Iraq

28/08/2009

The initial contract area covers the Pulhkana Block 10 and extends over an area of 529.48 square kilometers as detailed and indicated on the map attached in Annex A.

Shamaran Petroleum B.V.; and Petoil Petroleum and Petroleum Products International Exploration and Production Inc.

Pulkhana Block 10

Shamaran Petroleum Corp. is the parent company of Shamaran Petroleum

Pulkhana Block 10

Petroleum

Minister of Natural Resources, Kurdistan Regional Government of Iraq on behalf of the Ministry of Natural Resources in the Kurdistan region

The exploration period shall be for an initial term of 5 contract years extendable on a yearly basis up to a maximum period of 7 contract years. The development period for a commercial discovery of crude oil and any associated natural gas shall be 20 years beginning on the declaration of a commercial discovery by the contractor with an automatic right to a 5 year extension period. The development period for the commercial discovery of non-associated natural gas shall be 20 years commencing on the declaration of such commercial discovery by the contractor with an automatic right to a 5 year extension period. If commercial production from a production area is still possible upon the expiration of a development period, then the contractor shall be entitled to an extension of such development period under the same terms as contained in the contract. The term of the extension shall be 5 years for crude oil and any associated natural gas and 5 years for non-associated natural gas.

Production Sharing Contract

PetOil Petroleum and Petroleum Products International Exploration and Production shall conduct and submit an environmental impact assessment to the government within 6 months after the effective date.

PetOil Petroleum and Petroleum Products International Exploration and Production (PetOil Petroleum) shall contribute US$ 150,000 in advance each contract year during the exploration period and US$ 300,000 in advance for each contract year during the development period into the environment fund established by the government for the benefit of the natural environment of the Kurdistan region, pursuant to the Kurdistan region Oil and Gas Law. During the performance of petroleum operations, PetOil Petroleum shall take reasonable measures to ensure that it, the operator, its subcontractors and agents attend to the protection of the environment and prevention of pollution in accordance with prudent international petroleum industry practice and in similar physical and ecological environment and any then applicable Kurdistan region law. PetOil Petroleum shall also take reasonable precautions and measures in accordance with prudent international petroleum industry practice in similar physical and ecological environments to prevent any pollution which may arise directly as a result of the petroleum operations and to protect the environment (flora and fauna), water sources and any other natural resources when carrying out petroleum operations. PetOil Petroleum shall, in accordance with prudent international petroleum industry practice in similar physical and ecological environments, respect the preservation of property, agricultural areas and fisheries when carrying out petroleum operations. PetOil Petroleum shall take reasonable measures to minimize any adverse material impact on national parks and natural reserves which may arise directly as a result of petroleum operations, in accordance with prudent international petroleum industry practice in similar and ecological environments. Gas flaring is prohibited unless it is a short term flaring of up to 12 months necessary for testing or other operational reasons in accordance with prudent international petroleum industry practice and this shall include the flaring of associated natural gas to the extent that the contractor considers that re-injecting the associated natural gas is not economically and technically justified and provided the government decides not to take the associated natural gas. Flaring of natural gas would also be permitted with the prior authorization of the government.

For the execution of petroleum operation under this contract, the contractor shall have the right to freely use water and any other natural resources located inside or outside the contract area for the petroleum operations. The contractor shall have the right in the Kurdistan region to take or use any water necessary for the petroleum operations provided it does not damage any existing irrigation or navigation systems and that land, houses or watering points belonging to third parties are not deprived of their use.

The government has the right to request an audit of the contractor's accounts with regard to each year within a period of 2 years following the end of such year. The government also has the right to retain an auditor of international standing familiar with the international petroleum industry's accounting practice to undertake or assist the government in auditing the accounts of the contractor. The reasonable cost of retaining the auditor shall be borne by the contractor and shall be treated as petroleum cost for the purpose of cost recovery. The government shall have the right to audit the accounts with respect to each year at any time in the case of manifest error or fraud.

