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<DOCUMENT>

<TYPE>EX-10.27

<SEQUENCE>5

<FILENAME>u43864ex10-27.txt

<DESCRIPTION>PRODUCTION SHARING CONTRACT

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1

Exhibit 10(27)



PRODUCTION SHARING AGREEMENT

BETWEEN

STATE OF GEORGIA:

STATE AGENCY FOR REGULATION OF OIL AND GAS RESOURCES IN GEORGIA,

GEORGIAN OIL

AND

CANARGO NORIO LTD



DATED

12th December, 2000



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2

TABLE OF CONTENTS



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Preamble

...........................................................................

Article 1

Definitions................................................................

Article 2

Scope of Agreement and General

Provisions.................................. 11

Article 3

Agreement

Area............................................................. 13



4

5



Article 4

Agreement

Term............................................................. 13

Article 5

Relinquishments............................................................ 14

Article 6

Coordination

Committee..................................................... 15

Article 7

Operator

Responsibility.................................................... 18

Article 8

Article not

used........................................................... 19

Article 9

Procedure for Determination of Commerciality and

Approval of Development

Plans.............................................. 19

Article 10

Annual Work Programs and

Budgets........................................... 22

Article 11

Allocation of Production, Recovery of Costs and Expenses,

Production Sharing and Right of

Export..................................... 24

Article 12

Crude Oil

Valuation........................................................ 28

Article 13

Ancillary Rights of the Contractor and

Operator............................ 30

Article 14

Assistance Provided by the

State........................................... 31

Article 15

Measurement, Quality and Valuation of

Petroleum............................ 33

Article 16

Natural

Gas................................................................ 34

Article 17

Tax/Fiscal

Regime.......................................................... 38

Article 18

Accounting, Financial Reporting and

Audit.................................. 42

Article 19

Currency, Payments and Exchange

Control.................................... 43

Article 20

Import and

Export.......................................................... 44

Article 21

Export of Hydrocarbons, Transfer of Ownership

and Regulations for

Disposal............................................... 45

Article 22

Ownership of

Assets........................................................ 45

Article 23

Insurance, Environment, Health, Safety and

Liability....................... 46

Article 24

Personnel.................................................................. 50

Article 25

Force

Majeure.............................................................. 50

Article 26

Assignments and

Guarantees................................................. 51

Article 27

Agreement Enforcement and Stabilisation and Representations

and

Warranties............................................................. 53

</TABLE>

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3



<TABLE>

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<C>

<C>

Article 28

Notices and

Confidentiality................................................ 55



Article 29

Termination and

Breach..................................................... 57

Article 30

Dispute

Resolution......................................................... 58

Article 31

Text....................................................................... 58

Article 32

Approval and Effective

Date................................................ 59

ANNEX A

AGREEMENT

AREA............................................................. 61

ANNEX B

LICENCE.................................................................... 62

ANNEX C

ACCOUNTING

PROCEDURE....................................................... 63

ANNEX D

MINIMUM

PROGRAM.............................................................78

ANNEX E

PERMIT APPLICATION FEES

SCHEDULE............................................79

ANNEX F

PARENT COMPANY

GUARANTEE....................................................80

ANNEX G

GEORGIAN OIL CONSENT TO TRANSFER

LICENCE....................................82

</TABLE>

3

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4



PRODUCTION SHARING AGREEMENT AND LICENSES

This Agreement is made and entered into on 12th, December 2000 by and between:

(1)



State Agency for Regulation of Oil and Gas Resources in Georgia as the duly

authorised representative of the State (as it is defined in article 1.70)

with adequate authorization, (hereinafter referred to as "Agency") and

National Oil Company - Georgian Oil in its capacity as the state owned oil

company (hereinafter referred to as "Georgian Oil"), as the party of the

first part;



(2)



as party of the second part, CanArgo Norio Ltd. (Number 111838), a company

organised and existing under the laws of Cyprus, and its successors and

assignees, if any, will individually be referred to as "Contractor Party"

and collectively referred to as "Contractor"). The State Agency, Georgian

Oil, and the Contractor may sometimes be referred to as "Party" and

collectively as the "Parties".

WITNESSETH:



WHEREAS, all Petroleum resources within the territory and under the internal

waters, territorial sea, and continental shelf of Georgia are owned by the

State;

WHEREAS, the State enters into this Agreement wishing to promote the development

of the Agreement Area and Georgian Oil and Contractor desire to join and assist

in the exploration, development and production of the potential resources within

the Agreement Area;

WHEREAS, Contractor has the requisite technical, managerial and financial

capabilities and experience to carry out Petroleum Operations stipulated in this

Agreement and desires to cooperate with the State and Georgian Oil for the

exploration and exploitation of Petroleum reserves within the Agreement Area;

WHEREAS, Georgian Oil is the current holder of the oil and gas usage licence



number 0298 in respect of the Agreement Area (hereinafter referred to as the

"Licence") and the Licence is to be reissued to CanArgo Norio Ltd.

WHEREAS the Parties and Operator have agreed that in order to promote the

development of hydrocarbon resources in Georgia and to promote international

investment in Georgia, Petroleum Operations should be carried out pursuant to

the terms of this Agreement.

WHEREAS CanArgo Norio produced and agreed with State Agency and Georgian Oil

minimum work program for petroleum operations.

NOW, THEREFORE, in consideration of the promises and the mutual covenants and

conditions herein contained, it is hereby agreed as follows:

4

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5

ARTICLE 1

DEFINITIONS



The following words and terms used in this Agreement shall unless otherwise

expressly specified in this Agreement have the following respective meanings:

1.1



"Accounting Procedure" means the accounting procedure set out in Annex

"C" hereto.



1.2



An "Affiliated Company" or "Affiliate" means:

a)



b)



with respect to a Contractor Party: a company, corporation,

partnership or other legal entity:

i)



in which a Contractor Party owns directly or

indirectly more than fifty percent (50%) of the

shares, voting rights or otherwise has the right to

establish management policy; or



ii)



in which at least fifty percent (50%) of the shares

or voting rights are owned directly or indirectly by

a company or other legal entity, which owns directly

or indirectly more than fifty percent (50%) of the

shares, voting rights or otherwise has the right to

establish management policy of a Contractor Party;



with respect to the State and Georgian Oil: any legal entity

directly or indirectly controlled by the State or Georgian

Oil, respectively, or operating under their collective

management. For the purposes of this part of the definition,

the term to "control" (including the related terms

"controlled" or "operates under collective management") shall

mean with respect to any entity, having the right to carry out

direct or indirect supervision of such entity or to define a

general scope of its activity based on holding the shares

entitled to vote, other form of ownership, or on any other

grounds.



1.3



"Annex" or "Annexes" means each or all of the Annexes "A" through "G"

attached to this Agreement and made a part hereof. In the event of a

conflict between the provisions of an Annex and a term in the main body

of this Agreement, the provisions of the latter shall prevail.



1.4



"Appraisal" means all works carried out by Contractor to evaluate and



delineate the commercial character of a Discovery of Petroleum in the

Agreement Area.

1.5



"Appraisal Program" means a work program submitted by Contractor under

which Contractor plans to evaluate and delineate a Discovery of

Petroleum in the Agreement Area.

5



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6



1.6



"Associated Natural Gas" means all gaseous hydrocarbons produced in

association with Crude Oil, which Crude Oil itself can be commercially

produced and separated therefrom.



1.7



"Available Crude Oil" means Crude Oil produced and saved from the

Agreement Area and not used in Petroleum Operations in accordance with

Article 11.3.



1.8



"Available Natural Gas" means Natural Gas produced and saved from the

Agreement Area and not used in Petroleum Operations in accordance with

Article 11.3.



1.9



"Barrel" means a quantity consisting of forty-two (42) United States

gallons liquid measure, corrected to a temperature of sixty degrees

(60 degrees) Fahrenheit with pressure at sea level.



1.10



"Budget" means the estimate of the expenditures, listed category by

category, relating to Petroleum Operations and contained in any Work

Program proposed by Contractor.



1.11



"Calendar Quarter" or "Quarter" means a period of three consecutive

months beginning on January 1st, April 1st, July 1st and October 1st of

each Calendar Year.



1.12



"Calendar Year" means a period of twelve (12) consecutive months

beginning on January 1st and ending on December 31st in the same year,

according to the Gregorian Calendar.



1.13



"Capital Expenditures" means Development Expenditures Exploration

Expenditures and Drilling Costs.



1.14



"Commercial Discovery" means a discovery of Petroleum that the

Contractor in its sole discretion in accordance with the provisions of

Article 9 commits itself to develop and produce under the terms of the

Agreement.



1.15



"Commercial Production" means regular and continuous production of

Petroleum from a Development Area in such quantities (taking into

account any other relevant factors) as are worthy of commercial

development.



1.16



"Agreement" or "PSA" means this Production Sharing Agreement together

with all attached Annexes and any variation, extension or modification

hereto which may be agreed in writing by all the Parties.



1.17



"Agreement Area" means the area specified in Article 3 hereof and

delineated in Annex A, as reduced or enlarged from time to time in

accordance with the provisions of this Agreement.



1.18



"Agreement Year" means a period of twelve (12) consecutive months from

the Effective Date within the term of the Agreement.



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7



1.19



"Contractor" means CanArgo (Norio) Ltd., its assignees and successors,

as provided herein.



1.20



"Coordination Committee" means the committee composed of

representatives of the Contractor and the State represented by Georgian

Oil constituted in accordance with Article 6.



1.21



"Cost Recovery Petroleum" means Cost Recovery Crude Oil and Cost

Recovery Natural Gas.



1.22



"Cost Recovery Crude Oil" is defined as set forth in Article 11.5.



1.23



"Cost Recovery Natural Gas" is defined as set forth in Article 11.5



1.24



"Costs and Expenses" comprise the Exploration Expenditures, Development

Expenditures, Operation Expenses and Drilling Costs together with

Finance Costs whether directly or indirectly incurred by Contractor.



1.25



"Crude Oil" means crude mineral oil, asphalten, ozopherite and all

kinds of hydrocarbons whether in a solid, liquid or mixed state at the

wellhead or separator or which is obtained from Natural Gas through

condensation or extraction.



1.26



"Current Georgian Legislation" means laws, legislative acts, normative

documents, that are effective on the Effective Date.



1.27



"Customs Duties" means all import (or export) tariffs and duties and

other mandatory payments as stipulated by applicable laws, regulations

or other legal measures of Georgia with respect to the import or export

of materials, equipment, goods and any other similar items.



1.28



"Development Area" means all or any part of the Agreement Area

specified in an approved Development Plan containing a Commercial

Discovery.



1.29



"Development Expenditures" means all Costs and Expenses for Development

Operations with the exception of Operation Expenses and Drilling Costs

whether directly or indirectly incurred, including but not limited to

training, administration, service, Finance Costs and related expenses.



1.30



"Development Plan" means the plan to be produced by Contractor in

accordance with Article 9.6. following a declaration that Commercial

Production may be established.



1.31



"Development" or "Development Operations" or "Development Work" means

and includes any activities or operations associated with work to

develop Petroleum for production and subsequently to produce and render

Petroleum marketable for commercial sale and shall include, but not be

limited to:

a)



all the operations and activities under the Agreement with

respect to the drilling of wells, other than Exploration

wells, the deepening,

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8



reworking, plugging back, completing and equipping of such

wells, together with the design, construction and installation

of such equipment, pipeline or gathering lines, installations,

production units and all other systems relating to such wells

and related operations in connection with production and

operation of such wells as may be necessary in conformity with

sound oil field practices in the international Petroleum

industry.

b)



all operations and activities relating to the servicing and

maintenance of pipelines, gathering lines, installations,

production units and all related activities for the production

and management of wells including the undertaking of

re-pressurising, recycling and other operations aimed at

intensified recovery, enhanced production and oil recovery

rate.



1.32



"Discovery" means a well that the Contractor determines has encountered

Petroleum which would justify Commercial Production.



1.33



"Dollar" or "U.S.$" means the currency of the United States of America.



1.34



"Double Tax Treaty" means any international treaty or convention for

the avoidance of double taxation of income and/or capital which is

applicable in Georgia.



1.35



"Drilling Costs" means all expenditures whether directly or indirectly

incurred during Exploration and Development for well drilling,

completing and reworking operations including, but not limited to,

labour, geological design, engineering and other Subcontractors

(including all fees, tariffs and charges payable to any such

Subcontractors), material and equipment consumed or lost, perforation,

formation testing, cementing, well-logging and transportation.



1.36



"Effective Date" means the date on which this Agreement has been signed

by all Parties and the requirements of Article 32 have been satisfied.



1.37



"Excess Associated Natural Gas" is defined as set forth in Article

16.1.b.



1.38



"Exploration" or "Exploration Operations" means operations conducted

under this Agreement in connection with the exploration for previously

undiscovered Petroleum, or the evaluation of discovered reserves which

shall include geological, geophysical, aerial and (other survey)

activities and any interpretation of data relating thereto as may be

contained in Exploration Work Programs and Budgets, and the drilling of

such shot holes, core holes, stratigraphic tests, Exploratory Wells for

the discovery of Petroleum, Appraisal wells and other related

operations.



1.39



"Exploration Expenditures" means all Costs and Expenses for Exploration

Operations other than Drilling Costs whether directly or indirectly

incurred including but not limited to training, administration,

service, Finance Costs and related expenses and overhead and study

costs.

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9



1.40



"Exploratory Well" means any well drilled with the objective of

confirming a structure or geologic trap in which Petroleum capable of

Commercial Production in significant quantities has not been previously

discovered.



1.41



"Field" means a Petroleum reservoir or group of reservoirs within a

common geological structure or feature. "Field" may be an "Oil Field"

or a "Natural Gas Field" as designated by Contractor.



1.42



"Finance Costs" or "Interest Costs" shall include all amounts of

interest, fees and charges paid in respect of any debt incurred in

carrying out the Petroleum Operations and any refinancing of such

debts, providing that in the case of Affiliate debt, it shall include

interest only to the extent that it does not exceed a rate which would

have been agreed upon between independent parties in similar

circumstances and such interest is not limited by which assets or

services are purchased by the loan principal.



1.43



"Force Majeure" is defined as set forth in Article 25.2.



1.44



"Foreign Employee" is defined as set forth in Article 17.17



1.45



"Foreign Subcontractors" means Subcontractors which are organised

outside of Georgia and under Georgian legislation are not obliged to

establish permanent representative offices in Georgia.



1.46



"Gas Sales Agreement" is any agreement to be entered into for the sale

of Non-associated Natural Gas and Associated Natural Gas in accordance

with the provisions of Article 16.2.



1.47



Operator means the company defined in Article 2.8 by mutual agreement

of the parties.



1.48



"Contractor Licence" means the "Licence" issued by the State Agency for

Regulation of Oil and Gas Resources in Georgia, according to the

Georgian Law.



1.49



"Joint Operating Agreement" or "JOA" means the agreement to be

concluded between the Contractor Parties, Georgian Oil and CanArgo

(Norio) Ltd which shall be supplementary to and consistent with the

provisions of this Agreement and which shall regulate the terms under

which Petroleum Operations will be conducted.



1.50



"LIBOR" means the three (3) months U.S. Dollars London Interbank fixing

offer rate quoted daily in the London Financial Times.



1.51



"Marketing Team" is defined as set forth in Article 16.2.a.ii.



1.52



"Measurement Point" means the location specified in an approved

Development Plan where the Petroleum is metered and delivered to the

Parties or such other location as the Parties may agree from time to

time prior to the submission of a Development Plan as the circumstances

may require.

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1.53



10



"Month" or "Calendar Month" means a calendar month.



1.54



"Natural Gas" means Non-associated Natural Gas and Associated Natural

Gas in their natural state.



1.55



"Natural Gas Field" means a field from which more than fifty (50)

percent of the estimated reserves on an energy equivalency basis are

Natural Gas at surface conditions.



1.56



"Non-associated Natural Gas" means all gaseous hydrocarbons produced

from gas wells, and includes wet gas, dry gas and residue gas remaining

after the extraction of liquid hydrocarbons from wet gas.



1.57



"Oil Field" means a field from which more than fifty (50) percent of

the estimated reserves comprise Crude Oil.



1.58



"Operation Expenses" means those costs incurred in day-to-day Petroleum

Operations, whether directly or indirectly incurred including but not

limited to all costs, expenses and expenditures associated with the

Production, processing and transportation to the Measurement Point of

Petroleum, training, administration, service, payments for abandonment

and site restoration in accordance with Article 9.8, insurance costs in

accordance with Article 23.2. and related expenses.



1.59



"Parent Company Guarantee" means a guarantee to be issued by CanArgo

Energy Corporation in the form annexed hereto as Annex F.



1.60



"Party" or "Parties" means the parties whose authorised representatives

have affixed their signatures hereto.



1.61



"Payment Date" has the meaning as defined in 11.10.



1.62



"Petroleum" means Crude Oil and Natural Gas.



1.63



"Petroleum Operations" means the Exploration Operations, the

Development Operations, Production Operations, and transportation to

the Measurement Point and other activities related thereto carried out

pursuant to this Agreement and the JOA.



1.64



"Petroleum Operations Account" shall have the meaning given to it in

paragraph 4.1 of section I of the Accounting Procedure.



1.65



"Petroleum Law" means Georgian Law on Oil and Gas which came into force

on April 16, 1999.



1.66



"Production" or "Production Operations" means operations and all

related activities carried out for Petroleum production after the

approval of any Development Plan, including without limitation

extraction, injection, stimulation, treatment, transportation, storage,

lifting, and associated operations, but does not include any storage or

transportation beyond the Measurement Point.

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11



1.67



"Profit Natural Gas" is defined as set forth in Article 11.10.



1.68



"Profit Oil" is defined as set forth in Article 11.10.



1.69



"Profit Tax" is defined as set forth in Article 17.



1.70



"State" or "Government" means the Government of Georgia and all



political or other agencies or instrumentalities or subdivisions

thereof including but not limited to any local government or other

representative, agency or authority, which has the authority to govern,

legislate, regulate, levy and collect taxes or duties, grant licences,

permits, approve or otherwise impact (whether financially or otherwise)

directly or indirectly upon any of the Parties' rights, obligations or

activities under the Agreement; the word "Governmental" shall be

construed accordingly.

1.71



"Study Area" means the part of the Agreement Area which will be defined

in a Study Program.



1.72



"Study Program" means the program to be produced and carried out by the

Contractor in accordance with Article 9 following the conclusion that

Commercial Production is feasible.



1.73



"Subcontractor" means any natural person or juridical entity

Agreemented directly or indirectly by or on behalf of Contractor to

supply goods, works or services related to this Agreement.



1.74



"Third Party" or "Third Parties" means one or more of a natural person

or juridical entity other than a Party hereto and any Affiliate of a

Party.



1.75



"Taxes" means all levies, duties, payments, fees, taxes or

contributions payable to or imposed by Governmental agencies,

Governmental subdivisions or republican, municipal or local authorities

within the Government of Georgia.



1.76



"VAT" means Georgian value added tax.



1.77



"Withholding Tax" is defined as set forth in Article 17.19.



