operating Costs and Capital Costs as at the beginning of the preceding Calendar Quarter;

(b) Operating Costs and Capital Costs incurred during such preceding Calendar Quarter based on the Cash Basis principle in accordance with paragraph 1.2 above;

(c) The value and volume of Cost Recovery Petroleum lifted by Contractor during the preceding Calendar Quarter;

(d) Unrecovered Operating Costs and Capital Costs carried forward for recovery in s succeeding Calendar Quarters;

(e) The volume of (i) Petroleum produced, (ii) Petroleum used in Petroleum Operations, (iii) Petroleum available for lifting and (iv) Petroleum actually lifted by the parties, as at the end of the preceding Calendar Quarter;



(f) Profit Petroleum allocated to each of the Contractor Parties consisting Contractor, and SOCAR, during the preceding Calendar Quarter.



[signature]APPENDIX 4

FORM OF CONTRACTOR PARTY'S ULTIMATE PARENT COMPANY GUARANTEE

ULTIMATE PARENT COMPANY GUARANTEE

To: State Oil Company of the Republic of Azerbaijan Republic of Azerbaijan

Baku AZ 1000 Neftchilar Prospecti 73

[Date]

Gentlemen,

AZERBAIJAN — BLOCK INCLUDING THE BAHAR FIELD AND GUM-DENIZ FIELD

We refer to the Agreement on the Exploration, Rehabilitation, Development and Production Sharing for the Block including the Bahar Field and Gum-Deniz Field in the Azerbaijan Sector of the Caspian Sea (the "Agreement") signed on _______ _2009 between the State Oil Company of the Republic of Azerbaijan, BAHAR ENERGY LIMITED and SOCAR Oil Affiliate.

[ ] being the ultimate beneficial owner of [ ] hereby guarantees that [ ] will provide [ ] with all funds necessary for [ ] to fulfil all of its obligations, financial or otherwise, under the Agreement. This Ultimate Parent Company Guarantee shall enter into force as from the Effective Date of the Agreement.

Payment under this Ultimate Parent Company Guarantee shall be made by [ ] only after a default by [ ] under the Agreement has been established pursuant to an arbitration award against [ ] and a copy of the award to support the claim has been submitted to [ ].

(37)

This Ultimate Parent Company Guurmucc shall be governed and

interpreted under the applicable law provision in Article 26.l of the

Agreement. Any dispute under this UItimate Parent Company

Guarantee shall be resolved by arbitration in the same place and

manner as provided in the Agreement.



Yours faithfully,



for and on behalf of

[ ] APPENDIX 5



GUARANTEE AND UNDERTAKING

OF THE GOVERNMENT OF THE REPUBLIC OF

AZERBAIJAN



To:



BAHAR ENERGY LIMITED





Gentleman,



AZERBAIJAN - BLOCK INCLUDING THE BAHAR FIELD AND GUM-DENIZ FIELD



We the Government of the Republic of Azerbaijan (the "Government") have full knowledge of the Agreement on the Exploration, Rehabilitation, Development and Production Sharing of the Block Including the Bahar Field and Fum-Deniz Field in the Azerbaijan Sector of the Caspian Sea ("Agreement") signed on the _____ day of _____, 2009 between the State Oil Company of the Republic of Azerbaijan ("SOCAR"), being a company under the jurisdiction of and owned by the Government, of the First Part, and BAHAR ENERGY LIMITED ("BAHAR ENERGY"), and SOCAR Oil Affiliate ("SOA") (BAHAR ENERGY and SOA together constituting "Contractor") of the Second Part.



The Government hereby guarantees, undertakes and agrees as to each Contractor Party severally as follows:



1. The Government hereby guarantees:



(a) those rights granted or to be granted by SOCAR to Contractor under the Agreement; and



(39)(b) those obligations undertaken or to be undertaken by

SOCAR under the Agreement; and



(c) that SOCAR has full authority to grant the rights and

interests to Contractor as provided in the Agreement;

and



(d) that the Government shall at no time during the entire

duration of the Agreement enter into any treaties,

intergovernmental agreements or any other arrangements

which would, in any manner, diminish, infringe upon,

nullify or derogate from the rights and interests of

Contractor under the Agreement; and that any treaties,

intergovernmental agreements and any other

arrangements which the Government might enter into

which would in any way concern the Contract Area

and/or Contractor's rights and interests under the

Agreement will include an express recognition and

preservation of the rights and interests of Contractor

under the Agreement; and



(40)