Shamaran Petroleum shall pay to the government the following bonuses: 1) a signature bonus of US$ 2.5 million within 60 days following the effective date; and 2) a capacity building bonus of US$ 40 million 60 days following the effective date. PetOil Petroleum and Petroleum Products International Exploration and Production (PetOil Petroleum) shall pay the following relevant crude oil production bonus to the government within 30 days of the relevant occurrence: a) US$ 2.5 million at the start of the first production of crude oil; b) US$ 5 million when the first production of crude oil reaches a cumulative amount of 10 million barrels; c) US$ 10 million when production of crude oil reaches a cumulative amount of 25 million barrels; and d) US$ 20 million when production of crude oil reaches a cumulative amount of 50 million barrels. If there is a non-associated natural gas commercial discovery, PetOil Petroleum shall pay the following relevant non-associated natural gas production bonus to the government within 30 days of the following relevant occurrence: a) US$ 2.5 million upon the start of first production of non-associated natural gas; b) US$ 5 million when production of non-associated natural gas reaches a cumulative amount of ten million barrels of oil equivalent; c) US$ 10 million when production of non-associated natural gas reaches a cumulative of 25 million barrels of oil equivalent; and d) US$ 20 million when production of non-associated natural gas reaches a cumulative amount of 50 million barrels of oil equivalent.

The government intends to present to the National Assembly of the Kurdistan region a law(s) to authorize the government, by contract or other authorization, to exempt investors in long term projects relating to the conduct of petroleum operations in the Kurdistan region from Kurdistan region taxation to guarantee the stability of the applicable legal, fiscal and economic conditions of such projects.

For the entire duration of the contract, PetOil Petroleum and Petroleum Products International Exploration and Production (PetOil Petroleum), its affiliates and any subcontractors shall be liable for applicable taxes as a result of its income, assets and activities under the contract, however, all such taxes shall be assume, paid and fully discharged by the government on PetOil Petroleum's behalf. PetOil Petroleum shall be subject to corporate income tax on its income from petroleum operations and this shall be deemed to be inclusive and in full and total discharge of any tax on its income, receipts, revenues, gains or profit. The share of the profit petroleum to which the government is entitled in any calendar year shall be deemed to include a portion representing the corporate income tax imposed upon and due by PetOil Petroleum, and which will be paid directly by the government to the tax authority on behalf of PetOil Petroleum.

The rate of the corporate income tax applicable to the contractor shall be the generally applicable rate prescribed in the Law of Taxation (Law No. 5 of 1999) under the Kurdistan region, as may be amended from time to time or substituted in respect of petroleum operations but it shall not exceed 40%. The parties acknowledge and agree that at the effective date, the corporate income tax rate is 40% for all net taxable profits in excess of 9 million iraqi dinar. The parties agree that the contractor's corporate income tax shall be calculated on its net taxable profit under the contract.

To take account of specific conditions related to natural gas and to promote its development in the Kurdistan region, the government will grant specific benefits to the contractor on principles materially similar to those contained in this contract, including consistent with the Kurdistan region Oil and Gas Law, more generous provisions in respect of the recovery of petroleum costs and the sharing of profit petroleum than in respect of crude oil. Before the end of the first contract year, Shamaran Petroleum shall provide to the government technological and logistical assistance to the Kurdistan region petroleum sector, including geological computing hardware and software and such other equipment as the Minister of natural resources may require, up to the value of US$ 1 million. The form of such assistance shall be mutually agreed by the parties and any costs associated therewith shall be considered petroleum costs and shall be recoverable. Within 60 days of the effective date, Shamaran Petroleum shall procure the issuance of 65 million common shares in Shamaran Petroleum Corp., the ultimate parent company of Shamaran Petroleum, in favor of the government for no further consideration. If the exploration period does not expire at the end of the first sub-period and the contractor does not withdraw from the contract prior to the second sub-period and, on the date 30 days prior to the expiration of the first sub-period, neither the government nor Shamaran Petroleum has delivered written notice, Shamaran Petroleum shall procure the issuance of 50 million common shares in Shamaran Petroleum Corp. in favor of the government for no further consideration.

