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ISLAND OIL LTD.5/25/2004

PRODUCTION SHARING AGREEMENT



THIS AGREEMENT, made and entered into this 25th day of May,2004,by and between the GOVERNMEN r OF BELIZE, (hereinafter referred to as the “Government”) acting

through the Minister of Natural Resources, the Environment, Commerce and Industry and ISLAND OIL BELIZE LTD. OF #1 FRONT STREET, PUNTA GORDA TOWN, TOLEDO

DISTRICT, BELIZE CA. a corporation duly organized under the laws of BELIZE (hereinafter referred to as the "Contractor").



WHEREAS, the entire property in, and control over all Petroleum resources III or under the territory of Belize is vested in the Government on behalf of Belize;



AND WHEREAS, no petroleum operations shall be conducted in Belize by any person other them the Government unless such person has entered into a contract in accordance with the Petroleum Act Chapter 225 Substantive Laws of Belize, Revised Edition 2000;



AND WHEREAS, the Government wishes to promote the exploration for and production or the petroleum resources in and throughout the contract area, and the Contractor desires to join and assist the Government in accelerating the exploration for and production of the petroleum resources within the contract area;



AND WHEREAS, the Contractor represents that it has the financial resources, technical competence and professional skills necessary to carry out the petroleum operations hereinafter described;



AND WHEREAS, the Contractor understands that successful implementation of contractor's rights and obligations hereunder may involve cross-border hydrocarbon deposits and concomitant Joint Development Agreements) (JDAs);



AND WHEREAS, the Government understands that successful implementation of contractor's rights and obligation hereunder may require the Contractor to move exploration related equipment into and out of Belize from and to Guatemala;



AND WHEREAS, the Contractor has applied for additional vacant Areas of sixty-nine thousand one hundred eighty-nine point live (69,189.5) acres;



AND WHEREAS, the Contractor understands and agrees that the extent of the territorial waters of Belize, Guatemala and Honduras may be subject to a final dispute settlement, which may impact on the acreage the subject of this agreement. In the event that the settlement results in an increase in acreage of Belize's territorial waters, the Contractor shall be given first priority to apply for any such additional acreage within ninety 90) days of the settlement. In the event, however that any final settlement results in a decrease in acreage or Belize's territorial waters with consequential





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decrease in acreage to the Contractor, then the Government shall not be held liable for any loss sustained by the Contractor resulting from any decrease in acreage;



AND WHEREAS, the Government and the Contractor agree that this Agreement is in compliance with all Belize statutes, regulations and laws which govern or regulate the exploration, development and production of petroleum in Belize;



AND WHEREAS, the Government and the Contractor agree that this Agreement is bound by all Belize statutes, regulations and laws which govern or regulate the exploration, development and production of petroleum in Belize which are in effect at the time this Agreement was signed;



AND WHEREAS, the Government and the Contractor agree that this Agreement was freely negotiated at arms length;



AND WHEREAS, both the Government and the Contractor were represented by counsel with respect to the drafting and negotiation of this Agreement;



AND WHEREAS, the Government and the Contractor agree that the geographic area covered under this Agreement is that of Block(s) 12 as amended 2003 and additional vacant Areas of sixty-nine thousand one hundred eighty-nine point five (69,189.5) acres, referenced by coordinates in exhibit A, attached hereto, and a map in exhibit B, attached hereto;



AND WHEREAS, the Government has accepted the application for Block(s) 12 as amended / 2003 and additional vacant Areas of sixty-nine thousand one hundred eighty-nine point live (69,189.5) acres, made by ISLAND OIL BELIZE LTD. and submitted to the Geology & Petroleum Department;



AND WHEREAS, the award of Block(s) 12 as amended 2003 and additional vacant Areas of / sixty-nine thousand one hundred eighty-nine point five (69,189.5) acres, is dependent on, inter alia, success of negotiation process and approval of project proposal (work programme) including applicable Environmental Impact Assessment (EIA) (Belize Environmental Impact Assessment Regulations, No. 107 of 1995).



NOW, THEREFORE, THE PARTIES HERETO HEREBY AGREE AS FOLLOWS:



ARTICLE I



Definitions 1.1 In this Agreement, the following terms

shall have die following meanings:



1.1.1 “affiliated company” means any entity

directly or indirectly effectively

controlling, or effectively controlled

by, or under direct or indirect

effective common control of, a

specified entity. For the







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purposes of this definition, “control”,

when used with respect to any specified

entity, means the power to direct,

administer and dictate policies of such

entity (it being understood and agreed that

it is not necessary to own directly or

indirectly fifty percent (50%) or more of

such entity’s voting securities to have

effective control over such entity, but

ownership, direct or indirect, of fifty

percent (50%) or more of such entity’s

voting securities shall automatically

indicate effective control), and the terms

“controlling” and “controlled” have

meanings corresponding to the foregoing;



1.1.2 “appraisal well” means a well drilled

within the contract area, following a

discovery, for the purpose of delineating

the petroleum reservoir(s) to which the

discovery relates in terms of thickness and

lateral extent and estimating the quantity

of recoverable petroleum therein;



1.1.3 “barrel” means a quantity or unit of crude

oil equal to 158.9874 liters (forty-two

(42) United States gallons) at a

temperature of sixty (60) degrees

Fahrenheit (15.56 degrees Centigrade) under

one atmosphere of pressure;



1.1.4 “calendar year” means a period of twelve

(12) consecutive months, according to the

Gregorian Calendar, starting with the 1st

of January and ending with the 31st of

December;



1.1.5 “calendar month” or “month” means any of

the twelve (12) months of the calendar

year;



1.1.6 “carried interest” a commercial arrangement

whereby expenditures due from one

participant in a joint venture are met by

another usually in exchange for increased

equity or repayment out of production

revenues;



1.1.7 “commercial discovery” means a discovery of

petroleum which can be exploited

commercially in accordance with accepted

practices in the international petroleum

industry;



1.1.8 “continental shelf’ means the part of the

seabed and subsoil of the submarine areas

adjacent to the coast of Belize, but

outside the territorial waters, over which

Belize is entitled by international law to

exercise sovereign rights for the purposes

of exploring and exploiting its natural

resources;









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1.1.9 “contract area” means a geographical area which

is covered by the contract; and includes the

whole of, or such part or parts of, the original

area awarded to a Contractor which shall remain

at the disposal of such Contractor from lime to

time pursuant to the terms of the contract;



1.1.10 “contract year” means a period of twelve (12)

consecutive calendar months, counted from the

first day of the first calendar month following

the effective date of this Agreement or from the

anniversary of such first day of such month;



1.1.11 “Contractor” means any person with whom the

Government enters into a contract and includes

his agents, representatives and assignees;



1.1.12 “crude oil” means petroleum which is in liquid

state at the well head or gas/oil separator or

which is extracted from natural gas, including

distillate and condensate;



1.1.13 “day” means a calendar day unless otherwise

provided herein;



1.1.14 “delivery point” means the FOB point of export in

Belize or such other point which may be agreed

between the Government and the Contractor;



1.1.15 “development and production operations” means

operations for or in connection with the

production of petroleum;



1.1.16 “development and production period” means the

period referred to in paragraph 3.4;



1.1.17 “discovery” in relation to petroleum, means

petroleum not previously known to have existed,

recovered at the surface in a ilow measurable by

conventional petroleum industry testing methods;



1.1.18 “effective date” means die date first above

written;



1.1.19 “exploration expenditures” shall mean

expenditures made in conducting exploration

operations hereunder, but excluding expenditures

made within the area of a field after a

commercial discovery has been declared. These

expenditures shall be determined in accordance

with the Income and Business Tax Act, Chapter 55

Substantive Laws of Belize, Revised Edition 2000;







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1.1.20 “exploration operations” means operations for or

in connection with exploration for petroleum;



1.1.21 “exploration period” means the period referred to

in paragraph 3.1;



1.1.22 “exploration well” means a well other than an

appraisal well drilled in the course of

exploration operations;



1.1.23 “field” means an area, as designated by agreement

between the Government and the Contractor, where

a commercial discovery of crude oil or natural

gas has been declared;



1.1.24 “gross revenues” means the sum of all proceeds of

sales and the monetary equivalent of the value of

other dispositions of petroleum produced and

saved and not used in petroleum operations and

any other proceeds derived from petroleum

operations;



1.1.25 “income tax” means that tax imposed on net income

pursuant to the Income and Business Tax Act

Chapter 55 Substantive Laws of Belize, Revised

Edition 2000;



1.1.26 “initial commercial production” means the date on

which the first regular shipment of crude oil or

natural gas, or both, is made from a field under

a program of regular production and sale;



1.1.27 “Inspector” means the Inspector of Petroleum

appointed under section 4 of the Petroleum Act,

Chapter 225 of the Substantive Laws of Belize,

Revised Edition 2000 or any officer of the

Geology & Petroleum Department duly designated in

that behalf;



1.1.28 “Joint Development Agreement” means a contract

executed between State “X” and State “Y” to

develop (explore for/exploit) minerals and/or

petroleum (hydrocarbon) reserves which may be

found to exist in reservoirs/deposits and which

extend across the geographic borders of both

States (cross-border) X and Y, via a Joint

Hydrocarbon Authority (JHA) comprised

representatives of State X and Y. The investment

capital required for the development process is

supplied by private investor(s) who have entered

into prior contracts with both States to

simultaneously explore for and/exploit any such

cross-borders reservoir(s) which may exist;



1.1.29 “maximum efficient rate” means the maximum rate

of production of crude oil in a field, without

excessive rate of decline of





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production or excessive loss of reservoir

pressure, and in accordance with generally

accepted practices in the international

petroleum industry and the provisions of

paragraph 6.3;



1.1.30 “Minister” means the Minister responsible for

petroleum affairs in the Government of Belize;



1.1.31 “natural gas” means all petroleum which at

atmospheric conditions of temperature and

pressure is in a gaseous state, and includes wet

mineral gas, dry mineral gas, wet gas and

residue gas remaining after the extraction,

processing or separation of liquid petroleum

from wet gas, as well as non-petroleum gas or

gases produced in association with liquid or

gaseous petroleum;



1.1.32 “net petroleum” means the value of the total

quantity of petroleum produced and saved in a

given calendar year and not used in petroleum

operations after deductions of the value of the

royalties made in such calendar year and alter

recovery of petroleum operations expenditures

pursuant to paragraph 9.1;



1.1.33 “net taxable income” means net taxable income as

determined in accordance with the provisions of

the Income and Business "Fax Act, Chapter 55 of

the Substantive Laws of Belize, Revised Edition

2000;



1.1.34 “petroleum” means all natural organic substances

composed of carbon and hydrogen; and includes

crude oil and natural gas, and all other mineral

substances, products, by-products and

derivatives that are found in conjunction with

petroleum;



1.1.35 “Petroleum Act” means the Petroleum Act, Chapter

225 Substantive Laws of Belize, Revised Edition

2000, and any subsidiary legislation made

thereunder;



1.1.36 “petroleum operations” means the operations

related to the exploration, development,

extraction, production, field, separation,

transportation, storage, sale or disposal of

petroleum; but does not include any

transportation or other operations (i) beyond

the point of export; or (ii) in the case of

petroleum which is processed within Belize,

beyond the point of entry into a refinery or

liquefaction or natural gas treatment plant;



1.1.37 “petroleum operations expenditures” shall mean

expenditures incurred in conducting petroleum

operations hereunder,







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determined in accordance with the Income and Business Tax Act, Chapter 55 of the Substantive Laws of Belize, Revised Edition 2000;



1.1.38 "PSA" means Production Sharing Agreement;



1.1.39 "royalty" means the royally or production payment described in Article VIII;



1.1.40 "quarter" means a period of three (3) consecutive months commencing with the first day of January, April, July and October, respectively, of each calendar year;



1.1.41 "well" means any opening in the ground made or being made by drilling or boring, or in any other manner, in connection with exploration operations or development and production operations, other than a seismic hole;



1.1.42 "working interest" a full "equity" interest in an oil or gas concession as distinct from, for instance, a royalty entitlement or net profits interest;



1.1.43 "work programme" means an itemized statement of Ute petroleum operations to be carried out in the contract area in each calendar year, or to be carried out for specific activities such as drilling of exploration wells and appraisal wells and development programmes, all in a form acceptable to the Government;



1.1.44 "work programme budget" means the estimate of the costs or all items included in the corresponding work programme, including' both capital and operating budgets, all in a form acceptable to the Government.



ARTICLE II



Grant of Rights to 2.1 The Government grants to the Contractor, subject to the terms and

The Contractor conditions set forth in this Agreement, the exclusive right to conduct petroleum operations within the contract area for the term of this Agreement. Except as provided in paragraph 11.3, the Contractor shall have the right, during the term of this Agreement, to freely lift, dispose of and export its share of the petroleum produced hereunder.









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2.2 Title to petroleum to which the Contractor is entitled hereunder shall pass to the Contractor at the delivery point.



2.3 The Contractor shall except as expressly otherwise provided in this Agreement, conduct all petroleum operations hereunder at his sole risk, cost and expense. The Contractor shall look only to the petroleum to which he is entitled under this Agreement to recover such costs and expenses, and such petroleum shall be the Contractor's sole source of compensation thereunder.



2.4 The Contractor shall be responsible to the Government for the execution of all petroleum operations in accordance with the provisions of this Agreement. without prejudice to the Contractor's position as an independent contractor hereunder, the extent and character of such work to be done by the Contractor shall be subject to the general supervision, review and approval of the Government to which the Contractor shall report and be responsible as herein set forth. Government approval, as required pursuant to any provision of this Agreement, shall not be unreasonably withheld, and unless specified to the contrary in this Agreement, Government approval will be deemed given if the Government has not responded to the Contractor in writing within thirty (30) working days of Contractor's compliance with any provision of this Agreement.



2.5 The Contractor is authorized to construct pipelines, bridges, ferries, landing fields, radio, telephone, facsimile and related communication systems as may be necessary for petroleum operations but subject to the laws in force in Belize from time to time for the regulation and control of such installations and their construction. In the event that the laws or regulations of Belize change (after the signing of this Agreement) in any manner that frustrates the purpose of this Agreement, the Government agrees to use best efforts to take any action necessary to effectuate the purpose of this Agreement.