(e) that none of the Contractor Party's rights, interests or property shall be expropriated, nationalized or otherwise taken by reason of any act of any authority of the Republic of Azerbaijan. In the event, however, that, notwithstanding the provisions of this Guarantee and Undertaking ("Government Guarantee"), any such expropriation, nationalization or other taking of any of the Contractor Party's rights, interests or property (including undeveloped reserves) occurs, the Government shall provide full and prompt compensation in Dollars at full market value determined on the basis of a going concern utilizing the discounted cash flow method, assuming a willing buyer and a willing seller in a non-hostile environment and disregarding the unfavorable circumstances under which or following which such Contractor Party has been deprived of its rights, interests or property. The Government shall submit itself to the jurisdiction of the arbitration panel as provided in Paragraph 4 below and the arbitration panel select an investment bank of good international reputation for the purpose of appraising the full market value of said rights, interests and property of each such Contractor Party on the principles stated herein; and



(F) that no grant of rights to explore for and develop Petroleum reserves in the Contract Area shall be given or permitted to be given to any parties other than Contractor during the term of the Agreement and any extensions thereof, except as otherwise expressly provided in the Agreement; and(g) that all of the provisions in the Azeri language version of the Agreement accurately convey the same meaning as all of the provisions set forth in the English language version of the Agreement.



2. In addition the Government agrees and undertakes that within the framework of its authority all measures will be taken forthwith to enact the Agreement and this Government Guarantee into law so as to ensure that all rights, privileges and exemptions granted under the Agreement and this Government Guarantee to the Contractor, Contractor's Affiliates and their Subcontractors, as well as the Operating Company and any other entity established by Contractor pursuant to the Agreement, have full legal force and effect, and in particular:



(a) to provide Contractor with the necessary licenses, permits and approvals, permissions and authorizations whether from the Government, its ministries or other official bodies in the Republic of Azerbaijan, required by Contractor to enable it to carry out Petroleum Operations, exercise its rights and fulfil its obligations in accordance with the provisions of the Agreement; and



(b) to provide Contractor with the necessary licenses, permits and approvals, customers clearances, visas, residence permits, licenses to enter land and import and export licenses, as well as the right to open bank accounts, lease or acquire office space and employee accommodation, operate communication facilities and to do all other such matters as may be necessary for efficient implementation of the Petroleum Operations; and(c) to ensure that Contractor has, in accordance with the

Agreement, access for its share of Petroleum to all

necessary transportation, treatment and export

facilities and infrastructure in the Republic of

Azerbaijan, as well as access to land required by

Contractor for Petroleum Operations, and that such

access to any such facilities, infrastructure or land

owned or controlled by the Government (other than

through SOCAR) is on terms no less favourable to

Contractor than the best terms granted or agreed with

any other bona fide arm's length user of such

facilities and infrastructure; and





(d) to use its best endeavours, whether itself, or with

other Azerbaijan authorities or Third Parties, to

ensure that Contractor has access to, inter alia,

onshore construction and fabrication facilities,

supply bases, warehousing, means of transportation,

goods and services in the Republic of Azerbaijan, and

that such access is on terms no less favourable to

Contractor than the best terms granted to or agreed

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

facilities and services, and at rates commensurate

with the quality and efficiency of such facilities

and services, which shall in no circumstances exceed

prevailing international market rates for such

facilities and services outside the Republic of

Azerbaijan; and





(43)(e) to use its best endeavours, whether itself, with other Azerbaijan authorities or Third Parties, to assist Contractor in obtaining such rights, privileges, authorisations, approval and other agreements from authorities and jurisdictions outside the territory of the Republic of Azerbaijan as Contractor shall reasonably deem necessary for the Petroleum Operations. Such agreements may include, but need not be limited to, such matters as export pipeline rights, rights of way and operation rights, permits and undertakings with respect to the transhipment, storage or staging of Petroleum produced and saved from the Contract Area, material equipment and other supplies destined to or from the territory of the Republic of Azerbaijan, and exemptions from national, local and other taxes, duties, levies, imposts, transits fees, and other fees and charges on Petroleum Operations being conducted in such other jurisdictions; and