To determine the PetOil Petroleum and Petroleum Products International Exploration and Production (PetOil Petroleum)'s percentage share of the profit crude oil and profit natural gas, the R factor shall be calculated as follows: R = X/Y (where X is equal to cumulative revenues actually received by PetOil Petroleum and Y is equal to cumulative costs actually incurred by PetOil Petroleum). The share of profit petroleum to which PetOil Petroleum shall be entitled from first production is: (a) for profit crude oil, equal to the quantities of petroleum resulting from the application of the relevant percentage as indicated below to the daily volume of production of profit crude oil within the contract area at the corresponding delivery point: R < or = 1: PetOil Petroleum 26%; 1 < R < or = 2.0: PetOil Petroleum 26 - (26 - 13) x (R-1) / (2.0 - 1); R > 2.0: PetOil Petroleum 13%; and (b) for profit natural gas, equal to the quantities of non-associated natural gas resulting from the application of the relevant percentage as indicated below to the daily volume of production of profit natural gas within the contract area at the delivery point: R < or = 1: PetOil Petroleum 33%; 1 < R < or = 2.75: PetOil Petroleum 33 -(33 - 18) x (R - 1) / (2.75 - 1); R > 2.75: PetOil Petroleum 18%.

Subject to the provisions of the contract, from the first production, PetOil Petroleum and Petroleum Products International Exploration and Production (PetOil Petroleum) shall at all times be entitled to recover all petroleum costs incurred of up to 40% of available crude oil, which shall apply regardless of the gravity of the oil, and available associated natural gas produced and saved within any year. Subject to the provisions of the contract, from first production, PetOil Petroleum shall at all times be entitled to recover all petroleum costs incurred of up to 50% of available non-associated natural gas produced and saved within any year. If in any year, the available crude oil and/or available non-associated natural gas do not allow PetOil Petroleum recover all of its petroleum costs under the contract, the unrecovered petroleum costs in that year shall be carried forward indefinitely to the subsequent years until all the petroleum costs are fully recovered but, unless as provided in the contract, in no other case after the termination of the contract. The petroleum costs under the contract are not recoverable against other contract areas held by PetOil Petroleum.

For the financing of petroleum operations, PetOil Petroleum and Petroleum Products International Exploration and Production shall have the right to have recourse to external financing from third parties or from its affiliated companies on an arm's length basis.

The royalty due on any export petroleum produced and saved in the contract area shall be determined daily by applying the following relevant rate to the export crude oil or to the export non-associated natural gas, as the case may be, produced and saved on that day. For export crude oil, the royalty rate shall be 10% which shall apply regardless of the gravity of the oil. For export non-associated natural gas, the royalty rate shall be 10%. Associated natural gas and any other petroleum are exempt from any royalty payments.

From the effective date, the government shall participate in the contract through a public company with an undivided interest in the petroleum operations and all other rights, duties, obligations and liabilities of the contractor under the contract of 20%. The public company shall not have any liability to the contractor to contribute its government interest share of the petroleum cost and its share shall be the responsibility of contractors for the duration of the contract. The public company shall contribute its share of production bonuses attributable to the government interest. The public company may assign the interest to another public company authorized by the government provided that there shall be no transfers which would result in either the transferor or transferee holding less than 5% participating interest.

For the petroleum operation, PetOil Petroleum and Petroleum Products International Exploration and Production (PetOil Petroleum) shall give, and shall require that its subcontractors give, preference to personnel from the Kurdistan region and other parts of Iraq to the extent that such personnel has the technical capability, qualifications, competence and experience required to perform the work. PetOil Petroleum, its affiliates and subcontractors shall have the right to hire foreign personnel where the personnel from the Kurdistan region and other parts of Iraq do not have the required technical capabilities, qualification or experience for the position. If such foreign personnel and/or a member of their family engage in activities which breach any Kurdistan law, PetOil Petroleum shall, at the request of the management committee, take necessary steps to repatriate the foreign personnel. For the first 5 contract years, PetOil Petroleum is required to provide US$ 250,000 to the government in advance each contract year for the recruitment or secondment of personnel whether from the Kurdistan region, other parts of Iraq or abroad to the Ministry of Natural resources. This cost shall be recoverable as petroleum cost.