1.78



"Work Program" and "Work Program and Budget" means any work program and

work program and Budget to be submitted to the Coordination Committee

by the Contractor in accordance with the provisions of Article 10 and

which shall set out the proposed Petroleum Operations to be carried out

in the Agreement Area together with the associated Budget as the case

may be.



11



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12



ARTICLE 2

SCOPE OF AGREEMENT AND GENERAL PROVISIONS

2.1



By its approval of this Agreement the State Agency hereby ratifies the

Contractor Licence according to the current Laws.



2.2



Subject to the terms and conditions of the Agreement, the State hereby

in accordance with Petroleum Law grants to the Contractor the exclusive

rights to conduct Petroleum Operations in the Agreement Area during the

term of this Agreement.



2.3



Contractor shall be responsible to the State for the execution of such

Petroleum Operations in accordance with the provisions of the



Agreement.

2.4



In performing Petroleum Operations, Contractor shall provide all

financial and technical requirements, unless otherwise provided in this

Agreement, or agreed with Georgian Oil, and conduct all operations in

accordance with the standards generally accepted in the international

Petroleum industry.



2.5



Contractor shall be compensated for its services, not by way of

reimbursement in cash of its expenditures under the Agreement, but by

receipt of its share of Petroleum from the Agreement Area to which it

may become entitled by way of cost recovery out of Cost Recovery

Petroleum described in Article 11. If Petroleum produced from

Development Areas within the Agreement Area developed by Contractor,

Cost Recovery Petroleum under Article 11 and Profit Oil and Profit

Natural Gas is insufficient to reimburse Contractor for Costs and

Expenses incurred by Contractor, Contractor shall bear its own losses

in respect of any shortfall.



2.6



This Agreement defines the Parties' rights and obligations, governs

their mutual relations and establishes the rules and methods for the

Exploration, Development, Production, and sharing of Petroleum between

them. The entire interests, rights and obligations of each of the

Parties under this Agreement shall be solely governed by the provisions

of this Agreement.



2.7



During the period in which this Agreement is in force, all Available

Crude Oil and Available Natural Gas resulting from Petroleum

Operations, will be shared between Georgian Oil and the Contractor in

accordance with the provisions of Article 11 of this Agreement



2.8



State Agency, Georgian Oil and Contractor agree that the Operator shall

be Georgian British Oil Company Norio and may be changed by the

Contractor with the consent of Georgian Oil and the State Agency. Such

consent cannot be unreasonably withheld. That appointment shall be

effective from the date hereto. The Operator shall act as the

designated non-profit agent of Georgian Oil and Contractor for the

conduct of Petroleum Operations in accordance with this Agreement and

any future JOA to be entered into.

12



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2.9



13



The State has appointed the State Agency as its representative for the

purposes set out in Article 8 of the Petroleum Law and Georgian Oil as

its representative for the purposes set out in Article 9 of the

Petroleum Law, with the right of substitution and removal, each to

exercise the State functions and to perform the State obligations under

the contract as prescribed by the Petroleum Law and to enjoy the

benefit as herein provided. The State will give notice to Contractor of

the appointment and removal and substitution of its representatives.

The Contractor is entitled to assume that each State Representative has

full authority to represent the State for those State purposes under

the Agreement assigned to it according to the Petroleum Law, including

those where herein specific reference is made to the State

Representative.

ARTICLE 3

AGREEMENT AREA



3.1



The Agreement Area is as set out by the geographic location and

coordinates described in Annex "A" attached hereto and delineated in



the map which forms part thereof. The total area of the Agreement Area

may hereafter be reduced only in accordance with the provisions of this

Agreement.

3.2



Except as for all rights and authorisations necessary for the

implementation of the provisions of this Agreement, no right is granted

in favour of the Contractor or Georgian Oil to the use or disposal of

any other natural or man-made resources or aquatic resources with the

exception of aquatic resources used directly in Petroleum Operations in

accordance with relevant permits which will be obtained through the

State Agency.

ARTICLE 4

AGREEMENT TERM



4.1



The term of the Agreement shall be deemed to have begun on the

Effective Date and shall continue for a total of twenty-five (25)

consecutive Agreement Years, unless the Agreement is sooner terminated

in accordance with Article 29 of this Agreement.



4.2



If in respect of any Development Area, Commercial Production remains

possible beyond the initial period of 25 consecutive Agreement Years

specified in Article 4.1 the Contractor, after giving notice to

Georgian Oil and the State Agency at least one (1) year prior to the

end of any such period, and

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14



after obtaining approval by the Coordination Committee of a revised

Development Plan shall be entitled to have an extension of the term of

this Agreement with respect to such Development Area for an additional

term of five (5) years or the producing life of the Development Area,

whichever is lesser, subject to the approval of the State Agency, and

such approval shall not be unreasonably withheld.



ARTICLE 5

RELINQUISHMENTS

5.1



Subject to Article 5.2, Contractor shall select and relinquish portions

of the Agreement Area as follows:

a)



at least twenty-five percent (25%) of the original Agreement

Area less any Development Areas, not later than five (5)

Agreement Years after the Effective Date of the Agreement; and



b)



at least fifty percent (50%) of the Agreement Area less any

Development Areas, remaining after the relinquishment of

Clause 5.1(a) occurs not later than ten (10) Agreement Years

after the Effective Date of the Agreement; and



c)



at least fifty percent (50%) of the Agreement Area less any

Development Areas remaining after the relinquishment of Clause

5.1(b) occurs not later than fifteen (15) Agreement Years

after the Effective Date of the Agreement; and



d)



at least fifty percent (50%) of the Agreement Area less any

Development Areas remaining after the relinquishment of Clause

5.1(c) occurs not later than twenty (20) Agreement Years after

the Effective Date of the Agreement.



e)



Subject to the provisions of Clause 5.1 (f), all of the

Agreement Area including the Development Areas not later than

twenty-five (25) Agreement Years after the Effective Date of

the Agreement; and



f)



If and to the extent the term of this Agreement is extended

pursuant to the provisions of Article 4.2 then the remainder

of the Agreement Area not later than thirty (30) Agreement

Years after the Effective Date of the Agreement or the

producing life of the Development Areas, whichever is lesser.



g)



Following the expiration of ten (10) years from the

declaration of a Development Area, all depths deeper than five

hundred (500) meters below the total depth of the deepest well

drilled within the



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15

Development Area will cease to be included in the Development

Area, and shall be subject to relinquishment under this

Article 5.



5.2



Subject to the provisions of Article 5.1(f) and 5.1(g), the Contractor

shall not be required pursuant to Article 5.1 to relinquish any portion

of the original Agreement Area containing a Development Area.



5.3



Unless the Agreement is earlier surrendered or terminated, the

Contractor shall furnish the State Agency and Georgian Oil with a

description of the boundaries of the part of the Agreement Area to be

relinquished and retained not less than ninety (90) days in advance of

the deadline for the relinquishment prescribed in Article 5.1.



5.4



The area designated under Article 5.3 for relinquishment shall consist

as far as practicable of rectangular blocks bounded by lines running

due north and south and due east and west and shall not be less than

five (5) square kilometres. The area designated for relinquishment need

not consist of one contiguous area.



5.5



Contractor may at any time relinquish voluntarily all or any part of

the Agreement Area. Article 5.4 shall apply to all voluntary

relinquishments. Any such voluntary relinquishment of less than all of

the Agreement Area shall be credited toward any subsequent

relinquishment obligations hereunder.

ARTICLE 6

COORDINATION COMMITTEE



6.1



For the purpose of providing the overall supervision and direction of

and ensuring the performance of the Petroleum Operations, Georgian Oil

and Contractor shall establish a Coordination Committee within

forty-five (45) days of the Effective Date.



6.2



The Coordination Committee shall comprise a maximum total of eight (8)

members. Georgian Oil shall appoint a total of four (4) representatives

and Contractor shall appoint four (4) representatives to form the

Coordination Committee. Georgian Oil and Contractor shall each

designate one of its representatives as its chief representative. All

the aforesaid representatives shall have the right to attend and

present their views at meetings of the Coordination Committee. Each

representative shall have the right to appoint an alternate who shall



be entitled to attend all meetings of the Coordination Committee but

who shall have no vote except in the absence of the representative for

whom he is the alternate. When a decision is to be made on any

proposal, the chief representative from each Party shall be the

spokesman on behalf of such Party.



15

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16



6.3



The first Chairman of the Coordination Committee shall be the chief

representative designated by the Contractor (or his alternate), and the

first Vice Chairman shall be the chief representative designed by

Georgian Oil (or his alternate). The Chairman and Vice Chairman shall

be appointed for a term of two (2) years. Following the end of each

such two (2) year term of appointment, the identity of the Chairman and

the Vice Chairman shall rotate so that for the next two (2) year period

the previous Chairman shall become Vice Chairman for the next two (2)

years and the Vice Chairman shall become Chairman for the next two (2)

years. The Chairman of the Coordination Committee shall preside over

meetings of the Coordination Committee and in the absence of the

Chairman (or his alternate), the Vice Chairman shall preside. Such

Parties may designate a reasonable number of advisors, who may attend,

but shall not be entitled to vote at, Coordination Committee meetings.



6.4



A regular meeting of the Coordination Committee shall be held at least

once a Calendar Quarter. The Secretary to be designated pursuant to

Article 6.9 shall be responsible for calling such regular meetings of

the Coordination Committee and shall do so at the request of the

Chairman by sending a notice to the Parties. Other meetings, if

necessary, may be held at any time at the request of Georgian Oil or

Contractor. In each case the secretary shall give the Parties at least

30 days notice (or such shorter period as the Parties may agree) of the

proposed meeting date, the time and location of the meeting.



6.5



The Parties hereby empower the Coordination Committee to:

a)



review and examine any Work Program and Budget proposed by the

Contractor and any amendment thereof;



b)



determine the Commerciality of each proposed Development

Operation;



c)



review and adopt proposed Development Operations and Budgets;



d)



approve or confirm the following items of procurement and

expenditures:

i)



approve procurement of any item within the Budget

with a unit price exceeding Two Hundred and Fifty

Thousand U.S.$ (U.S.$ 250,000) or any single purchase

order of total monetary value exceeding One Million

U.S. $ (U.S.$1,000,000);



ii)



approve a lease of equipment, or an engineering sub

Agreement or a service Agreement within the Budget

worth more than Five Hundred Thousand U.S. $

(US$500,000) in total; and



iii)



approve excess expenditures pursuant to Article 10.5

hereof and the expenditures pursuant to Article 10.6

hereof;



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17



e)



demarcate boundaries of a Development Area;



f)



review and approve the insurance program proposed by the

Contractor and emergency procedures on safety and

environmental protection; in addition all programmes and

budgets which are in connection with environmental protection

should be previously agreed with the State Agency for

Regulation of Oil and Gas Resources in Georgia as required;



g)



review and approve personnel policies, selection and training

programs for Operator. Without prejudice to the foregoing, it

is accepted that part of the personnel policy of Operator

shall be to give preference to Georgian citizens, provided

that the conduct of Petroleum Operations shall not be

affected;



h)



discuss, review, decide and approve other matters that have

been proposed by either Georgian Oil, Contractor or the

Operator;



i)



review and examine matters required to be submitted to the

State Agency;



j)



review and discuss the development work and technological

regimes proposed by Contractor and Georgian Oil; and



k)



appoint sub-committees to meet from time to time to review any

aspect of Petroleum Operations, which the Coordination

Committee thinks fit.



6.6



Decisions of the Coordination Committee shall be made by majority

decision of the representatives present and entitled to vote. Each

representative will have one vote. All decisions made unanimously shall

be deemed as formal decisions and shall be conclusive and equally

binding upon the Parties.



6.7



Georgian Oil and Contractor shall endeavor to reach agreement on all

matters presented to the Coordination Committee. In the event that on

any matter the Coordination Committee are unable to reach agreement and

the Contractor is insisting that its proposal shall prevail, if

Georgian Oil is reasonably of the view that the proposed action would

result in serious permanent damage to that field or reservoir or

materially reduced recovery of Petroleum over the life of the field or

reservoir then the matter will be referred to an internationally

recognized independent expert appointed by the Contractor and Georgian

Oil whose decision on accepted international Petroleum Industry

practice shall be final and binding. The costs of the expert shall be

met by the Georgian Oil and Contractor equally and shall be recoverable

as Costs and Expenses.



6.8



A matter which requires urgent handling may be decided by the

Coordination Committee without convening a meeting, with the

Coordination Committee making decisions through telexes or the

circulation of documents.



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18



6.9



The Coordination Committee shall nominate a Secretary, to record

minutes of the meetings of the Coordination Committee, and may

establish technical and other advisory sub-committees. The Secretary

shall take a record of each proposal voted on and the results of such

vote at each meeting of the Coordination Committee. Each representative

of the Parties shall sign and be provided with a copy of such record at

the end of such meeting. The Secretary shall provide each Party with a

copy of the minutes of each meeting of the Coordination Committee

within fifteen (15) days after the end of such meeting. Each Party

shall thereafter have a period of fifteen (15) days to give notice of

any objections to the minutes to the Secretary. Failure to give notice

within the said fifteen (15) day period shall be deemed approval of

those minutes. In any event the record of proposals voted on to be

provided at the end of each meeting shall be conclusive and take

precedence over the minutes. Approved minutes of the Coordination

Committee shall be submitted to the State Agency.



6.10



All costs and expenses incurred with respect to the activities of the

Coordination Committee shall be paid or reimbursed by the Contractor

and charged to Operation Expenses in accordance with the Accounting

Procedure.

ARTICLE 7

OPERATOR RESPONSIBILITY



7.1



The Parties agree that the Operator shall act as the Operator for

Petroleum Operations within the Agreement Area in accordance with

approved Work Programs and Budgets unless otherwise stipulated in this

Article 7.



7.2



The Operator shall have the following obligations:

a)



to perform the Petroleum Operations reasonably, economically

and efficiently in accordance with directions received from

the Coordination Committee. It is recognised that the

Coordination Committee through the Operator will have

operating control of all Petroleum Operations, including the

right to authorise the appointment of the General Director and

Deputy Director or the Directors;



b)



to conduct (implement) the Work Programs and Budgets approved

by the Coordination Committee;



c)



to be responsible for purchasing facilities, equipment and

miscellaneous material and enter into subcontracts and service

contracts at Contractor's instruction with service providers

and vendors related to the Petroleum Operations, in accordance

with approved Work Programs and Budgets and instructions from

Contractor;

18



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d)



19

to prepare and submit for approval a personnel training

program and its annual budget and carry out the same as

approved by the Coordination Committee;



e)



to establish and maintain complete and accurate accounting

records regarding its costs and expenditures for the Petroleum

Operations in accordance with the Accounting Procedure and

this Agreement;



f)



to make necessary preparation for regular meetings of the

Coordination Committee, and to submit to the Coordination

Committee information related to the matters reviewed and

approved by the Coordination Committee;



g)



to assist Contractor and Georgian Oil as requested in the

provision of reports to the Coordination Committee on

Petroleum Operations conducted under this Agreement.



7.3



Operator and its shareholders shall not be responsible for any

activities (including Petroleum activities) affecting the Agreement

Area prior to the Effective Date.



7.4



The Operator shall provide both Parties with copies of all relevant

data and reports pertaining to Petroleum Operations (including but not

be limited to geophysical, geological, technological, operational,

accounting or other material) required by such Parties.



7.5



The Operator, Contractor and Georgian Oil agree to use their best

endeavours to agree and execute a Joint Operating Agreement should the

Parties consider it necessary. Any Joint Operating Agreement to be

entered into shall be based on the Association of International

Petroleum Negotiators Model International Joint Operating Agreement

then current and shall be subject to, wholly consistent with and shall

not detract from the provisions of this Agreement.

ARTICLE 8

THIS ARTICLE IS NOT USED



19



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20

ARTICLE 9

PROCEDURE FOR DETERMINATION OF COMMERCIALITY AND

APPROVAL OF DEVELOPMENT PLANS



9.1



If, at any time Contractor concludes that Commercial Production (or

significant additional Commercial Production if Commercial Production

has previously been established) from the Agreement Area is feasible,

it shall notify Georgian Oil and the State Agency within forty-five

(45) days of reaching such a conclusion.



9.2



Within forty-five (45) days of receipt of such notice, Contractor shall

in the first instance present to the Coordination Committee for

approval a proposed Study Program which shall be deemed approved if no

written objections are raised by any member of the Coordination

Committee within thirty (30) days following receipt thereof. The

proposed Study Program shall specify in reasonable detail the appraisal

work including seismic, drilling of wells and studies to be carried out

and the estimated time frame within which the Contractor shall commence



and complete the program and also appropriate budgets.

9.3



Thereafter the Contractor shall carry out the Study Program approved by

the Coordination Committee. Within ninety (90) days after completion of

such Study Program, the Contractor shall submit to the Coordination

Committee a comprehensive evaluation report on the Study Program. Such

evaluation report shall include, but not be limited to: geological

conditions, such as structural configuration; physical properties and

extent of reservoir rocks; pressure, volume and temperature analysis of

the reservoir fluid; fluid characteristics, including gravity of liquid

hydrocarbons, sulphur percentage, sediment and water percentage, and

product yield pattern; Natural Gas composition; production forecasts

(per well and per Field); and estimates of recoverable reserves.



9.4



Together with the submission of the evaluation report, the Contractor

shall submit to the Coordination Committee a written declaration

including one of the following statements:

a)



that the Commercial Production previously notified to Georgian

Oil pursuant to Article 9.1 is feasible;



b)



that such Commercial Production is not feasible (contrary to

the notice containing Contractor's initial expectations); or



c)



that Commercial Production will be conditional on the outcome

of further specified work that the Contractor commits to carry

out under a further Exploration or Study Program in specified

areas within or outside the relevant Study Area.

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21



9.5



In the event the Contractor makes a declaration under Article 9.4(c)

above, Contractor shall be entitled to retain the relevant Study Area

pending the completion of the further work committed under that

Article, at which time the Contractor shall advise the Coordination

Committee of its conclusion as to whether or not there is in fact a new

Commercial Discovery and the provisions of Article 9.4(a) or (b) shall

be applied accordingly.



9.6



If the Contractor declares pursuant to Article 9.4(a) that Commercial

Production is feasible, the Contractor shall submit to the Coordination

Committee (a) a proposed Development Plan in respect of the relevant

Commercial Discovery (containing the matters specified in Article 9.7

and 9.8) and (b) a proposed designation of the Development Area, both

of which shall be subject to the Coordination Committee's approval.

Such approval will not be unreasonably withheld or delayed, provided

that each shall be deemed approved as submitted if no written

objections are presented thereto by any member of the Coordination

Committee within forty-five (45) days of receipt. Upon approval being

granted or deemed as provided under this Article 9.6, the Contractor,

with any requested assistance from the Operator, shall proceed promptly

and diligently to implement the Development Plan in accordance with

good international Petroleum industry practices, to install all

necessary facilities and to commence Commercial Production.