(f) that the only abandonment obligations of Contractor shall be as set forth in the Agreement and in particular Contractor shall have no liability for abandonment of any fixed assets which have been taken over by SOCAR upon Contractor's notice of its intention to abandon them; and



(44)









(g) that liabilities and exemptions of each Contractor Party

(and, where relevant, Affiliates, Third Parties and

Operating Company, including employees and Sub-

contractors of any of them) with respect to Taxes shall be

as set out in the Agreement, and SOCAR shall not

receive from the Government any funds or other benefit

(including without limitation any rebate, refund, tax

credit or deduction, payment or discharge of any

obligation) which is determined, directly or indirectly, by

reference either to the amount of Taxes for which any of

the Contractor Parties is liable or by the Taxable Profits(s)

of any of Contractor Parties; and









(h) to ensure the banking and currency exchange rights

provided for in the Agreement, including the granting to

Contractor of the right to freely retain, whether in the

Republic of Azerbaijan or elsewhere, and dispose of all

of Contractor's proceeds from the export and/or sale of

Petroleum, and the free and unfettered right of

repatriation of all proceeds from Contractor's activities in

relation to Petroleum Operations; and











45



(i) that the rights and interest accruing to Contractor (or its

assignees) under the Agreement and the Government

Guarantee shall not be amended, modified or reduced

without the prior consent of Contractor. In the event any

Azerbaijan treaty, intergovernmental agreement, law,

decree or administrative order which contravenes or

conflicts with the provisions of the Agreement and/or this

Government Guarantee or adversely affects the rights or

interests of Contractor thereunder, including any changes

in jurisdiction over the Contract Area, tax legislation,

regulations or administrative practice, then the

Government shall idemnify Contractor (and its

assignees) for any disbenefit, deterioration in economic

circumstances, loss or damages that ensure therefrom. The

Government will take appropriate measures to resolve

promptly in accordance with the foregoing principles any

conflict or anomaly between the Agreement and/or the

Government Guarantee and such treaty,

intergovernmental agreement, law, decree or

administrative order; and





(j) to ensure observance of confidentiality with regard to any

confidential information or data disclosed to the

Government and Governmental Authorities; and



3. The privatisation, insolvency, liquidation, reorganisation or any

other change in the structure or legal existence of SOCAR shall

not affect the obligations of the Government hereunder. The

Government shall, throughout the entire duration of the

Agreement, ensure that the rights and obligations of SOCAR

under the Agreement are always vested in and undertaken by an

entity authorised to and capable of performing such obligations.

failing which the Government itself shall perform directly all

such obligations of SOCAR under the Agreement.

















(46)



4. Any dispute between the Government and Contractor

concerning this Government Guarantee shall be

resolved by arbitration in the same place and manner

and in accordance with the same principles as

provided in the Agreement. For the purposes of

allowing such arbitration and enforcement and

execution of any arbitration decision, award,

issuance of any attachment, provisional remedy or

other pre-award remedy, the Government hereby waives

all rights to claim sovereign immunity.



5. The rights and interests accorded to a Contractor

Party under this Government Guarantee shall enure

for the benefit of any successor or assignee of such

Contractor Party.



6. This Government Guarantee shall enter into force

upon its execution and shall, unless the Government

and Contractor agree otherwise, remain in force and

apply to the Agreement (as amended from time to

time) for its entire duration and for such longer

time as may be necessary for enforcement of any

rights accruing to any of the Contractor Parties

hereunder or under the Agreement.



7. Words and phrases used in this Government Guarantee

and which are defined in the Agreement shall have

the same meaning as in the Agreement.



8. This Government Guarantee shall be governed by and

interpreted in accordance with the principles of the

applicable law provisions set out in the Agreement.



IN WITNESS WHEREOF the authorised representative of the

Government has executed this Government Guarantee in Baku on __________________ 2009.