PetOil Petroleum and Petroleum Products International Exploration and Production (PetOil Petroleum) shall give priority to equipment and material that are readily available in the Kurdistan region and other parts of Iraq to the extent that their price, grade, quality, specifications, purchase, delivery and other commercial and technical terms are comparable in all material respects with those generally available in the international petroleum industry. PetOil Petroleum shall give priority to subcontractors from the Kurdistan region and other parts of Iraq to the extent their competence, rates, experience, reputation, qualifications, specialties, credit rating and terms of availability, delivery and other commercial terms are, in its sole opinion, comparable in all material respects with those provided by foreign companies operating in the international petroleum industry. Such subcontractors must be bona fide Kurdistan region companies not related to any public officer, directly or indirectly, and must have all necessary resources and capacity.

In a planned way and in accordance with the provisions of the contract, PetOil Petroleum and Petroleum Products International Exploration and Production (PetOil Petroleum) shall train all its personnel from Kurdistan and other parts of Iraq directly or indirectly involved in the petroleum operations to improve their knowledge and professional qualification to the same level as that of its foreign personnel with an equivalent resumé. The training shall include the transfer of knowledge of petroleum technology and the necessary management experience to enable the local personnel apply advanced technology in the petroleum operations to the extent permitted by law and agreements with third parties, and subject to appropriate confidentiality agreements. The recruitment, integration and training of the PetOil Petroleum's local personnel shall be provided in a plan submitted to the management committee for approval. The training plan shall provide for the allocation to the government of US$ 150,000 in advance for each contract year during the exploration period and US$ 300,000 for each contract year during the development period. All reasonable training expenses shall be considered as petroleum costs. PetOil Petroleum shall also give due consideration to the secondment of government personnel to it and the secondment of its personnel to the government during the various phases of the petroleum operations. The parties shall mutually agree on the terms, conditions and associated costs of the secondment. For the first 5 contract years, PetOil Petroleum is required to provide US$ 250,000 to the government in advance each contract year for the recruitment or secondment of personnel whether from the Kurdistan region, other parts of Iraq or abroad to the Ministry of Natural resources. This cost shall be recoverable as petroleum cost.

For its petroleum operations, PetOil Petroleum and Petroleum Products International Exploration and Production (PetOil Petroleum) shall have the right in the Kurdistan Region to use, subject to applicable law. any railway, tramway, road, airport, landing field, canal, river, bridge or waterway, any telecommunication network and any existing pipeline or transportation infrastructure, on terms no less favorable than those offered to other entities and, unless generally in force, to be mutually agreed. Under national emergencies due to environmental catastrophe or disaster, or internal or external war, the government shall have the right to request to use any transportation and communication facilities installed by PetOil Petroleum. The government shall have the right in the Kurdistan region, to build, operate and maintain roads, railways, airports, landing strips, canals, bridges, protection dams, police stations, military installations, pipelines and telecommunication networks in the contract area, provided this does not increase the costs, compromise or have a material adverse effect on the performance of the petroleum operations. PetOil Petroleum shall have the right to design, construct, operate and maintain pipelines and any related facilities, and/or to design acquire, lease, use, operate and maintain other transportation means (for example, by trucking or rail transport) and any related facilities, for the transportation of petroleum produced under this contract.

Subject to spare capacity being available and to their petroleum being compatible, third parties shall be entitled to transport their petroleum through any pipeline constructed and/or other transportation means acquired, leased or otherwise used by PetOil Petroleum and Petroleum Products International Exploration and Production (PetOil Petroleum) on terms to be agreed between PetOil Petroleum and such third party. Those terms shall be reasonable commercial terms and shall not discriminate among third party users. PetOil Petroleum shall always have priority of access to such pipelines and/or transportation means. To the extent related to transportation upstream of the delivery point, any tariffs received from third parties for use of any pipeline and related facilities and/or other transportation means by PetOil Petroleum shall be applied to the recovery of petroleum costs until all transportation costs have been fully recovered and shall not be included in income for corporate income tax purposes.