9.7



The Contractor's proposed Development Plan to be submitted pursuant to

Article 9.6 shall detail the Contractor's proposals for Development and

operation of the Development Area. It will detail any facilities and

infrastructure which may be required up to the Measurement Point,

either inside or outside of the Development Area. Any Development Plan

shall set forth production parameters, number and spacing of wells, the



facilities and infrastructure (including proposed locations) to be

installed for production, storage, transportation and loading of

Petroleum, an estimate of the overall cost of the Development, and

estimates of the time required to complete each phase of the

Development Plan, a production forecast and any other factor that would

affect the economic or technical feasibility of the proposed

Development.

9.8



Any Development Plan shall also include an abandonment and site

restoration program together with a funding procedure for such program.

Each abandonment plan shall describe removal and abandonment measures

deemed necessary following completion of Production from the relevant

Development Area together with an estimate of the costs thereof. The

abandonment plan shall provide for the removal of facilities and

equipment used in Petroleum Operations or their in place abandonment,

if appropriate, in the Development Area and the return of used areas to

a condition that reasonably permits the use of such areas for purposes

similar to those uses existing prior to the commencement of Petroleum

Operations hereunder. All expenditures incurred in abandonment and site

restoration shall be treated as Costs and Expenses and recoverable from

Cost Recovery Petroleum in accordance with Article 11 and the

Accounting Procedure. All funds collected pursuant to the funding

procedure shall be dedicated to site restoration and abandonment and

will be

21



<PAGE>



22



placed in a special interest bearing account by Contractor, which shall

be held in the joint names of the State and the Contractor or their

nominees. Contractor's responsibilities for environmental degradation,

site restoration and well abandonment obligations, and any other

actual, contingent, possible and potential activity associated with the

environmental condition of the Development Area shall be limited to the

obligation to place the funds agreed to be paid in accordance with the

said funding procedure in the approved account in accordance with

generally accepted international Petroleum industry practice. Deposits

in approved accounts shall be made on a quarterly basis in arrears

commencing with the first Calendar Quarter in which there is Available

Petroleum. All such payments deposited by Contractor shall be treated

as Costs and Expenses and recoverable as Operation Expenses from Cost

Recovery Petroleum in accordance with Article 11 of this Agreement. No

Taxes shall be imposed on any amounts paid into, received or earned by

or held in the special interest bearing account. The State shall be

solely responsible for the implementation of the abandonment plan.

Allocation of relevant sources and implementation of abandonment plan

shall be controlled by and under the rules established by the State

Agency for Regulation of Oil and Gas Resources in Georgia.

9.9



Any significant changes to an approved Development Plan or proposals

related to extension of a Field or for enhanced recovery projects shall

be submitted to the Coordination Committee.



9.10



Subject to the terms of this Agreement the Contractor shall carry out,

at its own expense and financial risk, all the necessary Petroleum

Operations to implement an approved Development Plan. However, if, the

Contractor in its sole discretion determines exploitation turns out not

to be commercially profitable, the Contractor shall not be obligated to

continue Development or Production and will in such circumstances

submit a revised development plan that is commercially profitable to

the Coordination Committee or relinquish the Development Area.



9.11



Where there is a perceived need recognised by the State Agency and the

Contractor to improve the economic effectiveness of the Petroleum

Operations by constructing and operating certain common facilities with

other organisations (including for example roads, non-import/non-export

pipelines, compression and pumping stations and communication lines)

the State Agency and the Contractor shall use their best efforts to

reach agreement between themselves and other appropriate enterprises as

to the construction and operation of such facilities with all costs,

tariffs and investments made by the Contractor to be recoverable as

Operation Expenses in accordance with Article 11 of the Agreement and

Accounting Procedure.



22



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23

ARTICLE 10

ANNUAL WORK PROGRAMS AND BUDGETS



10.1



Contractor shall be responsible for the procurement of installations,

equipment and supplies and entering into contracts for the purchase of

goods and services with Sub Contractors including Foreign Sub

Contractors and others arising out of Petroleum Operations, all in

accordance with approved Work Programs and Budgets. Operator shall

assist the Contractor when requested in respect of the matters set out

in the previous sentence, and shall implement domestic procurement

operations as provided in Clause 7.2(c) in accordance with approved

Work Programs and Budgets.



10.2



Contractor shall submit to a minimum Work Program and the corresponding

Budget before the Effective Date of the Agreement; Annex D.



10.3



Before the 31st October of each Calendar Year, the Contractor shall

prepare and submit to the Coordination Committee for its review a

proposed annual Work Program and Budget for the next Calendar Year. If

the Coordination Committee agrees to modifications in an annual Work

Program and/or Budget, the Contractor shall promptly make such

modifications to the Work Program and/or Budget and resubmit the

modified Work Program and Budget to the Coordination Committee. The

Coordination Committee shall approve each Work Program and Budget

within forty five (45) days after receipt of same. If the Coordination

Committee fails to notify the Contractor of its approval of the Work

Program and Budget within said forty-five (45) days after its receipt,

the annual Work Program and Budget proposed by the Contractor together

with any modifications timely requested by the Coordination Committee,

shall be deemed to have been approved by the Coordination Committee.



10.4



In connection with the review and approval of the annual Work Program

and Budget, the Contractor and Operator shall submit to the

Coordination Committee such supporting data as reasonably requested by

the Coordination Committee.



10.5



The Contractor may, in

expenditures in excess

the approved Budget in

that the objectives in

changed:



accordance with the following provisions, incur

of the approved Budget or expenditures outside

carrying out the approved Work Program, provided

the approved Work Program are not substantially



a)



In carrying out an approved Budget, the Contractor may, if

necessary, incur excess expenditures of no more than ten

percent (10%) of the approved Budget in any specified

budgetary category. The Contractor shall report quarterly the

aggregate amount of all such excess expenditures to the

Coordination Committee for confirmation.



b)



For the efficient and as required operative performance of

Petroleum Operations, the Contractor may, without approval,

undertake certain



23

<PAGE>



24

individual projects which are not included in the Work Program

and Budget, for a maximum expenditure of Two Hundred Fifty

Thousand U.S.$ (U.S.$250,000), but shall, within ten (10) days

after such expenditures are incurred, report to the

Coordination Committee for confirmation.



c)



Excess expenditures under this Article 10.5 shall not exceed

five percent (5%) of the approved or modified total annual

Budget for the Calendar Year. If the aforesaid excess is

expected to be in excess of said five percent (5%) of the

total annual Budget, the Contractor shall present its reasons

therefor to the Coordination Committee and obtain its approval

prior to incurring such expenditures.



10.6



In case of emergency (as in where there is an immediate threat to life

or property), the Contractor may incur emergency expenditures for the

amount actually needed but shall report such expenditures to the

Coordination Committee as soon as they are made. The said emergency

expenditures shall not be subject to Article 10.5 above.



10.7



Petroleum Operations will only be performed in accordance with the

approved or modified annual Work Program and Budget, otherwise they

will not be deemed to be Costs and Expenses and will not be treated as

Cost Recoverable.

ARTICLE 11

ALLOCATION OF PRODUCTION, RECOVERY OF COSTS AND

EXPENSES, PRODUCTION SHARING, AND RIGHT OF EXPORT



11.1



Contractor shall provide or procure the provision of all funds required

to conduct Petroleum Operations under this Agreement, except as

otherwise provided in this Agreement, and Contractor shall be entitled

to recover its Costs and Expenses from Petroleum produced from the

Agreement Area as provided below.



11.2



Costs and Expenses incurred directly or indirectly by Contractor prior

to the Effective Date pursuant to the provisions of this Agreement

including but not limited to the seismic data acquired by the

Contractor over the Agreement Area shall be deemed to be Costs and

Expenses for the purposes of this Agreement and shall be deemed to be

incurred on the Effective Date and shall be recoverable from Cost

Recovery Petroleum in accordance with the provisions of this Agreement

provided that these Costs will be documentarily approved by the

Coordination Committee.



24



<PAGE>



25



11.3



Contractor and Operator shall have the right to use free of charge

Petroleum produced from the Agreement Area to the extent required for

Petroleum Operations under the Agreement. The amount of Petroleum which

Contractor and Operator shall be entitled to use for Petroleum

Operations shall not exceed the amount which would be expected to be

used in accordance with international Petroleum industry practice. For

the avoidance of doubt, the use of such Petroleum shall only be for the

benefit of Petroleum Operations and not the personal gain of any Party.

An appropriate paper shall also be executed for the use of such

Petroleum.



11.4



Available Crude Oil and Available Natural Gas (hereinafter referred to

collectively as "Available Petroleum") shall be measured at the

applicable Measurement Point and allocated as set forth hereinafter.



11.5



Contractor and Georgian Oil shall be entitled to recover all Costs and

Expenses incurred in respect of Petroleum Operations in a following

manner:

a)



Operations Expenses will firstly be recovered from the

Available Petroleum;



b)



Capital Expenditures will be recovered from maximum 50% of

remaining Available Petroleum (hereinafter referred to as

"Cost Recovery Crude Oil" and "Cost Recovery Natural Gas" as

appropriate) following the recovery of Operations Costs.



Costs and Expenses shall be recovered in a manner consistent with the

Accounting Procedure and Article 11.6.

11.6



Costs and Expenses shall be recoverable from Cost Recovery Petroleum on

a first in, first out basis (i.e. Costs and Expenses will be recovered

according to the date they were incurred, earliest first). Recovery of

Costs and Expenses will commence as soon as Cost Recovery Petroleum is

available.



11.7



To the extent that in a Calendar Year outstanding recoverable Costs and

Expenses related to the Agreement Area exceed the value of all Cost

Recovery Crude Oil or Cost Recovery Natural Gas from the Agreement Area

for such Calendar Year, the excess shall be carried forward for

recovery in the next succeeding Calendar Years until fully recovered,

but in no case after termination of the Agreement or otherwise in

accordance with the Georgian Law.



11.8



Recovery of Costs and Expenses shall be achieved by transferring to a

Party at the Measurement Point title to quantities of Cost Recovery

Petroleum of equivalent value (determined in accordance with Article

12) to the Costs and Expenses to be recovered in accordance with this

Article 11.



11.9



To the extent that the value of Cost Recovery Petroleum received by a

Party from the Agreement Area during a Calendar Quarter is greater or

lesser than

25



<PAGE>



26



the Party was entitled to receive for that Calendar Quarter, an

appropriate adjustment shall be made in accordance with the Accounting

Procedure.

11.10



Following recovery of Costs and Expenses from Cost Recovery Petroleum

in accordance with the provisions of this Article 11, the remaining

Petroleum including any portion of Cost Recovery Petroleum not required

for recovery of Costs and Expenses (hereinafter referred to as "Profit

Oil" or "Profit Natural Gas") shall be allocated between Georgian Oil

and the Contractor in the following proportions, over each Calendar

Year:

a)



Profit Oil:



1)



before Payment Date



Georgian Oil's Share

Contractor's Share



- 50%

- 50%



2)



after Payment Date



Georgian Oil's share

Contractor's share



- 60%

- 40%



b)



Profit Natural Gas:



1)



before Payment Date



Georgian Oil's Share

Contractor's Share



- 50%

- 50%



2)



after Payment Date



Georgian Oil's share

Contractor's share



- 60%

- 40%



Payment Date is the date when Contractor's total costs incurred for

production of Crude Oil and Natural Gas are equal to the total of

profit received from the sales of Cost Recovery Crude Oil, Natural Gas

and Profit Crude Oil, Natural Gas.

11.11



Contractor shall prepare and provide Georgian Oil not less than ninety

(90) days prior to the beginning of each Calendar Quarter a written

forecast setting out the total quantity of Petroleum that Contractor

estimates can be produced and saved hereunder during each of the next

four (4) Calendar Quarters in accordance with Accepted international

Petroleum industry practices and the Work Program established in

accordance with Article 10.



11.12



Crude Oil shall be measured at the Measurement Point for purposes of

the Agreement and delivered to Georgian Oil and Contractor and each

such Party as owners shall take in kind, assume risk of loss and

separately dispose of their respective entitlements of Cost Recovery

Oil and Profit Oil. All Cost Recovery Natural Gas and Profit Natural

Gas shall be sold on a jointly committed basis in accordance with

Article 16 of this Agreement.



11.13



For the avoidance of any doubt, title to their relevant shares of

Petroleum shall pass from the State to Georgian Oil and Contractor as

appropriate at the Measurement Point. The Operator has no title to any

Petroleum.

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11.14



27



Georgian Oil and Contractor shall agree on procedures for taking

volumes of Crude Oil corresponding to their respective entitlements on

a regular basis and in a manner that is appropriate having regard to



the respective destinations and uses of the Crude Oil, all in

accordance with the provisions of this Agreement. If necessary Georgian

Oil and Contractor will enter into a lifting agreement setting out the

agreed procedures for taking volumes of Crude Oil, and such agreement

shall comply with the principles of accepted international Petroleum

industry practice.

11.15



Georgian Oil shall have a once only option to participate in Petroleum

Operations as a Contractor Party for up to and including fifteen

percent (15%) of the total Contractor participating interest as set out

in this Article 11 under the following terms and conditions ("Option"):

11.15.1



Georgian Oil shall have caused the Contractor Licence to have

been assigned solely to CanArgo Norio Ltd. Prior to the

signing of this Agreement.



11.15.2



The right to exercise the Option shall accrue on the date that

Contractor submits the first Development Plan to the

Coordination Committee pursuant to Article 9.4 (a) ("Option

Accrual Date").



11.15.3



Georgian Oil must exercise the Option within one hundred and

eighty (180) days from Option Accrual Date by giving notice in

writing to Contractor of its desire to do so and specifying in

the notice the percentage interest which it wishes to acquire.



11.15.4



Georgian Oil's right to exercise the Option shall be subject

to:



11.15.5



a)



its ability to satisfy the terms of Articles 26.1 and

26.3 to the reasonable satisfaction of CanArgo Norio

Ltd.



b)



payment of Back Costs in accordance with Article

11.15.5; and



c)



execution of a Joint Operating Agreement in

accordance with Article 11.15.9.



If Georgian Oil exercises the Option, then Georgian Oil will

become liable for payment to Contractor in U.S.$ of Costs and

Expenses incurred prior to the submittal of the first

Development Plan ("Back Costs") in proportion to the

percentage participating interest which it wishes to acquire.

Any unpaid share of Costs and Expenses for which Georgian Oil

is liable hereunder will accrue interest at the rate of LIBOR

plus five (5) percent per annum from the Option Accrual Date.

Back Costs must be paid in full in order for Georgian Oil to

acquire a participating interest. Failure by Georgian Oil to

satisfy all terms including payment of Back Costs within 180

days from the Option Accrual Date will result in the lapse of

the Option.

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28



11.15.6



Georgian Oil shall bear its pro rata share of Costs and

Expenses and other costs attributable to the Contractor

Parties in connection with Petroleum Operations incurred from

and after the date of submittal of the first Development Plan

in proportion to the participating interest which it acquired



through exercise of the Option. Upon exercise of the Option,

Georgian Oil shall pay all of its share of Costs and Expenses

and other costs attributable to the Contractor Parties in

connection with Petroleum Operations incurred from the Option

Accrual Date through the date of exercise of the Option within

ten (10) Days of receipt of invoice from CanArgo Norio Ltd for

such costs. For costs following the date of exercise of the

Option, if CanArgo Norio Ltd so requests, Georgian Oil shall

advance its share of estimated cash requirements for each

succeeding Month's operations based on CanArgo Norio Ltd's

estimate of the money to be spent in such Month. Each such

cash call shall be made in writing and delivered to Georgian

Oil not less than fifteen (15) Days before the payment due

date, which shall be no sooner than the first business Day of

the Month for which the advances are required. Georgian Oil

shall wire transfer its share of each such cash call to

CanArgo Norio Ltd on or before the due date, in the currencies

requested at a bank designated by CanArgo Norio Ltd. If

Canargo Norio Ltd does not request Georgian Oil to advance its

share of estimated cash requirements, then Georgian Oil shall

pay its share of cash expenditure for each Month within ten

(10) Days following receipt of CanArgo Norio Ltd's invoice.

11.15.7



Following exercise of the Option Georgian Oil will be

considered a Contractor Party under the Agreement, enjoying

all the rights and bearing all the obligations of a Contractor

Party with respect to the participating interest it has

acquired through exercise of the Option, except as modified in

this Article 11.15, and shall be represented by CanArgo Norio

Ltd from and after exercise of the Option.



11.15.8



The right to exercise the Option is personal to Georgian Oil

and is not capable of assignment by Georgian Oil to any Third

Party. The Option shall lapse upon any purported assignment or

transfer of the Option by Georgian Oil to any Third Party.



11.15.9



Georgian Oil will, within a reasonable time after exercise of

the Option, enter into an operating agreement based on the

Association of International Petroleum Negotiators Model

International Joint Operating Agreement then current ("AIPN

Model") with CanArgo Norio Ltd which shall include terms,

among others, embodying at least the following principles: (i)

voting rights in proportion to participating interests; (ii)

the minimum required vote to effect a decision being at least

seventy-five percent (75%) of participating interests; (iii)

cash call and default provisions that include forfeiture of

interest for failure to cure; and (iv) such other terms and

provisions as are commonly included in international petroleum

28



<PAGE>



29

operating agreements. If at the time that Georgian Oil

exercises the Option Contractor Parties have already entered

into a joint operating agreement based on the AIPN Model, then

Georgian Oil shall ratify and join in such operating

agreement.



11.15.10 Georgian Oil has not exercised and shall not exercise any

rights it may have pursuant to Article 26.2 and shall be

deemed to have given its approval pursuant to Article 26.3

with respect to any assignment to CanArgo Norio Ltd made prior



to signing of this Agreement

11.16



There are no production or other bonuses payable to the State

under this Agreement.

ARTICLE 12

CRUDE OIL VALUATION



12.1



Parties agree that the value of Cost Recovery Petroleum should reflect

the actual price received by the Contractor for the said Petroleum.

Given that the Contractor can demonstrate that Petroleum is being sold

to an independent third party on an arms length basis, then the Cost

Recovery Crude Oil shall be valued as the actual revenues received by

the Contractor for sales of Crude Oil at the Measurement Point

(adjusted if necessary for transportation, storage and processing

costs). If however such an independent third party sale cannot be

demonstrated, or at the discretion of the Contractor, then the Parties

agree that the value of the Cost Recovery Crude Oil, if sold on

International Markets, shall be adjusted to the international market

price for Crude Oil from time to time. In this case, for the purpose of

determining the value of the Cost Recovery Petroleum taken and disposed

of by the Parties and/or their assignees under this Agreement during

each Calendar Quarter, Georgian Oil and Contractor shall, prior to the

date of Commercial Production, agree upon the basket of Crude Oil

freely traded in international markets and referred to in subparagraph

a) below and the value of the Cost Recovery Petroleum shall be adjusted

to reflect the weighted average of daily f.o.b. prices for Agreement

term of sales from Petroleum producing countries in international

markets for the same Calendar Quarter of such basket of crude oil, it

being understood that the following principles will apply:

a)



The weighted average of the basket shall be such that the

average gravity of the basket and the average gravity of the

Crude Oil produced under this Agreement are equal; and



b)



The prices for individual referenced crude oil markers used

within the basket shall be based upon the numerical average of

a daily report of the actual price for each referenced crude

oil marker as published in agreed internationally recognised

publications; and



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12.2



30



c)



Adjustment provisions will be incorporated into the basket

formula to take account of transportation costs involved in

Crude Oil produced under this Agreement arriving at a

designated sales point (where the sales point is not the

Measurement Point) and to take account of gravity variation

beyond a pre-agreed range; and



d)



Unless agreed otherwise, the last calculated weighted average

basket price shall serve as the provisional price for a

Calendar Quarter until a new price is determined.