For and on behalf of



THE GOVERNMENT OF THE REPUBLIC OF AZERBAIJAN





(47)

APPENDIX 6



ARBITRATION PROCEDURE



1.1 Except as otherwise provided in this Agreement, all disputes arising between SOCAR and any or all of the Contractor Parties, including without limitation, any dispute as to the validity, construction, enforceability or breach of this Agreement, which are not amicably resolved by the Parties in accordance with the provisions of Article 26.3(a) shall be finally settled by a sole arbitrator appointed by the unanimous decision of the Parties or, in the absence of such unanimous decision within thirty (30) days of a submission of the request for arbitration, by a panel of three (3) arbitrators under the Arbitration Rules of The United Nations Commission on International Trade Law known as UNCITRAL (the “Rules”) adopted on 15 December 1976 as amended by UNCITRAL from time to time. In the event the Rules fail to make provision for any matter or situation the arbitration tribunal shall establish its own rules to govern such matter and procedure and any such rules so adopted shall be considered as a part of the Rules. For purposes of allowing such arbitration, and enforcement and execution of any arbitration decision, award, issuance of any attachment, provisional remedy or other pre-award remedy, each Party waives any and all claims to immunity, including, but not limited to, any claims to sovereign immunity.



(48)

1.2 The arbitration shall be held in Stockholm, Sweden. The language used during the procedure shall be the English language and only the English language text of this Agreement will be utilized by the arbitrators.



1.3 After providing thirty (30) days prior written notice to the other Party of intent to arbitrate, either SOCAR or Contractor may initiate arbitration (the Party initiating arbitration shall hereinafter be called the “First Party”) by submitting a request for arbitration to the Secretary General of the Permanent Court of Arbitration in the Hague, as provided in the Rules, and appointing an arbitrator who shall be identified in said request. Within thirty (30) days of receipt of a copy of the request, the other Party to the dispute (“Second Party”) shall respond, indicating whether it accepts the arbitrator appointed by the First Party as the sole arbitrator, or identifying the different arbitrator that it has selected.



If the Second Party does not accept the sole arbitrator appointed by the First Party and also does not appoint its arbitrator, the Secretary General of the Permanent Court of Arbitration in the Hague shall appoint a second arbitrator in accordance with the Rules. The two arbitrators shall, within thirty (30) days, select a third arbitrator failing which the third arbitrator shall be appointed by the Secretary General of the Permanent Court of Arbitration in the Hague, in accordance with the Rules. Unless otherwise agreed in writing by the Parties, the third arbitrator to be appointed shall not be a citizen of a country in which any Party (including the Ultimate Parent Company of such Party) is incorporated.



(49)

1.4 The Parties shall extend to the arbitration tribunal

all facilities (including access to the Petroleum

Operations and facilities) for obtaining any

information required for the proper determination of

the dispute. Any Party shall be allowed only one

absence or default beyond its reasonable control

which prevents or hinders the arbitration proceeding

in any or all of its stages. Additional absences, or

absences which are within a Party's reasonable

control, shall not be allowed to prevent or hinder

the arbitration proceeding.



1.5 Without limiting the generality of their powers, the

arbitrators shall have the power to award costs and

damages as necessary with respect to the Government

Guarantee and with respect to Article 26.2.



1.6 The arbitration tribunal's award shall be final and

binding on the Parties and shall be immediately

enforceable. Judgement on the award rendered may be

entered and execution had in any court having

jurisdiction or application may be made to such court

for a judicial acceptance of the award and an order

of enforcement and execution, as applicable.





(50)







1.7 The costs of a sole arbitrator shall be shared equally by the

Parties. In the event of three arbitrators, each Party shall pay the

costs of its own arbitrator and the costs of the third arbitrator in

equal shares, and any costs imposed by the Rules shall be shared

equally by the Parties. Notwithstanding the above, the

arbitrators may, however, award costs (including reasonable

legal fees) to the prevailing Party from the losing Party. In the

event that monetary damages are awarded, the award shall

include interest from the date of the breach or other violation to

the date when the award is paid in full. The rate of interest shall

be LIBOR plus four (4) percent over the period from the date of

the breach or other violation to the date the award is paid in full.

Each Party waives any and all requirements of any national law

relating to notice of a demand for interest or damage for the loss

of the use of funds.













(51)







APPENDIX 7





CRUDE OIL AND NATURAL GAS MEASUREMENT AND

EVALUATION PROCEDURE





1.1 General



This Appendix 7 describes the method of measuring and

evaluating the Petroleum produced from the Contract Area.