PetOil Petroleum and Petroleum Products International Exploration and Production shall sell and transfer to the government, upon written request of the government, any amounts of crude oil that the government shall deem necessary to meet Kurdistan region internal consumption requirements.

During the first sub-period, PetOil Petroleum and Petroleum Products International Exploration and Production (PetOil Petroleum) shall: (A) carry out geological and geophysical studies, comprising the following: (i) the compilation of a technical database; (ii) the performance of a remote sensing study; (iii) a field visit to verify initial geological and geophysical work and remote sensing results and plan for 2 dimensional seismic acquisition; and (B) carry out a data search for existing data specific to this contract area, comprising the following: (i) well data, if available, for example electric logs; (ii) seismic data and gravity data, if available; and (iii) reprocess seismic data, if available; (C) perform field work comprising structural, stratigraphic and lithologic mapping and sampling; (D) acquire, process and interpret 250 line kilometers of 2 dimensional seismic data committing for this purpose a minimum financial amount of US$ 5 million and process and interpret the seismic data provided to PetOil Petroleum; and (E) drill 3 exploration wells or appraisal wells, committing for this purpose a minimum financial amount of US$ 30 million. During the second sub-period, PetOil Petroleum shall: (A) acquire, process and interpret further seismic data (being either 2 dimensional or 3 dimensional) if it considers that the results from the first exploration well or appraisal well justify the acquisition of further seismic data; and, (B) drill 2 exploration wells or appraisal wells, committing for this purpose a minimum financial amount of US$ 25 million unless the data from the first, second and third exploration or appraisal wells demonstrates that there is not a reasonable technical case for drilling the fourth and fifth exploration or appraisal wells in the contract area. In addition, PetOil Petroleum shall provide the government, if so required, with a corporate guarantee issued with respect to the minimum financial commitment for each sub-period. The corporate guarantee shall expire automatically upon completion of the performance of the minimum exploration obligations or expenditure of such minimum financial commitment, whichever is earlier.

If a dispute arises under the contract, the parties shall first use their reasonable endeavors to negotiate promptly in good faith a mutually acceptable resolution of the dispute. The parties shall attempt to settle the dispute by negotiation between senior representatives. Senior representatives are individuals who have authority to negotiate the settlement on behalf of the parties, which for the government shall mean the minister of natural resources. If the dispute cannot be settled by negotiation, the dispute may be referred to mediation in accordance with the London Court of International Arbitration (LCIA) mediation procedure which is deemed incorporated in the contract by reference. If the dispute is not settled by mediation, the dispute may be referred to arbitration in accordance with the LCIA rules which is incorporated in the contract by reference for final determination. The arbitration shall be held in London, England and shall be conducted in English. The arbitration shall be heard by 3 arbitrators. During the arbitral proceeding and until the dispute is determined, the parties are required to continue to perform their obligations and to take no actions which would impair the contract. The parties agree that the arbitral award shall be final and not subject to any appeal including an appeal to the English courts on issues of law. The government and any public company which may be a contractor under the contract waive fully and irrevocably any claim to immunity for itself or any of its assets. This waiver includes any claim to immunity from any expert determination, mediation, arbitration, enforcement of any decision, settlement, award or judgment or the service of processes.