In the event that Georgian Oil and Contractor are unable to agree upon

the basket of Crude Oil envisaged in Article 12.1 above, or the

principles relating thereto, then either Georgian Oil or Contractor may

refer the question for a final, non-revisable determination by an

independent expert designated by the UK Institute of Petroleum. Pending



such determination, the price shall be as determined in Article 12.1(d)

above.

12.3



Natural Gas shall be valued at the actual revenues received less

transportation, storage, treatment, processing, marketing,

distribution, liquefaction and all other associated costs incurred by

Contractor beyond the Measurement Point in supplying Natural Gas to

customers beyond the Measurement Point.

ARTICLE 13

ANCILLARY RIGHTS OF THE CONTRACTOR AND OPERATOR



13.1



In addition to the rights to carry out Petroleum Operations within the

Agreement Area the State and Georgian Oil shall provide or otherwise

procure access to Contractor to all existing facilities and

infrastructure in the Agreement Area owned by the State or Georgian Oil

for the purpose of carrying out its Petroleum Operations during the

term of the Agreement. Such access shall be on terms as regards access

and tariffs no less favourable than those offered to other persons or

entities, in addition, in any case within the Petroleum Law.



13.2



Provided that Georgian Oil and the State are submitted information

below, the Contractor shall have the right to use, produce, reprocess

and export all existing geoscience, engineering, environmental and

geodetic data (including magnetic tapes and films) maps, surveys,

reports, and studies it deems necessary to carry out Petroleum

Operations hereunder including, but not limited to: magnetic surveys,

seismic surveys, well logs and analysis, core analysis, well files,

geologic and geophysical maps and reports, reservoir studies, reserve

calculations, accurate geodetic coordinates for the location of all

wells and seismic lines and all other pertinent data relative to the



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31



Agreement Area. In the event that any information is to be sold to any

third party by Georgian Oil or the Contractor (consent on which is

required from Coordination Committee and State Agency) profit shall be

distributed in accordance with the share of Profit Oil under the

Article 11. In addition, in accordance with the Petroleum Law.

13.3



The Contractor shall have the right to conduct all geoscience,

engineering, environmental and geodetic studies it deems necessary to

carry out Petroleum Operations under the Work Program. Said studies may

include, but are not limited to: seismic surveys, magnetic surveys,

global positioning surveys, aerial photography (obtaining relevant

permits), collection of soil/water/oil/rock samples for scientific and

environmental studies. Contractor shall be granted access to and/or

permission to fly subject to obtaining appropriate consents (which will

not be unreasonably withheld or delayed) over the Agreement Area to

conduct said studies. Contractor shall have the right to import

equipment and supplies necessary to conduct said studies as well as the

right to export data, film and samples to laboratories outside the

State to conduct such studies unless restricted by law of Georgia.



13.4



Subject to (i) prior approval by the Coordination Committee; and (ii)

prior consent and/or permit with any necessary local administration or

State body and relevant landowners, the Contractor and/or Operator

shall have the right to clear the land, to dig, pierce, drill,

construct, erect, locate, supply, operate, manage and maintain pits,

tanks, wells, trenches, excavations, dams, canals, water pipes,

factories, reservoirs, basins, maritime storage facilities and such,



primary distillation units, separating units for first oil extraction,

sulphur factories and other Petroleum producing installations, as well

as pipelines, pumping stations, generator units, power plants, high

voltage lines, telephone, telegraph, radio and other means of

communication (including satellite communication systems), plants,

warehouses, offices, shelters, personnel housing, hospitals, schools,

premises, underwater piers and other installations, means of

transportation, roads, bridges, and other means of transportation,

garages, hangers, workshops, maintenance and repair shops and all the

auxiliary services which are necessary or useful to Petroleum

Operations or related to them and, more generally, everything that is

or could become necessary or accessory to carry out the Petroleum

Operations but for the avoidance of any doubt in accordance with the

relevant law of Georgia.

13.5



The agents, employees and personnel of both Contractor and Operator, or

Subcontractors may enter or leave the Agreement Area and have free

access, within the scope of their functions, to all installations put

in place by the Contractor or Operator or otherwise utilised in

Petroleum Operations.



13.6



Subject to prior consent of any appropriate local State bodies and the

relevant landowners the Contractor shall have the right to utilise the

upper soil, mature timber, clay, sand, lime, gypsum and stones other

than precious stones, and any other similar substances, necessary for

the performance of Petroleum Operations only in accordance with

Georgian law. The Contractor may utilise the water necessary for

Petroleum Operations, on condition that reasonable

31



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32



efforts are taken to minimise potentially adverse effects on irrigation

and navigation, and that land, houses and the watering places are not

adversely affected.

13.7



The Contractor shall have the right to use existing pipeline and

terminal facilities belonging to or under the control of the State or

Georgian Oil. The State and Georgian Oil shall assist in making these

facilities available to the Contractor on terms with regard to access

and tariffs that are no less favourable than those available to others

including Georgian Oil and any other State enterprise. Priority shall

be given in the use of such pipelines and facilities to Petroleum

produced within Georgia.

ARTICLE 14

ASSISTANCE PROVIDED BY THE STATE



14.1



To enable the Contractor to properly carry out the Petroleum

Operations, the State Agency shall have the obligation to assist the

Contractor and Georgian Oil upon request to:

a)



provide the approvals or permits needed to conduct Petroleum

Operations and to carry out associated business activities and

to open bank accounts (for both local and foreign currency) in

Georgia;



b)



arrange for Foreign Exchange to be converted in accordance

with the principles set out in Article 19.9 of this Agreement;



c)



use office space, office supplies, transportation and

communication facilities and make arrangements for

accommodations as required;



d)



assist with any custom formalities;



e)



provide entry and exit visas and work permits for employees

and their family members of Operator, Contractor, their

Affiliated companies and Foreign Subcontractors, who are not

citizens of Georgia, and who come to Georgia to implement the

Agreement and to provide assistance for their transportation,

travel and medical facilities whilst in Georgia;



f)



provide necessary permits to send abroad documents, data and

samples for analysis or processing during the Petroleum

Operations;



g)



contact and instruct appropriate departments and ministries of

the State and any other bodies controlled by the State to do

all things necessary to expedite Petroleum Operations;

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33



h)



provide permits, approvals, and land usage rights requested by

Contractor and/or Operator for the construction of bases,

facilities and installations for use in conducting Petroleum

Operations; and



i)



provide to the Contractor data and samples if such data and

samples exist concerning the Agreement Area other than those

produced as a result of Petroleum Operations



14.2



The State Agency may charge as administrative fees for such assistance

such reasonable amounts as may be customary for the provision of such

services, but in no event shall such charges be in excess of charges

applicable to Third Parties for comparable service or assistance. It is

also understood that in respect to a number of matters such as the

conversion of currency and the provision of accommodations, for

example, the State may also have to secure the services of private

Third Parties. All administrative fees will be in keeping with the

schedule as set out in Annex E to this Agreement.



14.3



Notwithstanding anything in this Agreement to the contrary, Contractor

agrees to pay the fees described in Article 14.2 to the State Agency,

together with reimbursement to the Agency for all direct expenses

incurred by it in preparing and making necessary applications to

ministries, state agencies or other governmental authorities in the

course of obtaining permits and approvals required for Contractor

and/or Operating Company to conduct Petroleum Operations. Such direct

expenses may include the costs of retaining experts to review or

prepare technical submissions (e.g. environmental or engineering data),

but in no event shall the State Agency charge for additional

compensation, if any, to its personnel for performing such services.

Direct expense items also shall include, but not be limited to copying

or printing of applications and supporting data submitted to other

governmental bodies, transportation and hall rental for public hearings

required by laws or authorities other than those of the Agency itself,

and similar items that the Agency cannot reasonably provide through its

resources.



14.4



Fees and direct expenses paid under Articles 14.2 and 14.3 shall be

treated as Costs and Expenses for the purpose of determining Cost

Recovery Petroleum.



14.5



Contractor shall pay to the State Agency an Administrative/Licence Fee

in the amount of US$60,000.00 for obtaining a permit for usage of oil

and gas resources. The Administrative/Licence Fee will be paid in two

installments each of US$30,000.00. The first installment will be paid

on the Effective Date and the second installment will be paid on the

first anniversary of the Effective Date.

33



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34

ARTICLE 15

MEASUREMENT, QUALITY AND VALUATION OF PETROLEUM



15.1



All Petroleum produced, saved and not used in the Petroleum Operations

in accordance with Article 11.3 shall be measured at the Measurement

Point approved in the Development Plan.



15.2



The Measurement Point shall be the very final facility among all

facilities the cost of which is included as a Cost and Expense

recoverable from Cost Recovery Petroleum under the Agreement.



15.3



All Petroleum shall be measured in accordance with standards generally

acceptable in the international Petroleum industry. All measurement

equipment shall be installed, maintained and operated by the Operator.

The installed measurement equipment will have certificates of Georgian

state standards organization. The Contractor and Georgian Oil and the

State Agency shall be entitled periodically to inspect the measuring

equipment installed and all charts and other measurement or test data

at all reasonable times. The accuracy of measuring equipment shall be

verified by tests at regular intervals and upon request by either

party, Georgian Oil and the State Agency or the Contractor, using means

and methods generally accepted in the international Petroleum industry

by the state standard organisation of Georgia.



15.4



Should a meter malfunction occur, Operator shall immediately have the

meter repaired, adjusted and corrected and following such repairs,

adjustment or correction shall have it tested or calibrated to

establish its accuracy. Upon the discovery of metering error, Operator

shall have the meter tested immediately and shall take the necessary

steps to correct any error that may be discovered and after each case

approval of the state standard of Georgia on using the meter is

necessary.



15.5



In the event a measuring error is discovered, Contractor and Georgian

Oil shall use all reasonable efforts to determine the correct

production figures for the period during which there was a measuring

error and correct previously used readings. Contractor shall submit to

the Coordination Committee and the State Agency a report on the

corrections carried out. In determining the correction, Contractor

shall use, where required, the information from other measurements made

inside or outside the Development Area. If it proves impossible to

determine when the measuring error first occurred, the commencement of

the error shall be deemed to be the point in time halfway between the

date of the previous test and the date on which the existence of the

measuring error was first discovered.



15.6



All measurements for all purposes in this Agreement shall be adjusted

to standard conditions of pressure at sea level and temperature at

sixty degrees Fahrenheit (60 degrees F).

34



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35

ARTICLE 16

NATURAL GAS



16.1



Associated Natural Gas

a)



Associated Natural Gas produced within the Agreement Area

shall be used primarily for purposes related to the Production

Operations and production enhancement including, without

limitation, oil treating, gas injection, gas lifting and power

generation.



b)



Based on the principle of full utilisation of the Associated

Natural Gas and with no impediment to normal production of the

Crude Oil, any Development Plan shall include a plan of

utilisation of Associated Natural Gas. If there is any excess

Associated Natural Gas remaining in any Oil Field after

utilisation pursuant to Article 16.1.a) above (hereafter

referred to as "Excess Associated Natural Gas"), the

Contractor shall carry out a feasibility study regarding the

commercial utilisation of such Excess Associated Natural Gas.

i)



If Georgian Oil and Contractor agree that Excess

Associated Natural Gas has no commercial value, then

Operator shall act under the plan approved by

Coordination Committee, so that not to interfere with

normal oil production. Besides, in order to avoid any

doubt, both the plan and the Operator's activities

under the plan shall exclude pollution and correspond

to relevant standards effective in Georgia, which

shall be agreed with the State Agency for Regulation

of Oil and Gas Resources in Georgia.



ii)



If Georgian Oil and Contractor agree that Excess

Associated Natural Gas has commercial value, they

will endeavour to enter into gas sales agreement(s)

and/or other commercial and/or technical arrangements

with Third Parties required to develop such Natural

Gas. Investments in the facilities necessary for

production, transportation and delivery of Excess

Associated Natural Gas shall be made by the

Contractor. The construction of facilities for such

Production and utilisation of the Excess Associated

Natural Gas shall be carried out at the same time as

the Development Operations, or at any time as may be

agreed to by the Parties.



iii)



If either Georgian Oil or Contractor considers that

Excess Associated Natural Gas has commercial value

while the other considers that Excess Associated

Natural Gas has no commercial value, the one who

considers Excess Associated Natural Gas to have

commercial value may utilise such Excess Associated

Natural Gas, at its own cost and expense and



35

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36

without impeding the Production of Crude Oil and

without affecting the shares of Crude Oil and Natural

Gas otherwise to be allocated under the other

provisions of this Agreement, but if such Excess

Associated Natural Gas is not so utilised at any time

or from time to time, then such Excess Associated

Natural Gas shall be disposed of by the Operator in

accordance with Article 16.1 b) i).



16.2



c)



The price of Associated Natural Gas produced from the

Agreement Area shall be determined by Georgian Oil and

Contractor based on general pricing principles taking into

consideration such factors as sales prices of internationally

transported gas delivered in Western Europe, quality and

quantity of the Associated Natural Gas (including the

equivalent substitute energy value) and the economics of

Development. Unless otherwise agreed, Georgian Oil and

Contractor shall participate in all gas sales agreements

entered into for the sale of Associated Natural Gas produced

from the Agreement Area in proportion to their Article 11

allocation rights. Gas sales prices shall be denominated in

U.S.$. If gas sales are carried out in the local Georgian

market, sales price shall be denominated in local currency, in

accordance with exchange rate of US$ into local currency

determined by the National Bank of Georgia at the moment of

gas sale.



d)



Investments made in conjunction with the utilisation of both

Associated Natural Gas and Excess Associated Natural Gas,

together with investments incurred after approval of a

Development Plan in carrying out feasibility studies on the

utilisation of Excess Associated Natural Gas, shall be charged

to Operation Expenses.



Non-associated Natural Gas

a)



When any Non-associated Natural Gas is discovered within the

Agreement Area, Georgian Oil and Contractor shall implement a

program regarding the Appraisal and possible development and

marketing of the Non-associated Natural Gas in the domestic

and international markets. This program shall include the

following principles:

i)



After Non-associated Natural Gas has been discovered

within the Agreement Area, the Contractor shall

present to the Coordination Committee, a report,

including, without limitation, an initial estimate of

the boundaries of the Non-associated Natural Gas

reservoir and a range of recoverable reserves.



ii)



The decision period for commitment by Contractor to

an Appraisal Program shall be as soon as is practical

in all the circumstances but shall not be longer than

three (3) months from the submission of the discovery

report. During this

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37



decision period, the Coordination Committee will form

a Marketing Team whose goal will be to conduct

preliminary market studies and analyse the potential

markets for the Non-associated Natural Gas. During

this decision period, Contractor will report to the

Coordination Committee at regular intervals on the

progress and results of the technical evaluation of

moving forward with an Appraisal Program. Within the

said decision period, Contractor will make its

election whether or not to commit to an Appraisal

Program for the Non-associated Natural Gas.

iii)



If the Contractor commits to an Appraisal Program for

the Non-associated Natural Gas reservoir, delineation

and review of the potential of the Non-associated

Natural Gas reservoir will continue for a period not

longer than three (3) months from the submission of

the discovery report. During the review and Appraisal

periods, Contractor shall maintain all rights and

interests in the relevant portion of the Agreement

Area.



iv)



The expenses incurred by the Contractor in carrying

out the said review, evaluation and Appraisal Program

and the expenses incurred by the Marketing Team

representatives in conducting the preliminary market

studies and analysing the markets for the

Non-associated Natural Gas shall be charged to

Operation Expenses and are recoverable from Cost

Recovery "Natural Gas".



b)



Following the completion of the Appraisal Program and review

of the potential of the discovery, Contractor shall submit an

appraisal report to the Coordination Committee. If the

Coordination Committee decides that the Discovery is

commercial, the Parties shall agree on a Development Plan. The

Parties shall also endeavour to finalise Gas Sales

Agreement(s) and other agreements necessary for the

commercialisation of such Non-associated Natural Gas.



c)



The price of the Non-associated Natural Gas produced from the

Agreement Area shall be determined based on general pricing

principles, taking into consideration such factors as

representative sales prices of internationally transported

volumes delivered to distributors and end users in Western

Europe, quality and quantity of the Natural Gas (including the

equivalent substitute energy) and the economics of the

Development of such Natural Gas. Unless otherwise agreed,

Georgian Oil and Contractor shall participate in all Gas Sales

Agreements entered into for the sale of Non-associated Natural

Gas produced from the Agreement Area in proportion to their

Article 11 allocation rights. Sales Agreement prices shall be

denominated in U.S.$. In case if gas sale is carried out in

local market, sales price shall be denominated in local

currency, in accordance with exchange rate of

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38

US$ into local currency determined by the National Bank of



Georgia at the moment of gas sale.

d)



The production period of any Gas Field within the Agreement

Area shall be a period equal to the production period of the

Agreement.



e)



Recognizing the needs of the local Georgian gas market, the

State shall have the right to take in-kind the State's share

of the Non-Associated Profit Natural Gas and the Excess

Associated Profit Natural Gas, at its own costs and expense,

from the Measurement Point. Such election to take in-kind

shall indicate the volumes to be taken, and shall be made

prior to the submission of a Development Plan by the

Contractor. In the event of such election, the State and

Contractor acknowledge that the State shall not act to

displace the Contractor from the available domestic Natural

Gas market, and that the Contractor will make available

transportation, if any, for the State's share on a pro-rata

basis at a fee that will allow Contractor to recoup only that

share of its Costs and Expenses attributable to such

transportation of State' share. The State shall not exercise

its right to take in-kind the State's share of Profit Natural

Gas in the event that the Contractor has contracted to sell or

is in negotiations to sell Natural Gas internally in Georgia.



16.3



Contractor may participate in the installation and operation of the

pipeline(s) required to transport Natural Gas produced from the

Agreement Area to the market for such Natural Gas and share in any

revenues generated from the use of said pipeline(s) by others. If

Contractor participates in the installation and operation of such

pipeline(s), the installation and operation of such pipeline(s) shall

be included in a Development Plan and Petroleum Operations under this

Agreement. Any such investment shall be recoverable from Cost Recovery

"Natural Gas".



16.4



If the State, any state-owned company or other entity, or Georgian Oil

provides Natural Gas transportation services to Contractor, then the

tariffs charged to Contractor for such services shall be

non-discriminatory, and in no case will exceed the tariffs charged to

other entities.