2.6 The Government reserves the right to grant licences to others to prospect for, explore for and mine minerals other than hydrocarbons including petroleum within the contract area, and further reserves to itself the right to so prospect, explore and mine directly, all subject to the provisions of paragraph 5.3.



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Term 2.7 The Contractor is authorized to conduct exploration operations during an exploration period which shall be comprised of (i) an initial exploration period of two (2) contract years ("Initial Exploration Period"), and (ii) subject to the conditions hereinafter provided, three (3) successive renewal periods ("First Renewal Period", "Second Renewal Period" and "Third Renewal Period") of two (2) years each to the initial exploration period. Such renewal periods shall be granted to the Contractor upon the Contractor's request delivered to the Government in writing not later than ninety (90) days prior to the expiration of the then current period, subject to the Contractor having fulfilled his obligations hereunder for the then current period, including the relinquishment provisions of Article IV, and having submitted with such application a work programme and work programme budget for the period of renewal which is consistent with the undertakings set forth in paragraph 6.1.



2.8 If at the end of the exploration period, no commercial discovery has been made in any part of the contract area, this Agreement shall automatically terminate in its entirety provided, however, that the ISLAND OIL LTD 5/25/2004





ARTICLE III



Relinquishment 3.1 On or before the end of the initial

exploration period, the Contractor

shall relinquish twenty-five percent

(25%) of the original contract area.



3.1.2 On or before the end of the first

renewal period the Contractor shall

relinquish an additional twenty-live

percent (25%) of the original

contract area.



3.2 On or before the end of the second

renewal period the Contractor shall

relinquish an additional area equal

to twenty-live percent (25%) of the

original contract area.



3.3 At the end of the exploration period,

the Contractor shall relinquish the

remainder of the original contract

area not then converted to a field.



3.4 The size and shape of the portion or

portions to be relinquished shall be

determined by the Contractor,

provided however, that (a) the

Contractor shall advise the

Government at least ninety (90) days

in advance of the date of

relinquishment of the description and

area of the portion or portions to be

relinquished, (b) the Contractor

shall consult with the Government

regarding the shape and size of each

individual portion of the areas being

relinquished, (c) the area being

relinquished shall not be divided

into more than two portions, each of

which shall be comprised of, and be

defined by reference to, blocks as

described in Exhibit B, save where no

such area or areas can be identified

for relinquishment, in accordance

with this paragraph without including

in such area or areas in whole or in

part a field or area in which a

discovery has been made which the

Contractor is not otherwise required

to relinquish hereunder, and (d) each

such relinquished, individual portion

shall be not less than twenty percent

(20%) of the area being relinquished

at such time with sides parallel to

the boundaries of the original

contract area, to the extent that the

boundaries of the original contract

area permit, and with the longest

side not more than three times as

long as the shortest side, and shall

in any event be of sufficient size

and convenient shape to enable

petroleum operations to be conducted

thereon or thereunder.







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3.5 The Contractor shall not be

obliged to relinquish, pursuant

to paragraphs 4.1 and 4.2, any

part of the original contract

area which has been converted to

a field or in which a discovery

has been made which the

Contractor is not otherwise

required to relinquish

hereunder.



3.6 Upon at least ninety (90) days

written notice to the Government

prior to the end of any contract

year, the Contractor shall have

the right to relinquish all or

any portion of the contract area

effective as of the end of such

contract year, subject to the

provisions of paragraph 4.4, and

such portion shall then be

credited against that portion of

the contract area which the

Contractor is next required to

relinquish pursuant to the

provisions of paragraphs 4.1 and

4.2.



3.7 No relinquishment made in

accordance with this Article IV

shall relieve the Contractor of:

(a) its obligations to make

payments due as a result of

surface rentals prior to the

effective date of any such

relinquishment, or (b) the

minimum work and expenditure

commitments undertaken pursuant

to paragraphs 6.1.1 and 6.1.2.



3.8 Upon relinquishment of any area,

the Contractor shall perform all

necessary clean-up activities in

accordance with generally

accepted practices in the

international petroleum

industry, and shall take all

other action necessary to

prevent hazards to human life or

third party property.





ARTICLE IV



General Obligations 4.1 The Contractor shall be

of the Contractor responsible for conducting all

petroleum operations within the

contract area diligently,

expeditiously and efficiently in

accordance with generally

accepted practices in the

international petroleum industry

and the environmental laws of

Belize and pursuant to work

programmes approved in

accordance with paragraph 5.4.

The Contractor shall ensure that

all equipment, materials,

supplies, plant and

installations used by himself,

and his contractors and

subcontractors comply with

generally accepted standards in

the international petroleum

industry and are of proper

construction and kept in optimal

working order.



4.2 Except as otherwise provided in

this Agreement, the Contractor

shall:





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(a) Advance all necessary funds and purchase or lease all equipment, materials and supplies required to be purchased or leased in connection with petroleum operations;



(b) Furnish all technical expertise and assistance, including foreign personnel, required for the conduct of petroleum operations;



(c) Furnish all other funds for the performance of petroleum operations as may be required, including payment to foreign entities that perform services as contractors or subcontractors to the Contractor;



(d) Appoint a local representative and in his absence, a replacement therefore, with respect to this Agreement, who shall have an office and be resident in Belize and who shall have full authority to represent the Contractor for all purposes of this Agreement and whose name shall, on appointment within ninety (90) days after the effective date, be made known to the Government;



(e) Provide acceptable working conditions and living accommodations, and access to medical attention and nursing care, for all personnel employed by him, his contractors and subcontractors in petroleum operations; and



(f) Pay social security for all employees as per the Laws of Belize.



4.3 If, after the effective date, others are granted licenses within the contract area authorizing prospecting for, exploration for or mining f any minerals or other substances other than petroleum, or the Government proceeds with such prospecting, exploration or mining directly in its own behalf, the Contractor shall use his best efforts to avoid obstruction or interference with such licensee’s or Government’s operations within the contract area. The Government shall use its best efforts to ensure that operations of third parties do not interfere with the Contractor’s petroleum operations within the contract area. Additionally, at the request of the Contractor the Government shall notify Contractor (and provide Contractor the name, phone number, and address) of any companies which are granted licenses authorizing them to prospect for, explore for or mine any minerals in the contract area.



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(a) At least ninety (90) days prior to the beginning of each calendar year, or at such other time as is mutually agreed by the parties, the Contractor shall prepare and submit for approval lo the Government an annual work programme and work programme budget of petroleum operations and petroleum operations expenditures by quarters for the contract area setting forth the petroleum operations the Contractor proposes to carry out during the ensuing calendar year. Such annual work programmes and work programme budgets shall comply with the minimum work and expenditure obligations described in paragraphs 6.1. Approval by the Government of the proposed annual work programme budget ol petroleum operations and petroleum operation expenditures will not be unreasonably withheld or delayed. The Government and the Contractor shall have reached agreement upon an annual work programme and work programme budget for the period from the effective date until the end of the calendar year in which the effective date falls or for the ensuing calendar year if the effective date hills alter the 30th day of September.



(b) Should the Government wish to propose revisions to the annual work programme or work programme budget, it shall within thirty (30) days after receipt thereof so notify the Contractor specifying in reasonable detail its reasons therefor. Promptly thereafter the parties shall meet and endeavor to agree on the revisions proposed by the Government. If the Contractor and the Government fail to agree upon any revisions proposed by the Government within sixty (GO) days of the receipt of the Contractor’s proposals, the points of disagreement shall be resolved as follows:



(i) all other aspects of the annual work programme mid

work programme budget to which the Government

proposes revisions shall be mutually agreed before

such aspects of the annual work programme and work

programme budget shall be adopted.



(c) It is recognized by the parties that the details of

an annual work programme may require changes in

light of then existing circumstances. In such event,

the Contractor may introduce such changes as may be

necessary, following consultation with the

Government, but subject to the following:



(i) in the case of changes to an annual work

programme and work programme budget which relate

to exploration operations, such changes may be

implemented to the extent







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that they are not inconsistent

with the undertakings set forth

in paragraph 6.1 or the general

objective of such annual work

programme;



(ii) in the case of changes to an

annual work programme and work

programme budget which relate to

the development of a held, such

changes may be implemented to the

extent that they are not

inconsistent with the applicable

development work programme and

work programme budget adopted

pursuant to paragraph 6.2 or the

general objective of such annual

work programme;



(iii) all other changes may be

notified in writing to the

Government and shall be mutually

agreed before they may be

implemented.



(d) To the maximum extent

practicable, the Contractor shall

involve representatives of the

Government in the preparation of

the annual work programme and

work programme budget.



(e) Within thirty (30) days alter the

end of each quarter, the

Contractor shall submit to the

Government a report describing

and summarizing petroleum

operations carried out, and

petroleum operations expenditures

incurred during such quarter.

Such report shall be in a form

acceptable to the Government.





ARTICLE VI





Minimum Work 6.1 The Contractor shall commence

and Expendi- petroleum operations hereunder not

ture later than ninety (90) days after the

Obligations effective date.



Exploration 6.1.1 The amount to be expended by the

Period Contractor in conducting exploration

operations in accordance with approved

work programmes during the exploration

period, shall not be less than the

following as adjusted pursuant to

paragraph 6.1.4.



6.1.1.1 Initial Exploration Period:



(a) First contract year US$ 50,000.00



(b) Second contract year

US$ 100,000.00







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6.1.1.2 First renewal period (if requested by the

Contractor pursuant to paragraph 3.1):



(a) First contract year US$500,000.00



(b) Second contract year US$500,000.00



6.1.1.3 Second renewal period (if requested by the

Contractor pursuant to paragraph 3.1):



(a) First contract year US$1,000,000.00



(b) Second contract year US$1,000,000.00



6.1.1.4 Third renewal period (if requested by the

Contractor pursuant to paragraph 3.1):



(a) First contract year US$1,000,000.00



(b) Second contract year US$1,000.000.00



6.1.2 The Contractor undertakes to carry out and comply

with the following minimum work commitments.



6.1.2.1 Initial exploration period:



INITIAL PERIOD



(a) First contract year:



Assemble data package including acquiring

Marathon’s database; geochemical sampling and

interpretation; conduct manatee study by TIDE;

pay consulting lees and administrative fees.



INITIAL PERIOD



(b) Second contract year:



Acquire aeromagnetic data and incorporate with

marine magnetics and gravity magnetics; acquire

LandSat images; reprocess seismic data;

rationalize all data into Landmark programme for

interpretation; pay consulting fees and

administrative fees.







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6.1.2.2 FIRST RENEWAL PERIOD



First renewal period (if requested by the

Contractor pursuant to paragraph 3.1):



Drill one well on a mutually agreed upon

prospect at a mutually agreed upon depth or to

basement rock.



6.1.2.3 SECOND RENEWAL PERIOD



Second renewal period (if requested by the

Contractor pursuant to paragraph 3.1):



Drilling of second well



6.1.2.4 THIRD RENEWAL PERIOD



Third renewal period (if requested by the

Contractor pursuant to paragraph 3.1):



Drilling of third well



6.1.3 If, during any contract year in the exploration

period, the Contractor should expend more than

the required minimum annual exploration

expenditures, the Contractor may subtract an

amount equal to the excess amount spent from the

required minimum exploration expenditures for

the ensuing contract year in the exploration

period. If works carried out in any contract

year exceed the minimum work commitment relating

to such contract year as provided in paragraph

6.1.2, the excesses will count towards the

satisfaction of the minimum work commitments for

the ensuing contract year.



Compliance with the required minimum exploration

expenditures for a given contract year shall not

relieve the Contractor of his obligation to

comply with the required minimum work

commitment, nor shall compliance with the

required minimum work commitment for a given

contract year relieve the Contractor of his

obligation to comply with the required minimum

exploration expenditures for such contract year.



Security



6.1.4 (a) For each period, prior to commencing each

phase of the exploratory work programme, the

Contractor shall provide the Government with a

copy of the contract of work to be performed and

shall deposit into an escrow account with the

Government the











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estimated amount to be expended to

complete such phase. As I he work

progresses, the Government shall

release funds from the escrow account

to allow for timely payment of

invoices for completed work. This

escrow account is intended to satisfy

the requirement of Section 17 (d) of

the Petroleum Act.



(b) If Contractor fails to complete

any work substantially in accordance

with the applicable contract for such

work for which the money has been

escrowed under Paragraph 6.1.4 (a),

above, then the applicable funds

shall be forfeited to the Government

unless Contractor can demonstrate

that it is working continuously and

diligently to cause the work to be

completed.



Discovery and 6.2 The terms and conditions relating to

Development the discovery and development period

Period shall be as follows:



6.2.1 When in the course of petroleum

operations, a discovery of petroleum

is made, the Contractor shall

immediately notify the Government in

writing accordingly, specifying in

such notice all pertinent information

concerning the discovery.



6.2.2 If the Contractor determines to

conduct a drill-stem or production

test, in open hole or through

perforated casing, with regard to the

discovery, he shall notify the

Government that a drill-stem or

production test will be made within

twenty-four (24) hours of the time

that such proposed test has been

called, and the Government shall have

the right to have a representative

present during such test. Not later

than ninety (90) days after

completion of such test or tests, the

Contractor shall complete the

analysis and interpretation of the

data resulting from such test and

submit a report to the Government

which shall contain copies of such

data and its analysis and

interpretation thereof, and which

shall also contain a written

notification of whether or not, in

the Contractor’s opinion, such

discovery is of potential commercial

interest. If the Contractor plugs and

abandons the well which encountered

such discovery without conducting a

drill stem or production test, or

fails to conduct a drill stem or

production test with respect to such

discovery within one hundred and

eighty (180) days from the date on

which such discovery has been made,

it shall be deemed to have notified

the Government that, in the

Contractor’s opinion, such discovery

is not of potential commercial

interest.





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ISLAND OIL LTD 5/25/2004





6.2.3 If, pursuant to paragraph 6.2.2, the Contractor

notifies, or is deemed to have notified, the

Government that such discovery is not of

potential commercial interest, the Government

shall have the option, exercisable by notice in

writing to the Contractor, to require the

Contractor to relinquish the area corresponding

to such discovery and forfeit any rights

relating to such discovery and any production

therefrom. The area subject to relinquishment

shall not exceed the prospective producing area

determined by taking into account the area of

the structural closure of the prospective

horizon and other relevant technical factors.