1.2 Crude Oil Measurement



(a) Custody Transfer Meters. Contractor will have custody

transfer meters permanently installed at the Delivery

Point. The custody transfer meters will be capable of

accurately measuring and evaluating the specific type and

quantity of Crude Oil produced in the Contract Area and

will be comprised of all necessary meters, meter testing

devices, instruments, and other associated equipment

necessary to measure, evaluate and record the quantity,

quality and physical characteristics of the Crude Oil from

the Contract Area. Contractor will use the custody

transfer meters for measurement and evaluation of the

Crude Oil from the Contract Area.













(52)(b) Contractor will also provide necessary tools and instruments to measure BS&W and American Petroleum Institute (API) gravity and shall store such tools and instruments in an appropriate laboratory. Contractor shall test and calibrate the accuracy of the meters being used in accordance with generally accepted international Petroleum industry practice whenever necessary and in any event at least once per month. All testing and calibration will be witnessed both by SOCAR and by Contractor with detailed reports and results signed by two (2) representatives from each of SOCAR and Contractor.



1.3 Timing of Crude Oil Measurement



Official meter readings for accounting purposes will be monitored not less than weekly for purposes of providing production and Crude Oil shipment data. Information obtained from these readings will be reported to SOCAR and Contractor. The actual times of meter readings will be determined by Contractor with timely notification to SOCAR. SOCAR and Contractor will each have the right to have two (2) representatives present to witness meter readings and sign meter tickets.



1.4 Natural Gas Measurement



The quantity of Natural Gas delivered under this Agreement

will be determined from data obtained from orifice meter runs

using API standards and procedures. The type of Natural Gas

meters to be installed will be determined by Contractor. The

measurement and evaluation system installed will be comprised

of all the necessary meters, instruments and other associated

equipment necessary to record the quantity, quality and

physical characteristics of the Natural Gas. The entire Natural Gas metering system will have a backup and be capable of

continuously recording throughput data at all times. The

Natural Gas meters will be calibrated at least once per month

with calibration records witnessed and signed by

representatives of both SOCAR and Contractor.





1.5 Petroleum Measurement Procedures

________________________________



(a) Unless Contractor and SOCAR agree otherwise, API

standards and procedures will be used to measure and

evaluate Petroleum flowing through the equipment. The

API standards and procedures will be taken from or

provided by the API's Standard Method of Sampling and

Manual of Petroleum Measurement Standards. A copy of

the standards and procedures (and updates and reviews

thereof) will be provided by Contractor and will be

available both to SOCAR and to Contractor at all times.

















(54)





(b) Specialists from Contractor and SOCAR shall meet to

agree appropriate detailed Petroleum measurement and

evaluation procedures to be implemented as soon as

practicable after approval of the Rehabilitation and

Production Programme.





















(55) APPENDIX 8



DESIGN STANDARDS AND SPECIFICATIONS



All new production facilities and all new equipment added as part of modification programme to existing facilities, will be designed in accordance with current international standards, modified where appropriate for the specific requirements of the Caspian Sea conditions.



Existing facilities were designed to the standards appropriate at the time of their construction. They will not be modified to comply with international standards except where determined necessary by Contractor for the safe operation of new equipment.



The design specifications used will be based on current standards and recommended practice as published by recognised international engineering organisations and associations, some of which are listed below. The design specifications may also include additional requirements developed from these international standards by Contractor.



API - American Petroleum Institute

ANSI - American National Standards Institute

ASME - American Society of Mechanical Engineers

ASTM - American Society of Testing and Materials

BSI - British Standards Institution

CEN - European Committee for Normalisation

CENELEC - European Committee for Electrotechnical Standards

DIN - The German Institute for Standards

IEC - International Electrotechnical Commission

IEEE - Institute of Electrical and Electronics Engineers (USA)

IP - Institute of Petroleum (UK)

ISA - Instrument Society of America

ISO - International Organisation for Standardisation





(56)







NACE - National Association of Corrosion Engineers (USA)



NEMA - National Electrical Manufacturers Association (USA)



NFPA - National Fire Prevention Association (USA)





















(57)APPENDIX 9

EXPLORATION WORK PROGRAM



For the purposes of exploring the oil and gas potential within the Contract Area Contractor shall carry our a program of work as described in Article 7 in accordance with the following guidelines:

(i) Carry out an upper sec ion site investigation survey to ensure a safe and environmentally sound base for drilling.