ARTICLE 17

TAX/FISCAL REGIME



17.1



This Article shall apply to each Contractor Party individually.



17.2



Subject to Current Georgian Legislation each Contractor Party, Foreign

Employee and Operator shall be entitled to full and complete exemption

from all Taxes prior to or after the Effective Date of this Agreement

except as otherwise provided for in this Agreement.



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39



17.3



It is acknowledged that Double Tax Treaties will have effect to give

relief from Taxes to, but not limited to, Contractor, Contractor

Parties, Foreign Subcontractors and Foreign Employees in accordance

with the provisions of such Double Tax Treaties, but not otherwise.



17.4



Each Contractor Party shall be subject to "Profit Tax" Chapter II,

Article 5, "Mineral Usage Tax" Chapter X of the Taxation Code of



Georgia.

17.5



Each Contractor Party shall be subject to the Profit Tax for the

duration of the Agreement, at a rate determined by the Law per calendar

year in accordance with taxable base defined in Article 17.8. As for

Mineral Usage Tax, the tax rate will be five (5) percent.



17.6



Georgian Oil, its successors or assignees will assume, pay and

discharge, in the name and on behalf of each Contractor Party, that

Contractor Party's Profit Tax liability and Mineral Usage Tax liability

for a Calendar Year calculated in accordance with this Article 17 out

of Georgian Oil's share of Profit Oil and Profit Natural Gas for that

Calendar Year. The Georgian Oil Profit Oil and Profit Natural Gas share

as determined by Article 11 of this Agreement will include an amount

equal in value to all of the Contractor Parties' Profit Tax and Mineral

Usage Tax liabilities.



17.7



The obligation to assume, pay and discharge each Contractor Party's

payment of Profit Tax and Mineral Usage Tax (and only these taxes) set

out above by Georgian Oil in accordance with the provisions of Article

17.6 shall fulfill the entire tax liability of each Contractor Party,

except for the VAT on local sales and taxes established on salaries of

hired physical persons by law, taking into account that no social taxes

apply to foreign physical persons by law.



17.8



The calculation of the taxable base (balance profit/(loss)) for each

Contractor Party for a Calendar Year shall be as follows:

a)



The taxable base (balance profit/(loss)) for each Contractor

Party shall be determined as the total of each such Contractor

Party's sales revenues from Cost Recovery Petroleum, Profit

Oil and Profit Natural Gas acquired by that Contractor Party

pursuant to Article 11 of this Agreement reduced by, (i) the

Contractor Party's sales revenues from Cost Recovery Petroleum

and (ii) the Contractor Party's share of costs and the

Contractor Party's own costs incurred during a Calendar Year

in respect of Petroleum Operations which are not included in

Costs and Expenses determining Cost Recovery Petroleum in

Article 11 of this Agreement and (iii) any loss calculated in

accordance with Article 17.9 of this Agreement.



b)



Sales revenues from Cost Recovery Petroleum shall be defined

as the value of the volumes of Cost Recovery Petroleum, taken

and disposed of by the Contractor Party and/or their assignees

under this Agreement during a Calendar Year and determined by

applying the principles of



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40

valuation set out in Article 12 of this Agreement. Sales

revenues from Profit Oil and Profit Natural Gas shall be

defined as the value of the volumes of Profit Oil and Profit

Natural Gas taken and disposed of by the Contractor Party

and/or their assignees under this Agreement during a Calendar

Year.

Profit Oil volumes will be valued at the actual price received

at the Measurement Point where actually sold at the

Measurement Point. Where Profit Oil volumes are not sold at

the Measurement Point, they shall be valued at the actual

price received at the sales point less transportation and



other associated costs incurred by the Contractor Party in

transporting such Profit Oil from the Measurement Point to the

actual sales point.

c)



For the purposes of this Article 17 and specifically for the

purposes of calculating the taxable base of a Contractor Party

in accordance with this Article 17.8 and Article 17.9, Costs

and Expenses incurred by a Contractor Party prior to the

Effective Date of this Agreement be deemed to have been

incurred on the Effective Date of this Agreement, provided

such Costs and Expenses are proved by relevant documents and

are proved by Coordination Committee.



d)



For the purposes of calculating the taxable base of a

Contractor Party in accordance with this Article 17.8 and

Article 17.9, sales revenues related to Petroleum Operations

and costs incurred in respect of Petroleum Operations shall be

determined both in U.S.$ and in local currency. Sales revenues

in currency other than the U.S.$ and costs incurred in

currency other than the U.S.$ shall be translated into U.S.$

in accordance with the principles set out in Article 19.9 of

this Agreement.



17.9



If in calculating the taxable base of a Contractor Party the total sum

of deductions, represented by sales revenues from Cost Recovery

Petroleum and costs incurred in respect of Petroleum Operations which

are not included in Costs and Expenses in determining Cost Recovery

Petroleum in Article 11 of this Agreement, exceed sales revenues from

Cost Recovery Petroleum, Profit Oil and Profit Natural Gas in any

Calendar Year, the resulting loss (balance loss) may be carried forward

by a Contractor Party to the following Calendar Year and to subsequent

Calendar Years, one at a time in chronological order, and shall be

deductible in full and without restriction in computing such Contractor

Party's taxable base in such Calendar Year(s) until such time as the

loss is wholly offset against such Contractor Party's taxable base or

in accordance with the Tax Code. Provided, such losses are documented

and approved by Coordination Committee.



17.10



Each Contractor Party shall maintain its tax books and records both in

local currency and in U.S.$. The calculation of the taxable base for

each Contractor Party will be carried out in accordance with Article

17.8 d) of this Agreement.

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41



The payment of the Profit Tax and Mineral Usage Tax will be carried out

in local currency, unless otherwise provided by Georgian Legislation

17.11



The Profit Tax return for each Contractor Party shall be prepared and

submitted as follows:

I.



Each Contractor Party shall prepare a Profit Tax return in

local currency and in U.S.$ for each Calendar Year and submit

it to Georgian Oil by 15 February following the Calendar Year,

so that Georgian Oil can submit a Contractor Party's Profit

Tax return to the relevant Tax authority within terms

established by the Law.



II.



The Profit Tax return shall be prepared based on Contractor

books and accounts of Petroleum Operations as described in

Article 18 of this Agreement which Contractor is required to



maintain in local currency and in U.S.$ in accordance with the

Accounting Procedure attached hereto as Annex C.

17.12



Proper official assessments of a Contractor Party's Profit Tax

liability for each Calendar Year, and proper official receipts shall be

issued by the proper tax authorities and shall state the date and

amount and other particulars customary in Georgia for such receipts and

the currency in which the Profit Tax was paid.



17.13



Georgian Oil shall furnish to each Contractor Party the proper official

receipts that evidence official payment by Georgian Oil of that

Contractor Party's Profit Tax liability for a Calendar Year by 15 April

following the Calendar Year.



17.14



Georgian

Parties'

payments

Georgian



17.15



Georgian Oil shall assume, pay and discharge any penalties, interest,

fines or similar levies for late payment of a Contractor Party's Profit

Tax and/or Mineral Usage tax liabilities in respect of any Calendar

Year.



17.16



The State will notify each Contractor Party within one (1) month of the

Effective Date of this Agreement of the tax authority office ("the Tax

Authority") which is to be located in Tbilisi and be responsible for

and administer the implementation of the provisions of this Agreement

including but not limited to the filing of a Contractor Party's Profit

Tax return for each Calendar Year, the issuing of official assessments

and receipts evidencing the payment of each Contractor Party's Profit

Tax and Mineral Usage Tax liabilities, any audit in respect of any

Calendar Year of a Contractor Party's Profit Tax and Mineral Usage Tax

return and any other payment, liability or procedures in respect of any

other Taxes.



17.17



Employees of the Contractor, Contractor Parties, their Affiliates and

Subcontractors, and those employees assigned by Contractor to Operator

who



Oil shall not credit, directly or indirectly, Contractor

Profit Tax payments against Georgian Oil's tax or any other

to the Government or the treasury of Georgia required from

Oil.



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42



are not citizens of Georgia ("Foreign Employees") shall be liable to

Georgian personal income tax imposed by the State in accordance with

the Tax Code. A Foreign Employee will continue to be subject to the

provisions of any applicable Double Tax Treaty.

17.18



Foreign Employees who perform work in Georgia and their employers that

would otherwise be covered by and subject to social insurance, pension

fund contributions and similar payments under the social security

system of Georgia will be exempt from those payments.



17.19



The only Taxes, duties, fees or other charges to be levied by the State

or by any other Governmental entity on a Foreign Subcontractor in

connection with Petroleum Operations pursuant to this Agreement shall

be a tax to be withheld by any person or other legal entity making

revenue payments to a Foreign Subcontractor in the currency in which

the payment is made (the "Withhold Tax"). The Withhold Tax shall be

calculated in accordance with Georgian Law, provided that at the moment

of concluding the Agreement it was 4 (four) percent.



17.20



VAT shall be imposed as follows:

a)



Goods, works and services supplied directly or indirectly to

or by a Contractor Party or its Affiliates, Operator or a

Foreign Subcontractor for the purpose of Petroleum Operations

shall be exempt from VAT, save that the Contractor shall

charge VAT (at the then current rate but not exceeding twenty

(20%) per cent on Petroleum sold locally within Georgia which

is not intended for export.



b)



All imports including but not limited to goods, equipment,

works, services, loans and other forms of financing acquired

by a Contractor Party or its Affiliates, Operator, their

Subcontractors or their agents for the purpose of Petroleum

Operations shall be exempt from VAT and from excise duty on

oil products.



c)



Import and re-export of goods for personal use by Foreign

Employees and family members will not be subject to VAT

according to current Georgian Law.



d)



Exports of Petroleum by each Contractor Party or its agents

shall be exempt from VAT with credit (zero per cent rate).



e)



All re-exports by a Contractor Party or its Affiliates,

Subcontractors or their agents of goods, works and services

supplied for the purposes of Petroleum Operations including

but not limited to re-export of goods temporarily imported

into Georgia for the purposes of Petroleum Operations shall be

exempt from VAT with credit (zero per cent rate).



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ARTICLE 18

ACCOUNTING, FINANCIAL REPORTING AND AUDIT



18.1



Contractor shall maintain books and accounts of Petroleum Operations in

accordance with the Accounting Procedure attached hereto as Annex C.

These shall be maintained in local currency of Georgia and in U.S.$ in

accordance with generally accepted international Petroleum industry

accounting principles. All books and accounts which are made available

to Georgian Oil or to the State Agency in accordance with the

provisions of the Accounting Procedure shall be prepared both in the

Georgian and English languages.



18.2



The Accounting Procedure specifies the procedure to be used to verify

and establish promptly and finally Contractor's Costs and Expenses

under Article 11 of this Agreement.



18.3



Sales revenues, expenditures, financial results, tax liabilities, and

loss carry-forwards of each Contractor Party shall be determined in

accordance with the rules, rights, and obligations set forth in this

Agreement in so far as such sales revenues, expenditures, financial

results, tax liabilities, and loss carry-forwards are related to

Petroleum Operations under this Agreement.



18.4



To the extent that Georgian Oil incurs Costs and Expenses which are

recoverable from Cost Recovery Petroleum in accordance with Article 11,

Georgian Oil shall maintain separate books and accounts. These books



and accounts shall be maintained in local currency of Georgia and in

U.S.$, in the Georgian language and the English language and shall be

in accordance with generally accepted international Petroleum industry

accounting principles. Prior to Georgian Oil commencing to incur Costs

and Expenses an accounting procedure which establishes the method for

accounting for Georgian Oil's participation in the funding of Petroleum

Operations shall be agreed and approved by Coordination Committee. The

Contractor and the State Agency shall have the right to audit the books

and accounts maintained by Georgian Oil.

18.5



On annual basis Contractor shall submit to Georgian Oil and Agency an

internationally recognized audit's report on Costs and Expenses

incurred, that under Article 11 should be compensated by Cost Recovery

Petroleum, the report shall also include profit calculation pursuant to

provisions of Article 17 of this Agreement. Agency and/or Georgian Oil

shall have the right to audit the books and accounts maintained by

Contractor.



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44

ARTICLE 19

CURRENCY, PAYMENTS AND EXCHANGE CONTROL



19.1



Contractor and each Contractor Party, and their Affiliates and Operator

shall have the right to open, maintain, and operate Foreign Exchange

bank accounts both in and outside of Georgia and local currency bank

accounts inside Georgia. Such operations performed in Georgia will

comply with Petroleum Law and Current Georgian Legislation.



19.2



Contractor and each Contractor Party, and their Affiliates shall have

the right to transfer all funds received in and converted to Foreign

Exchange in Georgia without payment of Taxes, fees, duties or imposts

to bank accounts outside Georgia in accordance with Petroleum Law and

Current Georgian Legislation.



19.3



Contractor and each Contractor Party, and their Affiliates shall have

the right to hold, receive and retain outside Georgia and freely use

all funds received and derived from Petroleum Operations by them

outside Georgia without any obligation to repatriate or return the

funds to Georgia, including but not limited to all payments received

from export sales of Contractor Parties' share of Petroleum and any

sales proceeds from an assignment of their interest in this Agreement.



19.4



Contractor and each Contractor Party, and their Affiliates, and

Operator have the right to import into Georgia funds required for

Petroleum Operations under this Agreement in Foreign Exchange.



19.5



Contractor and each Contractor Party, and their Affiliates shall have

the right to pay outside of Georgia for goods, works and services of

whatever nature in connection with the conduct of Petroleum Operations

under this Agreement without having first to transfer to Georgia the

funds for such payments.



19.6



Whenever such a need arises Contractor and each Contractor Party and

their Affiliates, and Operator shall be entitled to purchase local



currency with Foreign Exchange and covert local currency into Foreign

Exchange in accordance with provisions stipulated in legislation.

19.7



Contractor and each Contractor Party, and their Affiliates shall have

the right to pay outside Georgia principal and interest on loans used

for funding Petroleum Operations without having to first transfer to

Georgia the funds for such payment.



19.8



Contractor and each Contractor Party and their Affiliates, and Operator

shall have the right to pay, wages, salaries, allowances and benefits

of their foreign personnel working in Georgia in Foreign Exchange

partly or wholly outside Georgia.



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19.9



45



Conversions of currency shall be recorded at the rate actually

experienced in that conversion. Expenditures and sales revenues in

currency other than the U.S.$ shall be translated to U.S.$ at the rates

officially published by National Bank of Georgia at the close of

business on the first business day of the current month.

ARTICLE 20

IMPORT AND EXPORT



20.1



Contractor, each Contractor Party and Affiliates and their agents and

Operator shall have the right to import into, export and re-export from

Georgia in accordance with Petroleum Law and the existing Georgian Law

in force on the date this Agreement is signed.



20.2



Contractor, each Contractor Party and Affiliates and their agents shall

have the right to sell any materials or equipment or goods which were

used in Petroleum Operations provided that such items are no longer

needed for Petroleum Operations and the costs of such items have not

been and are not intended to be included as Costs and Expenses

recoverable from Cost Recovery Petroleum. Contractor party and

Affiliates shall be solely liable for and shall indemnify Georgian Oil

and the State Agency from all Taxes, if any, (including but not limited

to VAT) due or which may become due on any such sales.



20.3



Contractor, each Contractor Party, their customers and their carriers

shall have the right to export the share of Petroleum on behalf of

Contractor or each Contractor Party in accordance with Petroleum Law

and the existing Georgian Law in force on the date this Agreement is

signed.



20.4



Foreign Employees and family members of Contractor and its Affiliates,

its agents and Foreign Subcontractors, shall have the right to import

into and re-export from Georgia household goods and personal property

at any time in accordance with Georgian Law.



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46



ARTICLE 21

EXPORT OF HYDROCARBONS, TRANSFER OF

OWNERSHIP, AND REGULATIONS FOR DISPOSAL

21.1



The Contractor, Contractor Parties, any purchaser from such parties and

their respective carriers shall, for the duration of this Agreement,

have the right to export from any export point selected by the

Contractor for such purpose, the share of Petroleum to which the

Contractor is entitled under this Agreement provided that access to

such export point is not restricted generally on the grounds of safety

or national security and/or legislative acts of Georgia. Access to

export points shall be given to the above parties on a non

discriminatory basis and at rates no less favourable than those

available to Georgian Oil, or granted to others by the State or

Georgian Oil.



21.2



The transfer of title to each Contractor Party and Georgian Oil of its

share of Petroleum shall be effective upon the lifting of that share by

such Party at the Measurement Point or, at the Parties' option, at some

other point, proved by Coordination Committee.



21.3



The Contractor and Georgian Oil shall each be entitled to designate (at

their own cost) an employee, independent company or consultant who

shall check the liftings of Petroleum from the Measurement Point or at

such other point as may be designated in accordance with Article 21.2.



21.4



If one of the Parties is unable to lift its share of Petroleum in due

time, with the result that Petroleum Operations may be interfered with

or in any way disrupted, then after giving such notice as is practical

in the circumstances any other Party may dispose of it, and

subsequently give back to such Party an equivalent amount of Petroleum

(taking into account any costs incurred).



ARTICLE 22

OWNERSHIP OF ASSETS

22.1



Ownership of any asset, whether fixed or moveable, acquired by or on

behalf of Contractor in connection with Petroleum Operations hereunder

shall vest in the State without consideration if (1) both the costs of

such asset have been recovered by Contractor under this Agreement, and

(2) either the Agreement has come to an end or, if earlier, when the

asset is no longer required for Petroleum Operations by the Contractor.

The Contractor shall enjoy continued free, exclusive and unrestricted

use of all assets at no cost or loss of benefit to the Contractor until

the termination of this Agreement or if earlier until they are no

longer required for Petroleum Operations. The Contractor shall bear the



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custody and maintenance of such assets and all risks of accidental loss

or damage thereto while they are required for Petroleum Operations,

provided however that all costs necessary to operate, maintain and

repair such assets and to replace or repair any damage or loss shall be

recoverable as Operation Expenses from Cost Recovery Petroleum in

accordance with the provisions of Article 11.

22.2



Whenever Contractor relinquishes any part of the Agreement Area, all

moveable property located within the portion of the Agreement Area so

relinquished may be removed to any part of the Agreement Area that has



been retained for use in Petroleum Operations.

22.3



The provisions of Article 22.1 and 22.2 shall not apply to materials or

other property that are rented or leased to Contractor, its Affiliates

or Operator or which belong to employees of Contractor, its Affiliates

or Operator.



ARTICLE 23

INSURANCE, ENVIRONMENT, HEALTH, SAFETY AND LIABILITY

23.1



Contractor shall obtain and maintain such types and amounts of

insurance for the Petroleum Operations as are reasonable and such that

they comply with Georgian Law and accepted international Petroleum

industry practice and standards.



23.2



The insurance which may be obtained may cover:

a)



destruction and damage to any property held for use during

Petroleum Operations and classified as fixed capital and/or

leased or rented property and/or interests in pipelines

operated by the Contractor;



b)



destruction of Crude Oil in storage;



c)



liability to Third Parties;



d)



liability for pollution and expenses for cleaning up in the

course of Petroleum Operations;



e)



expenses for wild well control;



f)



liability incurred by the Contractor in hiring land drilling

rigs, vessels and aircraft serving the Petroleum Operations;

and



g)



losses and expenses incurred during the transportation and

storage in transit of goods shipped from areas outside the

Agreement Area.