Any such relinquishment by the Contractor of the

area relating to such discovery before the end

of the exploration period shall be carried out

in accordance with paragraphs 4.4, 4.6 and 4.8.



6.2.4 If, pursuant to paragraph 6.2.2, the Contractor

notifies the Government that the discovery is of

potential commercial interest, the Contractor

shall promptly prepare and submit for approval

to the Government a reasonable work programme

and work programme budget for the appraisal of

such discovery. Such appraisal work programme

and work programme budget shall include a

complete programme of appraisal operations

necessary to determine whether such discovery is

a commercial discovery.



6.2.5 Within fifteen (15) days after the submission of

the appraisal work programme and work programme

budget pursuant to paragraph 6.2.4, the

Contractor and the Government shall meet with a

view to adopting such work programme and work

programme budget or mutually agreeing upon

amendments or additions thereto. Failing

agreement between the Contractor and the

Government as to such work programme and work

programme budget at such meeting, or within

fifteen (15) days thereafter, the original

appraisal work programme and work programme

budget submitted by the Contractor, revised in

accordance with any agreed amendments or

additions thereto, shall be deemed adopted, and

the Contractor shall immediately commence

implementation thereof. On adoption of the

appraisal work programme and work programme

budget, the annual work programme and work

programme budget adopted pursuant to paragraph

5.6 shall be revised accordingly.



6.2.6 If, pursuant to paragraph 6.2.2, the Contractor

has notified the Government that the discovery

is of potential commercial interest, it shall,

unless otherwise agreed:



(a) in respect of a discovery of crude oil,

advise the Government by





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ISLAND OIL LTD 5/25/2004



notice in writing, whether or not in its opinion,

the discovery is commercial within a period of

agreed eighteen (18) months from the date on which

the Contractor notified the Government that said

discovery was of potential commercial interest:



Provided that in respect of a discovery of crude

oil in water depths of more than 600 feet, such

period may be increased by mutual agreement from

eighteen (18) months to twenty-four (24) months.



(b) in respect of a discovery of non-associated

natural gas, advise the Government by notice in

writing, whether or not in its opinion, the

discovery is commercial, within such period as

may be stipulated in an Agreement made pursuant

to Article XIV with respect to such discovery

or, in the absence of such Agreement, within

thirty-six (36) months from the dale on which

the Contractor notified the Government that said

discovery was of potential commercial interest.



6.2.7 If the Contractor notifies the Government that

the discovery is not commercial, or fails to

notify the Government that the discovery is

commercial within the periods prescribed in

paragraphs 6.2.6(a) and (b), the Government

shall have the option, exercisable by notice in

writing to the Contractor, to require the

Contractor to





ISLAND OIL LTD 5/25/2004





of the reservoir, crude oil and natural gas

reserves estimates and any other relevant

characteristics and properties of the reservoirs

and fluids contained therein, as well as all

evaluations, interpretations and analyses of such

data and feasibility studies relating to the

discovery prepared by the Contractor, his

contractors, subcontractors and affiliated

companies.



(b) In addition, if the Contractor believes that

the discovery is commercial, he shall submit to

the Government with the report described in

paragraph 6.2.8 (a) a work programme and work

programme budget for the development of such

discovery. Such development work programme and

work programme budget shall set out detailed

proposals, including cost estimates, drilling

schedules, number of wells and well spacing,

production forecasts and a timing schedule, in

accordance with generally accepted engineering

practices and economics of the international

petroleum industry, for the establishment and

operation of all the facilities, installations and

services required for the production, processing,

storage and transportation of petroleum from the

area in which the discovery is located and may

other activities incidental thereto. Proposals

relating to production procedures shall ensure

that the area does not suffer an excessive rate of

decline of production or an excessive loss of

reservoir pressure. Such development work

programme and work programme budget shall also

contain particulars of feasible alternatives, if

any, considered by the Contractor for the

development and exploitation of the discovery and

economic feasibility studies carried out by or for

the Contractor with respect to the discovery

taking into account the location, meteorological

conditions, cost estimates, the price of petroleum

and any other relevant data turd evaluations

thereof.



6.2.9 The Government shall examine the report and any

work programme and work programme budget submitted

pursuant to paragraph 6.2.8 and may require the

Contractor to provide, within a specified period

of time, such additional information and data as

it may reasonably require to evaluate such report,

work programme and work programme budget. As soon

as possible after the submission of the report and

any work programme and work programme budget

pursuant to paragraph 6.2.8 or receipt of such

additional information and data, the Government

and the Contractor shall meet (i) to determine at

such meeting, or at such later date as may be

mutually agreed, the boundaries of the area to be

delineated as a held, and (ii) to adopt a work

programme and







-22-shall carefully consider and take into account the proposals of the Government and the reasons therefor and shall attempt in good faith to reach an agreement with the Government on the points at issue paying particular consideration to the objective of achieving initial commercial production expeditiously taking into account generally accepted engineering practices and economics of the international petroleum industry.



(b) If the Government and the Contractor agree upon the boundaries of the area to be delineated as a held and upon the adoption of a work programme and work programme budget for the development of the discovery, the date upon which such agreement is reached, as reflected in writing signed by both parties, shall be the date of the declaration of the commercial discovery for all purposes of this Agreement. The area so determined shall, on such date, be automatically converted into a Held, and the Contractor shall, as soon as is practicable, commence development and production operations in the field according to the adopted work programme and work programme budget. Upon adoption of the development work programme and work programme budget, the annual work programme and work programme budget adopted pursuant to paragraph 5.6 shall be revised accordingly.



(c) In the event that no agreement is reached between the Government and the Contractor within one hundred and eighty (180) days from the date of submission of the report and work programme and work programme budget pursuant to paragraph 6.2.8 as to (i) matters relating to the adoption of the work programme and work programme budget for the development of the discovery or (ii) the boundaries of the area to be delineated as a field, the Government or the Contractor may refer the matter for determination pursuant to Article XXIV. The determination in accordance with Article XXIV shall be final and the work programme and work programme budget for the development of the discovery and the boundaries of the area to be delineated as a field, as the case may be, shall be deemed to have been adopted and agreed as determined, except that the Contractor may, within sixty (60) days of receipt of such determination, notify the Government that the discovery to which such work programme and work programme budget and area so determined is no longer considered to be commercial. If the Contractor so notifies the









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ISLAND OIL LTD 5/25/2004





Government, the provisions of

paragraph 6.2.7 shall apply. Failing

such notification, the date after

sixty (60) days of the receipt of such

determination shall be deemed to be

the date of the declaration of the

commercial discovery for all purposes

of this Agreement. The area so determined shall, on such date, be automatically converted into a field and the Contractor shall, as soon as is practicable, commence development and production operations in the held according to the work programme and work programme budget so adopted. Upon adoption of the development work programme and work programme budget as aforesaid, the annual work programme and work programme budget adopted pursuant to paragraph 5.6 shall be revised accordingly.



6.2.11 Notwithstanding any other provision of this Agreement, in the event that initial commercial production has not occurred within three (3) years, in the case of a crude oil discovery on land or in water depths of less than six hundred feet (200 m), or live (5) years, in the case ol non-associated natural gas discovery, or such longer period as the Government may have agreed in the development work programme and work programme budget, from the date of declaration of commercial discovery for a field, the Contractor shall relinquish the area comprising such field and shall forfeit any rights relating to such field and any production therefrom.



6.3 The terms and conditions of the production period shall be as set



out below.



6.3.1 The Contractor shall produce crude oil from the contract area at a rate below the maximum efficient rate. In conjunction with the adoption of the development work programme and work programme budget pursuant to paragraph 6.2.10 the Contractor and the Government shall establish at that time the maximum efficient rate of production for crude oil and the production rate for non-associated natural gas. Such rales shall be reviewed annually at the time of submission of the annual work programme by the Contractor pursuant to paragraph 5.4 and revised, if necessary, by mutual agreement. In the case of non-associated natural gas, the production rate shall not be required by the Government to be less than that required to satisfy any contracts then in existence for the sale of such natural gas.



6.3.2 Not less than ninety (90) days prior to the beginning of each calendar year following initial commercial production, the Contractor shall prepare and furnish to the Government for

Production Period





ISLAND OIL LTD 5/25/2004





approval a forecast statement

setting forth by quarters the

total quantity of crude oil (by

quality, grade and gravity) and

natural gas that the Contractor

estimates can be produced, saved

and transported hereunder during

such calendar year in accordance

with generally accepted practices

in the international petroleum

industry. The Contractor shall

endeavor to produce in each

calendar year the forecast

quantity. The crude oil shall be

run to storage tanks,

constructed, maintained and

operated by the Contractor in

accordance with Government

Regulations, in which such crude

oil shall be metered or otherwise

measured for all purposes

required by this Agreement.





ARTICLE VII



Obligations of the The Government shall:

Government



7.1 assist the Contractor in the

execution of work programmes by

supplying or otherwise making

available all geological,

geophysical, geographical,

drilling, well, production and

other information, including well

location maps, relating to the

contract area in the possession

of the Government or coming into

the possession of the Government;



7.2 provide the right of ingress to

and egress from the contract area

and any facilities used in

petroleum operations, and, upon

application in the prescribed

manner, all necessary visas, work

permits, import licenses and

rights of way and easements as

may be required by the Contractor

and his contractors and

subcontractors and which may be

available from resources within

the Government’s control.





ARTICLE VIII





Royalty/Production 8.1 The Contractor shall pay to the

Payment Government a royally equal to

(i) seven and a half percent

(7.5%) of the value of the annual

gross production of crude oil

produced and saved in each

calendar year and not used or

consumed in petroleum operations

and (ii) live percent (5%) of the

value of the annual gross

production of natural gas

produced, saved and sold in each

calendar year and not used or

consumed in the conduct of

petroleum operations.









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ISLAND OIL LTD 5/25/2004





8.2 The royalty with respect to

crude oil shall be payable in

cash and/or kind at the option

of the Government. The royalty

with respect to natural gas

shall always be paid in cash.



8.3 For the purposes of determining

the amount of the royally due,

crude oil and natural gas shall

be valued in accordance with

paragraphs 10.1, 10.2 and 14.4,

less such costs as the

Government may reasonably allow

for handling and transportation

from the wellhead to the

delivery point as described in

such paragraphs, and the royalty

shall be payable quarterly

within thirty (30) days of the

end of each quarter on the basis

of crude oil production or

natural gas sales which occur in

each such quarter. Payment shall

be accompanied by a certificate

from the Contractor setting

forth in detail the basis for

computation of the royalty. Such

certificate shall be in a form

acceptable to the Government.



8.4 If the Government elects to take

the Royalty with respect to

Crude Oil, or any part thereof,

in kind, it shall notify the

Contractor in accordance with

the provisions of paragraph

11.2.



ARTICLE IX



Recovery of 9.1 In each calendar year, after Petroleum discharging its obligation for

Operations the royalty payment due to the Expenditures: Government pursuant to Article Production Sharing VIII, the Contractor shall be

entitled to recover all

petroleum operations

expenditures incurred hereunder,

out of one hundred percent

(100%) of the petroleum produced

and saved in such calendar year

and not used in petroleum

operations by retaining and

disposing of that amount of

petroleum equal in value to the

unrecovered petroleum operations

expenditures for that calendar

year plus all unrecovered

petroleum operations

expenditures from prior calendar

years. All such petroleum

operations expenditures shall be

recovered without a ceiling in

the manner, to the extent

provided for, in the Income and

Business Tax Act, Chapter 55 of

the Substantive Laws of Belize,

Revised Edition 2000. For the

purpose of determining the value

of the quantity of petroleum to

which the Contractor is entitled

in each calendar year pursuant

to this paragraph 9.1, the

provisions of Article X shall be

applied.



9.2 The remaining quantity of

petroleum produced and saved in

a given calendar year and not

used in petroleum operations,

after deduction of the value of

the royalty payments made in

such calendar year and







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ISLAND OIL LTD 5/25/2004





alter recovery by the Contractor of

petroleum operations expenditures

pursuant to paragraph 9.1, (“Net

Petroleum”) shall be taken and

disposed of separately by the

Government and the Contractor in each

calendar year in the following

proportions:



Daily Average Production:



Government's Contractor's

Share Share

Percent (%) Percent (%)



First 50,000 barrels 5 95



Next 50,000 barrels 10 90



Next 50,000 barrels 15 85



Any volume over first 25 75

150,000 barrels





ARTICLE X



Valuation and 10.1 Crude oil sold to third parties Measurement of shall be valued at the net realized Petroleum price at the delivery point, well-

head or point of collection in

Belize received by the Contractor

for such crude oil.



10.2 Crude oil sold to other than third

parties shall be valued as follows:



10.2.1 By using the weighted average unit

price received by the Contractor

from sales to third parties at the

delivery point, net of any

commissions and brokerages paid in

relation to such third party sales,

during the ninety (90) days

preceding such sale, adjusted as

necessary for quality, grade and

gravity, and taking into

consideration any special

circumstances with respect to such

sales, unless less than fifty

percent (50%), by volume, of crude

oil sales during such period are

made to third parties, in which

case crude oil sold to other than

third parties shall be valued in

accordance







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ISLAND OIL LTD 5/25/2004





with paragraph 10.2.2.



10.2.2 If no third party sales have been made during

such period of lime, then (a) on the basis used

to value other crude oil from Belize oi similar

quality, grade and gravity (or, if not similar,

adjusted as necessary for quality, grade and

gravity) and taking into consideration any

special circumstances with respect to sales of

such crude oil, or (b) if there is no other

crude oil from Belize, on the basis used to

value crude oil from other sources in the

Caribbean, Central America, Colombia and

Venezuela as posted in Platt’s Oil Gram for

Caribbean/Central American Crudes of similar

quality, grade and gravity and taking into

consideration any special circumstances with

respect to sales of such similar crude oil.



10.3 Natural gas shall be valued in accordance with

the provisions of paragraph 14.4.



10.4 Third party sales referred to in this Article

shall mean sales other than barter sales made

by the Contractor to purchasers who are not

affiliated companies of the Contractor in arms

length transactions and with whom (at the time

the same is made) the Contractor has no

contractual interest involving directly or

indirectly any joint interest.