Unless exceptions under the contract apply, the parties undertake to keep all data and information relating to the contract and the petroleum operations confidential during the entire term of the contract and to refrain from disclosing such information to third parties without the consent of the other party. The confidentiality obligation does not apply to: 1) information which is, or through no fault of the parties becomes, a part of the public domain; 2) information which is known to the recipient at the date of disclosure; 3) information disclosed in compliance with any applicable law, by a government agency having jurisdiction over PetOil Petroleum and Petroleum Products International Exploration and Production (PetOil Petroleum), or by a court order or any legal proceedings; 4) disclosure required pursuant to the rules and regulations of any government or recognized stock exchange having jurisdiction over PetOil Petroleum. In accordance with prudent international petroleum industry practice, confidential information may be disclosed to: 1) PetOil Petroleum's affiliates, employees, officers, directors for the purpose of the petroleum operations and subject to PetOil Petroleum ensuring that customary precautions to keep the information confidential is taken; 2) consultants or agents retained by PetOil Petroleum or its affiliates for the purpose of analyzing or evaluating information (such disclosure shall not be made unless the third party has entered into a confidentiality undertaking); 3) banks or other financial institutions, including any such consultants retained by the banks, engaged by PetOil Petroleum or its affiliate for the purpose of financing the petroleum operations (such disclosure shall not be made unless the third party has entered into a confidentiality undertaking); 4) bona fide prospective assignees of a participating interest under the contract (such disclosure shall not be made unless the third party has entered into a confidentiality undertaking); 5) prospective or actual subcontractors engaged by a party (such disclosure shall not be made unless the third party has entered into a confidentiality undertaking); and 6) any other person with the prior written approval of the non-disclosing party. Subject to the contract, PetOil Petroleum is precluded from engaging in the sale or exchange of any data relating to the petroleum operations without the approval of the government which shall not be unreasonably withheld or delayed where in PetOil Petroleum's opinion such sale or exchange would benefit the petroleum operation.

The governing law is English law (except any rule of English law which would refer the matter to another jurisdiction), together with any relevant rules, customs and practices of international law and by principles and practice generally accepted in petroleum producing countries and in the international petroleum industry.

If it is reasonably proven that this contract was obtained in violation of Kurdistan region law relating to corruption, the contract shall be void. Also, each contractor agrees that if, at any time, it is reasonably proven to be in breach of Kurdistan region law concerning corruption, the government or any other contractor shall have the right to terminate this contract.

The obligations of PetOil Petroleum and Petroleum Products International Exploration and Production (PetOil Petroleum) under the contract shall not be changed by the government and the general and overall equilibrium between the parties under the contract shall not be affected in a substantial and lasting manner. The government guarantees that for the entire duration of the contract, it will maintain the stability of the legal, fiscal and economic conditions of the contract as they result from the contract and from laws and regulations in force on the date of signing the contract. If at any time after the effective date there is a change in the fiscal, legal and economic framework under the Kurdistan region law or other applicable law in or to the Kurdistan region which adversely affects PetOil Petroleum, or any person entitled to benefits under the contract, the terms and conditions of the contract shall be altered to restore PetOil Petroleum or such other person to the same overall economic position (taking into account home country taxes) as they would have been if the change did not occur. If PetOil Petroleum believes that its economic position or that of any person entitled to benefits under this contract has been detrimentally affected by any change, upon the PetOil Petroleum's written request, the parties shall meet to agree on any necessary measures or amendments to the terms of the contract to reestablish the equilibrium between the parties and restore PetOil Petroleum and such person to the position (taking into account home country taxes) they were prior to the occurrence of the change. If the parties fail to agree on the merit of amending the contract or on any amendment to be made within 90 days from PetOil Petroleum's request to meet, or such other period as may be agreed by the parties, PetOil Petroleum may refer the matter directly to arbitration in accordance with the provision for arbitration under the contract. PetOil Petroleum shall be entitled to the benefits of any future changes in the petroleum legislation or any other legislation complementing, amending or replacing it. The government intends to present to the National Assembly of the Kurdistan region a law(s) to authorize the government, by contract or other authorization, to exempt investors in long term projects relating to the conduct of petroleum operations in the Kurdistan region from Kurdistan region taxation to guarantee the stability of the applicable legal, fiscal and economic conditions of such projects. The rate of the corporate income tax applicable to the contractor shall be the generally applicable rate prescribed in the Law of Taxation (Law No. 5 of 1999) under the Kurdistan region, as may be amended from time to time or substituted in respect of petroleum operations but it shall not exceed 40%.