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48



23.3



In any insurance agreements, the amount for which the Contractor itself

is liable (the "deductible amount") shall be reasonably determined

between the Contractor and the insurer and such deductible amount shall

in the event of any insurance claim be considered as Costs and Expenses

of Petroleum Operations recoverable from Cost Recovery Petroleum.



23.4



It is understood that, in order to meet their insurance obligations,

insurance providers used by Contractor may conclude reinsurance and

co-insurance agreements with any other insurance enterprises and

organisations.



23.5



Notwithstanding the other provisions of this Agreement, the Contractor

shall indemnify and hold harmless the State and Georgian Oil against

all losses, damages and liability arising under any claim, demand,

action or proceeding brought or instituted against the State or

Georgian Oil by any employee of the Contractor or any Subcontractor 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; provided, however, that such losses, damages and

liabilities are not caused by or do not arise out of the performance or

non-performance of this Agreement by the State and/or Georgian Oil, and

the State and/or Georgian Oil shall indemnify and hold the Contractor

(including for this purpose any Affiliate, the Operating Company and

all Subcontractors) harmless against all such damage, losses and

liabilities.

23.6



The Contractor (including for this purpose any Affiliate, the Operating

Company and all Subcontractors) shall indemnify the State and Georgian

Oil for all loss or damage suffered by the State or Georgian Oil

arising out of the Contractor's Petroleum Operations if such Petroleum

Operations were not in accordance with Good Oilfield Practices or

applicable laws, rules and regulations and, notwithstanding the

foregoing, for any loss or damage to the environment or any cultural or

national monument arising out of conduct of the Petroleum Operations;

provided, however, that the Contractor (including for this purpose any

Affiliate, the Operating Company and all Subcontractors) shall have no

liability hereunder if and to the extent any loss and damage is caused

by or arises out of any breach of this Agreement (and any other

agreements that may be entered into by and between the Contractor, the

State or Georgian Oil in respect of the Petroleum Operations) or breach

of duty by the State or Georgian Oil. Notwithstanding the foregoing,

the Contractor (including for this purpose any Affiliate, the Operating

Company and all Subcontractors) shall not be liable to the State or

Georgian Oil for any punitive or exemplary damages or any other

indirect or consequential damages.



23.7



The Contractor shall not be responsible to the State or Georgian Oil

for, and shall bear no cost, expense or liability of the State or

Georgian Oil for, any claim, damage or loss to the extent such claim,

damage or loss does not arise out of a failure to conduct Petroleum

Operations as provided in Article 23.6. In amplification of the

foregoing, the Contractor shall not be responsible for any

environmental condition or damage existing in the Agreement Area prior



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49



to the commencement of Petroleum Operations or caused by a Force

Majeure event during the term of this Agreement. Existing environmental

conditions will be evidenced by an independent Third Party

environmental baseline study of existing environmental conditions to be

commissioned by the Contractor, at its own cost and expense (which

shall be included as Costs and Expenses for the purposes of determining

Cost Recovery Petroleum, subject to prior approval by the Coordination

Committee) and shall be completed prior to the commencement of the

relevant Petroleum Operations in accordance with Good Oilfield

Practices and the environmental laws of Georgia. Such baseline study

shall be submitted to the State Agency and shall be incorporated in the

Environmental Impact Assessment to be prepared by the Contractor in

accordance with the environmental laws of Georgia for the purpose of

obtaining a permit for Petroleum Operations from the State Agency,

which permit and any other permits, authorizations and consents which

are or may be applicable under the laws of Georgia, shall not be

unreasonably withheld. State Agency agrees to provide Contractor with

all authorizations, permits, certificates and other documents necessary

for Petroleum Operations. If in the course of the Petroleum Operations,

the State provides other areas for Contractor's activities, then new



environmental baseline studies shall be included in the Development

Plan that includes these areas. The State and Georgian Oil shall

indemnify the Contractor against any claim, damage or loss arising from

such pre-existing environmental condition or damage, subject however,

to the Contractor having taken reasonable and appropriate precautions

in conducting Petroleum Operations, it being understood that in

pursuing Petroleum Operations the Contractor has assumed the risk of

working in the Agreement Area, and provided, further, that such

indemnification shall not extend to any natural pre-existing condition.

23.8



In conducting Petroleum Operations, the Contractor shall operate

according to Good Oilfield Practices and use best endeavors to minimize

potential disturbances to the environment, including the surface,

subsurface, sea, air, flora, fauna, other natural resources and

property. The order of priority for actions shall be protection of

life, environment and property.



23.9



The Contractor shall take all necessary steps to respond to, and shall

promptly notify the State Agency of, all emergency and other events

(including explosions, leaks and spills), occurring in relation to the

Petroleum Operations which are causing or likely to cause material

environmental damage or material risk to health and safety. Such notice

shall include a summary description of the circumstances and steps

taken and planned by the Contractor to control and remedy the

situation. The Contractor shall provide such additional reports to the

State Agency as are necessary in respect of the effects of such events

and the course of all actions taken to prevent further loss and to

mitigate deleterious effects.



23.10



In the event of emergency situations as set forth in 23.9, above, at

the request of the Contractor, the State, without prejudice and in

addition to any indemnification obligations the State may have

hereunder, shall assist the Contractor, to the extent possible, in any

emergency response, remedial



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50



or repair effort by making available any labor, materials and equipment

in reasonable quantities requested by the Contractor which are not

otherwise readily available to the Contractor and by facilitating the

measures taken by Contractor to bring into Georgia personnel, materials

and equipment to be used in any such emergency response or remedial or

repair effort. Contractor shall reimburse the State's reasonable and

necessary costs incurred in such efforts, which reimbursed amounts

shall be considered Costs and Expenses.

23.11



The Contractor shall not be liable to the State, Georgian Oil or Third

Parties for any damages caused by contamination entering the Agreement

Area as a result of State, Georgian Oil or Third Party activities

beyond or within the boundaries of the Agreement Area. The State shall

be legally and financially responsible for any loss, damage and

liability, including remediation of environmental conditions which may

be required for safe conduct of the Petroleum Operations, caused by the

State's or Georgian Oil's activities beyond or within the Agreement

Area.



23.12



The Contractor shall not be liable for any loss or damage, including

but not limited to spillage, explosion, contamination or similar

environmental damage, in respect of any storage facilities, pipelines

or means of transportation which are not under the direct possession

and control of the Contractor or its Affiliates or its Subcontractors



or the Operating Company. In addition to the foregoing, the Contractor

shall not be liable for any damage whatsoever in respect of the State

share of Petroleum, storage or transportation thereof once Georgian Oil

has taken custody of the State share of Petroleum.

23.13



The State shall make best efforts to ensure the safety and security of

the Contractor's property and personnel in Georgia and to protect them

from loss, injury and damage resulting from war (declared or

undeclared), civil conflict, sabotage, blockade, riot, terrorism,

unlawful commercial extortion, or organized crime. Notwithstanding

anything to the contrary contained herein, Contractor acknowledges and

agrees that the obligations undertaken by the State in this Article

23.13 are no greater than the general obligations of the State towards

citizens of Georgia in respect to the perils named above. Furthermore,

Contractor agrees that it shall have no claim for legal or equitable

relief for failure of the State to comply with the provisions of this

Article 23.13, except as may be permitted by law.



23.14



Except as set forth in Article 29 hereof, it is understood and agreed

that the State shall not seek or declare any cancellation or

termination of this Agreement and/or the License as a result of the

occurrence of any emergency event described in this Article 23.



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51



ARTICLE 24

PERSONNEL

24.1



24.2



Contractor shall be entitled to bring foreign personnel into Georgia in

connection with the performance of Petroleum Operations. The entry into

Georgia of such personnel is hereby authorised, and the State

authorised body shall issue at the Contractor's request the required

documents, such as entry and exit visas, work permits and residence

cards. At Contractor's request, the State shall facilitate all

immigration formalities at the points of exit and entry into Georgia

for the employees and family members of the Contractor, its Affiliates,

Subcontractors, Operator, agents and brokers. The Contractor (or

Operator on its behalf) shall contact the appropriate offices of the

State to secure the necessary documents, and to satisfy the required

formalities.

The employees working within the scope of Petroleum Operations shall be

placed under the authority of the Contractor, its Affiliates, its

Subcontractors, agents or brokers or the Operator each of which shall

act individually in their capacity as employers. The works, hours,

wages, and all other conditions relating to their employment shall be

determined by the relevant employer of such employees. In relation to

employees who are citizens of Georgia their employment shall be in

accordance with Georgian law. To the extent that any expatriate

personnel are engaged under a Agreement subject to Georgian law, that

Agreement shall comply with the provisions of Georgian law. The

Contractor, its Affiliates, its Subcontractors, agents or brokers

however, shall enjoy full freedom in the selection and assignment of

their employees.



ARTICLE 25



FORCE MAJEURE

25.1



If as a result of Force Majeure, Contractor is rendered unable, wholly

or in part, to carry out its obligations under this Agreement, other

than the obligation to pay any amounts due, then the obligations of

Contractor, so far as and to the extent that the obligations are

affected by such Force Majeure, shall be suspended during the

continuance of any inability so caused, but for no longer period.

Contractor shall notify the Parties of the Force Majeure situation

within seven (7) days of becoming aware of the circumstances relied

upon and shall keep Georgian Oil and the State Agency informed of all

significant developments. Such notice shall give reasonably full

particulars of the said Force Majeure, and also estimate the period of

time which Contractor will probably require to remedy the Force

Majeure. Contractor shall use all reasonable diligence to remove or

overcome the Force Majeure situation as quickly as possible in an

economic manner. The period of any such non-performance or delay,

together with such period as may be necessary for the



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52



restoration of any damage done during such delay, shall be added to the

time given in this Agreement for the performance of any obligation

dependent thereon (and the continuation of any right granted) and to

the term of this Agreement.

25.2



For the purposes of this Agreement, "Force Majeure" shall mean a

circumstance which is irresistible or beyond the reasonable control of

Contractor, or any other hindrance of Contractor's performance not due

to its fault or negligence and shall be in accordance with the

provision of the Petroleum Law.



ARTICLE 26

ASSIGNMENTS AND GUARANTEES

26.1



No assignment, mortgage or charge or other encumbrance shall be made by

a Party of its rights obligations and interests arising under this

Agreement other than in accordance with the provisions of this Article

26. Any purported assignment made in breach of the provisions of this

Article 26 shall be null and void.



26.2



Save in the case of any assignment made pursuant to the provisions of

Articles 26.4, 26.5 and 26.6 the following shall apply. Any Party

wishing to assign all or part of its rights and interests hereunder or

in any circumstances where there is deemed to be an assignment, the

Party wishing to make the assignment shall first give written notice to

the other Parties specifying the proposed terms and conditions of the

assignment.

Following receipt of those terms and conditions, for a period of thirty

(30) days each Party shall have the preferential right to match the

terms and conditions of the proposed assignment or deemed assignment.

This right may be exercised by any Party giving written notice of its

intention to match the relevant terms and conditions (the "Acceptance")

and thereafter the relevant Parties shall negotiate all necessary

documentation in good faith. If within a further period of ninety (90)

days from receipt of the Acceptance the relevant parties have not



reached final agreement the Party seeking to assign may within a

further period of thirty (30) days complete an assignment to a Third

Party on the same terms and conditions. For the avoidance of doubt any

assignment to a Third Party shall be subject to the assigning Party and

the Third Party complying with the provisions of this Article 26.

26.3



A Contractor Party may assign all or part of its rights, obligations

and interests arising from this Agreement to a Third Party provided

that the Third Party:

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53



a)



has the technical and financial ability to perform the

obligations to be assumed by it under the Agreement; and



b)



as to the interest assigned to it, accepts and assumes all of

the terms and conditions of the Agreement.



Any such assignment shall be subject to the prior written consent of

the State Agency which consent shall not be unreasonably withheld or

delayed. By way of clarification, and not in limitation of the

foregoing provisions of this Article 26.3, the State shall not be

considered to be acting unreasonably in declining to consent to any

such assignment if the assignment to such proposed assignee is deemed

contrary to State interests, as evidenced by a writing to that effect

signed by the President, the State Minister, State Chancellor, or the

Minister of Foreign Affairs or Defense or there is an act of Parliament

to that effect.

If within thirty (30) Days following notification of an intended

assignment, accompanied by a copy of the proposed deed of assignment

and related documentation with respect to the proposed assignee,

including certified financial statements and other evidence to the

State's reasonable satisfaction of the matters set forth in Article

26.3 and such documentation, which shall include evidence of the

identity of owners of the assignee, provided in the case of a company

the stock of which is registered on a recognized stock exchange, a copy

of the documents identifying the significant owners, as such concept is

defined or used in the applicable laws pursuant to which such company

registered its stock, will satisfy the foregoing requirements, and its

direct and indirect parent companies, including the identity of the

owners of the ultimate parent, subject to the foregoing proviso, as may

be reasonably necessary for the State, and as requested by the State,

to make a determination of the State interests as described above, the

State has not given its written decision concerning such assignment,

then it shall be deemed that the State has declined to give such

consent; provided that thereafter if upon the further written request

of the Contractor for a written decision, the State has not given a

written response of any kind within fifteen (15) Days after such

further request, then the assignment shall be deemed approved and the

State shall execute an assignment, in a form acceptable to the State,

accepting such assignment. This second request from the Contractor

shall cite the provisions of this paragraph and the Contractor shall

obtain confirmation from the State that the request has been received.

In the event of the transfer of rights and obligations under the

Agreement and License to a Third Party, Contractor shall pay all costs

associated with such transfer incurred by the Agency and any tax or

charge due on such transfer under Georgian Legislation.

26.4



A Contractor Party may assign all or part of its rights, obligations

and interests arising from this Agreement to another Contractor Party

or Affiliate, without prior consent of the State or Georgian Oil,



provided that any such Affiliate:

a)



has the technical and financial ability to perform the

obligations to be assumed by it under the Agreement; and



53

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b)



54

as to the interest assigned to it, accepts and assumes all of

the terms and conditions of the Agreement.



26.5



Each reference in this Agreement to the Contractor shall be treated as

including each assignee to which an assignment has been made pursuant

to this Article 26. Each reference in this Agreement to Georgian Oil

shall be treated as including each assignee to which an assignment has

been made by Georgian Oil pursuant to this Article 26.



26.6



Georgian Oil may assign all or part of its rights, obligations and

interests arising from this Agreement (including all or part of its

right to lift a share of Profit Oil) to a wholly owned Affiliate with

the prior consent of the Contractor and the State Agency provided that

any such Affiliate:

a)



has the technical and financial ability to perform the

obligations to be assumed by it under the Agreement; and



b)



as to the interest assigned to it, accepts and assumes all of

the terms and conditions of the Agreement.



Georgian Oil shall give prior notice to the Contractor and the State

Agency to any assignment under this Article 26.6.

26.7



The State may assign all or part of its rights, obligations, and

interests arising form this Agreement (including all or part of its

right to lift its share of Profit Oil) to a Third Party, provided, that

any such Third Party accepts and assumes all of the terms and

conditions of this Agreement as to the interest so assigned. The State

shall notify Contractor of such assignment within thirty (30) days of

the effective date of such transfer.



26.8



Subject to the approval of the State Agency in the event of there being

any proposed assignment in accordance with the terms of this Article 26

then to the extent of the interest assigned the assignor shall be

released from all further obligations and liabilities arising under the

Agreement after the effective date of the assignment. The assignee

shall thereafter be liable for the obligations arising from such

interest in the Agreement except to the extent provided in the

Agreement.



ARTICLE 27

AGREEMENT ENFORCEMENT AND STABILISATION, AND

REPRESENTATIONS AND WARRANTIES

27.1



In the course of performing the Petroleum Operations, the Operator and

the Parties shall be subject to all applicable laws, decrees, rules and

regulations.



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55



27.2



The State agrees and commits to Contractor, for the duration of this

Agreement, to maintain the stability of the legal, tax, financial,

minings, customs and economic import and export conditions of this

Agreement in accordance with Article 27 of the Petroleum Law.



27.3



The Parties agree to cooperate in every possible way in order to

achieve the objectives of this Agreement. The State and its

subdivisions shall facilitate the exercise of Contractor's activities

by granting it all decrees, permits, resolutions, licenses and access

rights and making available to it all appropriate existing facilities

and services under the control of the State or Georgian Oil so that the

Parties may derive the greatest benefit from Petroleum Operations for

their own benefit and for the benefit of Georgia.



27.4



If at any time after this Agreement has been signed there is a change

in the applicable laws, regulations or other provisions effective

within Georgia which to a material degree adversely affect the economic

position of the Contractor or any Contractor Party hereunder, the terms

and conditions of this Agreement shall be altered so as to restore the

Contractor to the same overall economic position as that which the

Contractor would have been in had this Agreement been given full force

and effect without amendment.



27.5



If the Contractor believes that its economic position has been

adversely affected, under Article 27.4 it may give notice to the State

and to Georgian Oil describing how its position has been so affected

and the Parties shall thereafter promptly meet with a view to reaching

agreement on the remedial action to be taken. If matters have not been

resolved within 90 days or as otherwise agreed the matter may be

referred to arbitration by any Party in accordance with the provisions

of Article 30.



27.6



The State within Georgian Law and its capacities warrants to the

Contractor as follows:

a)



The State has taken the appropriate steps necessary to

authorise State Agency for Regulation of Oil and Gas Resources

in Georgia and Georgian Oil to execute this Agreement on

behalf of the State and has the power to do so;



b)



The signatory to this Agreement on behalf of the State (in

each of its capacities hereunder) is duly authorised to bind

State Agency for Regulation of Oil and Gas Resources in

Georgia and Georgian Oil;



c)



State Agency for Regulation of Oil and Gas Resources in

Georgia and Georgian Oil have been legally vested by the State

with the necessary power to authorise Petroleum Operations in

the Agreement Area and to compensate the Contractor by

allocating to it a share of the Petroleum produced in

accordance with the terms of this Agreement.



d)



Upon completion of the matters and procedures set out in

Article 32 there is no other entity or authority whose

approval or authorisation

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56



is required to permit the Contractor to enjoy and enforce its

rights hereunder.

27.7



CanArgo Norio Ltd., represents and warrants that:

27.7.1



It possesses the technical expertise and financial resources

to fulfill the obligations of Contractor under this

Agreement;



27.7.2



The execution, delivery and performance by CanArgo Norio Ltd.

of this Agreement are within the corporate powers of CanArgo

Norio Ltd.;



27.7.3



CanArgo Norio Ltd., has obtained all corporate consents,

approvals, authorizations and resolutions in accordance with

its corporate statutes and the applicable laws to empower

CanArgo Norio Ltd., to execute this Agreement, to undertake

all of the obligations of Contractor hereunder.