10.5 Commissions or brokerages incurred in

connection with sales to third parties, if any,

shall not exceed the customary and prevailing

rate.



10.6 In the event that petroleum operations involve

the segregation of crude oils of different

quality, grade or gravity, and if the parties

do not otherwise mutually agree, any and all

provisions of this Agreement concerning

valuation of crude oil shall separately apply

to each segregated crude oil. However, in

electing to take crude oil for internal

consumption pursuant to paragraph 11.7 and to

take royalty in kind pursuant to paragraph

11.2, the Government shall have the right to

receive, at its own expense and risk, crude oil

of the quality, grade and gravity of its

choice.



10.7 The Contractor shall supply, operate and

maintain equipment for measuring the volume and

quality of the petroleum produced and saved

hereunder, including gravity, density,

temperature and pressure measuring devices and

any other devices that may be required. All

measurement equipment and devices shall, prior

to their installation or usage, be approved by

the Inspector of









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ISLAND OIL LTD 5/25/2004





Petroleum. Such equipment and devices

shall at all reasonable times be

available for inspection and testing

by the Inspector of Petroleum or other

authorized representatives. Any such

inspection or testing shall not

interfere with the normal operation of

the facilities involved. The equipment

and devices used or installed pursuant

to this paragraph shall not be

replaced or altered without the prior

approval of the Government.



10.8 The Contractor shall undertake to

measure the volume and quality of the

petroleum produced and saved

hereunder, consistent with generally

accepted practices in the

international petroleum industry, with

the frequency and according to

procedures which shall be approved by

the Government.



10.9 The Contractor shall give the

Inspector of Petroleum timely notice

of its intention to conduct measuring

operations and the Inspector shall

have the right to be present at and

supervise, either directly or through

authorized representatives, such

operations.



10.10 If it is determined, following an

inspection or test carried out by the

Government or its representatives,

that the equipment, devices or

procedures used for measurement are

inaccurate and exceed the permissible

tolerances which shall be established

by agreement between the Government

and the Contractor, and such

determination is verified by an

independent surveyor acceptable to

both parties, such inaccuracy shall be

deemed to have existed for one-half of

the period since the last previous

such inspection or test, unless it is

proved that such inaccuracy has been

in existence for a longer or shorter

period. Appropriate adjustments

covering such period skill be made

within thirty (30) days from the date

of such determination.



ARTICLE XI



Marketing, 11.1 The Contractor shall be obligated to

Production market all crude oil produced and

(Royalty) saved from the contract area, subject

in Kind and to the provisions hereinafter set

Domestic forth.

Requirements



11.2 If the Government elects to take the

royalty payment on crude oil in kind,

it shall so notify the Contractor in

writing not less than sixty (60) days

prior to the commencement of each six

month period of each calendar year

specifying the quantity, and

designating the grade







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ISLAND OIL LTD 5/25/2004





and quality that it elects to lake in land, based

upon estimates, including those contained in the

forecast statement furnished pursuant to paragraph

6.3.2. Final adjustments shall be made within

ninety (90) days of the end of each calendar year

on the basis of actual quantities. Such notice

shall be effective for the ensuing six month

semester of that calendar year. Failure to give

such notice shall be conclusively deemed to

indicate the election by the Government not to

take in kind.



11.3 Any sale by the Contractor of any part of the

Government’s share of crude oil production shall

not be for a term expiring more than six (6)

months alter the date of execution of the sales

contract without the Government’s written consent.

If the Government so consents, the Government

shall not exercise its rights to receive crude oil

in kind pursuant to paragraph 11.2.



11.4 Any sale by the Contractor of any part of its

share of the crude oil produced and saved from the

contract area shall not be for a term expiring

more than twelve (12) months alter the date of

execution of the sales contract without the

Government’s written consent. The Government shall

not exercise its rights under paragraph 11.7 to

require the Contractor to satisfy the internal

consumption requirements of Belize from crude oil

which is subject to such contract.



11.5 Crude oil which the Government has elected to take

in kind shall be delivered by the Contractor, free

of cost to the Government, at regularly spaced

intervals at the delivery point or to the

Government’s storage facilities in the held, or

both, at the option of the Government. The

Government shall provide at such delivery points,

at its sole risk and expense, all storage,

transportation and other facilities necessary to

receive such crude oil, provided, however, that if

the Government requests, the Contractor shall

provide adequate storage facilities at such

places, free of charge, at the risk of the

Government, for a quantity of the Government's

crude oil not exceeding one hundred thousand

(100,000) barrels for each Held. If storage

exceeds one hundred thousand (100,000) barrels per

field at any time, the Government shall pay to the

Contractor a reasonable storage charge for such

excess. If such storage is provided, and the

Government has no need for such storage capacity,

the Contractor has the right to use such storage

capacity for its own use and Government shall not

pay any storage charge for any such period in

which Contractor uses the storage







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ISLAND OIL LTD 5/25/2004





facilities.



11.6 If the Government elects to meet all

or part of the requirements of the

domestic market of Belize from crude

oil production in Belize, it shall

use its share of production from all

crude oil production in Belize to do

so. If in any year there is domestic

demand in excess of the Government’s

share of such production, the

Government may require the

Contractor to sell crude oil in

Belize on a pro rata basis with

other producers in Belize, according

to the quantity of crude oil

production of each producer in each

year. The Government shall give the

Contractor at least three (3) months

notice in advance of such

requirement and the term of supply

will be on an annual basis. The

price for such sales shall be the

price as calculated pursuant to

paragraph 10.2 above.



11.7 If the Government elects to exercise

its rights under paragraph 11.6, it

shall notify the Contractor in

accordance with the provisions of

paragraph 11.2 relating to the

Government’s election to take

royally payment in kind. The amounts

to be taken shall be based upon

estimates, including those contained

in the forecast statement furnished

pursuant to paragraph 6.3.2, and

final adjustments shall be made

within ninety (90) days of the end

of each calendar year on the basis

of actual quantities.



11.8 Not less than twelve (12) months

prior to initial commercial

production in any field, the

Contractor shall submit to the

Government for approval, proposed

procedures and related operating

regulations and financial terms

covering the scheduling, storage and

lifting of crude oil from such

field. The procedures, regulations

and terms shall be in accordance

with accepted standards and

practices in the international

petroleum industry and comprehend

the subjects necessary to efficient

and equitable operations including,

but not limited to: rights of

parties, notification time, maximum

and minimum quantities: duration of

storage, scheduling, conservation,

spillage, liabilities of the

parties, and penalties for over and

under lifting, safety and emergency

procedures.





ARTICLE XII



Payment 12.1 All payments due to the Government

Procedure hereunder shall be made in United

States dollars at a bank to be

designated by the Government.





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ISLAND OIL LTD 5/25/2004





or at the Contractor’s election,

such other currency as is

acceptable to the Government.



12.2 All payments due to the Contractor

hereunder shall be made in United

States dollars at a bank to be

designated by the Contractor, or,

at the Government’s election, such

other currency as is acceptable to

the Contractor.



12.3 Except as otherwise expressly

provided herein, all payments

required to be made pursuant to

this Agreement shall be made within

thirty (30) days following the end

of the calendar month in which the

obligation to make such payment

occurs.



12.4 First year administrative fees for

the Initial Exploration period

shall be paid to the Government of

Belize (GOB) via the Inspector of

Petroleum within ninety' (90) days

of execution of PSA. Fees for the

subsequent years of the Exploration

period shall be paid on or before

anniversary of effective date of

PSA.



12.5 If any payment is not made when

due, such unpaid amount shall bear

interest from and alter the due

date at an interest rate compounded

annually at two percent (2%)

greater than the interest rate

charged by any Commercial Bank in

Belize to prime commercial

customers for ninety (90) day loans

as in effect from time to time

until the date of payment or prime

rate published in the Wall Street

Journal which is a base rate on

corporate loans posted by at least

75% of the nation’s 30 largest

banks or LIBOR.





ARTICLE XIII



Surface Rentals 13.1 The Contractor shall be liable for

payment of such fees and surface

rentals as are stipulated in the

Petroleum Regulations 1992. The

fees payable for each year shall be

paid in advance and in accordance

with paragraph 12.4. The fees for

the first year shall be paid within

ninety (90) days of the effective

date of this Agreement.



ARTICLE XIV



Natural Gas 14.1 The Contractor shall have the right

to use associated natural gas for

petroleum operations, including

re injection for pressure







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ISLAND OIL LTD 5/25/2004





maintenance in the field or adjacent fields

of the Contractor. Associated natural gas

which is, in the opinion of both the Contractor

and the Government, not economical, shall be

returned to the subsurface structure, or may be

flared with the consent of the Government. In the

event that the Contractor chooses to process and

sell associated natural gas, the Contractor shall

notify the Government of the same and upon such

notification, the Government and the Contractor

shall, as soon as practicable thereafter, meet

together with a view to reaching an agreement on

the production, processing and sale of such gas.

In the event the Contractor chooses not to

process and sell associated natural gas, the

Government may elect to off-take at the outlet

flange of the gas-oil separator and use such

associated natural gas which is not required for

petroleum operations. There shall be no charge to

the Government for such associated natural gas,

provided that the cost to gather such associated

natural gas in the field at the point of being

flared and to process and utilize it shall be for

the account of the Government.



14.2 Where non-associated natural gas is discovered in

the contract area and the Contractor has,

pursuant to paragraph 6.2 informed the Government

that the discovery is of potential commercial

interest, the Government and the Contractor will,

on completion of the appraisal programme relating

to such discovery, or sooner if so agreed, meet

together with a view to reaching an agreement on

the development, production, processing,

utilization, disposition or sale of such gas.



14.3 In the event that the development, production,

processing, utilization, disposition or sale of

natural gas from the contract area is determined

by the parties to be economically feasible in

accordance with this Article XIV, the costs of

development and production of the same from the

reservoir to the delivery point, and the revenue

derived therefrom, shall, unless otherwise agreed

pursuant to paragraphs 14.1 and 14.2, be included

in petroleum operations expenditures and gross

revenues, respectively, for all purposes of this

Agreement, subject to the accounting procedure

outlined in the Bulletin of the Income Tax

Commissioner (Annex 1).



14.4 The price to be paid for natural gas, or the

value to be attributed thereto shall -



14.4.1 for sales to third parties, be equal to the net

realized price obtained









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ISLAND OIL LTD 5/25/2004





by the Contractor for such Natural Gas

at the delivery point;



14.4.2 for sales other than to third parties,

be determined by agreement between the

Government and the Contractor,

provided, however, that such price or

value shall reflect the following: (i)

the quality and quantity of the

natural gas (ii) the price at which

sales of natural gas from other

sources in Belize, if any, are then

being made, (iii) the price at which

sales, if any, of natural gas imported

into Belize are being made, (iv) the

purpose for which the natural gas is

to be used, and (v) the international

market price of competing or

alternative fuels or feedstocks.



14.4.3 Third party sales shall mean sales as

described in paragraph 10.4





ARTICLE XV





Taxes 15.1 The Contractor and his contractors and

subcontractors shall be obligated to

pay income tax for the applicable

calendar year upon net taxable income

derived from petroleum operations

pursuant to the Income and Business

Tax Act, Chapter 55 Substantive Laws

of Belize, Revised Edition 2000.



15.2 In each calendar year, the Contractor’s

income tax shall be payable to the

Government in installments on the last

day of each quarter on the basis of the

estimate, and quarterly updates

thereto, provided to the Government.

The estimated unpaid liability for

income tax for each calendar year as of

the current estimate or quarterly

update shall be payable equally over

the remaining quarterly installments

for such calendar year. Adjusting

payments or refunds, as the case may

be, shall be made within ninety (90)

days of the end of the calendar year

based upon the detailed accounts

submitted for such calendar year

pursuant to paragraph 26.2 as approved

by the Government.



15.3 (a) The Contractor shall within ninety

(90) days of the end of each calendar

year, notify the Government of any and

all amounts paid to its contractors

with respect to operations carried out

by them in Belize and in turn shall

notify its contractors that they must

similarly advise the Government within

ninety (90) days after the end of each

calendar year of any and all amounts

paid to their sub-contractors with

respect to operations carried out by

them in Belize.







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(b) The Contractor shall also advise

each of its contractors, and shall

require such contractors to likewise

notify their subcontractors that for

every six (6) months such

contractors and subcontractors shall

furnish to the Government a list of

all their Belizean and expatriate

personnel, along with the

remuneration received by each of

such personnel, and that they shall

be required, prior to leaving

Belize, to establish to the

satisfaction of the Government that

the necessary income taxes have been

paid.



15.4 The Contractor and his contractors

and subcontractors and their

respective personnel shall be

obligated to pay such reasonable

transfer taxes and stamp duties as

may be in effect from time to lime

at the rates which are generally

applicable to all persons or

entities in Belize.



15.5 Except as may be otherwise agreed in

writing between the Government and

the Contractor, all transactions

giving rise to revenues, costs or

expenses which will be credited or

charged to the books, accounts,

records and reports prepared,

maintained or submitted hereunder

shall be conducted at arm’s length

or on such a basis as will assure

that all such revenues, costs or

expenses will not be higher or

lower, as the case may be, than

would result from a transaction

conducted at arm’s length on a

competitive basis with third

parties.





ARTICLE XVI



Exemptions 16.1 The Contractor and his non-Belizean from Custom contractors and subcontractors

Duties engaged in conducting petroleum

operations under this Agreement

shall be permitted to import upon

application to and approval by the

Minister of Finance for exemptions

from customs duties with respect to

the importation of, machinery,

equipment, spare parts, materials,

supplies, consumable items, moveable

property, and any other items or

articles connected with petroleum

operations, subject to the

provisions of paragraph 16.2.



16.2 The exemptions provided in paragraph

16.1 shall not apply to any imported

item when, in the reasonable opinion

of the Government, items of the

same, or substantially the same,

kind and quality are manufactured

locally and/or are available locally

for purchase and timely delivery at

the Contractor’s operating base in

Belize at a price







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equal to the cost of the imported item(s).