(ii) Drill in the Contract Area one (1) exploration well to ascertain the presence of oil and gas in the prospective horizons. During the Exploration Period one (1) well shall be drilled to a depth based on the results of the newly acquired one hundred and eight (108) square kilometers of three-dimensional seismic in the Contract Exploration Area.

(iii) During the Additional Exploration Period, Contractor shall drill one (1) well, to a depth based on the integrated exploration plan for the Exploration Contract Area.



(58)



[signature](iv) Wells drilled as set out in (ii) and (iii) shall have the objective of further defining the areal extent, downdip limits and reservoir properties of any Petroleum found within the Contract Exploration Area. Drilling of such wells shall be accomplished with conventional core acquisition techniques according to international Petroleum industry standards.



(v) To evaluate the wells an appropriate logging and testing program may include but not be limited to the following:

(a) at the conductor casing point—standard logs, gamma ray and neuron log (from approximately conductor setting point to seafloor);

(b) at the casing point—standard logs, gamma ray log, induction logs, sonic log, density and neuron logs, caliper (profiler), and formations tests as deemed necessary;



(59)



[signature](c) at final drilling depth-standard logs, gamma ray log, induction lofs, sonic log, density and neuron logs, caliper (profiler), and formation tests as warranted by shows and well log indications and vertical seismic profile log (VSP) taken at intervals between total depth to seafloor;

(d) Wireline formation testing (MDT for example) in the first well for all productive horizons and, in the subsequent well, in major productive horizons.



(vi) Contractor shall have the right, but not the obligation, to sidetrack any exploration wells, drill to greater depths or drill additional exploration wells within the Contract Area for the purposes of obtaining additional geological information.



(vii) All reporting and records pertaining to exploration drilling and evaluation shall be submitted according to Article 10 of this Agreement.



(60)



[signature]APPENDIX 10

ENVIRONMENTAL STANDARDS AND PRACTICES



I. Integrated Management System

A. Environmental Sub-Committee

1. The formation and organization of an environmental sub-committee of the Steering Committee shall be set forth in a proposal of Contractor which will be submitted to SOCAR for approval. Once approved by SOCAR, the Environmental Sub-Committee shall be formed in accordance with the approved recommendation and shall be composed of environmental representatives of Contractor Parties and SOCAR, the Ministry of Ecology and Natural Resources of the Republic of Azerbaijan, Azerbaijan Academy of Sciences and other relevant research institutes.



2. Responsibilities of the environmental sub-committee shall be to:

-design monitoring program for monitoring of selected environmental parameters;



(61)



[signature]- co-ordinate monitoring program;



- review results and propose recommendations;



- publish annual report;



- participate in environmental planning related to Petroleum Operations.



B. Environmental Work Program



The Environmental work program to be pursued during Petroleum Operations pursuant to Article 29.2 shall be phased as follows:



1. For seismic surveys



- Environmental impact assessment;



- Health, safety and environmental management plan for seismic operations, including emergency procedures, oil spill contingency plan, waste management plan and an audit program.



2. For exploration drilling



(62)Drilling environment impact assessment;



Baseline environmental study;



Environmental monitoring program;



Health, safety and environment management plan

for exploration drilling, including emergency

procedures, oil spill contingency plan, waste

management plan (including drill cuttings

disposal) and an audit program.



3. For development and production



Environmental impact assessment;



The environmental work program for the

Development and Production Period shall be

submitted together with the Development

Program to SOCAR for approval. SOCAR shall

obtain any requisite approvals from the relevant

Governmental Authority as provided in Article

7.6(e) of this Agreement.



II. Environmental Standards The following are general and specific guidelines relating to discharges associated with Crude Oil and Natural Gas exploration and production activities.



A. General Guidelines



1. There shall be no discharge of waste oil, produced water and sand, drilling fluids, drill cuttings or other wastes from exploration and production sites except in accordance with the following guidelines.



2. There shall be no unauthorized discharges directly to the surface of the sea. All discharges authorized by these guidelines shall be controlled by discharging into a caisson whose open end is submerged, at all times, a minimum of two (2) feet below the surface of the sea.