ARTICLE 28

NOTICES AND CONFIDENTIALITY

28.1



Except as otherwise specifically provided, all notices authorised or

required between the Parties by any of the provisions of this

Agreement, shall be in writing in Georgian and English and delivered in

person or by registered mail or by courier service or by any electronic

means of transmitting written communications which provides

confirmation of complete transmission, and addressed to such Parties as

designated below. The originating notice given under any provision of

this Agreement shall be deemed delivered only when received by the

Party to whom such notice is directed, and the time for such Party to

deliver any notice in response to such originating notice shall run

from the date the originating notice is received. The second or any

responsive notice shall be deemed delivered when received. "Received"

for purposes of this Article with respect to written notice delivered

pursuant to this Agreement shall be actual delivery of the notice to

the address of the Party to be notified specified in accordance with

this Article. Each Party shall have the right to change its address at

any time and/or designate that copies of all such notices be directed

to another person at another address, by giving written notice thereof

to all other Parties. The addresses for service of notices on each of

the parties is as follows:56



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57



CanArgo Norio Limited

Po Box 119, Commerse House

Les Banques, St. Peter Port

Guernsey, British Isles

Attention:

Fax:



Chairman

+ 44 1481 729 982



The State Agency for Regulation of Oil and Gas Resources of Georgia



Kazbegi Avenue 45

Tbilisi 380077

Georgia

Attention: Head of Agency

Fax:

+995 32 253311

Georgian National Oil Company "Georgian Oil"

Georgia, Tbilisi 380015

Kostava St. N65

Attention:

Fax:

28.2



General Director

+ 99532 33 30 32



Subject to the provisions of the Agreement, the Parties agree that all

information and data acquired or obtained by any Party in respect of

Petroleum Operations shall be considered confidential and shall be kept

confidential and not be disclosed during the term of the Agreement to

any person or entity not a Party to this Agreement, except:

a)



To an Affiliate, provided such Affiliate maintains

confidentiality as provided herein;



b)



To a governmental agency or other entity when required by the

Agreement;



c)



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;



d)



To prospective or actual Contractors, consultants and

attorneys employed by any Party where disclosure of such data

or information is essential to such Contractor's, consultant's

or attorney's work;



e)



To a bona fide prospective transferee of a Party's

participating interest (including an entity with whom a Party

or its Affiliates are conducting

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58



bona fide negotiations directed toward a merger, consolidation

or the sale of a majority of its or an Affiliate's shares);



28.3



f)



To a bank or other financial institution to the extent

appropriate to a Party arranging for funding;



g)



To the extent that any data or information which, through no

fault of a Party, becomes a part of the public domain.



Disclosure as pursuant to Article 28.2(d), (e), and (f) shall not be

made unless prior to such disclosure the disclosing Party has obtained

a written undertaking from the recipient party to keep the data and

information strictly confidential for at least three (3) years and not

to use or disclose the data and information except for the express

purpose for which disclosure is to be made.



ARTICLE 29

TERMINATION AND BREACH

29.1



At any time, if in the opinion of Contractor, circumstances do not

warrant continuation of the Petroleum Operations, Contractor may, by

giving written notice to that effect to State Agency for Regulation of

Oil and Gas Resources and Georgian Oil, relinquish its rights and be

relieved of its obligations pursuant to this Agreement except for

Contractor's obligations to complete the Minimum Work Program, except

such rights and obligations as related to the period prior to such

relinquishment. Neither this Agreement nor any of the rights granted

hereunder nor the Operator Licence may be terminated as a result of any

act or omission of Operator save in the case where Operator has carried

out an act or omitted to do something at the specific request of the

Contractor and Operator has previously advised the Contractor prior to

carrying out the act or omitting to do something that to carry out that

act or to omit to do the relevant thing may result in this Agreement

being terminated.



29.2



Without prejudice to the provisions stipulated in Article 29.1 above,

this Agreement may only be terminated by the State in its entirety by

giving ninety (90) days advance written notice thereof to all Parties,

when and only if a material breach of Agreement is alleged to have been

committed by Contractor and, provided that conclusive evidence thereof

has been found by prior arbitration as stipulated in Article 30.



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ARTICLE 30

DISPUTE RESOLUTION

30.1



The Parties hereby consent to submit to the International Centre for

Settlement of Investment Disputes any dispute in relation to or arising

out of this Agreement for settlement by arbitration pursuant to the

Convention on the Settlement of Investment Disputes between States and

Nationals of Other States.



30.2



The Parties agree that, for the purposes of Article 25(1) of the

Convention, any dispute in relation to or arising out of this Agreement

is a legal dispute arising directly out of any investment, and this

article has force only if all the requirements of Article 30.1 are

followed.



30.3



For the purposes of Article 25(2) of the Convention, it is agreed that,

CanArgo Norio Limited is a national of Great Britain, and shall be

treated as a national of that state for the purposes of the Convention.



30.4



A Party need not exhaust administrative or judicial remedies prior to

commencement of arbitrage proceedings.



30.5



Any arbitrage tribunal constituted pursuant to this Agreement shall

apply the provisions of this Agreement as supplemented and interpreted

by general principles of the laws of Georgia and England as are in

force on the Effective Date. In case these principles are in conflict

with each other, Georgian Law shall prevail.



ARTICLE 31

TEXT

31.1



This Agreement shall be executed in three (3) originals in the Georgian

language and three (3) originals in the English language, which will be

duly certified by a competent authorized body selected by the State

Agency, and each of which shall have equal legal force and effect;

provided however that in case of dispute, conflict, or arbitration the

English version shall (after the Georgian version has been reviewed and

its provisions have been discussed in good faith) be used as the

authentic version to determine the rights and obligations of the

Parties which shall be determined by reference solely to the English

version of this Agreement.



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60



ARTICLE 32

APPROVAL AND EFFECTIVE DATE

32.1



32.2



This Agreement shall enter into force and effect in its entirety on the

Effective Date. The Effective Date shall be the date on which the

following conditions have been fulfilled:

32.1.1



The State Agency issues the License to CanArgo Norio Ltd;

Annex B. A copy of the letter from Georgian Oil to the State

Agency notifying it of its consent to transfer the Licence to

CanArgo Norio Ltd is attached as Annex G to this Agreement.



32.1.2



Georgian Oil has obtained the consent or approval from the Tax

Inspectorate for Georgian Oil (or its successors or assigns)

to assume, pay and discharge, in the name and on the behalf of

Contractor, Contractor's entire Profit Tax liability and

Mineral Usage Tax liability for each Agreement Year.



32.1.3



The Administrative/Licence Fee set forth in Article 14.5 and

any other outstanding fees or sums then due and owing by

Contractor or the Operating Company to the State, if any, have

been paid by Contractor.



32.1.4



A duly executed copy of the Parent Company Guarantee has been

delivered the State Agency.



32.1.5



The Contractor will notify the State Agency and Georgian Oil

in writing that the Contractor is satisfied that this

Agreement and Licence have been executed and are in full force

and effect in accordance with the requirements of all Georgian

laws, rules, approvals and regulations.



Notwithstanding any other provision of this Agreement to the contrary,

including, but not limited to Article 29, if after the expiration of one

(1) year from the date of the execution of this Agreement by all

Parties, the Effective Date, as determined by provisions of Article

32.1, has not occurred, then the License and this Agreement shall

terminate and neither shall be of any further force and effect.



By execution hereof, the State Agency for Regulation of Oil and Gas Resources

in Georgia, acting in its capacity as the sovereign representative of Georgia,



pursuant to the Law of Georgia on Oil and Gas, enacted 16 April 1999 and as

successor to Georgian Oil ("Saknavtobi") in such capacity, joins as a Party to

the foregoing Production Sharing Agreement as amended, and consents to the

provisions thereof.



60

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61



Signed and sealed this 12th day of December, 2000 in three (3) versions in

Georgian and English.



For State Agency For Regulation of Oil

and Gas Resources in Georgia

Head of the State Agency



For CanArgo Norio Ltd.

President



/s/G. Itonishvili

-------------------------------G. Itonishvili



/s/D. Robson

-------------------------------D. Robson



For "National Oil Company

"Georgian Oil"

General Director

/s/G. Makharadze

-------------------------------G. Makharadze



61

<PAGE>



62

ANNEX A



Map 1 - XIc & Kumisi License Blocks, Georgia



62

<PAGE>



63

ANNEX B



<PAGE>



64



ANNEX C

ACCOUNTING PROCEDURE

SECTION I

GENERAL PROVISIONS

1.



PURPOSE

The accounting procedures included in this Accounting Procedure

establish a framework 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

accounting for Petroleum Operations under the Agreement.

The purpose of this Accounting Procedure is not to define Costs and

Expenses for the purposes of determining Cost Recovery Petroleum or to

define what costs will be deductible in the calculation of Profit Tax.

Costs and Expenses are defined in Article 11 of the Agreement.

Calculation procedure for the taxable base and Profit Tax is set forth

in Article 17 of the Agreement.



2.



DEFINITIONS

For the purpose of this Accounting Procedure the following terms shall

have the following meanings:

"Accounting Procedure" shall mean the accounting principles, practices

and procedures set forth in this Annex C.

"Accepted Accounting Practices" shall mean accounting principles,

practices and procedures generally accepted and recognised in the

international Petroleum industry.

"Cash Accounting Basis" shall mean the basis of accounting which

records the effect of transactions and events on financial conditions

and income when they are settled in cash.

"Material and Equipment" means property, including without limitation

all exploration, appraisal and development facilities together with

supplies and equipment, acquired and held for use in Petroleum

Operations.

"Controllable Material" means all materials, equipment physical assets,

consumables and other stocks and inventory acquired and held for use in

Petroleum Operations. A list of types of such Controllable Material

shall be furnished to Georgian Oil and the State Agency upon request.

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65



The words and phrases defined in the Agreement but not defined above

shall have the same meaning in this Accounting Procedure as is given to

them in the Agreement.

3.



AUDITS



Georgian Oil and the State Agency shall have the right to inspect and

audit Contractor's books, accounts and records relating to Petroleum

Operations under the Agreement for the purpose of verifying that the

Costs and Expenses charged to the Petroleum Operations Account comply

with the terms and conditions of the Agreement and this Accounting

Procedure. Such books, accounts and records shall be available in

Georgia at all reasonable times for inspection subject to thirty (30)

days notice by duly authorised representatives of Georgian Oil and the

State Agency, including outside independent auditors. Audits shall be

conducted in such a manner as not to interfere unduly with ongoing

operations. All costs associated with the audit will be the sole

responsibility of Georgian Oil. Georgian Oil and the State Agency shall

have a period of twenty-four (24) months after the end of each Calendar

Year in which to audit and verify costs and expenses, volumes and value

of Petroleum and arithmetic calculations. Any exception by Georgian Oil

shall be communicated to the Contractor with each disputed charge

specified, with supporting rationale, within thirty (30) days after the

completion of the particular audit. If the Contractor and Georgian Oil

are unable to agree on any item or adjustment, the issue will be

resolved in accordance with the dispute resolution procedures contained

in Article 30 of the Agreement. All accounts of Petroleum Operations

for any Calendar Year shall conclusively be presumed to be true and

correct twenty-four (24) months following the end of any such Calendar

Year, unless, within the said twenty-four (24) month period Georgian

Oil expresses any exception thereto in writing to the Contractor.

4.



CONTRACTOR'S BOOKS



4.1



The Contractor shall maintain in English in U.S.$ and on a Cash

Accounting Basis books and accounts for Petroleum Operations. Such

books and accounts shall be kept in accordance with Accepted Accounting

Practices and the provisions of the Agreement and this Accounting

Procedure ("Petroleum Operations Account"). The documentation required

to support such books and accounts shall be the documentation as

specified in this Accounting Procedure. If no documentation is

specified then the documentation required shall be the documentation

reasonably acceptable and recognised in the international Petroleum

industry.



4.2



All U.S.$ expenditures shall be charged in the amount expended.

Expenditures incurred in currencies other than U.S.$ shall be

translated into U.S.$ as per Article 19.11 of the Agreement. A record

shall be kept of the exchange rates used in translating expenditures

incurred in currencies other than U.S.$. Any gain or loss resulting

from the exchange of currencies required for Petroleum Operations and

any fees or other banking charges



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66



levied in connection with such exchange of currencies or any gain or

loss resulting from translation of expenditures and sales revenues in

accordance with the provisions of Article 19.11 shall be included in

Costs and Expenses and recoverable from Cost Recovery Petroleum and

credited or charged to the Petroleum Operations Account.

4.3



Contractor shall maintain books and accounts relating to Petroleum

Operations for four (4) years following the end of the Calendar Year to

which they relate.



5.



PRECEDENCE OF DOCUMENTS

In the event of any inconsistency or conflict between the provisions of

this Accounting Procedure and the provisions of the Agreement treating

the same subject differently, the provisions of the Agreement shall

prevail.



6.



REVISION OF ACCOUNTING PROCEDURE

This Accounting Procedure may be revised from time to time by mutual

written agreement Georgian Oil and Contractor with the approval of the

State Agency.



7.



ARBITRATION PROCEDURES

Any dispute in relation to or arising out of this Accounting Procedure

shall, unless settled by agreement among the Parties be submitted to

arbitration in accordance with Article 30 of the Agreement.



8.



OPERATOR

To the extent that Operator is to incur Costs and Expenses on behalf of

Contractor, Contractor will advance Operator funds necessary to settle

such liabilities. Operator shall provide Contractor a projection of

cash expenditures no later than the tenth (10th) day of the month for

funding requirements for the following month. Contractor may then

advance funds to Operator no later than the last business day of the

month preceding the month the funds are being advanced for. Such cash

advances will be deducted from actual expenditures for the month with

any over or short position carried forward to the next month.

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SECTION II

COSTS, EXPENSES AND EXPENDITURES

DIRECT CHARGES

The Contractor shall charge the Petroleum Operations Account for all

costs and expenses whether directly or indirectly incurred necessary to

conduct Petroleum Operations under this Agreement. For the purposes of

this Accounting Procedure costs and expenses incurred directly or

indirectly by a Contractor Party and its Affiliated Companies prior to

the Effective Date of this Agreement shall be deemed to be incurred on

the Effective Date of this Agreement. Chargeable costs and expenses

shall include, but not be limited to:

2.1



LICENSES, PERMITS

All costs, if any, attributable to the acquisition, maintenance,

renewal or relinquishment of licenses, permits, Agreementual and/or

surface rights acquired for Petroleum Operations and any bonuses paid

in accordance with the Agreement when paid by Contractor if and to the

extent provided by law.

Documentation requirements: Copy of Agreement or payment request

documentation indicating purpose of payment, amount of payment and

recipient of payments.



2.2



SALARIES, WAGES AND RELATED COSTS



2.2.1



Gross salaries and wages in respect of employees of Contractor and its

Affiliates who are in Georgia directly engaged in Petroleum Operations

whether temporarily or permanently assigned.

Documentation requirements: Copy of timesheet indicating project or

area worked during time period.



2.2.2



Gross salaries and wages in respect of employees of Contractor and its

Affiliates outside of Georgia directly engaged in Petroleum Operations

whether temporarily or permanently assigned, and not otherwise covered

in Section 2.7.2.

Documentation Requirements: Copy of timesheet indicating project or

area worked during time period.



2.2.3



Salaries and wages, including everything constituting the employees'

total compensation. To the extent not included in salaries and wages,

the Petroleum Operations Account shall also be charged with the cost to

Contractor and its

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Affiliates of payroll taxes, holiday, vacation, sickness, disability

benefits, living and housing allowances, travel time, bonuses, and

other similar allowances in accordance with Contractor and its

Affiliates usual practice, as well as costs to Contractor and its

Affiliates for employee benefits, including but not limited to employee

group life insurance, group medical insurance, hospitalisation,

retirement, and other benefit plans of a like nature applicable to

labour costs of Contractor and its Affiliates.

Documentation Requirements: Copy of records indicating Contractor or

its Affiliates payment to or on behalf of employee. These records will

be made available only during the conduct of an audit in accordance

with the provisions of paragraph 3 of Section I of this Accounting

Procedure.

2.2.4



Expenditures or contributions made pursuant to assessments imposed by

the State or any Governmental authority which are applicable to the

Contractor and its Affiliates costs of salaries and wages under

paragraph 2.2 of this section II of this Accounting Procedure including

but not limited to payroll taxes and social insurance contributions.

Documentation Requirements: Copy of records indicating Contractor or

its Affiliates payment to the State or Governmental authority on behalf

of employee.



2.2.5



Expenses ((including related travel costs) which are considered

reasonable in accordance with Contractor's and its Affiliates usual

practice) of those employees whose salaries and wages are chargeable to

the Petroleum Operations Account under paragraphs 2.2.1 and 2.2.2 of

this Section II and for which expenses the employees are reimbursed

under the usual practice of Contractor and its Affiliates.

Documentation Requirements:

documents.



Copy of expense reimbursement request



2.2.6



Gross salaries and wages, pensions, benefits and other related costs

(together with attributable office costs) of those employees of the

Contractor and its Affiliates not solely engaged in the conduct of

Petroleum Operations shall be apportioned to the Petroleum Operations

and the Contractor's other activities based on the percentage time

worked on the Petroleum Operations or other activities multiplied by

the total cost of the employee for the time period.

Documentation Requirements: Copy of timesheet indicating project or

area worked during period.



2.3



EMPLOYEE RELOCATION COSTS



2.3.1



Except as provided in Section 2.3.3, Contractor or its Affiliates cost

of employees' relocation to or from the Agreement Area vicinity or

location where the employees will reside or work, whether permanently

or temporarily



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assigned to the Petroleum Operations. If

activities of the Contractor in addition

relocation costs shall be charged to the

percentage time expected to be worked on

the employee relocation costs.



such employee works on other

to Petroleum Operations, such

other activities based on the

other activities multiplied by



Documentation Requirements: Copy of expense payment requests to or on

behalf of employee.

2.3.2



Such relocation costs shall include transportation of employees and

their family, personal and household effects of the employee and their

family, transit expenses, and all other related costs in accordance

with Contractor and its Affiliates usual practice.

Documentation Requirements: Copy of payment requests to or on behalf of

employee.



2.3.3



Relocation costs from the vicinity of the Agreement Area to another

location classified as a foreign location by Contractor shall not be

chargeable to the Petroleum Operations Account unless such foreign

location is the point of origin of the employee.

Documentation Requirements: Copy of payment requests to or on behalf of

employee.



2.4



OFFICES, CAMPS AND MISCELLANEOUS FACILITIES

All costs of maintaining any offices, sub-offices, camps warehouses,

housing, and other facilities of the Contractor and/or Affiliates

directly serving the Petroleum Operations either within Georgia or

elsewhere. If such facilities serve operations in addition to the

Petroleum Operations the costs shall be allocated to the properties

served on an equitable basis approved by the Parties.

Documentation Requirements: Copy of invoice, payment request document

or Agreement indicating purpose of payment, amount of payment,

recipient of payment and date goods and/or services were received.



2.5



MATERIAL AND EQUIPMENT

Cost, net of any discounts taken by Agreement, of Material and

Equipment purchased or furnished by Contractor whether directly or



indirectly. Such costs shall include, but are not limited to, export

brokers' fees, taxes, transportation charges, loading, unloading fees,

export and import duties and licence fees associated with the

procurement of Material and Equipment and in-transit losses, if any,

not covered by insurance. So far as it is reasonably practical and

consistent with efficient and economical operation, such Material

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and Equipment shall be purchased for, and the cost thereof charged to

the Petroleum Operations Account.

Documentation Requirements: Copy of invoice, payment request document

or Agreement indicating purpose of payment, amount of payment,

recipient of payment and date goods and/or services were received.

2.6



EXCLUSIVELY OWNED EQUIPMENT AND FACILITIES OF CONTRACTOR AND AFFILIATES

Charges for exclusively owned equipment, facilities and utilities of

Contractor and its Affiliates at costs or rates not to exceed the

average cost or rates of non-affiliated Third Parties then prevailing

for Contractor for like equipment, facilities, and utilities for use.

Exclusively owned equipment leased to the Petroleum Operations lost or

damaged beyond repair may be charged at replacement cost plus

transportation costs to deliver like equipment to the location where

the like equipment will be used.

Documentation Requirements: Copy of invoice, payment request document

or Agreement indicating purpose of payment, amount of payment,

recipient of payment and date goods and/or services were received.

Additionally, documentation as to how the average commercial cost or

rates were determined are required.



2.7



SERVICES



2.7.1



The cost of services provided by Third Parties, Contractor and

Affiliates of Contractor other than those services covered by Section

2.7.2. Such charges for services by Contractor and Contractor's

Affiliates shall not exceed those currently prevailing if performed by

Third Parties, considering quality and availability of services.

Documentation Requirements: Copy of invoice, payment request document

or Agreement indicating purpose of payment, amount of payments,

recipient of payment and date services were performed.



2.7.2



The cost of services performed by Contractor and Contractor's

Affiliates technical and professional staffs not located within

Georgia.

Documentation Requirements: Copy of timesheet indicating project or

area worked during period.

The charges for such services shall not exceed those currently

prevailing if performed by Third Parties, considering the quality and

availability of such services.

Examples of such services include, but are not limited to, the

following:

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Geologic studies and interpretation

Seismic data processing

Well log analysis, correlation and interpretation

Laboratory services

Well site geology

Project engineering

Source rock analysis

Petrophysical analysis

Geochemical analysis

Drilling supervision

Development evaluation

Accounting and professional services

Other data processing

Costs shall include salaries and wages of such technical and

professional personnel, lost time, governmental assessments, employee

benefits, and expenses which are considered reasonable in accordance

with Contractor and its Affiliates usual practice. Costs shall also

include all support costs necessary for such technical and professional

personnel to perform such services, such as, but not limited to, rent,

utilities, administration, support staff, drafting, telephone and other

communications expenses, computer support, supplies, and depreciation.

2.8



INSURANCE

Premiums paid for insurance required by law or the Agreement to be

carried for the benefit of the Petroleum Operations. If the insurance

is for the benefit of operations in addition to the Petroleum

Operations the premiums paid shall be allocated to the operations

covered on an equitable basis.

Documentation Requirements: Copy of invoice, payment request document

or Agreement indicating purpose of payment, amount of payment,

recipient of payment and period of coverage.



2.9



DAMAGES AND LOSSES TO PROPERTY



2.9.1



All costs or expenditures necessary to replace or repair any damages,

losses incurred by fire, flood, storm, theft, accident, or any other

cause. Operator shall maintain written documentation of damages or

losses

Documentation Requirements: Copy of invoice, payment request document

or Agreement indicating purpose of payment, amount of payment,

recipient of payment.



2.9.2



Expenditures incurred in the settlement of all losses, claims, damages,

judgments, and other expenses for the account of Petroleum Operations.

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Documentation Requirements: Copy of invoice, payment request document

or Agreement indicating purpose of payment, amount of payment,

recipient of payment.

2.10



LITIGATION AND LEGAL EXPENSES

The costs and expenses of litigation and legal services necessary for

the protection of the Petroleum Operations under this Agreement as

follows:



2.10.1



Legal Services necessary or expedient for the protection of the



Petroleum Operations, and all costs and expenses of litigation,

arbitration or other alternative dispute resolution procedure,

including but not limited to lawyers' fees and expenses, court costs,

cost of investigation of procuring evidence, together with all

judgments obtained against the Parties or any of them arising from the

Petroleum Operations, except for disputes arising under Article 30 of

this Agreement.

Documentation Requirements: Copy of invoice, payment request document

or Agreement indicating purpose of payment, amount of payments,

recipient of payment and date services were performed.

2.10.2



If the Parties hereunder shall so agree, actions or claims affecting

the Petroleum Operations hereunder may be handled by the legal staff of

a Contractor Party or its Affiliates; and a charge commensurate with

the similar costs of providing and furnishing such services rendered

may be made, but no such charges shall be made until the service and

the charge has been approved by the Parties.

Documentation Requirements: Copy of timesheet indicating project or

area worked during period.



2.11



TAXES AND DUTIES

All State or Governmental Taxes, duties, assessments and charges, of

every kind and nature (except for the Profit Tax and Mineral Usage Tax

determined in accordance with the provisions of Article 17 of the

Agreement), assessed or levied upon or in connection with the Petroleum

Operations. If Contractor or an Affiliate is subject to income or

withholding tax as a result of services performed for Petroleum

Operations under the Agreement, its charges for such services may be

increased by the amount of such taxes incurred.

Documentation Requirements: Copy of records indicating Contractor's

payment to governmental authority, purpose of payment, amount of

payment and recipient of payment.

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<PAGE>

2.12



73



FINANCE COSTS

All Finance Costs.

Documentation Requirements: Copy of loan document, amount of principal

and interest paid, any arrangement or other fees and lending

institution.



2.13



SALE AND SALVAGE OF MATERIALS PREVIOUSLY CHARGED TO PETROLEUM

OPERATIONS

Proceeds from the sale or salvage of Material and Equipment previously

charged to Petroleum Operations will be credited to the Petroleum

Operations less any expenses associated with the disposition of the

Material and Equipment. Material and Equipment transferred to

Contractor or an Affiliate will be credited to the Petroleum Operations

at fair market value.

Documentation Requirements: Copy of sales agreement indicating amount

recovered, parties to agreement, date of sale of Material and Equipment

and a description.



2.14



ABANDONMENT AND SITE RESTORATION



Any costs and expenditures in relation to abandonment and site

restoration and any payments in accordance with the funding procedure

described in Article 9.8 of the Agreement and Section VII of this

Accounting Procedure shall be charged to the Petroleum Operations

Account.

Documentation Requirements: Copy of invoice, payment request document

indicating purpose of payment, amount of payment, recipient of payment,

if applicable copy of any schedule indicating funding requirements for

abandonment and site restoration.

2.15



ENERGY EXPENSES

All costs of fuel, electricity, heat, water or other energy used for

Petroleum Operations.

Documentation Requirements: Copy of invoice, payment request document

or Agreement indicating purpose of payment, amount of payments,

recipient of payment.



2.16



COMMUNICATION CHARGES

The costs of acquiring, leasing, installing, operating, repairing and

maintaining communications systems.

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74



Documentation Requirements: Copy of invoice, payment request document

or Agreement indicating purpose of payment, amount of payments,

recipient of payment.

2.17



COORDINATION COMMITTEE

All costs and expenditures incurred with respect to the activities of

the Coordination Committee pursuant to Article 6 of the Agreement.

Documentation Requirements: Copy of invoice, payment request document

indicating purpose of payment, amount of payments, recipient of

payments.



2.18



CREDITS

The Contractor will credit to the Petroleum Operations Account the net

proceeds of the following transactions:



2.18.1



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 premiums with respect

thereto have been charged to the Petroleum Operations Account.



2.18.2



The net proceeds of any successful claim in connection with Petroleum

Operations where the costs and expenditures relating to the subject of

the claim have been charged to the Petroleum Operations Account.



2.19



OTHER EXPENDITURES

Any other costs and expenditures incurred by Contractor and its

Affiliates for the necessary and proper conduct of the Petroleum

Operations in accordance with approved Work Program and Budget and not



covered in this Section II or in Section III, of this Accounting

Procedure.

Documentation Requirements: Documentation reasonably acceptable and

recognised in the international Petroleum industry to support those

costs or expenditures.

74

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75



SECTION III

INDIRECT CHARGES

3.1



PURPOSE

Contractor shall charge an administration overhead to the Petroleum

Operations Account for the cost of indirect services and related office

costs of Contractor and its Affiliates not otherwise provided in this

Accounting Procedure. For the purposes of this Accounting Procedure

costs and expenses incurred directly or indirectly by a Contractor

Party and its Affiliated Companies prior to the Effective Date of this

Agreement shall be deemed to be incurred on the Effective Date of this

Agreement. Indirect costs chargeable under this Section III represent

the cost of general administration and support services provided by the

Contractor and its Affiliates outside of Georgia for the indirect

benefit of Petroleum Operations. Such support will 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 can not be specifically identified or

attributed to particular projects. No cost or expenditure included

under Section II of this Accounting Procedure shall be included or

duplicated under this Section III.



3.2



AMOUNT

The charge under Section 3.1 will be charged at rates on total annual

expenditures attributable to Petroleum Operations as follows:

ANNUAL EXPENDITURES

U.S$ 0 to U.S.$10,000,000 of expenditures per Calendar Year = 5%

Excess above U.S.$10,000,000 of expenditures per Calendar Year =3%



3.3



CHANGES

The indirect charges provided for in this Section III may be amended

periodically by mutual agreement between Georgian Oil and Contractor

if, in practice, these charges are found to be insufficient or

excessive.

75



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76

SECTION IV



INVENTORIES

4.1



PERIODIC INVENTORIES, NOTICE AND REPRESENTATION

At reasonable intervals as agreed with Georgian Oil, inventories shall

be taken by Contractor of all Controllable Material, which shall

include materials and physical assets. Written notice of intention to

take inventory shall be given by Contractor to Georgian Oil; at least

thirty (30) days before any inventory is to begin so that Georgian Oil

may be represented when any inventory is taken. Failure of Georgian Oil

to be represented at an inventory shall bind Georgian Oil to accept the

inventory taken by Contractor who shall in that event furnish Georgian

Oil with a copy thereof.



4.2



RECONCILIATION AND ADJUSTMENT OF INVENTORIES

Reconciliation of inventory shall be made by Contractor and Georgian

Oil and a list of overages and shortages shall be jointly determined by

Contractor and Georgian Oil, and the inventory accordingly adjusted by

Contractor.

SECTION V

FINANCIAL REPORTS



5.1



ACCOUNTS OF PETROLEUM OPERATIONS

Contractor shall submit to Georgian Oil and the State Agency by March

15 following each Calendar Year accounts for that Calendar Year of the

Petroleum Operations prepared in accordance with this Accounting

Procedure.



5.2



STATEMENT FOR RECOVERY OF COSTS AND OF COST RECOVERY PETROLEUM

The Contractor shall, render to Georgian Oil and the State Agency as

promptly as practical but not later than forty five (45) days after the

end of the last Calendar Quarter in which the date of commencement of

Commercial Production first occurs, and not later than forty five (45)

days after the end of each succeeding Calendar Quarter a Calendar

Quarter Cost Recovery report and Calendar Quarter Profit Petroleum

division report showing:

(i)



Recoverable Costs and Expenses carried forward from the

previous Calendar Quarter, if any;

76



<PAGE>



77



(ii)



Recoverable Costs and Expenses incurred during the Calendar

Quarter;



(iii)



Total recoverable Costs and Expenses for the Calendar Quarter

(sum of (i) plus (ii));



(iv)



Volume and value of Cost Recovery Petroleum taken and

separately disposed of by Contractor for the Calendar Quarter;



(v)



Amount of Costs and Expenses actually recovered for the

Calendar Quarter;



(vi)



Amount of recoverable Costs and Expenses to be carried forward

into the succeeding Calendar Quarters if any;



5.3



(vii)



Excess, if any, of the value of Cost Recovery Petroleum taken

and separately disposed of by Contractor over recoverable

Costs and Expenses for the Calendar Quarter;



(viii)



The value and volume of Petroleum produced, used in Petroleum

Operations, available for lifting and actually lifted by

Parties during the Calendar Quarter; and



(ix)



Profit Petroleum allocated to each Contractor Party and

Georgian Oil during the Calendar Quarter.



PAYMENTS

If such statement shows an amount due to Georgian Oil, payment of that

amount shall be made in U.S.$ by Contractor to Georgian Oil with the

rendition of such statement.



SECTION VI

CONTROL AND MAJOR ACCOUNTS

6.1



COST RECOVERY CONTROL ACCOUNT

Contractor will establish a cost recovery control account and an

offsetting Agreement account to control therein the amount of cost

remaining to be recovered, if any, and the amount of cost recovered.

77



<PAGE>

6.2



78



MAJOR ACCOUNTS

For the purpose of classifying costs, expenses and expenditures for

cost recovery, costs, expenses and expenditures shall be recorded in

major accounts including but not limited to the following:

(a)



Exploration Expenditures



(b)



Development Expenditures, other than Operation Expenses



(c)



Operation Expenses



Any other necessary sub-accounts shall be used. All Costs and Expenses,

regardless of classification, shall be recovered as per Article 11 of

the Agreement.

SECTION VII

ABANDONMENT AND SITE RESTORATION

The Development Plan shall also include an abandonment and site

restoration program together with a funding procedure for such program.

All funds collected pursuant to the funding procedure shall be

indicated to site restoration and abandonment and will be placed in a

special interest bearing account by Contractor which shall be held in

the joint names of the State and the Contractor or their respective

nominees, or its designee. Contractor's responsibilities for

environmental degradation, site restoration and well abandonment

obligations, and any other actual contingent and potential activity

associated with the environmental status of the Development Area shall

be limited to the obligation to place the necessary funds in the

approved account. All expenditures incurred in abandonment and site



restoration including but not limited to all payments deposited by

Contractor in the special interest bearing account shall be treated as

Costs and Expenses in accordance with Article 11 and Article 9.8 of the

Agreement and chargeable to the Petroleum Operations Account.



78

<PAGE>



79



ANNEX D

MINIMUM WORK PROGRAM

Work Program for the Agreement Area, Norio-Satkhenisi Area Block XIc and Kumisi

Block, includes minimal obligatory seismic program and program for future works

which is divided into two phases. Works planned for first two phases are given

below.

PHASE 1 - prior to Effective Date and during year 1

1.



Acquire 173 kilometers of seismic data (acquired prior to

Effective Date)

Process acquired seismic data

Geological and geophysical evaluation of the Agreement Area



2.

3.



Cost: US$1,400,000

PHASE 2 - year 1

Drill one well to test prospective horizons

Cost: up to US$5,000,000

Works planned for Phases 1 and 2 comprise the minimum Work Program and Budget as

required under Article 10.2 of this Agreement.

79

<PAGE>



80

ANNEX E



PERMIT APPLICATION FEES SCHEDULE



<TABLE>

<CAPTION>

APPLICATION TYPE

FEE U.S.$

-----------------------<S>

<C>

Application for Permit to Drill



200.00

Application to Plug and Abandon a Well

100.00

Application to Temporarily Abandon a Well

100.00

Application for Geophysical Permit (by distance, US$200 + US$0.25/km)

200.00

Miscellaneous Required Filings (well completion reports, production reports, etc.)

25.00

Application for Offshore Construction Permit

500.00

Application for Treated Water Discharge Permit

200.00

Application for Waste Disposal Permit

250.00

Application for Injection (Disposal) Well Permit

250.00

Application for Gas Flaring Permit

250.00

Public Hearing Required by Non-Agency Law (e.g. EIA)

100.00

Application for Pipeline Permit (by distance, US$500 + US$0.25/km)

500.00

Application for Onshore Facilities Permit (<0.5 ha - US$100; 0.5 ha - 1 ha

100.00

US$200; 1 ha - 5 ha US$400; >5 ha US$600)

- 600.00

Instituting Eminent Domain Proceedings on behalf of Contractor

1,000.00

Copies per page

1.00

Certification/Authentication per document

2.50

</TABLE>

80

<PAGE>



81



ANNEX F

GUARANTEE DATED 12 DECEMBER 2000 BY

1



CanArgo Energy Corporation having its registered office at 32 Lookerman

Square, Suite L-100, City of Dover, County of Kent, Delaware 19904 USA

(the "Guarantor");



in favour of

2



The State of Georgia represented by the Joint Stock National Oil

Company - Georgian Oil and the State Agency for Regulation of Oil and

Gas Resources in Georgia (the "State").



WHEREAS

A



CanArgo Norio Limited (a company in which the Guarantor is interested)

has entered into a Production Sharing Agreement dated 12 December 2000

(the "Agreement") in relation to the Norio-Satkhenisi Area Block XIc

and Kumisi Block.



B



The Agreement contains a Minimum Work Program which the Contractor (as



defined in the Agreement) is contracted to perform.

C



The Guarantor has agreed to enter into this Agreement in respect of the

obligations of the Contractor to perform the Minimum Work Program under

the Agreement.



NOW THEREFORE IT IS AGREED AS FOLLOWS:

1



DEFINITIONS

Defined terms in this Guarantee shall have the meaning

attributed to them in the Agreement save as where otherwise

specified herein.



2



GUARANTEE



2.1



The Guarantor guarantees to the State the due and punctual

performance and observance by the Contractor (or the Operator

in accordance with the terms of the Agreement) of the Minimum

Work Program. For the avoidance of doubt the provisions of

this guarantee do not extend beyond the obligation to perform

or procure the performance of the Minimum Work Program.



2.2



If the Contractor does not perform any obligation referred to

in clause 2.1 in accordance with the terms of the Agreement

and following a period of

81



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82

thirty (30) days after the State has given written notice to

the Contractor and the Guarantor of such default in accordance

with the terms of the Agreement the default has not been

rectified, the Guarantor shall, subject to clause 2.3, perform

that obligation or procure performance of that obligation,

immediately on demand.



2.3



The State shall not enforce the Guarantee against the

Guarantor unless and until it has demanded payment of the

relevant amount or performance of the relevant obligation from

the Contractor.



3



NO PREJUDICE TO THE CONTRACTOR'S RIGHTS

For the avoidance of doubt, the existence of this Guarantee

does not prejudice the Contractor's rights expressly conferred

under the Agreement or any related document. The Guarantor

shall be entitled to the same pleas and defences against the

State as the Contractor under the Agreement.



4



CHOICE OF LAW

This Guarantee shall be governed by and interpreted in

accordance with English law and the parties hereto hereby

submit to the non-exclusive jurisdiction of the courts in

England.



Signed by David Robson and J F R Hammond

For CanArgo Energy Corporation



/s/J F R Hammond

/s/David Robson



Signed by the State Agency for

Regulation of Oil and Gas Resources in Georgia



/s/Gia Itonishvili



Signed by Joint Stock National

Oil Company - Georgian Oil



/s/G. Makharadze

82



</TEXT>

</DOCUMENT>