16.3 The Government reserves die right to inspect during

normal business hours the records, documentation or

the physical item or items for which an exemption is

or has been provided under paragraph 16.1 to

determine that such item or items are being or







ISLAND OIL LTD 5/25/2004





provided, however, that:



(i) the Contractor shall be permitted

to freely dispose of any crude oil

produced alter satisfying its

obligations of payment of taxes,

bonuses, royalties and other fees

to the Government and with the

prior approval of the Central Bank

of Belize to receive and hold the

proceeds from the sale of any

petroleum, crude oil, natural gas

and casing head petroleum spirit

produced therefrom in its offshore

banking account;



(ii) the Contractor shall be permitted

to remit any profits, dividends,

capital, or sums owed in repayment

of loans including sums owed to

affiliates, which are not required

for conducting the petroleum

operations, to their home office or

non-resident shareholders free of

any charges, taxes, imposts or

other duties;



(iii) the Contractor shall have the right

to establish mid maintain local

bank accounts which may be

denominated in Belize dollars or,

subject to the prevailing

conditions of the Central Bank of

Belize, in United States dollars

which may be utilized as necessary

for payment of Contractor’s

obligations in Belize;



(iv) no restriction shall be placed on

the importation by the Contractor

of funds necessary for carrying out

the petroleum operations stipulated

in this Agreement;



(v) the Contractor shall have the right

to pay directly outside of Belize

from its offices abroad for

purchases or services for petroleum

operations hereunder, provided,

however, that no such payments

shall be made to residents of

Belize or to firms using Belize as

their main base of operations

(whether natural or juridical)

contrary to the Laws of Belize.





ARTICLE XVIII



Title of Equipment All equipment and assets which are

fixed installations and are not

exported by the Contractor under

paragraph 16.6 shall become the

property of the Government without

cost as soon as this Agreement is

terminated.







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ARTICLE XIX



Government 19.1 The Government shall have the option to

Participation acquire For itself or for its designee

an undivided and unencumbered equity,

working interest of up to ten percent

(10%) of the total interest of the

Contractor in this Agreement and in

return therefore shall furnish its

participating interest share of the

funds as provided in paragraphs 19.3.



19.2 Within ninety (90) days following the

date of declaration of commercial

discovery for any held, the Government,

by written notice to the Contractor,

may exercise its option to participate

in this Agreement. If the Government

exercises its option to participate,

(a) it shall promptly reimburse the

Contractor an amount, equivalent to

that percentage of working interest ten

(10%) requested by the Government of

Belize and not exceeding ten percent

(10%) of all exploration expenditures

incurred prior to the date of

declaration of commercial discovery for

such field and (b) the Contractor (or

each corporation, individual or entity

comprising the Contractor at that time

pro rata) shall assign and transfer to

the Government or its designee the

percentage interest that the Government

has opted to acquire. The Government or

its designee shall assume all rights

and obligations of the Contractor pro

rata with its participating interest,

in connection with this agreement.



19.3 The Government may, upon giving the

Contractor reasonable written notice,

require the Contractor to lend the

Government tip to seventy percent (70%)

of the funds required to pay the

Government’s pro-rata share of

expenditure. The loan shall bear

interest at the prime rate plus three

percent (prime plus 3%). The Government

shall make repayments of the loan on a

quarterly basis in amount equal to

fifty percent (50%) of the differences

between the gross revenues attributable

to the Government’s Participating

Interest in the field and the costs and

expenses, including royalty but

excluding income taxes, attributable to

the Government’s Participating Interest

in the field for Petroleum Operations.

Repayments of the loan shall be applied

first to accrued and unpaid interest

and the balance shall be applied in

reduction of the outstanding principal

balance.





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ARTICLE XX



Training 20.1 The Contractor agrees to train and

and employ qualified nationals of Belize in

Employment its petroleum operations and, after

initial commercial production, will

undertake the schooling and training of

nationals of Belize for staff positions,

including administrative and executive

management positions. The Contractor

will require his c ontractors and

subcontractors to do the same. The

Contractor undertakes to gradually

replace its expatriate staff with

qualified nationals of Belize as they

become available. An annual programme

for training and phasing in of nationals

of Belize shall be established by the

Contractor and shall be submitted for

approval to the Government. Such

programme shall be included in the

annual work programmes submitted by the

Contractor pursuant to paragraph 5.4.

Within thirty (30) days of the end of

each calendar year, the Contractor shall

submit a written report to the

Government describing the number of

personnel employed, their nationality,

their positions and the status of

training programmes for nationals of

Belize.



20.2 The Contractor shall also be required to

establish a programme, satisfactory to

the Government, to train personnel of

the Government to undertake skilled and

technical jobs in petroleum operations

for the Government. Such programme shall

also include provisions for involving

representatives of the Government in

preparation of the annual work programme

and work programme budgets as required

by paragraph 5.4 (d).



20.3 The Contractor shall be responsible for

on-the-job training of Belizean

nationals during the exploration and

development periods pursuant to

paragraphs 20.1 and 20.2. Commencing

with the first contract year following

initial commercial production in the

first field, the Contractor shall

undertake responsibility of training not

less than_____Belizean nationals per

each calendar year in accordance with

paragraphs 20.1.



ARTICLE XXI



Purchase 21.1 In procurement, the Contractor shall

in give preference to goods which are Belize produced or available in Belize and

services which are rendered by nationals

of Belize and companies of Belize,

provided







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such goods and services are offered on

terms equal to or better than imported

goods and services with regard to

quality, price and availability at the

time and in the quantities required.



21.2 Locally produced or available

equipment, materials and supplies shall

be deemed equal in price to imported

items if the local cost of such locally

produced or available items at the

Contractor’s operating base in Belize

is not more than ten percent (10%)

higher than die cost of such imported

items before customs duties but after

transportation and insurance costs have

been added.



ARTICLE XXII



Unitization 22.1 If a field is designated within the

contract area and such held extends

beyond the contract area to other areas

of Belize over which other parties have

the right to conduct exploration,

development and production operations,

the Government may require that the

development of the field and the

production of petroleum therefrom be

carried out in collaboration with the

other contractors consistent with

accepted practices in the international

petroleum industry. The same rule shall

be applicable if deposits of petroleum

within the contract area, although not

equivalent to a commercial discovery if

developed alone, would be deemed to be

a commercial discovery if developed

with those pails of the deposits which

extend to areas controlled by other

contractors.



22.2 If the Government so requests, the

Contractor shall collaborate with other

contractors in preparing a collective

proposal for common development and

production of the deposits of petroleum

for approval by the Government.



22.3 If the proposal for common development

and production has not been presented

within ninety (90) days of the request

described in paragraph 22.2, or if the

Government does not approve such

proposal, the Government may prepare or

cause to be prepared, for the account

of the Contractor and the other

contractors involved, a reasonable plan

for common development and production.

If the Government adopts such plan, the

Contractor shall comply with all

conditions established in such plan.



22.4 The Contractor may within twenty eight

(28) days from the date on which notice

in writing of such plan has been given

to him by the







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Minister refer the matter to arbitration

pursuant to Article XXIV. In such event

the plan shall not be implemented until

the arbitrators render a decision or the

parties agree on a compromise plan,

whichever occurs first.



22.5 This Article XXII shall also be

applicable to discoveries of deposits of

petroleum within the contract area which

extend to areas that are not within the

dominion of Belize, provided that in

these cases the Government shall be

empowered to impose the special rules

and conditions which may be necessary to

satisfy obligations under any agreements

with international organizations or

adjacent states with respect to the

development and production of such

deposits of petroleum.



22.6 Within ninety (90) days following the

approval or adoption of a unitization

plan for common development and

production, the Contractor shall proceed

to operate under any such plan. If a

clause of a cooperative or unitary

development and production plan which by

its terms affects the contract area or a

part of the same, contradicts a clause

of this Agreement, the clause of the

cooperative or unitary plan shall

prevail.



ARTICLE XXIII



Danger to 23.1 The Contractor shall undertake relevant

Persons, studies to identify sources of potential

Property environmental damage and pollution which

or may result as a consequence of petroleum

Environment operations under PSA__of 200_.

The Contractor shall identify

mitigation/prevention measures to be

adopted to minimize the effects(s) of

any and all such sources identified, and

shall submit these to the approval of

the Government prior to the execution of

any work.



23.2 If the Government reasonably determines

that any works or installations erected

by the Contractor or any operations

conducted by the Contractor endanger or

may endanger persons or third party

property or cause pollution or harm

wild-life or the environment to



ISLAND OIL LTD 5/25/2004





required by the Government within the

time period established by the

Government, the Government may carry

out such remedial measures for the

Contractor’s account.



ARTICLE XXIV



Arbitration 24.1 If any time during the continuance of

this Agreement or any renewal thereof

or alter the termination thereof any

question, disagreement or dispute

shall arise regarding this Agreement

or any matter or thing connected

therewith or the breach thereof or

the powers, duties, or liabilities of

the parties thereunder, the parties

shall first attempt to amicably solve

the question, disagreement or dispute

between themselves by consulting and

negotiating with each other in good

faith. If the Government and the

Contractor are not able to amicably

resolve their differences within a

period of forty-five (45) days alter

such difference arises, then the

dispute or differences shall be

finally settled by arbitration in

accordance with the Arbitration Rules

of the United Nations Commission on

International Trade Law (hereinafter

referred to as UNCITRAL Arbitration

Rules).



24.2 The number of arbitrators shall be

three. The Government shall appoint

one and the Contractor shall appoint

one. The two arbitrators thus

appointed shall choose the third

arbitrator who will act as the

Presiding Arbitrator. If the two

arbitrators cannot come to an

agreement on the designation of the

third, the third arbitrator shall be

designated in accordance with the

UNCITRAL Arbitration Rules.



24.3 The place of arbitration shall be

Belmopan, Belize if at the Lime of

such arbitration, Belize is

recognized as a member state of the

19.58 Convention on the Recognition

and Enforcement of Foreign Arbitral

Awards (“New York Convention”). If

Belize is not a member state of the

New York Convention at that time, the

place of arbitration shall be Mexico

City, Mexico.



24.4 The language to be used in the

arbitration proceeding shall be

English.



24.5 The arbitral tribunal shall decide

all questions presented on the basis

of:





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ISLAND OIL LTD 5/25/2004





(a) the laws and regulations of Belize

applicable to this Agreement and other

relevant laws, both national and

international;



(b) the provisions of the Agreement,

and



(c) trade usages and customs of the

international petroleum industry.



24.6 Arbitral awards shall be final and

binding upon the parties from the date

they are made and judgment upon the

award may be entered in any court

having jurisdiction.



ARTICLE XXV



Termination 25.1 The Government shall have the right to

terminate this Agreement upon giving

thirty (30) days written notice of its

intention to do so if the Contractor

(a) fails to make any monetary payment

required by law or under this Agreement

for a period of thirty (30) days after

the due date for such payment, (b)

fails to comply with any other material

obligation that he has assumed under

this agreement, or (c) fails to comply

with the Petroleum Act Chapter 22.5,

Substantive Laws of Belize, Revised

Edition 2000 and any lawful acts,

regulations, orders or instructions

issued by the Government or any

department or agency of the Government,

or (d) becomes bankrupt, or goes into

liquidation because of insolvency or

makes a composition with its creditors.



25.2 If the circumstance or circumstances

that result in termination under

paragraph 2.5.1(a), (b) or (c) are

remedied by the Contractor within the

thirty (30) days period following the

notice of termination as aforesaid,

such termination shall not become

effective.



25.3 If the circumstance or circumstances

that would otherwise result in

termination under paragraph 2.5.1 are

the result of force majeure, then

termination shall not take place so long

as such force majeure continue mid for

such period thereafter as is reasonable.



25.4 The termination of this Agreement for

whatever reason shall be without

prejudice to the obligations incurred

and not discharged by the Contractor

prior to the date of termination.



25.5 In the event of termination pursuant to

paragraph 2.5.1 or 2.5.7, the



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Government may require the Contractor,

where reasonable, for a period not to

exceed one hundred eighty (180) days,

to continue, for the account of the

Government at the Government’s sole

risk and expense, crude oil or natural

gas production activities until the

right to continue such production has

been transferred to another entity.



25.6 Within ninety (90) days after the

termination of this Agreement pursuant

to paragraph 25.1 or paragraph 25.7,

unless the Minister has granted an

extension of this period, the

Contractor shall complete any

reasonably necessary action as

directed by the Government to avoid

environmental damage or a hazard to

human life or third party property.



25.7 The Contractor has the right to

terminate this Agreement for material

nonperformance of the Government

consistent with all available remedies

at law and equity. Additionally,

Contractor shall have the right to

terminate this Agreement totally, or

partially, (a) with respect to any

part of the contract area other than a

field then producing, or that prior

thereto had produced, crude oil or

natural gas upon giving thirty (30)

days written notice of its intention

to do so, and (b) with respect to any

field then producing, or that prior

thereto had produced crude oil or

natural gas upon giving ninety (90)

days written notice of its intention

to do so. Upon termination, the

provisions of paragraphs 4.7 and 4.8

shall apply.



ARTICLE XXVI



Books, 26.1 The Contractor shall be responsible Accounts and for keeping complete accounts, books Audits, and records reflecting all petroleum Records, operations expenditures and gross Reports and revenues consistent with generally Inspections accepted procedures and standards in

the international petroleum industry

and in accordance with the accounting

procedure outlined in the Bulletin of

the Income Tax Commissioner (Annex 1).



26.2 Within ninety (90) days filter the

expiration of each calendar year, the

Contractor shall submit to the

Government detailed accounts showing

all petroleum operations expenditures

and all gross revenues during the past

calendar year. Before submission to

the Government, the accounts shall be

audited by an independent chartered

accountant or certified public

accountant acceptable to both parties,

at the expense of the Contractor. It

is understood that









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the Government, through the Auditor General's

Department, retains the authority to review and

audit the Contractor’s accounts, books and records

with respect to petroleum operations conducted

hereunder either directly or through an independent

accountant designated by the Government.



26.3 The Government and its duly authorized

representatives shall have full and complete access

to the contract area at all reasonable times with a

right to observe petroleum operations and shall

have the right to inspect all assets, records,

books, accounts and data kept by the Contractor

relating to petroleum operations and this

Agreement. In so doing, the Government and its

representatives shall not unduly interfere with the

Contractor’s petroleum operations. However, the

Government and its representatives may make a

reasonable number of surveys, drawings, tests and

copies for the purpose of implementing this

Agreement. In doing so, the Government and its

representatives shall be entitled to make

reasonable use of the equipment and instruments of

the Contractor provided that no damage to the

equipment or instruments or impediment to the

petroleum operations hereunder shall result from

such use. The Government shall indemnify and

reimburse the Contractor for any loss or damage

which may in fact result from any such use of

equipment and instruments, provided that such loss

or damage is reported to the Government within

twenty-four (24) hours from the time of such

inspection. The Government and its representatives

shall be given reasonable assistance by the

Contractor for such functions, and the Contractor

shall afford to the Government and its

representatives all facilities and privileges

afforded to its own personnel in the field.



26.4 The Contractor shall prepare and maintain accurate

and current records of its activities in the

contract area hereunder. The Contractor shall

furnish the Government in conformity with the

applicable regulations, and as the Government may

reasonably require, information, reports and data

concerning its activities and operations under this

Agreement.



26.5 The Contractor shall save and keep for the duration

of this Agreement all unused cores and samples

taken from the wells drilled, which shall be

forwarded to the Inspector of Petroleum or his

authorized representatives at such time and in the

manner directed by the Government. All cores and

samples acquired by the Contractor shall be

available for inspection by the Inspector of

Petroleum or his authorized representatives at all

reasonable times.









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Unless previously forwarded to the Government

pursuant to instructions given under this

paragraph, the Contractor shall forward to the

Government all remaining cores and samples upon the

expiration or termination of this Agreement.



26.6 Unless otherwise agreed to by the Government, in

the case of exporting any rock or petroleum samples

from Belize for the purpose of testing and

analysis, samples equivalent in size and quantity

shall, before such exportation, be delivered to the

Inspector of Petroleum.



26.7 Originals of records and other data can be exported

only with the permission of the Government,

provided, however, that magnetic tapes and any

other data which must be processed or analyzed

outside Belize may be exported if a comparable

record is maintained in Belize and provided that

such exported records and data shall be repatriated

to Belize.



26.8 The Contractor shall provide to the Inspector of

Petroleum in appropriate form all original data

resulting from petroleum operations, including,

but not limited to, geological, geophysical,

petrophysical engineering, well logs, production

data and completion status reports and any other

data which the Contractor may compile during the

term hereof including all reports, analyses,

interpretations, maps and evaluations thereof

prepared by the Contractor and any contractors,

subcontractors or consultants to the Contractor or

by affiliated companies, and cuttings of all

samples that have been obtained, or compiled

during the term, hereof

ISLAND OIL LTD 5/25/2004





which are disclosed by the Government

or the Contractor to third parties

pursuant to this paragraph (26.8)

shall be disclosed on terms which

ensure that such data are treated as

confidential by the recipient. To the

extent that there is any

inconsistency between the provisions

of this paragraph (26.8) and the

provisions of Article XXXIII, the

provisions of this paragraph (26.8)

shall govern.



ARTICLE XXVII



Insurance and 27.1 To ensure that the Contractor shall Indemnification meet his obligations to third

parties, or to Government agencies,

that might arise in the event of

damage or injury (including

environmental damage or injury,

removal of wrecks and cleaning up

caused by accidents) caused by

petroleum operations, notwithstanding

that the damage is accidental, the

Contractor shall maintain in force a

third party liability insurance

policy covering the activities of

himself, his contractors and

subcontractors and the employees of

all such parties. Such insurance

policy shall include the Government

as an additional insured, shall waive

subrogation against the Government

and shall provide that it may not be

cancelled except upon thirty (30)

days prior written notice to the

Government. A certificate evidencing

such insurance policy shall be

furnished to the Government within

ninety (90) days of the effective

date. The limits, coverage,

deductibles and other terms thereof

shall be subject to approval in

writing by the Government. To the

extent that such third party

liability insurance is unavailable or

is not obtained, or does not cover

part or all of any chums or damage

caused by or resulting from petroleum

operations, the Contractor shall

remain fully responsible mid shall

defend, indemnify and hold the

Government harmless against all such

nature whatsoever. The Contractor

shall maintain in force a third party

liability insurance policy covering

the activities of himself, his

contractors and subcontractors and

the employees of till such parties.

Such insurance policy shall include

the Government as an additional

insured, shall waive subrogation

against the Government, and shall

provide that it may not be canceled

except upon thirty (30) days prior

written notice to the Government. A

certificate evidencing such insurance

policy shall be furnished to the

Government within ninety (90) days of

the effective date. The Contractor

shall procure at his own expense and

maintain in full force at all times,

where applicable and available, the

following:



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ISLAND OIL LTD 5/25/2004





1. Workmen’s Compensation Insurance in full

compliance with the laws of the applicable

country and state of hire.



2. Employer’s liability Insurance.



6. Automobile Liability: Coverage with Bodily

Insurance and Property Damage with combined

Single Limit per Occurrence.



7. Energy Exploration and Development Policy:

Blowout insurance covering cost of well

control, re drilling and pollution liability.



Such insurance will be purchased within

limits that are mutually agreed to and

acceptable based on international industry

standards. Originals of all insurances

obtained under Article XXVII, this para. 27.1

shall be lodged with the Inspector of

Petroleum within thirty (30) days of

execution of insurances.



27.2 The Contractor shall indemnify, defend and

hold the Government harmless against claims,

losses and damages, without limitation, claims

for loss or damage to property or injury or death

to persons caused by or resulting from only

petroleum operations conducted by or on behalf of

the Contractor, provided that the Contractor

shall not be held responsible to the Government

under this paragraph 27.2 for any loss, claim,

damage or injury caused by or resulting from any

negligent action of personnel of the Government.



27.3 The Contractor shall contribute zero point one

percent (0.1%) of the value of the annual gross

production of crude oil and/or natural gas

produced and saved in each calendar year and not

used or consumed in petroleum operations to a

Common Fund to be held in trust by the Government

and managed for the sole purpose of

indemnification against any or all environmental

damages caused during the petroleum operations.





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ISLAND OIL LTD 5/25/2004







27.4 Nothing contained in paragraph

27.3 above shall be construed to

relieve the Contractor of his

obligations of indemnification as

set elsewhere out in this

Agreement.



ARTICLE XXVIII



Assignment 28.1 The Contractor may assign,

transfer, convey or otherwise

dispose of any part or all of its

rights or interest under this

Agreement with the prior written

consent of the Government, which

consent shall not be unreasonably

withheld.



28.2 Notwithstanding the provisions of

paragraph 28.1, if the Contractor

assigns to any affiliated

company, the Contractor shall

remain fully liable for the

performance of this Agreement and

shall be fully liable for the

performance of any such assignee.



28.3 In the case of an assignment to

any non-affiliated company, the

Contractor shall provide to the

Government an unconditional

undertaking by the assignee to

assume all obligations of the

Contractor under this Agreement.

Notwithstanding such undertaking,

the Contractor shall remain

jointly and severally liable with

the assignee for performance of

the obligations of the Contractor

unless the Contractor assigns his

entire interest under this

Agreement.





ARTICLE XXIX



Law of the 29.1 This Agreement shall be construed

Agreement under, governed by and

interpreted in accordance with

the laws of Belize and such

principles of international law

as may be applicable.





ARTICLE XXX



Force Majeure 30.1 Except as otherwise provided in

this Article, each party shall be

excused from complying with the

terms of this Agreement, if such

compliance is prevented by

strikes, wars (declared or

undeclared), acts of God,

governmental intervention not

otherwise addressed in this

Agreement, third-party

intervention, or by any act or

cause that is reasonably beyond

the control of such party, such

causes being







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herein called "force majeure". In the event that either party hereto is rendered unable, wholly or in part, by any of these causes to carry out its obligations under this Agreement, such party shall give notice and details of force majeure in writing to the other party within thirty (30) days after the party giving notice of such force majeure is aware of its occurrence. In such cases, the obligations of the party giving the notice shall be suspended during the continuance of any inability so caused. The Government and Contractor will do all that is reasonably within their power to remove such cause.



ARTICLE XXXI





| Entire Agreement and Amendments |31.1| This Agreement is based on the principles of pacta sunt observanda and rebus sic stantibus. Since this Agreement embodies the entire agreement and understanding between the Contractor and the Government relative to the subject matter hereof, and supercedes and replaces any provisions on the same subject in any other Agreement between the parties, whether written or oral, prior to the date of this agreement. Therefore, this Agreement may not be amended, modified, varied or supplemented except by an instrument in writing signed by the Contractor and the Government



ARTICLE XXXII



| Waiver | 32.1 | Performance of any condition or obligation to be performed here under shall, not be deemed to have been waived or postponed except by an instrument in writing signed by the party which is claimed to have granted such waiver or postponement.



| 32.2 | No Waiver by any party of any one or more obligations or defaults by any other party in performance of this Agreement shall operate or be construed as a waiver of any other obligations or defaults whether of a like or of a different character.



ARTICLE XXXIII



| Confidentiality | 33.1 | This Agreement and any confidential information of any party hereto which becomes known to the other party in connection with



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ISLAND OIL LTD 5/25/2004





the performance of this Agreement shall

not be published or disclosed to third

parties without the former party’s

written consent, except as otherwise

provided herein, and provided however

that such other party may communicate

confidential information to legal

counsel, accountants, other professional

consultants, underwriters, lenders,

agents, contractors or shipping companies

to the extent necessary in connection

with this Agreement, with the obligation

of the parties receiving such information

to maintain confidentiality, or to an

agency of the Government of the country

of the Contractor having authority to

require such disclosure.



The term “confidential information”, as

used herein shall mean information

identified as “confidential” by the party

originally in possession of it and

disclosed to the other party, excluding

information previously known to the other

party or information which is publicly

known (except through disclosure of the

other party in violation of this Article

XXXIII) or information that comes into

the legitimate possession of such other

party.



33.2 The confidentiality obligations of this

Article XXXIII shall expire upon

relinquishment of the area to which the

information relates.



ARTICLE XXXIV



Notices 34.1 Ail notices and other communications

required or permitted hereunder or any

notices that one party may desire to give

to the other party shall be in writing in

the English language and deemed to have

been properly delivered if personally

handed to an authorized representative of

the party for whom intended, or sent by

registered airmail, cable, telex,

facsimile and/or e-mail, at or to the

address of such party for whom intended,

or such other addresses as any party may

from time to time designate by notice in

writing to the other party.







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EXHIBIT “A”



THIS EXHIBIT “A” is attached to and is incorporated as part of the award and delivery of acreage dated this 25th day of May, 2004 from Government of Belize (GOB) to Island Oil Belize Ltd., covering 421 sub-sectors or 416,125.50 acres more or less.



ACREAGE DESCRIPTION

SECTOR | SUB-SECTORS | NUMBER OF SUB-SECTORS | AREA (ACRES)

369 | Q,R,S,T,VW,X,Y | 8 | 7,907.37

370 | P-Y | 10 | 9,884.23

384 | T, Y | 2 | 1,976.84

385 | B-Y | 24 | 23,722.12

386 | All | 25 | 24,710.54

387 | All | 25 | 24,710.54

388 | All | 25 | 24,710.54

387 | N,O,R,S,T,WX,Y | 8 | 7,907.37

398 | C,D,E,G,H,I,J,K,L,M,N,O,P,Q,R,S,T,U,V,W,X,Y | 2 | 21,745.28

399 | All | 25 | 24,710.54

400 | All | 25 | 24,710.54

401 | All | 25 | 24,710.54

402 | All | 25 | 24,710.54

403 | A,B,C,F,G,H,K,L,M,P,Q,R,U,V,W | 15 | 14,826.32

411 | T,X,Y | 3 | 2,965.26

412 | C,D,E,H,I,J,K,L,M,N,O,P,Q,R,S,T,U,V,W,X,Y | 21 | 20,756.85

413 | All | 25 | 24,710.54

414 | A-O | 15 | 14,826.32

416 | D,E,I,,N,O,S,T,X,Y | 10 | 9,884.22

417 | All | 25 | 24,710.54

418 | A,B,F,G,K,L,P,Q,U,V | 10 | 9884.22

426 | D,E,H,I,J,L,M,N,O,Q,R,S,T,U,V,W,X,Y | 18 | 17,791.59

427 | A,B,C,D,E,F,G,H,I,J,K,P,U | 13 | 12,849.48

438 | C,D,E,H,IJ, M,N,O,R,S,W,X |13 | 12,849.48

439 | A,B,C,D | 4 | 3,953.69

TOTAL | 421 | 416,125.50



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EXHIBIT "B"



MAP OF CONTRACT AREA





















[------------------------IMAGE------------------------]

































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ISLAND OIL LTD 5/25/2004





IN WITNESS WHEREOF, the Government and die Contractor have hereunto set their hands and seals the day and year first herein before written.



SIGNED, SEALED AND DELIVERED [SIGNATURE]

BY the above-named ____________________

JOHN BRICENO JOHN BRICENO

for and on behalf MINISTER OF NATURAL

of the Government of Belize RESOURCES,

THE ENVIRONMENT &

INDUSTRY



in the presence of:



[SIGNATURE]

_________________

WITNESS





SIGNED, SEALED AND DELIVERED BY



STEVE REILLY [SIGNATURE]

FOR ISLAND OIL BELIZE LTD. _____________________

STEVE REILLY

FOR ISLAND OIL BELIZE LTD





in the presence of:



[SIGNATURE]

_________________

WITNESS





I, JOHN BRICENO of Belmopan, hereby acknowledge that I did sign, seal find deliver the within written document as my act and deed.



Acknowledged at BELMOPAN this 25th day of May, 2004







[SIGNATURE]

____________________

JOHN BRICENO

MINISTER OF NATURAL RESOURCES,

THE ENVIRONMENT & INDUSTRY







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ISLAND OIL LTD 5/25/2004







Before me,



[SIGNATURE]

________________________

CHIEF EXECUTIVE OFFICER







BE IT REMEMBERED, that on the 25th day of May, 2004 personally appeared before me the within named JOHN BRICENO and acknowledged before me that he did sign, seal and deliver the within-written instrument as his act and deed and that the signature of JOHN BRICENO is

in his writing.









[SIGNATURE]

________________________

CHIEF EXECUTIVE OFFICER













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ISLAND OIL LTD 5/25/2004





I, EVADNE L. WADE, MAKE OATH AND SAY as follows:



1. I am a subscribing witness to the execution of this

agreement by STEVE REILLY FOR ISLAND OIL BELIZE LTD.



2. I was present and did see STEVE REILLY FOR ISLAND OIL

BELIZE LTD. sign, seal, and deliver this agreement as

his act and deed.



3. The signature “Steve Reilly” is in the proper

handwriting of STEVE REILLY FOR ISLAND OIL BELIZE

LTD. and the signature “[SIGNATURE]” is my own

proper handwriting.



SWORN AT BELMOPAN

THIS 25th DAY OF May, 2004





[SIGNATURE]

WITNESS



Before me, [SIGNATURE]

_____________________

CHIEF EXECUTIVE OFFICER





BE IT REMEMBERED that on the 25th day of May, 2004, personally appeared before me the within-named EVADNE L. WADE and made oath that she was a subscribing witness to the execution of this AGREEMENT by STEVE REILLY FOR ISLAND OIL BELIZE LTD. and was present and did see STEVE REILLY FOR ISLAND OIL BELIZE LTD. sign, seal and deliver this agreement as his act and deed and that the signature "Steve Reilly" is in his proper handwriting.







[SIGNATURE]

_______________________

CHIEF EXECUTIVE OFFICER







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I hereby certify that I have count the within-written document and that it contains two hundred eight-eight (288) folios of seventy two words each and six (36) words over and no more.



AS WITNESS my hand this 25th of May, 2004.



[Signature]

WITNESS



THIS DOCUMENT was prepared in the Geology & Petroleum Department for the Inspector of Petroleum for and on behalf of the Government of Belize





[Signature]

INSPECTOR OF PETROLEUM



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ISLAND OIL LTD 5/25/2004





Annex - I

INCOME TAX COMMISSIONER’S BULLETIN



Article I General Provisions



1.1 Definitions

1.2 Inconsistency

1.3 Accounting Records and Reports

1.4 Language - and Units of Account

1.5 Tax Accounting Principles

1.6 Accrual Basis

1.7 Definitions of Capital and Operating

Expenditures

1.8 Depreciation

1.9 Arm’s Length Transactions

1.10 General Exclusions

1.11 Currency Exclusions

1.12 Revision of the Accounting Procedure

1.13 Acceptance of Costs



Article II Petroleum Operations Expenditures



2.1 Definition for the Purpose of Determining

Compliance with the Minimum Exploration

Expenditures Commitment

2.2 Definition for the Purpose of Article IX



Article III Accounting Methods and Principles



3.1 Labour Costs

3.2 Material Costs

3.3 Technical Services Costs

3.4 Insurance and Claims

3.5 Legal and Litigation Costs

3.6 General Administration and Services

3.7 Interest, etc

3.8 Office Costs, etc. in Belize

3.9 Example of Production Share Calculation







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INCOME TAX COMMISSIONER’S BULLETIN



ARTICLE I



DEFINITIONS 1.1 The Accounting Procedure described

herein is to be followed and observed

in the performance of both parties

obligations under this Agreement. The

definitions appearing in Article I of

this Agreement shall also apply to this

Exhibit.



INCONSISTE- 1.2 In the event of any inconsistency or NCY conflict between the provisions of this

Exhibit and the other provisions of

this Agreement, then the other

provisions of this Agreement shall

prevail.



ACCOUNTING 1.3 (a) The Contractor shall establish and

RECORDS AND maintain at its business office in

REPORT Belize complete accounts, books and

records of all revenues, costs and

expenses relating to all Petroleum

Operations hereunder in accordance with

generally accepted procedures and

standards in the international

petroleum industry. Such account books,

records and reports will be available

for the inspection and use of the

Government and its representatives in

carrying out its supervisory function

under the Agreement.



(b) Within thirty (30) days of the

Effective Date of this Agreement, the

Contractor shall submit to and discuss

with the Government a proposed outline

of charts of accounts, books, records

and reports, which outline shall be in

accordance with generally accepted and

recognized accounting systems and

consistent with modern petroleum

industry practices and procedures.

Within ninety (90) days of receiving

the above submission, the Government

shall either indicate its approval of

the proposal or request revisions to

the proposal. Within one hundred and

eighty (180) days after the Effective

Date of the Agreement, the Contractor

and the Government shall agree on the

outline of charts of accounts, books,

records and reports which shall

describe the







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ISLAND OIL LTD 5/25/2004





basis of the accounting system and

procedure to be developed and used

under this Agreement. Following such

agreement, the Contractor shall

expeditiously prepare and provide the

Government with formal copies of the

comprehensive charts of accounts and

manuals related to the accounting,

recording and reporting functions, and

procedures which are, and shall be,

observed under this Agreement.



(a) All reports and statements will be

prepared in accordance with this

Agreement, the laws of Belize, and

where there are no relevant provisions

of either of these, in accordance with

generally accepted practices in the

international petroleum industry.



LANGUAGE - AND 1.4 Unless otherwise agreed, all accounts, UNITS OF records, books and reports shall be

ACCOUNT maintained and prepared in the English

language and shall be recorded in

United States dollars.



TAX ACCOUNTING 1.5 The following tax accounting

principles shall apply

ISLAND OIL L TO.5/25/2004



an allowable deduction to subsequent Calendar Years until fully recovered from Gross Revenues. In the event that an operating loss remains unrecovered upon the termination of this Agreement, such loss may be carried over and deducted from other revenues of the Contractor from Petroleum

Operations in Belize



ACCRUAL BASIS 1.6 All books, accounts and records shall be prepared on an accrual basis. Revenues shall be attributed to the accounting period in which they are earned, and costs and expenses to the accounting period in which

they are incurred, without the need to distinguish

whether cash is received or disbursed in connection

with a particular transaction. Costs and expenses

shall be deemed to have been incurred, in the case

of physical items, in the accounting period when title

thereto passes, and in the case of services, in the

accounting period when such services arc

performed.



DEFINITION OF 1.7 Petroleum Operations Expenditures

PETROLEUM OPERATIONS may consist of

EXPENDITURES capital and operating

expenditures as follows:









CAPITAL EXPENDITURES 1.7.1 Capital expenditures are those Petroleum Operations Expenditures for assets that normally

have a useful life which extends beyond the year in

which the assets was acquired.



In addition to expenditures relating to assets that

normally have a useful life beyond the year in which

the asset was acquired, the costs of development and

production drilling operations, as described in

paragraph 1.7.1 (e) of this Exhibit, will be classified

as capital expenditures.



Capital expenditures include, but are not limited to,

the following:



(a) Construction utilities, but are not limited to, the

following: water facilities, warehouses, and field





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ISLAND OIL LTD. 5/25/2004



roads. Cost of Crude Oil treating plants and

equipment, secondary recovery systems, natural gas

plants and steam systems,



(b) Construction housing and welfare housing recreational

facilities and other tangible property

incidental to construction,



(c) Production facilities - production rigs (including

the costs of labor, fuel, hauling and supplies for both

the offsite fabrication and onsite installation of rigs,

and other construction costs in erecting rigs and

installing pipelines), wellhead equipment, subsurface

lifting equipment, production tubing, sucker rods,

surface pumps, flow lines, gathering equipment,

delivery lines and storage facilities,



(d) Movables - surface and subsurface drilling and

production tools, equipment and instruments,

barges, floating craft, automotive equipment, aircraft,

construction equipment, furniture and office

equipment and miscellaneous equipment,



(e) Development and production drilling - labor,

materials and services used in drilling wells with the

object of penetrating a proven reservoir, including

the drilling of delineation wells as well as redrilling,

deepening or recompleting wells, and access roads, if

any, leading directly to wells,



OPERATING EXPENDITURES 1.8 Operating expenditures are all Petroleum Operations Expenditures other than capital expenditures.



Operational expenditures include, but are not

limited to, the following:



(a) Exploration drilling - labor, materials and

services used in the drilling of wells with the object of finding unproven reservoirs of crude oil and natural

gas, and access roads, if any, leading directly to wells.



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ISLAND OIL LTD.5/25/2004



(b) Surveys - labor, materials and services used in

aerial, geological, topographical, geophysical and

seismic surveys, and core hole drilling, and



(c) Other exploration expenditures -auxiliary or

temporary facilities having lives of one year or less

used in exploration and purchased geological and

geophysical information.



DEPRECIATION 1.9 Capital expenditures, as defined ill paragraph 1.7 of

this Exhibit, shall be depreciated only for the

purpose of the calculation of Income Tax. For the

purpose of determining the amount of depreciation

which is allowable as a deduction in each calendar

year, the following principles shall apply,



l.8.1 Capital expenditures will be depreciated using straight line method over five (5) years,



l.8.2 A full year's depreciation may be taken in the first calendar year in which such depreciation is

allowable,



l.8.3 Deductions with respect to depreciation of capital expenditures incurred shall be allowable

commencing with (A) the calendar year in which the

capital asset is placed into service, or, if the capital

expenditure does not relate to an asset that normally

has a useful life beyond the year in which it is placed

in service, the calendar year in which the capital

expenditure is incurred, or (B) the calendar year in

which Initial Commercial Production First occurs,

whichever is later.



ARM'S LENGTH 1.9 Except as may be otherwise agreed in

TRANSACTIONS writing between the Government and

the Contractor, all transactions

giving rise to revenues, costs or

expenses which will be credited or charged to the books,accounts, records and reports prepared, maintained or submitted hereunder shall be conducted at arm's length or on such a basis as will assure that all such



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ISLAND OIL LTD.5/25/2004



revenues, costs or expenses will not be higher or

lower, as the case may be, than would result from a

transaction conducted at arm's length on a

competitive basis with third parties.



GENERAL EXCLUSIONS 1.10 The following

expenditures shall not be included in

Petroleum Operations Expenditures:



(a) costs and expenses incurred at any time prior to

the Effective Date,



(b) costs relating to petroleum marketing or

transportation beyond the Delivery Point,



(c) contributions and donations except those

approved by the Government,



(d) gifts or rebates to suppliers, and gifts or

commissions to intermediaries arranging service or

supply contracts,



(e) any interest, tines, monetary corrections or

increases in expenses resulting from the Contractor's

failure to comply with its obligations under this

Agreement, applicable law or agreements with third

parties, and



(f) any other expenditures not directly related to

Petroleum Operations or not in compliance with the

provisions of this Exhibit.



CURRENCY EXCHANGE 1.11 For conversion purposes RATES between any other

currency and United States

dollars, the average of

the buying and selling rate of exchange shall be used

as issued by the Central Bank of Belize on the first

day of the month in which the revenues, costs or

expenses are recorded. Any realized or unrealized

gains or losses from the exchange of currency shall

be charged or credited to Petroleum Expenditures.

A record of the exchange rates used in converting

other currencies into United States dollars shall be

kept by the Contractor.





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REVISION OF 1.12 By mutual agreement between the

THE ACCOUNTING Government and the Contractor this

PROCEDURE Accounting Procedure may be

revised from time to time.





ACCEPTANCE OF COSTS 1.13 The acceptance by the

Government of the values

and treatment proposed by the Contractor relating to

all costs and expenses may be conditional upon the

presentation by the Contractor, following a request

by the Government or its representatives, of all

records and original documents supporting such

costs and expenses, such as invoices, cash vouchers,

debit notes, price lists or similar documentation

verifying the value and treatment proposed.





Article II

Petroleum Operations Expenditures

DEFINITION FOR 2.1 In determining the Contractor's

THE PURPOSE OF compliance with the minimum

DETERMINING Exploration Expenditures obligations

COMPLIANCE undertaken pursuant to this Agreement,

WITH THE Petroleum Operations Expenditures shall

MINIMUM include all costs and expenses incurred

EXPLORATION in the performance of exploration

EXPENDITURES operations in accordance with approved work

COMMITMENT programmes, but excluding those

incurred in the performance of

development and production operations

in the contract year in question without the need to distinguish, between capital and

operating expenditures, provided, however, that

expenditures incurred in training nationals of Belize

pursuant to paragraphs 20.1 and 20.2 of this

Agreement and the value of stock listed in inventory

shall be excluded from petroleum operations

expenditures for the purpose of this subparagraph.



DEFINITION FOR 2.2

THE PURPOSE OF

ARTICLE IX



2.2.1 For each calendar year, including any calendar year

prior to the calendar year in which initial commercial

production first occurs, petroleum operations

expenditures, for the purposes of Article IX of this

Agreement, shall include all petroleum operations



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ISLAND OIL LTD.5125/2004



expenditures incurred in that calendar year in the

contract area



2.2.2 The following costs and expenses shall not be included in petroleum operations expenditures for

the purposes of Article IX of this Agreement:



(a) surface rentals payable pursuant to Article XIII

of this Agreement,



(b) any costs relating to the provision of the security

described in paragraph 6.1.6 of this Agreement

including payments made to the Government

pursuant to such security or otherwise for failure to

incur the minimum exploration expenditures in

accordance with paragraph 6.1 of this Agreement,

and



(c) any interest, fees, duties, taxes and other financial

charges, referred to in paragraph 3.7 of this Exhibit,

relating to loans and credits obtained by the

Contractor to acquire funds for the execution of its

obligations under this Agreement.



DEFINITION FOR THE 2.2.3 For each calendar year, PURPOSE OF THE INCOME commencing with the calendar

TAX year in which initial commercial production first occurs, petroleum operations expenditures

which shall be deductible for the purpose of the

calculation of Income Tax payable shall consist of

the sum of:



(1) the current calendar year's operating

expenditures incurred, including the current

calendar year's allowable deductions for depreciation

of capital expenditures determined in accordance

with subparagraphs 1.5.2 of this Exhibit.