B. Discharge Guidelines and Monitoring



1. Produced Water



(64)Contractor will endeavour to utilize produced water for reservoir pressure maintenance if, through standard compatibility testing with Caspian Sea water, no damage to the reservoir resulting in a reduction in overall hydrocarbon recovery would occur by mixing the two water streams. In the event that the two water streams are compatible, Contractor may only discharge a volume of produced water after treatment to the Caspian Sea that exceeds the total volume required for reservoir pressure maintenance or in the event of an emergency, accident or mechanical failure. In the event that the two water streams are not compatible, Contractor may inject produced water into carbon-bearing subsurface zones (“absorbing zones”) or discharge produced water to the Caspian Sea after treatment in accordance with generally accepted international Petroleum industry standards and practices.



2. Drill Cuttings and Drilling Fluids

(a) There shall be no discharge of oil based drilling fluids, other than accidental discharge, duly reported to the appropriate environmental authority pursuant to article 4 (b) below.



(65)



[signature](b) There shall be no discharge of drill cuttings generated in association with the use of oil based drilling fluids, invert emulsion drilling fluids, or drilling fluids that contain radiation, if any, waste engine oil, cooling oil, gear oil, or other oil based lubricants, other than cuttings generated in association with the use of low toxicity and biodegradable drilling fluids as well as water based drilling fluids and cuttings.



(c) There shall be no discharge of drill cuttings or drilling fluids if the maximum chloride concentration of the drilling fluid system is greater than four (4) times the ambient concentration of the receiving water.



(66)



[signature](d) Prior to the start of the drilling program, a drilling mud system will be designed and laboratory tested under the U.S. EPA, 96-hour acute toxicity test using indicator organisms of the Caspian Sea agreed between Contractor and SOCAR. Those muds biodegradable and of low toxicity will be authorized for discharge during the drilling program.

(e) During drilling operations, mud samples will be collected periodically to determine toxicity using procedures established for the Caspian Sea.

(f) The composition of the mud system may be altered as necessary to meet changes in the drilling operations. The modified mud system may be discharged if it has been shown to meet the above limits for discharge on oil, salinity and toxicity.



3. Other Wastes

(a) Sanitary waste may be discharged with total

residual chlorine content agreed upon with

MENR as long as no floating solids are

observable. The Hach method CN-66-DPD

test shall be used to measure the residual

chlorine.



(b) Domestic wastes and gray water may be

discharged as long as no floating solids are

observable.



(c) Desalinization unit wastes shall be

discharged.



(d) Deck drainage and wash water may be

discharged as long as no visible sheen is

observable. Oily and clean drainage or wash

water shall be segregated; clean water shall be

discharged to the sea and oily water shall be

treated as provided in B.l above.



(e) Trash shall not be discharged offshore. Trash

shall be transported to an appropriate

land-based disposal facility.



4. Monitoring

(a) Produced water (1) The volume of produced water discharged and concentration of oil and grease contained in the discharge will be monitored every two days on manned platforms and once a week for other installations.



(2) The monthly average oil and grease concentration will be reported monthly to an appropriate environmental authority designated by MENR.



(b) Drill cuttings and Drilling Fluids



(1) An inventory of drilling fluids additives and their volumes or mass added to the drilling fluid system will be maintained for each well.



(2) Drilling fluid properties, including volume percent oil and concentration of chlorides, will be monitored daily for each well.



(3) The estimated volume of water based drill cuttings and drilling fluids discharged shall be recorded daily and reported monthly to the appropriate environmental authority.



(69)(c) Other wastes



The estimated volume of other wastes discharged according to section II B 2 above shall be monitored and reported monthly to include:



(i) Sanitary waste



(ii) Domestic waste



(iii) Deck drainage and wash water



C. Air Emission Guidelines and Monitoring



Contractor is authorized to discharge air emissions. Such discharges will be limited and monitored in accordance with generally accepted international Petroleum industry standards and practices.



D. Public Health



Contractor shall take all actions with respect to public health of personnel involved in Petroleum Operations in accordance with generally international Petroleum industry standards.