Article III

Accounting Methods and Principles



Petroleum operations expenditures incurred

hereunder shall be calculated and accounted for in a





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manner consistent with the following principles and

definitions and shall include:



LABOUR COSTS 3.1 Costs of salaries and wages of the Contractor’s

employees directly engaged in petroleum operations,

including costs of holidays, vacations, sickness, living

and housing allowances, travel time, bonuses and

other established plans for employee .benefits

customarily granted to the Contractor's employees

and their families in similar ventures,



MATERIAL COSTS 3.2 Costs of materials, equipment, machines, tools and

any other goods of a similar nature used or

consumed in petroleum operations subject to the

following:



(a) Acquisition - the Contractor shall only supply or

purchase materials for use in petroleum operations

that may be used in the foreseeable future. The

accumulation of surplus stocks and inventory shall

be avoided. Inventory levels shall, however, take into

account the time lag for replacement, emergency

needs and similar considerations,



(b) Components of costs - costs of materials

purchased by the Contractor for use in petroleum

operations may include, in addition to the invoice

price (subtracting the discounts given, if any), freight

costs and costs of transportation between the supply

point and delivery point (provided that such costs are

not included in the invoice price), inspection costs,

insurance, custom duties, taxes and other items that

may be charged to imported materials or to materials

purchased in the Belize,



(c) Accounting - such materials costs shall be

charged to the accounting records and books based

on the "First in-First Out" (FIFO) method,



(d) Supply of Materials by Affiliated Companies materials supplied by the Contractor's Affiliated



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Companies shall be charged to the accounting

records and books at prices no higher than the

prices comparable material purchased on a

competitive basis from third party suppliers. This

criterion shall apply to both new and used materials,



(e) Inventories - the Contractor shall maintain both a

physical and accounting inventory of all materials in

stock in accordance with generally accepted practices

in the international petroleum industry. The

Contractor shall make a physical inventory of all

such materials at least twice in any Contract Year.

The Government may carry out total or partial

inventories whenever it deems it necessary. The

costs of non capital items purchased for inventory

shall be charged to operating expenditure when

issued from stock for consumption,



TECHNICAL SERVICE COSTS 3.3 The value of technical services costs relating to

Petroleum Operations shall be:



(a) In the case of technical services performed by

third parties directly subcontracted, including outside

consultants, contractors and utilities, the price paid

by the Contractor, provided that such prices are no

higher than the prices charged by other suppliers for

comparable work and services, and



(b) In the case of technical services performed by

the Contractor or its Affiliated Companies, prices

which are no higher than the most favorable prices

charged to other Affiliated Companies of the

Contractor and to third parties for comparable

services,



INSURANCE AND CLAIMS 3.4 Costs relating to insurance, provided such insurance

is customary, affords prudent protection against risks

and is at a premium no higher them that charged on a

competitive basis by insurance companies which are

not Affiliated Companies of the Contractor. The

proceeds of any insurance or claim shall be credited

against Petroleum Operations Expenditures. Except



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in cases where insurance coverage is required

pursuant to Article XXV of this Agreement, if no

insurance is carried for a particular risk, all costs

incurred by the Contractor in settlement of any

related loss, claim, damage or judgment, including

legal services, shall be includable in Petroleum

Operations Expenditures provided that such costs

did not result from the Contractor's gross negligence.



LEGAL AND 3.5 Costs and expenses of litigation and

LITIGATION legal or related services necessary

COSTS or expedient [or the protection of

the Contract area. Any damages or

compensation received shall be credited

against Petroleum

Operations Expenditures. Under no circumstances

may the Contractor's costs incurred in the course of

arbitration, entered into under Article XXII of this

Agreement, be included in Petroleum Operations

Expenditures,



GENERAL 3.6 General services and administrative costs

ADMINISTRATION other than direct costs, including,

AND SERVICES but not limited to:

OVERHEAD COSTS (a) The Contractor's personnel and

services costs, outside of Belize

relating to administration, legal,

accounting, treasury, auditing,

taxation, planning, employee

relations, purchasing and other

functions required for Petroleum

Operations under this Agreement, and



(b) Reasonable travel expenses of the Contractor's

personnel in the general and administrative

categories listed in (a) above for the purpose of

inspection and supervision of Petroleum Operations

in Belize shall be allocable to Petroleum Operations

Expenditures according to methods agreed to by the

Contractor and the Government. The methods

agreed shall result from a detailed study and the

methods selected following such study shall be

applied each year consistently unless otherwise

agreed by the parties. In the case of Exploration

Operations, these general administration and

services overhead costs shall not exceed three



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percent (3%) of the direct costs incurred in such operations in each Calendar Year. Following the date of declaration of Commercial Discovery in the first Field, the Government and the Contractor shall agree upon the level of General Administration and Services Overhead Costs which may be allocable to Petroleum Operations Expenditures and the percentage of direct costs ceiling shall be reduce accordingly.



INTEREST, ETC.

3.7

interest, fees, duties, taxes and other financial charges relating to loans and credits obtained by the Contractor to acquire funds for the execution of its obligations under this Agreement at rates not exceeding the prevailing commercial rates may be charged to Petroleum Operations Expenditures. Details of any financial plan, and amounts thereof, shall be included in each annual Work Programme Budget.



OFFICE COSTS, ETC. IN BELIZE

3.8

St Staffing and maintenance of the Contractor's head office in Belize and other offices in Belize, including rent, telephone, telex and radio expenses, as well as the expenses of general facilities such as shore bases, warehouses, water, power and communications systems, roads and bridges.



EXAMPLE OF PRODUCTION SHARE CALCULATION

3.9

The example below shows the application of the scale of Production Sharing for fields producing 360,000 bbls per day on an average in the course of a quarter.



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Example-1 (offshore)



Productions Share Table



Daily Average Production (bbl/d) | Government Share (%) | Contractor Share (%)

0-50,000 | 10 | 90

50,000-150,000 | 15 | 85

150,000-250,000 | 20 | 80

250,000-350,000 | 25 | 75

350,000 | 30 | 70



Gross Value of 360,000 bbl/d @ $20/bbl

$7,200,000

100% Recovery of expenses $2,880,000

Balance in dollars $4,320,000



Government’s Share of the Balance:

|(50,000 bbls x 10% + 100,000 bbls x 15%

+ 100,000 bbls x 20% + 100,000 bbls x 25%

+ 10,000 bbls x 30%) / (360,000 bbls)|

X $ 4,320,000 -$816,000



Contractor’s Share

$ 4,320,000-$ 816,000 -3,504,000



Example-2 (onshore)



Production Share Table



Daily Average Production (bbl/d) | Government Shore (%) | Contractor Share (%)

0-50,000 | 10 | 90

50,000-100,000 | 20 | 80

100,000-150,000 | 30 | 70

> 150,000 | 40 | 60



Gross Value of 360,000 bbl/d @ 20/bbl

$7,200,000

100% Recover of Expenses $1,620,000

Balance in dollar $5,580,000



Government’s Share of the Balance:



|(50,000 bbls x 10% + 50,000 bbls x 20% +

50,000 bbls x 30% + 210,000 bbls x 40%)/360,000 bbls)|

x 5,580,000 - $1,767,000

- $3,813,000



-71-







1217/04

Lodge for record by [---] + Petroleum Department

This 28 day of May 2004

At 3:30 p.m.



[SIGNTAURE]

Registrar of Lands.





Conformity with the provision

Of the General Registry AC

Chapter 258 of the Law of Belize

Revised Editions 1980 in Deed

Book Volume 17 459-596 of 2004 at Folios this 28 day of May 2004





[SIGNATURE]

Registrar of Lands.

B E L I Z E:





PRODUCTION SHARING AGREEMENT

SUPPLEMENTAL AGREEMENT





THIS SUPPLEMENTAL AGREEMENT is made this 14th day of November, 2005 between THE GOVERNMENT OF BELIZE (acting through the Minister of Natural Resources, Local Government and the Environment) (hereinafter referred to as “the Government”) of the one part and ISLAND OIL BELIZE LTD., a company duly incorporated under the laws of Belize, with address at 1 Front Street, Punta Gorda Town, Toledo (hereinafter referred to as “the Contractor”).



WHEREAS on the 25th day of May 2004 the Government and the Contractor entered into a Production Sharing Agreement (hereinafter referred to as “the Principal Agreement”) for the conduct of petroleum operations by the Contractor in the area of Belize described in Exhibit A and Exhibit B of the Principal Agreement;



AND WHEREAS the Contractor has made an application for other acreage, in addition to the area described in the Exhibit A and Exhibit B of the Principal Agreement, within which to conduct petroleum operations under the Principal Agreement;



AND WHEREAS the Government is desirous of granting such application subject to the provisions herein contained;



NOW THEREFORE THIS AGREEMENT WITNESSETH as follows:



1. The words used in this Agreement shall have the same

meaning as the definition of such words in Article I

of the Principal Agreement.



2. The Principal Agreement is hereby amended by

repealing and replacing Exhibit A and Exhibit B

thereto with Schedules I and II of this Agreement.

3. All other terms and conditions of the Principal Agreement shall remain the same.



4. The Principal Agreement shall be construed as if though Schedules I and II hereof were originally included in the Principal Agreement instead of the said Exhibit A

and Exhibit B.



5. Without prejudice to the generality of paragraphs 2 and 3 above, the Contractor shall revise the current annual work programme of petroleum operations and work

programme budget of petroleum operations expenditures (paragraph 4.4 of the Principal Agreement) In light of the new contract area and submit the same within thirty (30) days from the date hereof for approval, which approval shall be determined in accordance with paragraph 4.4 of the Principal Agreement and any other applicable paragraphs. SCHEDULE I



DESCRIPTIONS OF THE CONTRACT AREA



ISLAND OIL BELIZE LTD.

BLOCK | SUB-BLOCKS | NO. OF SUB-BLOCKS | SQUARE KILOMETERS | ACRES

369 | E, J, O, Q, R, S, T, V, W, X, Y | 11 | 44 | 10,872.64

370 | A thru Y | 25 | 100 | 24,710.54

371 | A, B, F, G, K, L, P, Q, R, S, T, U, V, W, X, Y, HALF OF C, H, M, N, O | 12.5 | 50 | 12,355.27

373 | A thru Y | 25 | 100 | 24,710.54

384 | T and Y | 2 | 8 | 1,976.84

385 | B thru Y | 24 | 96 | 23,722.12

386 | A thru Y | 25 | 100 | 24,710.54

387 | A thru Y | 25 | 100 | 24,710.54

388 | A thru Y | 25 | 100 | 24,710.54

397 | N, O, R, S, T, WX, Y | 8 | 32 | 7907.37

398 | C, D, E, G, H, I, J, K, L, M, N, O, P, Q, R, S, T, U, V, W, X, Y | 22 | 88 | 21,745.28

399 | A thru Y | 25 | 100 | 24,710.54

400 | A thru Y | 25 | 100 | 24,710.54

401 | A thru Y | 25 | 100 | 24,710.54

402 | A thru Y | 25 | 100 | 24,710.54

403 | A, B, C, F, G, H, K, L, M, P, Q, R, U, V, W | 15 | 60 | 14,826.32

411 | T, X, Y | 3 | 12 | 2,965.26

412 | C, D, E, H, I, J, K, L, M, N, O, P, Q, R, S, T, U, V, W, X, Y | 21 | 84 | 20,756.85

413 | A thru Y | 25 | 100 | 24,710.54

414 | A thru O | 15 | 60 | 14,826.32

416 | D, E, I, J, N, O, S, T, X, Y | 10 | 40 | 9,884.22

417 | A thru Y | 25 | 100 | 24,710.54

418 | A, B, F, G, K, L, P, Q, U, V | 10 | 40 | 9,884.22

426 | D, E, H, I, J, L, M, N, O, Q, R, S, T, U, V, W, X, Y | 18 | 72 | 17,791.59

427 | A, B, C, D, E, F, G, H, I, J, K, P, U | 13 | 52 | 12,849.48

438 | C, D, E, H, I, J, M, N, O, R, S, W, X | 13 | 52 | 12,849.48

439 | A, B, C, D | 4 | 16 | 3,953.69

TOTAL | 495 | 1,980 | 489,268.69

SCHEDULE II





MAP OF THE CONTRACT AREA

__________________________







ISLAND OIL BELIZE LTD.































[-----------------------IMAGE----------------------------]IN WITNESS WHEREOF the parties hereto have set their hands and seals the day and year first herein before written.



SIGNED, SEALED AND DELIVERED )

by JOHN BRICENO, Minister ofNatural )

Resources, Local Government and the ) (signature) Environment for and on behalf of the) JOHN BRICENO

Government of Belize )





In the presence of:



(signature)

WITNESS

Name: Carol Guzman





SIGNED, SEALED AND DELIVERED )

by STEVE REILLY ) (signature)

President ) STEVE REILLY

for and on behalf of Island Oil Belize Ltd. )





In the presence of:



(SIGNATURE)

WITNESS

Name: Alister King

I, JOHN BRICENO, Minister of Natural Resources, Local Government and the Environment hereby acknowledge that I did sign, seal and deliver the within written document as my act and deed.



Acknowledge at BELMOPAN this 14th day of November 2005.



(Signature)

JOHN BRICENO

MINISTER OF NATURAL RESOURCES,

LOCAL GOVERNMENT AND

THE ENVIRONMENT



Before me,



(Signature)



CHIEF EXECUTIVE OFFICER



BE IT REMEMBERED that on the 14TH day of November 2005

personally appeared before me the within named JOHN BRICENO and acknowledged before me that he did sign, seal and deliver the within-written document as his act and deed and that the signature" (signature)” is in his own proper handwriting.





(Signature)



CHIEF EXECUTIVE OFFICER





I, STEVE REILLY, hereby acknowledge that I did sign, seal and deliver the within written document as my act and deed for and on behalf of Island Oil Belize Ltd.



Acknowledge at BELMOPAN this 14th day of November, 2005







[SIGNATURE]

_______________

STEVE REILLY





Before me,





[SIGNATURE]

_______________________

CHIEF EXECUTIVE OFFICER









BE IT REMEMBERED that on the 14 day of November 2005

personally appeared before me the within named STEVE REILLY and acknowledged before me that he did sign, seal and deliver the within-written document as his act and deed for and on behalf of Island Oil Belize Ltd. and that the signature.

Steve Reilly is in his own proper handwriting.







[SIGNATURE]

CHIEF EXECUTIVE OFFICER

I hereby certify that I have counted the within-written document and that it contains twelve (12) folios of seventy-two (72) words each and fifty-nine (59) words over and no more.



Witness my hand this ,14th day of November 2005.







(signature)

WITNESS

This Document was prepared and drawn in the Ministry of Natural Resources and the Environment.











(SIGNATURE)

INSPECTOR OF PETROLEUM