E. Safety Guidelines



(70)Contractor shall take into account subject to the

provisions of Article 29. l relevant Azerbaijani

regulations and the following international safety and

industrial hygiene standards in conducting its Petroleum

Operations under the Agreement:



1. International Association of Oil and Gas Producers

(OGP) reports and guidelines - HSE Management;



2. International Association of Drilling Contractors

(IADC) - Drilling Safety Manual;



3. International Association of Geophysical

Contractors (IAGC) - Operations Safety Manual;



4. Threshold Limited Values for Chemical Substances

in the Work Environment - American Conference of

Governmental Industrial Hygienists. ADDENDUM

to

AGREEMENT ON THE EXPLORATION,

REHABILITATION, DEVELOPMENT AND PRODUCTION

SHARING FOR THE BLOCK INCLUDING THE BAHAR

FIELD AND GUM-DENIZ FIELD IN THE AZERBAIJAN

SECTOR OF THE CASPIAN SEA

relating to the formation of SOCAR Oil Affiliate

between

The State Oil Company of the Republic of Azerbaijan

and

BAHAR ENERGY LIMITED This Addendum is made and entered into on the same date as the Agreement on the Exploration, Rehabilitation, Development and Production Sharing for the Block Including the Bahar Field and Fum Deniz Field in the Azerbaijan Sector of the Caspian Sea (hereinafter called "the Agreement") between:



THE STATE OIL COMPANY OF THE REPUBLIC OF AZERBAIJAN (hereinafter called "SOCAR") a Government body on the one hand and



BAHAR ENERGY LIMITED ("BAKHAR ENERGY") a company incorporated in Jebel Ali Free Zone, Dubai, UAE, on the other hand.



The entities named above may sometimes be referred to individually as "Party" and collectively as "the Parties".



WHEREAS:



1. SOCAR has informed BAHAR ENERGY that SOCAR Oil Affiliate (hereinafter called "SOA") has not yet been formed; and



2. SOCAR is willing and fully empowered to assume and be bound by all the obligations and liabilites of SOA under the Agreement; and



3. SOCAR and BAHAR ENERGY have agreed that SOCAR will act on behalf of SOA pending the formation of SOA and SOA's written ratification of the Agreement as hereinafter appears.



(73)NOW THEREFORE the Parties hereby agree as follows:



1. SOCAR shall be primarily responsible for all obligations of SOA under the Agreement and any further agreements, contracts or legal instrument between the Other Contractor Parties and SOA and shall act on behalf of SOA, Until such time as: (i) SOA has been duly organised and is validly existing in accordance with the law of its country of incorporation and with its charter; (ii) SOA has ratified its participation in the Agreement through a resolution of Board of Directors; (iii) SOA has ratified all actions taken by SOCAR on Behalf of SOA; and (IV) SOA delivers to the Other Contractor Parties all documents evidencing (i), (ii) and (iii) above. The Parties may place reliance on the actions of SOCAR taken on behalf of SOA, as if taken by SOA itself until such time as the events and actions required in (i), (ii), (iii) and (iv) above have occurred.



2. SOCAR hereby undertakes that: (i) SOA shall be duly organised and be validly existing; (ii) SOCAR shall ensure that SOA authorises SOA's participation in the Agreement promptly after it is duly organised and is validly existing; (iii) SOCAR shall ensure that SOA ratifies all actions taken by SOCAR on behalf of SOA promptly after it is duly organised and validly existing; and (iv) SOCAR shall ensure that SOA delivers to the Parties all documents evidencing (i), (ii) and (iii) of this paragraph 2, promptly after it is duly organised and validly existing.



(74)

3 This Addendum modifies and/or amends the relevant terms and

conditions of the Agreement as set forth herein and shall be

considered for all purposes a part of the Agreement and shall

accordingly be given the full force of law in the Republic of

Azerbaijan as providedin.Article 28. 1 ofthe Agreement.



4. Any disputes arising out of or in connection with this

Addendum shall be resolved as set forth in Article 26.3 of the

Agreement, and the law governing this Addendum shall be as

set forth in Article 26.1 of the Agreement.



IN WITNESS WIIEREOF the Parties have executed this Addendum

as of the "22" day of December 2009 by their duly

authorised representatives.·

For an on behalf of State Oil Company of the

Republic of Azerbaijan.



"Signed"

Name:

Position: President



"Signed"

Name:

Position:ID General ManagerFor and on behalf of BAHAR ENERGY LIMITED



"Signed"

Name:

Person:



"Signed"

Name:

Person:For and on behalf of BAHAR ENERGY LIMITED



"Signed"

Name:

Person:



"Signed"

Name:

Person: