<DOCUMENT>
<TYPE>EX-10.27
<SEQUENCE>5
<FILENAME>u43864ex10-27.txt
<DESCRIPTION>PRODUCTION SHARING CONTRACT
<TEXT>
<PAGE> 1
Exhibit 10(27)
PRODUCTION SHARING AGREEMENT
BETWEEN
STATE OF GEORGIA:
STATE AGENCY FOR REGULATION OF OIL AND GAS RESOURCES IN GEORGIA,
GEORGIAN OIL
AND
CANARGO NORIO LTD
DATED
12th December, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
<C>
Preamble
........................................................................... 4
Article 1
Definitions................................................................ 5
Article 2 Scope of Agreement and General
Provisions.................................. 11
Article 3 Agreement
Area............................................................. 13
Article 4 Agreement
Term............................................................. 13
Article 5
Relinquishments............................................................ 14
Article 6 Coordination
Committee..................................................... 15
Article 7 Operator
Responsibility.................................................... 18
Article 8 Article not
used........................................................... 19
Article 9 Procedure for Determination of Commerciality and
Approval of Development
Plans.............................................. 19
Article 10 Annual Work Programs and
Budgets........................................... 22
Article 11 Allocation of Production, Recovery of Costs and Expenses,
Production Sharing and Right of
Export..................................... 24
Article 12 Crude Oil
Valuation........................................................ 28
Article 13 Ancillary Rights of the Contractor and
Operator............................ 30
Article 14 Assistance Provided by the
State........................................... 31
Article 15 Measurement, Quality and Valuation of
Petroleum............................ 33
Article 16 Natural
Gas................................................................ 34
Article 17 Tax/Fiscal
Regime.......................................................... 38
Article 18 Accounting, Financial Reporting and
Audit.................................. 42
Article 19 Currency, Payments and Exchange
Control.................................... 43
Article 20 Import and
Export.......................................................... 44
Article 21 Export of Hydrocarbons, Transfer of Ownership
and Regulations for
Disposal............................................... 45
Article 22 Ownership of
Assets........................................................ 45
Article 23 Insurance, Environment, Health, Safety and
Liability....................... 46
Article 24
Personnel.................................................................. 50
Article 25 Force
Majeure.............................................................. 50
Article 26 Assignments and
Guarantees................................................. 51
Article 27 Agreement Enforcement and Stabilisation and Representations
and
Warranties............................................................. 53
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
<C>
Article 28 Notices and
Confidentiality................................................ 55
Article 29 Termination and
Breach..................................................... 57
Article 30 Dispute
Resolution......................................................... 58
Article 31
Text....................................................................... 58
Article 32 Approval and Effective
Date................................................ 59
ANNEX A AGREEMENT
AREA............................................................. 61
ANNEX B
LICENCE.................................................................... 62
ANNEX C ACCOUNTING
PROCEDURE....................................................... 63
ANNEX D MINIMUM
PROGRAM.............................................................78
ANNEX E PERMIT APPLICATION FEES
SCHEDULE............................................79
ANNEX F PARENT COMPANY
GUARANTEE....................................................80
ANNEX G GEORGIAN OIL CONSENT TO TRANSFER
LICENCE....................................82
</TABLE>
3
<PAGE> 4
PRODUCTION SHARING AGREEMENT AND LICENSES
This Agreement is made and entered into on 12th, December 2000 by and between:
(1) State Agency for Regulation of Oil and Gas Resources in Georgia as the duly
authorised representative of the State (as it is defined in article 1.70)
with adequate authorization, (hereinafter referred to as "Agency") and
National Oil Company - Georgian Oil in its capacity as the state owned oil
company (hereinafter referred to as "Georgian Oil"), as the party of the
first part;
(2) as party of the second part, CanArgo Norio Ltd. (Number 111838), a company
organised and existing under the laws of Cyprus, and its successors and
assignees, if any, will individually be referred to as "Contractor Party"
and collectively referred to as "Contractor"). The State Agency, Georgian
Oil, and the Contractor may sometimes be referred to as "Party" and
collectively as the "Parties".
WITNESSETH:
WHEREAS, all Petroleum resources within the territory and under the internal
waters, territorial sea, and continental shelf of Georgia are owned by the
State;
WHEREAS, the State enters into this Agreement wishing to promote the development
of the Agreement Area and Georgian Oil and Contractor desire to join and assist
in the exploration, development and production of the potential resources within
the Agreement Area;
WHEREAS, Contractor has the requisite technical, managerial and financial
capabilities and experience to carry out Petroleum Operations stipulated in this
Agreement and desires to cooperate with the State and Georgian Oil for the
exploration and exploitation of Petroleum reserves within the Agreement Area;
WHEREAS, Georgian Oil is the current holder of the oil and gas usage licence
number 0298 in respect of the Agreement Area (hereinafter referred to as the
"Licence") and the Licence is to be reissued to CanArgo Norio Ltd.
WHEREAS the Parties and Operator have agreed that in order to promote the
development of hydrocarbon resources in Georgia and to promote international
investment in Georgia, Petroleum Operations should be carried out pursuant to
the terms of this Agreement.
WHEREAS CanArgo Norio produced and agreed with State Agency and Georgian Oil
minimum work program for petroleum operations.
NOW, THEREFORE, in consideration of the promises and the mutual covenants and
conditions herein contained, it is hereby agreed as follows:
4
<PAGE> 5
ARTICLE 1
DEFINITIONS
The following words and terms used in this Agreement shall unless otherwise
expressly specified in this Agreement have the following respective meanings:
1.1 "Accounting Procedure" means the accounting procedure set out in Annex
"C" hereto.
1.2 An "Affiliated Company" or "Affiliate" means:
a) with respect to a Contractor Party: a company, corporation,
partnership or other legal entity:
i) in which a Contractor Party owns directly or
indirectly more than fifty percent (50%) of the
shares, voting rights or otherwise has the right to
establish management policy; or
ii) in which at least fifty percent (50%) of the shares
or voting rights are owned directly or indirectly by
a company or other legal entity, which owns directly
or indirectly more than fifty percent (50%) of the
shares, voting rights or otherwise has the right to
establish management policy of a Contractor Party;
b) with respect to the State and Georgian Oil: any legal entity
directly or indirectly controlled by the State or Georgian
Oil, respectively, or operating under their collective
management. For the purposes of this part of the definition,
the term to "control" (including the related terms
"controlled" or "operates under collective management") shall
mean with respect to any entity, having the right to carry out
direct or indirect supervision of such entity or to define a
general scope of its activity based on holding the shares
entitled to vote, other form of ownership, or on any other
grounds.
1.3 "Annex" or "Annexes" means each or all of the Annexes "A" through "G"
attached to this Agreement and made a part hereof. In the event of a
conflict between the provisions of an Annex and a term in the main body
of this Agreement, the provisions of the latter shall prevail.
1.4 "Appraisal" means all works carried out by Contractor to evaluate and
delineate the commercial character of a Discovery of Petroleum in the
Agreement Area.
1.5 "Appraisal Program" means a work program submitted by Contractor under
which Contractor plans to evaluate and delineate a Discovery of
Petroleum in the Agreement Area.
5
<PAGE> 6
1.6 "Associated Natural Gas" means all gaseous hydrocarbons produced in
association with Crude Oil, which Crude Oil itself can be commercially
produced and separated therefrom.
1.7 "Available Crude Oil" means Crude Oil produced and saved from the
Agreement Area and not used in Petroleum Operations in accordance with
Article 11.3.
1.8 "Available Natural Gas" means Natural Gas produced and saved from the
Agreement Area and not used in Petroleum Operations in accordance with
Article 11.3.
1.9 "Barrel" means a quantity consisting of forty-two (42) United States
gallons liquid measure, corrected to a temperature of sixty degrees
(60 degrees) Fahrenheit with pressure at sea level.
1.10 "Budget" means the estimate of the expenditures, listed category by
category, relating to Petroleum Operations and contained in any Work
Program proposed by Contractor.
1.11 "Calendar Quarter" or "Quarter" means a period of three consecutive
months beginning on January 1st, April 1st, July 1st and October 1st of
each Calendar Year.
1.12 "Calendar Year" means a period of twelve (12) consecutive months
beginning on January 1st and ending on December 31st in the same year,
according to the Gregorian Calendar.
1.13 "Capital Expenditures" means Development Expenditures Exploration
Expenditures and Drilling Costs.
1.14 "Commercial Discovery" means a discovery of Petroleum that the
Contractor in its sole discretion in accordance with the provisions of
Article 9 commits itself to develop and produce under the terms of the
Agreement.
1.15 "Commercial Production" means regular and continuous production of
Petroleum from a Development Area in such quantities (taking into
account any other relevant factors) as are worthy of commercial
development.
1.16 "Agreement" or "PSA" means this Production Sharing Agreement together
with all attached Annexes and any variation, extension or modification
hereto which may be agreed in writing by all the Parties.
1.17 "Agreement Area" means the area specified in Article 3 hereof and
delineated in Annex A, as reduced or enlarged from time to time in
accordance with the provisions of this Agreement.
1.18 "Agreement Year" means a period of twelve (12) consecutive months from
the Effective Date within the term of the Agreement.
6
<PAGE> 7
1.19 "Contractor" means CanArgo (Norio) Ltd., its assignees and successors,
as provided herein.
1.20 "Coordination Committee" means the committee composed of
representatives of the Contractor and the State represented by Georgian
Oil constituted in accordance with Article 6.
1.21 "Cost Recovery Petroleum" means Cost Recovery Crude Oil and Cost
Recovery Natural Gas.
1.22 "Cost Recovery Crude Oil" is defined as set forth in Article 11.5.
1.23 "Cost Recovery Natural Gas" is defined as set forth in Article 11.5
1.24 "Costs and Expenses" comprise the Exploration Expenditures, Development
Expenditures, Operation Expenses and Drilling Costs together with
Finance Costs whether directly or indirectly incurred by Contractor.
1.25 "Crude Oil" means crude mineral oil, asphalten, ozopherite and all
kinds of hydrocarbons whether in a solid, liquid or mixed state at the
wellhead or separator or which is obtained from Natural Gas through
condensation or extraction.
1.26 "Current Georgian Legislation" means laws, legislative acts, normative
documents, that are effective on the Effective Date.
1.27 "Customs Duties" means all import (or export) tariffs and duties and
other mandatory payments as stipulated by applicable laws, regulations
or other legal measures of Georgia with respect to the import or export
of materials, equipment, goods and any other similar items.
1.28 "Development Area" means all or any part of the Agreement Area
specified in an approved Development Plan containing a Commercial
Discovery.
1.29 "Development Expenditures" means all Costs and Expenses for Development
Operations with the exception of Operation Expenses and Drilling Costs
whether directly or indirectly incurred, including but not limited to
training, administration, service, Finance Costs and related expenses.
1.30 "Development Plan" means the plan to be produced by Contractor in
accordance with Article 9.6. following a declaration that Commercial
Production may be established.
1.31 "Development" or "Development Operations" or "Development Work" means
and includes any activities or operations associated with work to
develop Petroleum for production and subsequently to produce and render
Petroleum marketable for commercial sale and shall include, but not be
limited to:
a) all the operations and activities under the Agreement with
respect to the drilling of wells, other than Exploration
wells, the deepening,
7
<PAGE> 8
reworking, plugging back, completing and equipping of such
wells, together with the design, construction and installation
of such equipment, pipeline or gathering lines, installations,
production units and all other systems relating to such wells
and related operations in connection with production and
operation of such wells as may be necessary in conformity with
sound oil field practices in the international Petroleum
industry.
b) all operations and activities relating to the servicing and
maintenance of pipelines, gathering lines, installations,
production units and all related activities for the production
and management of wells including the undertaking of
re-pressurising, recycling and other operations aimed at
intensified recovery, enhanced production and oil recovery
rate.
1.32 "Discovery" means a well that the Contractor determines has encountered
Petroleum which would justify Commercial Production.
1.33 "Dollar" or "U.S.$" means the currency of the United States of America.
1.34 "Double Tax Treaty" means any international treaty or convention for
the avoidance of double taxation of income and/or capital which is
applicable in Georgia.
1.35 "Drilling Costs" means all expenditures whether directly or indirectly
incurred during Exploration and Development for well drilling,
completing and reworking operations including, but not limited to,
labour, geological design, engineering and other Subcontractors
(including all fees, tariffs and charges payable to any such
Subcontractors), material and equipment consumed or lost, perforation,
formation testing, cementing, well-logging and transportation.
1.36 "Effective Date" means the date on which this Agreement has been signed
by all Parties and the requirements of Article 32 have been satisfied.
1.37 "Excess Associated Natural Gas" is defined as set forth in Article
16.1.b.
1.38 "Exploration" or "Exploration Operations" means operations conducted
under this Agreement in connection with the exploration for previously
undiscovered Petroleum, or the evaluation of discovered reserves which
shall include geological, geophysical, aerial and (other survey)
activities and any interpretation of data relating thereto as may be
contained in Exploration Work Programs and Budgets, and the drilling of
such shot holes, core holes, stratigraphic tests, Exploratory Wells for
the discovery of Petroleum, Appraisal wells and other related
operations.
1.39 "Exploration Expenditures" means all Costs and Expenses for Exploration
Operations other than Drilling Costs whether directly or indirectly
incurred including but not limited to training, administration,
service, Finance Costs and related expenses and overhead and study
costs.
8
<PAGE> 9
1.40 "Exploratory Well" means any well drilled with the objective of
confirming a structure or geologic trap in which Petroleum capable of
Commercial Production in significant quantities has not been previously
discovered.
1.41 "Field" means a Petroleum reservoir or group of reservoirs within a
common geological structure or feature. "Field" may be an "Oil Field"
or a "Natural Gas Field" as designated by Contractor.
1.42 "Finance Costs" or "Interest Costs" shall include all amounts of
interest, fees and charges paid in respect of any debt incurred in
carrying out the Petroleum Operations and any refinancing of such
debts, providing that in the case of Affiliate debt, it shall include
interest only to the extent that it does not exceed a rate which would
have been agreed upon between independent parties in similar
circumstances and such interest is not limited by which assets or
services are purchased by the loan principal.
1.43 "Force Majeure" is defined as set forth in Article 25.2.
1.44 "Foreign Employee" is defined as set forth in Article 17.17
1.45 "Foreign Subcontractors" means Subcontractors which are organised
outside of Georgia and under Georgian legislation are not obliged to
establish permanent representative offices in Georgia.
1.46 "Gas Sales Agreement" is any agreement to be entered into for the sale
of Non-associated Natural Gas and Associated Natural Gas in accordance
with the provisions of Article 16.2.
1.47 Operator means the company defined in Article 2.8 by mutual agreement
of the parties.
1.48 "Contractor Licence" means the "Licence" issued by the State Agency for
Regulation of Oil and Gas Resources in Georgia, according to the
Georgian Law.
1.49 "Joint Operating Agreement" or "JOA" means the agreement to be
concluded between the Contractor Parties, Georgian Oil and CanArgo
(Norio) Ltd which shall be supplementary to and consistent with the
provisions of this Agreement and which shall regulate the terms under
which Petroleum Operations will be conducted.
1.50 "LIBOR" means the three (3) months U.S. Dollars London Interbank fixing
offer rate quoted daily in the London Financial Times.
1.51 "Marketing Team" is defined as set forth in Article 16.2.a.ii.
1.52 "Measurement Point" means the location specified in an approved
Development Plan where the Petroleum is metered and delivered to the
Parties or such other location as the Parties may agree from time to
time prior to the submission of a Development Plan as the circumstances
may require.
9
<PAGE> 10
1.53 "Month" or "Calendar Month" means a calendar month.
1.54 "Natural Gas" means Non-associated Natural Gas and Associated Natural
Gas in their natural state.
1.55 "Natural Gas Field" means a field from which more than fifty (50)
percent of the estimated reserves on an energy equivalency basis are
Natural Gas at surface conditions.
1.56 "Non-associated Natural Gas" means all gaseous hydrocarbons produced
from gas wells, and includes wet gas, dry gas and residue gas remaining
after the extraction of liquid hydrocarbons from wet gas.
1.57 "Oil Field" means a field from which more than fifty (50) percent of
the estimated reserves comprise Crude Oil.
1.58 "Operation Expenses" means those costs incurred in day-to-day Petroleum
Operations, whether directly or indirectly incurred including but not
limited to all costs, expenses and expenditures associated with the
Production, processing and transportation to the Measurement Point of
Petroleum, training, administration, service, payments for abandonment
and site restoration in accordance with Article 9.8, insurance costs in
accordance with Article 23.2. and related expenses.
1.59 "Parent Company Guarantee" means a guarantee to be issued by CanArgo
Energy Corporation in the form annexed hereto as Annex F.
1.60 "Party" or "Parties" means the parties whose authorised representatives
have affixed their signatures hereto.
1.61 "Payment Date" has the meaning as defined in 11.10.
1.62 "Petroleum" means Crude Oil and Natural Gas.
1.63 "Petroleum Operations" means the Exploration Operations, the
Development Operations, Production Operations, and transportation to
the Measurement Point and other activities related thereto carried out
pursuant to this Agreement and the JOA.
1.64 "Petroleum Operations Account" shall have the meaning given to it in
paragraph 4.1 of section I of the Accounting Procedure.
1.65 "Petroleum Law" means Georgian Law on Oil and Gas which came into force
on April 16, 1999.
1.66 "Production" or "Production Operations" means operations and all
related activities carried out for Petroleum production after the
approval of any Development Plan, including without limitation
extraction, injection, stimulation, treatment, transportation, storage,
lifting, and associated operations, but does not include any storage or
transportation beyond the Measurement Point.
10
<PAGE> 11
1.67 "Profit Natural Gas" is defined as set forth in Article 11.10.
1.68 "Profit Oil" is defined as set forth in Article 11.10.
1.69 "Profit Tax" is defined as set forth in Article 17.
1.70 "State" or "Government" means the Government of Georgia and all
political or other agencies or instrumentalities or subdivisions
thereof including but not limited to any local government or other
representative, agency or authority, which has the authority to govern,
legislate, regulate, levy and collect taxes or duties, grant licences,
permits, approve or otherwise impact (whether financially or otherwise)
directly or indirectly upon any of the Parties' rights, obligations or
activities under the Agreement; the word "Governmental" shall be
construed accordingly.
1.71 "Study Area" means the part of the Agreement Area which will be defined
in a Study Program.
1.72 "Study Program" means the program to be produced and carried out by the
Contractor in accordance with Article 9 following the conclusion that
Commercial Production is feasible.
1.73 "Subcontractor" means any natural person or juridical entity
Agreemented directly or indirectly by or on behalf of Contractor to
supply goods, works or services related to this Agreement.
1.74 "Third Party" or "Third Parties" means one or more of a natural person
or juridical entity other than a Party hereto and any Affiliate of a
Party.
1.75 "Taxes" means all levies, duties, payments, fees, taxes or
contributions payable to or imposed by Governmental agencies,
Governmental subdivisions or republican, municipal or local authorities
within the Government of Georgia.
1.76 "VAT" means Georgian value added tax.
1.77 "Withholding Tax" is defined as set forth in Article 17.19.
1.78 "Work Program" and "Work Program and Budget" means any work program and
work program and Budget to be submitted to the Coordination Committee
by the Contractor in accordance with the provisions of Article 10 and
which shall set out the proposed Petroleum Operations to be carried out
in the Agreement Area together with the associated Budget as the case
may be.
11
<PAGE> 12
ARTICLE 2
SCOPE OF AGREEMENT AND GENERAL PROVISIONS
2.1 By its approval of this Agreement the State Agency hereby ratifies the
Contractor Licence according to the current Laws.
2.2 Subject to the terms and conditions of the Agreement, the State hereby
in accordance with Petroleum Law grants to the Contractor the exclusive
rights to conduct Petroleum Operations in the Agreement Area during the
term of this Agreement.
2.3 Contractor shall be responsible to the State for the execution of such
Petroleum Operations in accordance with the provisions of the
Agreement.
2.4 In performing Petroleum Operations, Contractor shall provide all
financial and technical requirements, unless otherwise provided in this
Agreement, or agreed with Georgian Oil, and conduct all operations in
accordance with the standards generally accepted in the international
Petroleum industry.
2.5 Contractor shall be compensated for its services, not by way of
reimbursement in cash of its expenditures under the Agreement, but by
receipt of its share of Petroleum from the Agreement Area to which it
may become entitled by way of cost recovery out of Cost Recovery
Petroleum described in Article 11. If Petroleum produced from
Development Areas within the Agreement Area developed by Contractor,
Cost Recovery Petroleum under Article 11 and Profit Oil and Profit
Natural Gas is insufficient to reimburse Contractor for Costs and
Expenses incurred by Contractor, Contractor shall bear its own losses
in respect of any shortfall.
2.6 This Agreement defines the Parties' rights and obligations, governs
their mutual relations and establishes the rules and methods for the
Exploration, Development, Production, and sharing of Petroleum between
them. The entire interests, rights and obligations of each of the
Parties under this Agreement shall be solely governed by the provisions
of this Agreement.
2.7 During the period in which this Agreement is in force, all Available
Crude Oil and Available Natural Gas resulting from Petroleum
Operations, will be shared between Georgian Oil and the Contractor in
accordance with the provisions of Article 11 of this Agreement
2.8 State Agency, Georgian Oil and Contractor agree that the Operator shall
be Georgian British Oil Company Norio and may be changed by the
Contractor with the consent of Georgian Oil and the State Agency. Such
consent cannot be unreasonably withheld. That appointment shall be
effective from the date hereto. The Operator shall act as the
designated non-profit agent of Georgian Oil and Contractor for the
conduct of Petroleum Operations in accordance with this Agreement and
any future JOA to be entered into.
12
<PAGE> 13
2.9 The State has appointed the State Agency as its representative for the
purposes set out in Article 8 of the Petroleum Law and Georgian Oil as
its representative for the purposes set out in Article 9 of the
Petroleum Law, with the right of substitution and removal, each to
exercise the State functions and to perform the State obligations under
the contract as prescribed by the Petroleum Law and to enjoy the
benefit as herein provided. The State will give notice to Contractor of
the appointment and removal and substitution of its representatives.
The Contractor is entitled to assume that each State Representative has
full authority to represent the State for those State purposes under
the Agreement assigned to it according to the Petroleum Law, including
those where herein specific reference is made to the State
Representative.
ARTICLE 3
AGREEMENT AREA
3.1 The Agreement Area is as set out by the geographic location and
coordinates described in Annex "A" attached hereto and delineated in
the map which forms part thereof. The total area of the Agreement Area
may hereafter be reduced only in accordance with the provisions of this
Agreement.
3.2 Except as for all rights and authorisations necessary for the
implementation of the provisions of this Agreement, no right is granted
in favour of the Contractor or Georgian Oil to the use or disposal of
any other natural or man-made resources or aquatic resources with the
exception of aquatic resources used directly in Petroleum Operations in
accordance with relevant permits which will be obtained through the
State Agency.
ARTICLE 4
AGREEMENT TERM
4.1 The term of the Agreement shall be deemed to have begun on the
Effective Date and shall continue for a total of twenty-five (25)
consecutive Agreement Years, unless the Agreement is sooner terminated
in accordance with Article 29 of this Agreement.
4.2 If in respect of any Development Area, Commercial Production remains
possible beyond the initial period of 25 consecutive Agreement Years
specified in Article 4.1 the Contractor, after giving notice to
Georgian Oil and the State Agency at least one (1) year prior to the
end of any such period, and
13
<PAGE> 14
after obtaining approval by the Coordination Committee of a revised
Development Plan shall be entitled to have an extension of the term of
this Agreement with respect to such Development Area for an additional
term of five (5) years or the producing life of the Development Area,
whichever is lesser, subject to the approval of the State Agency, and
such approval shall not be unreasonably withheld.
ARTICLE 5
RELINQUISHMENTS
5.1 Subject to Article 5.2, Contractor shall select and relinquish portions
of the Agreement Area as follows:
a) at least twenty-five percent (25%) of the original Agreement
Area less any Development Areas, not later than five (5)
Agreement Years after the Effective Date of the Agreement; and
b) at least fifty percent (50%) of the Agreement Area less any
Development Areas, remaining after the relinquishment of
Clause 5.1(a) occurs not later than ten (10) Agreement Years
after the Effective Date of the Agreement; and
c) at least fifty percent (50%) of the Agreement Area less any
Development Areas remaining after the relinquishment of Clause
5.1(b) occurs not later than fifteen (15) Agreement Years
after the Effective Date of the Agreement; and
d) at least fifty percent (50%) of the Agreement Area less any
Development Areas remaining after the relinquishment of Clause
5.1(c) occurs not later than twenty (20) Agreement Years after
the Effective Date of the Agreement.
e) Subject to the provisions of Clause 5.1 (f), all of the
Agreement Area including the Development Areas not later than
twenty-five (25) Agreement Years after the Effective Date of
the Agreement; and
f) If and to the extent the term of this Agreement is extended
pursuant to the provisions of Article 4.2 then the remainder
of the Agreement Area not later than thirty (30) Agreement
Years after the Effective Date of the Agreement or the
producing life of the Development Areas, whichever is lesser.
g) Following the expiration of ten (10) years from the
declaration of a Development Area, all depths deeper than five
hundred (500) meters below the total depth of the deepest well
drilled within the
14
<PAGE> 15
Development Area will cease to be included in the Development
Area, and shall be subject to relinquishment under this
Article 5.
5.2 Subject to the provisions of Article 5.1(f) and 5.1(g), the Contractor
shall not be required pursuant to Article 5.1 to relinquish any portion
of the original Agreement Area containing a Development Area.
5.3 Unless the Agreement is earlier surrendered or terminated, the
Contractor shall furnish the State Agency and Georgian Oil with a
description of the boundaries of the part of the Agreement Area to be
relinquished and retained not less than ninety (90) days in advance of
the deadline for the relinquishment prescribed in Article 5.1.
5.4 The area designated under Article 5.3 for relinquishment shall consist
as far as practicable of rectangular blocks bounded by lines running
due north and south and due east and west and shall not be less than
five (5) square kilometres. The area designated for relinquishment need
not consist of one contiguous area.
5.5 Contractor may at any time relinquish voluntarily all or any part of
the Agreement Area. Article 5.4 shall apply to all voluntary
relinquishments. Any such voluntary relinquishment of less than all of
the Agreement Area shall be credited toward any subsequent
relinquishment obligations hereunder.
ARTICLE 6
COORDINATION COMMITTEE
6.1 For the purpose of providing the overall supervision and direction of
and ensuring the performance of the Petroleum Operations, Georgian Oil
and Contractor shall establish a Coordination Committee within
forty-five (45) days of the Effective Date.
6.2 The Coordination Committee shall comprise a maximum total of eight (8)
members. Georgian Oil shall appoint a total of four (4) representatives
and Contractor shall appoint four (4) representatives to form the
Coordination Committee. Georgian Oil and Contractor shall each
designate one of its representatives as its chief representative. All
the aforesaid representatives shall have the right to attend and
present their views at meetings of the Coordination Committee. Each
representative shall have the right to appoint an alternate who shall
be entitled to attend all meetings of the Coordination Committee but
who shall have no vote except in the absence of the representative for
whom he is the alternate. When a decision is to be made on any
proposal, the chief representative from each Party shall be the
spokesman on behalf of such Party.
15
<PAGE> 16
6.3 The first Chairman of the Coordination Committee shall be the chief
representative designated by the Contractor (or his alternate), and the
first Vice Chairman shall be the chief representative designed by
Georgian Oil (or his alternate). The Chairman and Vice Chairman shall
be appointed for a term of two (2) years. Following the end of each
such two (2) year term of appointment, the identity of the Chairman and
the Vice Chairman shall rotate so that for the next two (2) year period
the previous Chairman shall become Vice Chairman for the next two (2)
years and the Vice Chairman shall become Chairman for the next two (2)
years. The Chairman of the Coordination Committee shall preside over
meetings of the Coordination Committee and in the absence of the
Chairman (or his alternate), the Vice Chairman shall preside. Such
Parties may designate a reasonable number of advisors, who may attend,
but shall not be entitled to vote at, Coordination Committee meetings.
6.4 A regular meeting of the Coordination Committee shall be held at least
once a Calendar Quarter. The Secretary to be designated pursuant to
Article 6.9 shall be responsible for calling such regular meetings of
the Coordination Committee and shall do so at the request of the
Chairman by sending a notice to the Parties. Other meetings, if
necessary, may be held at any time at the request of Georgian Oil or
Contractor. In each case the secretary shall give the Parties at least
30 days notice (or such shorter period as the Parties may agree) of the
proposed meeting date, the time and location of the meeting.
6.5 The Parties hereby empower the Coordination Committee to:
a) review and examine any Work Program and Budget proposed by the
Contractor and any amendment thereof;
b) determine the Commerciality of each proposed Development
Operation;
c) review and adopt proposed Development Operations and Budgets;
d) approve or confirm the following items of procurement and
expenditures:
i) approve procurement of any item within the Budget
with a unit price exceeding Two Hundred and Fifty
Thousand U.S.$ (U.S.$ 250,000) or any single purchase
order of total monetary value exceeding One Million
U.S. $ (U.S.$1,000,000);
ii) approve a lease of equipment, or an engineering sub
Agreement or a service Agreement within the Budget
worth more than Five Hundred Thousand U.S. $
(US$500,000) in total; and
iii) approve excess expenditures pursuant to Article 10.5
hereof and the expenditures pursuant to Article 10.6
hereof;
16
<PAGE> 17
e) demarcate boundaries of a Development Area;
f) review and approve the insurance program proposed by the
Contractor and emergency procedures on safety and
environmental protection; in addition all programmes and
budgets which are in connection with environmental protection
should be previously agreed with the State Agency for
Regulation of Oil and Gas Resources in Georgia as required;
g) review and approve personnel policies, selection and training
programs for Operator. Without prejudice to the foregoing, it
is accepted that part of the personnel policy of Operator
shall be to give preference to Georgian citizens, provided
that the conduct of Petroleum Operations shall not be
affected;
h) discuss, review, decide and approve other matters that have
been proposed by either Georgian Oil, Contractor or the
Operator;
i) review and examine matters required to be submitted to the
State Agency;
j) review and discuss the development work and technological
regimes proposed by Contractor and Georgian Oil; and
k) appoint sub-committees to meet from time to time to review any
aspect of Petroleum Operations, which the Coordination
Committee thinks fit.
6.6 Decisions of the Coordination Committee shall be made by majority
decision of the representatives present and entitled to vote. Each
representative will have one vote. All decisions made unanimously shall
be deemed as formal decisions and shall be conclusive and equally
binding upon the Parties.
6.7 Georgian Oil and Contractor shall endeavor to reach agreement on all
matters presented to the Coordination Committee. In the event that on
any matter the Coordination Committee are unable to reach agreement and
the Contractor is insisting that its proposal shall prevail, if
Georgian Oil is reasonably of the view that the proposed action would
result in serious permanent damage to that field or reservoir or
materially reduced recovery of Petroleum over the life of the field or
reservoir then the matter will be referred to an internationally
recognized independent expert appointed by the Contractor and Georgian
Oil whose decision on accepted international Petroleum Industry
practice shall be final and binding. The costs of the expert shall be
met by the Georgian Oil and Contractor equally and shall be recoverable
as Costs and Expenses.
6.8 A matter which requires urgent handling may be decided by the
Coordination Committee without convening a meeting, with the
Coordination Committee making decisions through telexes or the
circulation of documents.
17
<PAGE> 18
6.9 The Coordination Committee shall nominate a Secretary, to record
minutes of the meetings of the Coordination Committee, and may
establish technical and other advisory sub-committees. The Secretary
shall take a record of each proposal voted on and the results of such
vote at each meeting of the Coordination Committee. Each representative
of the Parties shall sign and be provided with a copy of such record at
the end of such meeting. The Secretary shall provide each Party with a
copy of the minutes of each meeting of the Coordination Committee
within fifteen (15) days after the end of such meeting. Each Party
shall thereafter have a period of fifteen (15) days to give notice of
any objections to the minutes to the Secretary. Failure to give notice
within the said fifteen (15) day period shall be deemed approval of
those minutes. In any event the record of proposals voted on to be
provided at the end of each meeting shall be conclusive and take
precedence over the minutes. Approved minutes of the Coordination
Committee shall be submitted to the State Agency.
6.10 All costs and expenses incurred with respect to the activities of the
Coordination Committee shall be paid or reimbursed by the Contractor
and charged to Operation Expenses in accordance with the Accounting
Procedure.
ARTICLE 7
OPERATOR RESPONSIBILITY
7.1 The Parties agree that the Operator shall act as the Operator for
Petroleum Operations within the Agreement Area in accordance with
approved Work Programs and Budgets unless otherwise stipulated in this
Article 7.
7.2 The Operator shall have the following obligations:
a) to perform the Petroleum Operations reasonably, economically
and efficiently in accordance with directions received from
the Coordination Committee. It is recognised that the
Coordination Committee through the Operator will have
operating control of all Petroleum Operations, including the
right to authorise the appointment of the General Director and
Deputy Director or the Directors;
b) to conduct (implement) the Work Programs and Budgets approved
by the Coordination Committee;
c) to be responsible for purchasing facilities, equipment and
miscellaneous material and enter into subcontracts and service
contracts at Contractor's instruction with service providers
and vendors related to the Petroleum Operations, in accordance
with approved Work Programs and Budgets and instructions from
Contractor;
18
<PAGE> 19
d) to prepare and submit for approval a personnel training
program and its annual budget and carry out the same as
approved by the Coordination Committee;
e) to establish and maintain complete and accurate accounting
records regarding its costs and expenditures for the Petroleum
Operations in accordance with the Accounting Procedure and
this Agreement;
f) to make necessary preparation for regular meetings of the
Coordination Committee, and to submit to the Coordination
Committee information related to the matters reviewed and
approved by the Coordination Committee;
g) to assist Contractor and Georgian Oil as requested in the
provision of reports to the Coordination Committee on
Petroleum Operations conducted under this Agreement.
7.3 Operator and its shareholders shall not be responsible for any
activities (including Petroleum activities) affecting the Agreement
Area prior to the Effective Date.
7.4 The Operator shall provide both Parties with copies of all relevant
data and reports pertaining to Petroleum Operations (including but not
be limited to geophysical, geological, technological, operational,
accounting or other material) required by such Parties.
7.5 The Operator, Contractor and Georgian Oil agree to use their best
endeavours to agree and execute a Joint Operating Agreement should the
Parties consider it necessary. Any Joint Operating Agreement to be
entered into shall be based on the Association of International
Petroleum Negotiators Model International Joint Operating Agreement
then current and shall be subject to, wholly consistent with and shall
not detract from the provisions of this Agreement.
ARTICLE 8
THIS ARTICLE IS NOT USED
19
<PAGE> 20
ARTICLE 9
PROCEDURE FOR DETERMINATION OF COMMERCIALITY AND
APPROVAL OF DEVELOPMENT PLANS
9.1 If, at any time Contractor concludes that Commercial Production (or
significant additional Commercial Production if Commercial Production
has previously been established) from the Agreement Area is feasible,
it shall notify Georgian Oil and the State Agency within forty-five
(45) days of reaching such a conclusion.
9.2 Within forty-five (45) days of receipt of such notice, Contractor shall
in the first instance present to the Coordination Committee for
approval a proposed Study Program which shall be deemed approved if no
written objections are raised by any member of the Coordination
Committee within thirty (30) days following receipt thereof. The
proposed Study Program shall specify in reasonable detail the appraisal
work including seismic, drilling of wells and studies to be carried out
and the estimated time frame within which the Contractor shall commence
and complete the program and also appropriate budgets.
9.3 Thereafter the Contractor shall carry out the Study Program approved by
the Coordination Committee. Within ninety (90) days after completion of
such Study Program, the Contractor shall submit to the Coordination
Committee a comprehensive evaluation report on the Study Program. Such
evaluation report shall include, but not be limited to: geological
conditions, such as structural configuration; physical properties and
extent of reservoir rocks; pressure, volume and temperature analysis of
the reservoir fluid; fluid characteristics, including gravity of liquid
hydrocarbons, sulphur percentage, sediment and water percentage, and
product yield pattern; Natural Gas composition; production forecasts
(per well and per Field); and estimates of recoverable reserves.
9.4 Together with the submission of the evaluation report, the Contractor
shall submit to the Coordination Committee a written declaration
including one of the following statements:
a) that the Commercial Production previously notified to Georgian
Oil pursuant to Article 9.1 is feasible;
b) that such Commercial Production is not feasible (contrary to
the notice containing Contractor's initial expectations); or
c) that Commercial Production will be conditional on the outcome
of further specified work that the Contractor commits to carry
out under a further Exploration or Study Program in specified
areas within or outside the relevant Study Area.
20
<PAGE> 21
9.5 In the event the Contractor makes a declaration under Article 9.4(c)
above, Contractor shall be entitled to retain the relevant Study Area
pending the completion of the further work committed under that
Article, at which time the Contractor shall advise the Coordination
Committee of its conclusion as to whether or not there is in fact a new
Commercial Discovery and the provisions of Article 9.4(a) or (b) shall
be applied accordingly.
9.6 If the Contractor declares pursuant to Article 9.4(a) that Commercial
Production is feasible, the Contractor shall submit to the Coordination
Committee (a) a proposed Development Plan in respect of the relevant
Commercial Discovery (containing the matters specified in Article 9.7
and 9.8) and (b) a proposed designation of the Development Area, both
of which shall be subject to the Coordination Committee's approval.
Such approval will not be unreasonably withheld or delayed, provided
that each shall be deemed approved as submitted if no written
objections are presented thereto by any member of the Coordination
Committee within forty-five (45) days of receipt. Upon approval being
granted or deemed as provided under this Article 9.6, the Contractor,
with any requested assistance from the Operator, shall proceed promptly
and diligently to implement the Development Plan in accordance with
good international Petroleum industry practices, to install all
necessary facilities and to commence Commercial Production.
9.7 The Contractor's proposed Development Plan to be submitted pursuant to
Article 9.6 shall detail the Contractor's proposals for Development and
operation of the Development Area. It will detail any facilities and
infrastructure which may be required up to the Measurement Point,
either inside or outside of the Development Area. Any Development Plan
shall set forth production parameters, number and spacing of wells, the
facilities and infrastructure (including proposed locations) to be
installed for production, storage, transportation and loading of
Petroleum, an estimate of the overall cost of the Development, and
estimates of the time required to complete each phase of the
Development Plan, a production forecast and any other factor that would
affect the economic or technical feasibility of the proposed
Development.
9.8 Any Development Plan shall also include an abandonment and site
restoration program together with a funding procedure for such program.
Each abandonment plan shall describe removal and abandonment measures
deemed necessary following completion of Production from the relevant
Development Area together with an estimate of the costs thereof. The
abandonment plan shall provide for the removal of facilities and
equipment used in Petroleum Operations or their in place abandonment,
if appropriate, in the Development Area and the return of used areas to
a condition that reasonably permits the use of such areas for purposes
similar to those uses existing prior to the commencement of Petroleum
Operations hereunder. All expenditures incurred in abandonment and site
restoration shall be treated as Costs and Expenses and recoverable from
Cost Recovery Petroleum in accordance with Article 11 and the
Accounting Procedure. All funds collected pursuant to the funding
procedure shall be dedicated to site restoration and abandonment and
will be
21
<PAGE> 22
placed in a special interest bearing account by Contractor, which shall
be held in the joint names of the State and the Contractor or their
nominees. Contractor's responsibilities for environmental degradation,
site restoration and well abandonment obligations, and any other
actual, contingent, possible and potential activity associated with the
environmental condition of the Development Area shall be limited to the
obligation to place the funds agreed to be paid in accordance with the
said funding procedure in the approved account in accordance with
generally accepted international Petroleum industry practice. Deposits
in approved accounts shall be made on a quarterly basis in arrears
commencing with the first Calendar Quarter in which there is Available
Petroleum. All such payments deposited by Contractor shall be treated
as Costs and Expenses and recoverable as Operation Expenses from Cost
Recovery Petroleum in accordance with Article 11 of this Agreement. No
Taxes shall be imposed on any amounts paid into, received or earned by
or held in the special interest bearing account. The State shall be
solely responsible for the implementation of the abandonment plan.
Allocation of relevant sources and implementation of abandonment plan
shall be controlled by and under the rules established by the State
Agency for Regulation of Oil and Gas Resources in Georgia.
9.9 Any significant changes to an approved Development Plan or proposals
related to extension of a Field or for enhanced recovery projects shall
be submitted to the Coordination Committee.
9.10 Subject to the terms of this Agreement the Contractor shall carry out,
at its own expense and financial risk, all the necessary Petroleum
Operations to implement an approved Development Plan. However, if, the
Contractor in its sole discretion determines exploitation turns out not
to be commercially profitable, the Contractor shall not be obligated to
continue Development or Production and will in such circumstances
submit a revised development plan that is commercially profitable to
the Coordination Committee or relinquish the Development Area.
9.11 Where there is a perceived need recognised by the State Agency and the
Contractor to improve the economic effectiveness of the Petroleum
Operations by constructing and operating certain common facilities with
other organisations (including for example roads, non-import/non-export
pipelines, compression and pumping stations and communication lines)
the State Agency and the Contractor shall use their best efforts to
reach agreement between themselves and other appropriate enterprises as
to the construction and operation of such facilities with all costs,
tariffs and investments made by the Contractor to be recoverable as
Operation Expenses in accordance with Article 11 of the Agreement and
Accounting Procedure.
22
<PAGE> 23
ARTICLE 10
ANNUAL WORK PROGRAMS AND BUDGETS
10.1 Contractor shall be responsible for the procurement of installations,
equipment and supplies and entering into contracts for the purchase of
goods and services with Sub Contractors including Foreign Sub
Contractors and others arising out of Petroleum Operations, all in
accordance with approved Work Programs and Budgets. Operator shall
assist the Contractor when requested in respect of the matters set out
in the previous sentence, and shall implement domestic procurement
operations as provided in Clause 7.2(c) in accordance with approved
Work Programs and Budgets.
10.2 Contractor shall submit to a minimum Work Program and the corresponding
Budget before the Effective Date of the Agreement; Annex D.
10.3 Before the 31st October of each Calendar Year, the Contractor shall
prepare and submit to the Coordination Committee for its review a
proposed annual Work Program and Budget for the next Calendar Year. If
the Coordination Committee agrees to modifications in an annual Work
Program and/or Budget, the Contractor shall promptly make such
modifications to the Work Program and/or Budget and resubmit the
modified Work Program and Budget to the Coordination Committee. The
Coordination Committee shall approve each Work Program and Budget
within forty five (45) days after receipt of same. If the Coordination
Committee fails to notify the Contractor of its approval of the Work
Program and Budget within said forty-five (45) days after its receipt,
the annual Work Program and Budget proposed by the Contractor together
with any modifications timely requested by the Coordination Committee,
shall be deemed to have been approved by the Coordination Committee.
10.4 In connection with the review and approval of the annual Work Program
and Budget, the Contractor and Operator shall submit to the
Coordination Committee such supporting data as reasonably requested by
the Coordination Committee.
10.5 The Contractor may, in accordance with the following provisions, incur
expenditures in excess of the approved Budget or expenditures outside
the approved Budget in carrying out the approved Work Program, provided
that the objectives in the approved Work Program are not substantially
changed:
a) In carrying out an approved Budget, the Contractor may, if
necessary, incur excess expenditures of no more than ten
percent (10%) of the approved Budget in any specified
budgetary category. The Contractor shall report quarterly the
aggregate amount of all such excess expenditures to the
Coordination Committee for confirmation.
b) For the efficient and as required operative performance of
Petroleum Operations, the Contractor may, without approval,
undertake certain
23
<PAGE> 24
individual projects which are not included in the Work Program
and Budget, for a maximum expenditure of Two Hundred Fifty
Thousand U.S.$ (U.S.$250,000), but shall, within ten (10) days
after such expenditures are incurred, report to the
Coordination Committee for confirmation.
c) Excess expenditures under this Article 10.5 shall not exceed
five percent (5%) of the approved or modified total annual
Budget for the Calendar Year. If the aforesaid excess is
expected to be in excess of said five percent (5%) of the
total annual Budget, the Contractor shall present its reasons
therefor to the Coordination Committee and obtain its approval
prior to incurring such expenditures.
10.6 In case of emergency (as in where there is an immediate threat to life
or property), the Contractor may incur emergency expenditures for the
amount actually needed but shall report such expenditures to the
Coordination Committee as soon as they are made. The said emergency
expenditures shall not be subject to Article 10.5 above.
10.7 Petroleum Operations will only be performed in accordance with the
approved or modified annual Work Program and Budget, otherwise they
will not be deemed to be Costs and Expenses and will not be treated as
Cost Recoverable.
ARTICLE 11
ALLOCATION OF PRODUCTION, RECOVERY OF COSTS AND
EXPENSES, PRODUCTION SHARING, AND RIGHT OF EXPORT
11.1 Contractor shall provide or procure the provision of all funds required
to conduct Petroleum Operations under this Agreement, except as
otherwise provided in this Agreement, and Contractor shall be entitled
to recover its Costs and Expenses from Petroleum produced from the
Agreement Area as provided below.
11.2 Costs and Expenses incurred directly or indirectly by Contractor prior
to the Effective Date pursuant to the provisions of this Agreement
including but not limited to the seismic data acquired by the
Contractor over the Agreement Area shall be deemed to be Costs and
Expenses for the purposes of this Agreement and shall be deemed to be
incurred on the Effective Date and shall be recoverable from Cost
Recovery Petroleum in accordance with the provisions of this Agreement
provided that these Costs will be documentarily approved by the
Coordination Committee.
24
<PAGE> 25
11.3 Contractor and Operator shall have the right to use free of charge
Petroleum produced from the Agreement Area to the extent required for
Petroleum Operations under the Agreement. The amount of Petroleum which
Contractor and Operator shall be entitled to use for Petroleum
Operations shall not exceed the amount which would be expected to be
used in accordance with international Petroleum industry practice. For
the avoidance of doubt, the use of such Petroleum shall only be for the
benefit of Petroleum Operations and not the personal gain of any Party.
An appropriate paper shall also be executed for the use of such
Petroleum.
11.4 Available Crude Oil and Available Natural Gas (hereinafter referred to
collectively as "Available Petroleum") shall be measured at the
applicable Measurement Point and allocated as set forth hereinafter.
11.5 Contractor and Georgian Oil shall be entitled to recover all Costs and
Expenses incurred in respect of Petroleum Operations in a following
manner:
a) Operations Expenses will firstly be recovered from the
Available Petroleum;
b) Capital Expenditures will be recovered from maximum 50% of
remaining Available Petroleum (hereinafter referred to as
"Cost Recovery Crude Oil" and "Cost Recovery Natural Gas" as
appropriate) following the recovery of Operations Costs.
Costs and Expenses shall be recovered in a manner consistent with the
Accounting Procedure and Article 11.6.
11.6 Costs and Expenses shall be recoverable from Cost Recovery Petroleum on
a first in, first out basis (i.e. Costs and Expenses will be recovered
according to the date they were incurred, earliest first). Recovery of
Costs and Expenses will commence as soon as Cost Recovery Petroleum is
available.
11.7 To the extent that in a Calendar Year outstanding recoverable Costs and
Expenses related to the Agreement Area exceed the value of all Cost
Recovery Crude Oil or Cost Recovery Natural Gas from the Agreement Area
for such Calendar Year, the excess shall be carried forward for
recovery in the next succeeding Calendar Years until fully recovered,
but in no case after termination of the Agreement or otherwise in
accordance with the Georgian Law.
11.8 Recovery of Costs and Expenses shall be achieved by transferring to a
Party at the Measurement Point title to quantities of Cost Recovery
Petroleum of equivalent value (determined in accordance with Article
12) to the Costs and Expenses to be recovered in accordance with this
Article 11.
11.9 To the extent that the value of Cost Recovery Petroleum received by a
Party from the Agreement Area during a Calendar Quarter is greater or
lesser than
25
<PAGE> 26
the Party was entitled to receive for that Calendar Quarter, an
appropriate adjustment shall be made in accordance with the Accounting
Procedure.
11.10 Following recovery of Costs and Expenses from Cost Recovery Petroleum
in accordance with the provisions of this Article 11, the remaining
Petroleum including any portion of Cost Recovery Petroleum not required
for recovery of Costs and Expenses (hereinafter referred to as "Profit
Oil" or "Profit Natural Gas") shall be allocated between Georgian Oil
and the Contractor in the following proportions, over each Calendar
Year:
a) Profit Oil:
1) before Payment Date Georgian Oil's Share - 50%
Contractor's Share - 50%
2) after Payment Date Georgian Oil's share - 60%
Contractor's share - 40%
b) Profit Natural Gas:
1) before Payment Date Georgian Oil's Share - 50%
Contractor's Share - 50%
2) after Payment Date Georgian Oil's share - 60%
Contractor's share - 40%
Payment Date is the date when Contractor's total costs incurred for
production of Crude Oil and Natural Gas are equal to the total of
profit received from the sales of Cost Recovery Crude Oil, Natural Gas
and Profit Crude Oil, Natural Gas.
11.11 Contractor shall prepare and provide Georgian Oil not less than ninety
(90) days prior to the beginning of each Calendar Quarter a written
forecast setting out the total quantity of Petroleum that Contractor
estimates can be produced and saved hereunder during each of the next
four (4) Calendar Quarters in accordance with Accepted international
Petroleum industry practices and the Work Program established in
accordance with Article 10.
11.12 Crude Oil shall be measured at the Measurement Point for purposes of
the Agreement and delivered to Georgian Oil and Contractor and each
such Party as owners shall take in kind, assume risk of loss and
separately dispose of their respective entitlements of Cost Recovery
Oil and Profit Oil. All Cost Recovery Natural Gas and Profit Natural
Gas shall be sold on a jointly committed basis in accordance with
Article 16 of this Agreement.
11.13 For the avoidance of any doubt, title to their relevant shares of
Petroleum shall pass from the State to Georgian Oil and Contractor as
appropriate at the Measurement Point. The Operator has no title to any
Petroleum.
26
<PAGE> 27
11.14 Georgian Oil and Contractor shall agree on procedures for taking
volumes of Crude Oil corresponding to their respective entitlements on
a regular basis and in a manner that is appropriate having regard to
the respective destinations and uses of the Crude Oil, all in
accordance with the provisions of this Agreement. If necessary Georgian
Oil and Contractor will enter into a lifting agreement setting out the
agreed procedures for taking volumes of Crude Oil, and such agreement
shall comply with the principles of accepted international Petroleum
industry practice.
11.15 Georgian Oil shall have a once only option to participate in Petroleum
Operations as a Contractor Party for up to and including fifteen
percent (15%) of the total Contractor participating interest as set out
in this Article 11 under the following terms and conditions ("Option"):
11.15.1 Georgian Oil shall have caused the Contractor Licence to have
been assigned solely to CanArgo Norio Ltd. Prior to the
signing of this Agreement.
11.15.2 The right to exercise the Option shall accrue on the date that
Contractor submits the first Development Plan to the
Coordination Committee pursuant to Article 9.4 (a) ("Option
Accrual Date").
11.15.3 Georgian Oil must exercise the Option within one hundred and
eighty (180) days from Option Accrual Date by giving notice in
writing to Contractor of its desire to do so and specifying in
the notice the percentage interest which it wishes to acquire.
11.15.4 Georgian Oil's right to exercise the Option shall be subject
to:
a) its ability to satisfy the terms of Articles 26.1 and
26.3 to the reasonable satisfaction of CanArgo Norio
Ltd.
b) payment of Back Costs in accordance with Article
11.15.5; and
c) execution of a Joint Operating Agreement in
accordance with Article 11.15.9.
11.15.5 If Georgian Oil exercises the Option, then Georgian Oil will
become liable for payment to Contractor in U.S.$ of Costs and
Expenses incurred prior to the submittal of the first
Development Plan ("Back Costs") in proportion to the
percentage participating interest which it wishes to acquire.
Any unpaid share of Costs and Expenses for which Georgian Oil
is liable hereunder will accrue interest at the rate of LIBOR
plus five (5) percent per annum from the Option Accrual Date.
Back Costs must be paid in full in order for Georgian Oil to
acquire a participating interest. Failure by Georgian Oil to
satisfy all terms including payment of Back Costs within 180
days from the Option Accrual Date will result in the lapse of
the Option.
27
<PAGE> 28
11.15.6 Georgian Oil shall bear its pro rata share of Costs and
Expenses and other costs attributable to the Contractor
Parties in connection with Petroleum Operations incurred from
and after the date of submittal of the first Development Plan
in proportion to the participating interest which it acquired
through exercise of the Option. Upon exercise of the Option,
Georgian Oil shall pay all of its share of Costs and Expenses
and other costs attributable to the Contractor Parties in
connection with Petroleum Operations incurred from the Option
Accrual Date through the date of exercise of the Option within
ten (10) Days of receipt of invoice from CanArgo Norio Ltd for
such costs. For costs following the date of exercise of the
Option, if CanArgo Norio Ltd so requests, Georgian Oil shall
advance its share of estimated cash requirements for each
succeeding Month's operations based on CanArgo Norio Ltd's
estimate of the money to be spent in such Month. Each such
cash call shall be made in writing and delivered to Georgian
Oil not less than fifteen (15) Days before the payment due
date, which shall be no sooner than the first business Day of
the Month for which the advances are required. Georgian Oil
shall wire transfer its share of each such cash call to
CanArgo Norio Ltd on or before the due date, in the currencies
requested at a bank designated by CanArgo Norio Ltd. If
Canargo Norio Ltd does not request Georgian Oil to advance its
share of estimated cash requirements, then Georgian Oil shall
pay its share of cash expenditure for each Month within ten
(10) Days following receipt of CanArgo Norio Ltd's invoice.
11.15.7 Following exercise of the Option Georgian Oil will be
considered a Contractor Party under the Agreement, enjoying
all the rights and bearing all the obligations of a Contractor
Party with respect to the participating interest it has
acquired through exercise of the Option, except as modified in
this Article 11.15, and shall be represented by CanArgo Norio
Ltd from and after exercise of the Option.
11.15.8 The right to exercise the Option is personal to Georgian Oil
and is not capable of assignment by Georgian Oil to any Third
Party. The Option shall lapse upon any purported assignment or
transfer of the Option by Georgian Oil to any Third Party.
11.15.9 Georgian Oil will, within a reasonable time after exercise of
the Option, enter into an operating agreement based on the
Association of International Petroleum Negotiators Model
International Joint Operating Agreement then current ("AIPN
Model") with CanArgo Norio Ltd which shall include terms,
among others, embodying at least the following principles: (i)
voting rights in proportion to participating interests; (ii)
the minimum required vote to effect a decision being at least
seventy-five percent (75%) of participating interests; (iii)
cash call and default provisions that include forfeiture of
interest for failure to cure; and (iv) such other terms and
provisions as are commonly included in international petroleum
28
<PAGE> 29
operating agreements. If at the time that Georgian Oil
exercises the Option Contractor Parties have already entered
into a joint operating agreement based on the AIPN Model, then
Georgian Oil shall ratify and join in such operating
agreement.
11.15.10 Georgian Oil has not exercised and shall not exercise any
rights it may have pursuant to Article 26.2 and shall be
deemed to have given its approval pursuant to Article 26.3
with respect to any assignment to CanArgo Norio Ltd made prior
to signing of this Agreement
11.16 There are no production or other bonuses payable to the State
under this Agreement.
ARTICLE 12
CRUDE OIL VALUATION
12.1 Parties agree that the value of Cost Recovery Petroleum should reflect
the actual price received by the Contractor for the said Petroleum.
Given that the Contractor can demonstrate that Petroleum is being sold
to an independent third party on an arms length basis, then the Cost
Recovery Crude Oil shall be valued as the actual revenues received by
the Contractor for sales of Crude Oil at the Measurement Point
(adjusted if necessary for transportation, storage and processing
costs). If however such an independent third party sale cannot be
demonstrated, or at the discretion of the Contractor, then the Parties
agree that the value of the Cost Recovery Crude Oil, if sold on
International Markets, shall be adjusted to the international market
price for Crude Oil from time to time. In this case, for the purpose of
determining the value of the Cost Recovery Petroleum taken and disposed
of by the Parties and/or their assignees under this Agreement during
each Calendar Quarter, Georgian Oil and Contractor shall, prior to the
date of Commercial Production, agree upon the basket of Crude Oil
freely traded in international markets and referred to in subparagraph
a) below and the value of the Cost Recovery Petroleum shall be adjusted
to reflect the weighted average of daily f.o.b. prices for Agreement
term of sales from Petroleum producing countries in international
markets for the same Calendar Quarter of such basket of crude oil, it
being understood that the following principles will apply:
a) The weighted average of the basket shall be such that the
average gravity of the basket and the average gravity of the
Crude Oil produced under this Agreement are equal; and
b) The prices for individual referenced crude oil markers used
within the basket shall be based upon the numerical average of
a daily report of the actual price for each referenced crude
oil marker as published in agreed internationally recognised
publications; and
29
<PAGE> 30
c) Adjustment provisions will be incorporated into the basket
formula to take account of transportation costs involved in
Crude Oil produced under this Agreement arriving at a
designated sales point (where the sales point is not the
Measurement Point) and to take account of gravity variation
beyond a pre-agreed range; and
d) Unless agreed otherwise, the last calculated weighted average
basket price shall serve as the provisional price for a
Calendar Quarter until a new price is determined.
12.2 In the event that Georgian Oil and Contractor are unable to agree upon
the basket of Crude Oil envisaged in Article 12.1 above, or the
principles relating thereto, then either Georgian Oil or Contractor may
refer the question for a final, non-revisable determination by an
independent expert designated by the UK Institute of Petroleum. Pending
such determination, the price shall be as determined in Article 12.1(d)
above.
12.3 Natural Gas shall be valued at the actual revenues received less
transportation, storage, treatment, processing, marketing,
distribution, liquefaction and all other associated costs incurred by
Contractor beyond the Measurement Point in supplying Natural Gas to
customers beyond the Measurement Point.
ARTICLE 13
ANCILLARY RIGHTS OF THE CONTRACTOR AND OPERATOR
13.1 In addition to the rights to carry out Petroleum Operations within the
Agreement Area the State and Georgian Oil shall provide or otherwise
procure access to Contractor to all existing facilities and
infrastructure in the Agreement Area owned by the State or Georgian Oil
for the purpose of carrying out its Petroleum Operations during the
term of the Agreement. Such access shall be on terms as regards access
and tariffs no less favourable than those offered to other persons or
entities, in addition, in any case within the Petroleum Law.
13.2 Provided that Georgian Oil and the State are submitted information
below, the Contractor shall have the right to use, produce, reprocess
and export all existing geoscience, engineering, environmental and
geodetic data (including magnetic tapes and films) maps, surveys,
reports, and studies it deems necessary to carry out Petroleum
Operations hereunder including, but not limited to: magnetic surveys,
seismic surveys, well logs and analysis, core analysis, well files,
geologic and geophysical maps and reports, reservoir studies, reserve
calculations, accurate geodetic coordinates for the location of all
wells and seismic lines and all other pertinent data relative to the
30
<PAGE> 31
Agreement Area. In the event that any information is to be sold to any
third party by Georgian Oil or the Contractor (consent on which is
required from Coordination Committee and State Agency) profit shall be
distributed in accordance with the share of Profit Oil under the
Article 11. In addition, in accordance with the Petroleum Law.
13.3 The Contractor shall have the right to conduct all geoscience,
engineering, environmental and geodetic studies it deems necessary to
carry out Petroleum Operations under the Work Program. Said studies may
include, but are not limited to: seismic surveys, magnetic surveys,
global positioning surveys, aerial photography (obtaining relevant
permits), collection of soil/water/oil/rock samples for scientific and
environmental studies. Contractor shall be granted access to and/or
permission to fly subject to obtaining appropriate consents (which will
not be unreasonably withheld or delayed) over the Agreement Area to
conduct said studies. Contractor shall have the right to import
equipment and supplies necessary to conduct said studies as well as the
right to export data, film and samples to laboratories outside the
State to conduct such studies unless restricted by law of Georgia.
13.4 Subject to (i) prior approval by the Coordination Committee; and (ii)
prior consent and/or permit with any necessary local administration or
State body and relevant landowners, the Contractor and/or Operator
shall have the right to clear the land, to dig, pierce, drill,
construct, erect, locate, supply, operate, manage and maintain pits,
tanks, wells, trenches, excavations, dams, canals, water pipes,
factories, reservoirs, basins, maritime storage facilities and such,
primary distillation units, separating units for first oil extraction,
sulphur factories and other Petroleum producing installations, as well
as pipelines, pumping stations, generator units, power plants, high
voltage lines, telephone, telegraph, radio and other means of
communication (including satellite communication systems), plants,
warehouses, offices, shelters, personnel housing, hospitals, schools,
premises, underwater piers and other installations, means of
transportation, roads, bridges, and other means of transportation,
garages, hangers, workshops, maintenance and repair shops and all the
auxiliary services which are necessary or useful to Petroleum
Operations or related to them and, more generally, everything that is
or could become necessary or accessory to carry out the Petroleum
Operations but for the avoidance of any doubt in accordance with the
relevant law of Georgia.
13.5 The agents, employees and personnel of both Contractor and Operator, or
Subcontractors may enter or leave the Agreement Area and have free
access, within the scope of their functions, to all installations put
in place by the Contractor or Operator or otherwise utilised in
Petroleum Operations.
13.6 Subject to prior consent of any appropriate local State bodies and the
relevant landowners the Contractor shall have the right to utilise the
upper soil, mature timber, clay, sand, lime, gypsum and stones other
than precious stones, and any other similar substances, necessary for
the performance of Petroleum Operations only in accordance with
Georgian law. The Contractor may utilise the water necessary for
Petroleum Operations, on condition that reasonable
31
<PAGE> 32
efforts are taken to minimise potentially adverse effects on irrigation
and navigation, and that land, houses and the watering places are not
adversely affected.
13.7 The Contractor shall have the right to use existing pipeline and
terminal facilities belonging to or under the control of the State or
Georgian Oil. The State and Georgian Oil shall assist in making these
facilities available to the Contractor on terms with regard to access
and tariffs that are no less favourable than those available to others
including Georgian Oil and any other State enterprise. Priority shall
be given in the use of such pipelines and facilities to Petroleum
produced within Georgia.
ARTICLE 14
ASSISTANCE PROVIDED BY THE STATE
14.1 To enable the Contractor to properly carry out the Petroleum
Operations, the State Agency shall have the obligation to assist the
Contractor and Georgian Oil upon request to:
a) provide the approvals or permits needed to conduct Petroleum
Operations and to carry out associated business activities and
to open bank accounts (for both local and foreign currency) in
Georgia;
b) arrange for Foreign Exchange to be converted in accordance
with the principles set out in Article 19.9 of this Agreement;
c) use office space, office supplies, transportation and
communication facilities and make arrangements for
accommodations as required;
d) assist with any custom formalities;
e) provide entry and exit visas and work permits for employees
and their family members of Operator, Contractor, their
Affiliated companies and Foreign Subcontractors, who are not
citizens of Georgia, and who come to Georgia to implement the
Agreement and to provide assistance for their transportation,
travel and medical facilities whilst in Georgia;
f) provide necessary permits to send abroad documents, data and
samples for analysis or processing during the Petroleum
Operations;
g) contact and instruct appropriate departments and ministries of
the State and any other bodies controlled by the State to do
all things necessary to expedite Petroleum Operations;
32
<PAGE> 33
h) provide permits, approvals, and land usage rights requested by
Contractor and/or Operator for the construction of bases,
facilities and installations for use in conducting Petroleum
Operations; and
i) provide to the Contractor data and samples if such data and
samples exist concerning the Agreement Area other than those
produced as a result of Petroleum Operations
14.2 The State Agency may charge as administrative fees for such assistance
such reasonable amounts as may be customary for the provision of such
services, but in no event shall such charges be in excess of charges
applicable to Third Parties for comparable service or assistance. It is
also understood that in respect to a number of matters such as the
conversion of currency and the provision of accommodations, for
example, the State may also have to secure the services of private
Third Parties. All administrative fees will be in keeping with the
schedule as set out in Annex E to this Agreement.
14.3 Notwithstanding anything in this Agreement to the contrary, Contractor
agrees to pay the fees described in Article 14.2 to the State Agency,
together with reimbursement to the Agency for all direct expenses
incurred by it in preparing and making necessary applications to
ministries, state agencies or other governmental authorities in the
course of obtaining permits and approvals required for Contractor
and/or Operating Company to conduct Petroleum Operations. Such direct
expenses may include the costs of retaining experts to review or
prepare technical submissions (e.g. environmental or engineering data),
but in no event shall the State Agency charge for additional
compensation, if any, to its personnel for performing such services.
Direct expense items also shall include, but not be limited to copying
or printing of applications and supporting data submitted to other
governmental bodies, transportation and hall rental for public hearings
required by laws or authorities other than those of the Agency itself,
and similar items that the Agency cannot reasonably provide through its
resources.
14.4 Fees and direct expenses paid under Articles 14.2 and 14.3 shall be
treated as Costs and Expenses for the purpose of determining Cost
Recovery Petroleum.
14.5 Contractor shall pay to the State Agency an Administrative/Licence Fee
in the amount of US$60,000.00 for obtaining a permit for usage of oil
and gas resources. The Administrative/Licence Fee will be paid in two
installments each of US$30,000.00. The first installment will be paid
on the Effective Date and the second installment will be paid on the
first anniversary of the Effective Date.
33
<PAGE> 34
ARTICLE 15
MEASUREMENT, QUALITY AND VALUATION OF PETROLEUM
15.1 All Petroleum produced, saved and not used in the Petroleum Operations
in accordance with Article 11.3 shall be measured at the Measurement
Point approved in the Development Plan.
15.2 The Measurement Point shall be the very final facility among all
facilities the cost of which is included as a Cost and Expense
recoverable from Cost Recovery Petroleum under the Agreement.
15.3 All Petroleum shall be measured in accordance with standards generally
acceptable in the international Petroleum industry. All measurement
equipment shall be installed, maintained and operated by the Operator.
The installed measurement equipment will have certificates of Georgian
state standards organization. The Contractor and Georgian Oil and the
State Agency shall be entitled periodically to inspect the measuring
equipment installed and all charts and other measurement or test data
at all reasonable times. The accuracy of measuring equipment shall be
verified by tests at regular intervals and upon request by either
party, Georgian Oil and the State Agency or the Contractor, using means
and methods generally accepted in the international Petroleum industry
by the state standard organisation of Georgia.
15.4 Should a meter malfunction occur, Operator shall immediately have the
meter repaired, adjusted and corrected and following such repairs,
adjustment or correction shall have it tested or calibrated to
establish its accuracy. Upon the discovery of metering error, Operator
shall have the meter tested immediately and shall take the necessary
steps to correct any error that may be discovered and after each case
approval of the state standard of Georgia on using the meter is
necessary.
15.5 In the event a measuring error is discovered, Contractor and Georgian
Oil shall use all reasonable efforts to determine the correct
production figures for the period during which there was a measuring
error and correct previously used readings. Contractor shall submit to
the Coordination Committee and the State Agency a report on the
corrections carried out. In determining the correction, Contractor
shall use, where required, the information from other measurements made
inside or outside the Development Area. If it proves impossible to
determine when the measuring error first occurred, the commencement of
the error shall be deemed to be the point in time halfway between the
date of the previous test and the date on which the existence of the
measuring error was first discovered.
15.6 All measurements for all purposes in this Agreement shall be adjusted
to standard conditions of pressure at sea level and temperature at
sixty degrees Fahrenheit (60 degrees F).
34
<PAGE> 35
ARTICLE 16
NATURAL GAS
16.1 Associated Natural Gas
a) Associated Natural Gas produced within the Agreement Area
shall be used primarily for purposes related to the Production
Operations and production enhancement including, without
limitation, oil treating, gas injection, gas lifting and power
generation.
b) Based on the principle of full utilisation of the Associated
Natural Gas and with no impediment to normal production of the
Crude Oil, any Development Plan shall include a plan of
utilisation of Associated Natural Gas. If there is any excess
Associated Natural Gas remaining in any Oil Field after
utilisation pursuant to Article 16.1.a) above (hereafter
referred to as "Excess Associated Natural Gas"), the
Contractor shall carry out a feasibility study regarding the
commercial utilisation of such Excess Associated Natural Gas.
i) If Georgian Oil and Contractor agree that Excess
Associated Natural Gas has no commercial value, then
Operator shall act under the plan approved by
Coordination Committee, so that not to interfere with
normal oil production. Besides, in order to avoid any
doubt, both the plan and the Operator's activities
under the plan shall exclude pollution and correspond
to relevant standards effective in Georgia, which
shall be agreed with the State Agency for Regulation
of Oil and Gas Resources in Georgia.
ii) If Georgian Oil and Contractor agree that Excess
Associated Natural Gas has commercial value, they
will endeavour to enter into gas sales agreement(s)
and/or other commercial and/or technical arrangements
with Third Parties required to develop such Natural
Gas. Investments in the facilities necessary for
production, transportation and delivery of Excess
Associated Natural Gas shall be made by the
Contractor. The construction of facilities for such
Production and utilisation of the Excess Associated
Natural Gas shall be carried out at the same time as
the Development Operations, or at any time as may be
agreed to by the Parties.
iii) If either Georgian Oil or Contractor considers that
Excess Associated Natural Gas has commercial value
while the other considers that Excess Associated
Natural Gas has no commercial value, the one who
considers Excess Associated Natural Gas to have
commercial value may utilise such Excess Associated
Natural Gas, at its own cost and expense and
35
<PAGE> 36
without impeding the Production of Crude Oil and
without affecting the shares of Crude Oil and Natural
Gas otherwise to be allocated under the other
provisions of this Agreement, but if such Excess
Associated Natural Gas is not so utilised at any time
or from time to time, then such Excess Associated
Natural Gas shall be disposed of by the Operator in
accordance with Article 16.1 b) i).
c) The price of Associated Natural Gas produced from the
Agreement Area shall be determined by Georgian Oil and
Contractor based on general pricing principles taking into
consideration such factors as sales prices of internationally
transported gas delivered in Western Europe, quality and
quantity of the Associated Natural Gas (including the
equivalent substitute energy value) and the economics of
Development. Unless otherwise agreed, Georgian Oil and
Contractor shall participate in all gas sales agreements
entered into for the sale of Associated Natural Gas produced
from the Agreement Area in proportion to their Article 11
allocation rights. Gas sales prices shall be denominated in
U.S.$. If gas sales are carried out in the local Georgian
market, sales price shall be denominated in local currency, in
accordance with exchange rate of US$ into local currency
determined by the National Bank of Georgia at the moment of
gas sale.
d) Investments made in conjunction with the utilisation of both
Associated Natural Gas and Excess Associated Natural Gas,
together with investments incurred after approval of a
Development Plan in carrying out feasibility studies on the
utilisation of Excess Associated Natural Gas, shall be charged
to Operation Expenses.
16.2 Non-associated Natural Gas
a) When any Non-associated Natural Gas is discovered within the
Agreement Area, Georgian Oil and Contractor shall implement a
program regarding the Appraisal and possible development and
marketing of the Non-associated Natural Gas in the domestic
and international markets. This program shall include the
following principles:
i) After Non-associated Natural Gas has been discovered
within the Agreement Area, the Contractor shall
present to the Coordination Committee, a report,
including, without limitation, an initial estimate of
the boundaries of the Non-associated Natural Gas
reservoir and a range of recoverable reserves.
ii) The decision period for commitment by Contractor to
an Appraisal Program shall be as soon as is practical
in all the circumstances but shall not be longer than
three (3) months from the submission of the discovery
report. During this
36
<PAGE> 37
decision period, the Coordination Committee will form
a Marketing Team whose goal will be to conduct
preliminary market studies and analyse the potential
markets for the Non-associated Natural Gas. During
this decision period, Contractor will report to the
Coordination Committee at regular intervals on the
progress and results of the technical evaluation of
moving forward with an Appraisal Program. Within the
said decision period, Contractor will make its
election whether or not to commit to an Appraisal
Program for the Non-associated Natural Gas.
iii) If the Contractor commits to an Appraisal Program for
the Non-associated Natural Gas reservoir, delineation
and review of the potential of the Non-associated
Natural Gas reservoir will continue for a period not
longer than three (3) months from the submission of
the discovery report. During the review and Appraisal
periods, Contractor shall maintain all rights and
interests in the relevant portion of the Agreement
Area.
iv) The expenses incurred by the Contractor in carrying
out the said review, evaluation and Appraisal Program
and the expenses incurred by the Marketing Team
representatives in conducting the preliminary market
studies and analysing the markets for the
Non-associated Natural Gas shall be charged to
Operation Expenses and are recoverable from Cost
Recovery "Natural Gas".
b) Following the completion of the Appraisal Program and review
of the potential of the discovery, Contractor shall submit an
appraisal report to the Coordination Committee. If the
Coordination Committee decides that the Discovery is
commercial, the Parties shall agree on a Development Plan. The
Parties shall also endeavour to finalise Gas Sales
Agreement(s) and other agreements necessary for the
commercialisation of such Non-associated Natural Gas.
c) The price of the Non-associated Natural Gas produced from the
Agreement Area shall be determined based on general pricing
principles, taking into consideration such factors as
representative sales prices of internationally transported
volumes delivered to distributors and end users in Western
Europe, quality and quantity of the Natural Gas (including the
equivalent substitute energy) and the economics of the
Development of such Natural Gas. Unless otherwise agreed,
Georgian Oil and Contractor shall participate in all Gas Sales
Agreements entered into for the sale of Non-associated Natural
Gas produced from the Agreement Area in proportion to their
Article 11 allocation rights. Sales Agreement prices shall be
denominated in U.S.$. In case if gas sale is carried out in
local market, sales price shall be denominated in local
currency, in accordance with exchange rate of
37
<PAGE> 38
US$ into local currency determined by the National Bank of
Georgia at the moment of gas sale.
d) The production period of any Gas Field within the Agreement
Area shall be a period equal to the production period of the
Agreement.
e) Recognizing the needs of the local Georgian gas market, the
State shall have the right to take in-kind the State's share
of the Non-Associated Profit Natural Gas and the Excess
Associated Profit Natural Gas, at its own costs and expense,
from the Measurement Point. Such election to take in-kind
shall indicate the volumes to be taken, and shall be made
prior to the submission of a Development Plan by the
Contractor. In the event of such election, the State and
Contractor acknowledge that the State shall not act to
displace the Contractor from the available domestic Natural
Gas market, and that the Contractor will make available
transportation, if any, for the State's share on a pro-rata
basis at a fee that will allow Contractor to recoup only that
share of its Costs and Expenses attributable to such
transportation of State' share. The State shall not exercise
its right to take in-kind the State's share of Profit Natural
Gas in the event that the Contractor has contracted to sell or
is in negotiations to sell Natural Gas internally in Georgia.
16.3 Contractor may participate in the installation and operation of the
pipeline(s) required to transport Natural Gas produced from the
Agreement Area to the market for such Natural Gas and share in any
revenues generated from the use of said pipeline(s) by others. If
Contractor participates in the installation and operation of such
pipeline(s), the installation and operation of such pipeline(s) shall
be included in a Development Plan and Petroleum Operations under this
Agreement. Any such investment shall be recoverable from Cost Recovery
"Natural Gas".
16.4 If the State, any state-owned company or other entity, or Georgian Oil
provides Natural Gas transportation services to Contractor, then the
tariffs charged to Contractor for such services shall be
non-discriminatory, and in no case will exceed the tariffs charged to
other entities.
ARTICLE 17
TAX/FISCAL REGIME
17.1 This Article shall apply to each Contractor Party individually.
17.2 Subject to Current Georgian Legislation each Contractor Party, Foreign
Employee and Operator shall be entitled to full and complete exemption
from all Taxes prior to or after the Effective Date of this Agreement
except as otherwise provided for in this Agreement.
38
<PAGE> 39
17.3 It is acknowledged that Double Tax Treaties will have effect to give
relief from Taxes to, but not limited to, Contractor, Contractor
Parties, Foreign Subcontractors and Foreign Employees in accordance
with the provisions of such Double Tax Treaties, but not otherwise.
17.4 Each Contractor Party shall be subject to "Profit Tax" Chapter II,
Article 5, "Mineral Usage Tax" Chapter X of the Taxation Code of
Georgia.
17.5 Each Contractor Party shall be subject to the Profit Tax for the
duration of the Agreement, at a rate determined by the Law per calendar
year in accordance with taxable base defined in Article 17.8. As for
Mineral Usage Tax, the tax rate will be five (5) percent.
17.6 Georgian Oil, its successors or assignees will assume, pay and
discharge, in the name and on behalf of each Contractor Party, that
Contractor Party's Profit Tax liability and Mineral Usage Tax liability
for a Calendar Year calculated in accordance with this Article 17 out
of Georgian Oil's share of Profit Oil and Profit Natural Gas for that
Calendar Year. The Georgian Oil Profit Oil and Profit Natural Gas share
as determined by Article 11 of this Agreement will include an amount
equal in value to all of the Contractor Parties' Profit Tax and Mineral
Usage Tax liabilities.
17.7 The obligation to assume, pay and discharge each Contractor Party's
payment of Profit Tax and Mineral Usage Tax (and only these taxes) set
out above by Georgian Oil in accordance with the provisions of Article
17.6 shall fulfill the entire tax liability of each Contractor Party,
except for the VAT on local sales and taxes established on salaries of
hired physical persons by law, taking into account that no social taxes
apply to foreign physical persons by law.
17.8 The calculation of the taxable base (balance profit/(loss)) for each
Contractor Party for a Calendar Year shall be as follows:
a) The taxable base (balance profit/(loss)) for each Contractor
Party shall be determined as the total of each such Contractor
Party's sales revenues from Cost Recovery Petroleum, Profit
Oil and Profit Natural Gas acquired by that Contractor Party
pursuant to Article 11 of this Agreement reduced by, (i) the
Contractor Party's sales revenues from Cost Recovery Petroleum
and (ii) the Contractor Party's share of costs and the
Contractor Party's own costs incurred during a Calendar Year
in respect of Petroleum Operations which are not included in
Costs and Expenses determining Cost Recovery Petroleum in
Article 11 of this Agreement and (iii) any loss calculated in
accordance with Article 17.9 of this Agreement.
b) Sales revenues from Cost Recovery Petroleum shall be defined
as the value of the volumes of Cost Recovery Petroleum, taken
and disposed of by the Contractor Party and/or their assignees
under this Agreement during a Calendar Year and determined by
applying the principles of
39
<PAGE> 40
valuation set out in Article 12 of this Agreement. Sales
revenues from Profit Oil and Profit Natural Gas shall be
defined as the value of the volumes of Profit Oil and Profit
Natural Gas taken and disposed of by the Contractor Party
and/or their assignees under this Agreement during a Calendar
Year.
Profit Oil volumes will be valued at the actual price received
at the Measurement Point where actually sold at the
Measurement Point. Where Profit Oil volumes are not sold at
the Measurement Point, they shall be valued at the actual
price received at the sales point less transportation and
other associated costs incurred by the Contractor Party in
transporting such Profit Oil from the Measurement Point to the
actual sales point.
c) For the purposes of this Article 17 and specifically for the
purposes of calculating the taxable base of a Contractor Party
in accordance with this Article 17.8 and Article 17.9, Costs
and Expenses incurred by a Contractor Party prior to the
Effective Date of this Agreement be deemed to have been
incurred on the Effective Date of this Agreement, provided
such Costs and Expenses are proved by relevant documents and
are proved by Coordination Committee.
d) For the purposes of calculating the taxable base of a
Contractor Party in accordance with this Article 17.8 and
Article 17.9, sales revenues related to Petroleum Operations
and costs incurred in respect of Petroleum Operations shall be
determined both in U.S.$ and in local currency. Sales revenues
in currency other than the U.S.$ and costs incurred in
currency other than the U.S.$ shall be translated into U.S.$
in accordance with the principles set out in Article 19.9 of
this Agreement.
17.9 If in calculating the taxable base of a Contractor Party the total sum
of deductions, represented by sales revenues from Cost Recovery
Petroleum and costs incurred in respect of Petroleum Operations which
are not included in Costs and Expenses in determining Cost Recovery
Petroleum in Article 11 of this Agreement, exceed sales revenues from
Cost Recovery Petroleum, Profit Oil and Profit Natural Gas in any
Calendar Year, the resulting loss (balance loss) may be carried forward
by a Contractor Party to the following Calendar Year and to subsequent
Calendar Years, one at a time in chronological order, and shall be
deductible in full and without restriction in computing such Contractor
Party's taxable base in such Calendar Year(s) until such time as the
loss is wholly offset against such Contractor Party's taxable base or
in accordance with the Tax Code. Provided, such losses are documented
and approved by Coordination Committee.
17.10 Each Contractor Party shall maintain its tax books and records both in
local currency and in U.S.$. The calculation of the taxable base for
each Contractor Party will be carried out in accordance with Article
17.8 d) of this Agreement.
40
<PAGE> 41
The payment of the Profit Tax and Mineral Usage Tax will be carried out
in local currency, unless otherwise provided by Georgian Legislation
17.11 The Profit Tax return for each Contractor Party shall be prepared and
submitted as follows:
I. Each Contractor Party shall prepare a Profit Tax return in
local currency and in U.S.$ for each Calendar Year and submit
it to Georgian Oil by 15 February following the Calendar Year,
so that Georgian Oil can submit a Contractor Party's Profit
Tax return to the relevant Tax authority within terms
established by the Law.
II. The Profit Tax return shall be prepared based on Contractor
books and accounts of Petroleum Operations as described in
Article 18 of this Agreement which Contractor is required to
maintain in local currency and in U.S.$ in accordance with the
Accounting Procedure attached hereto as Annex C.
17.12 Proper official assessments of a Contractor Party's Profit Tax
liability for each Calendar Year, and proper official receipts shall be
issued by the proper tax authorities and shall state the date and
amount and other particulars customary in Georgia for such receipts and
the currency in which the Profit Tax was paid.
17.13 Georgian Oil shall furnish to each Contractor Party the proper official
receipts that evidence official payment by Georgian Oil of that
Contractor Party's Profit Tax liability for a Calendar Year by 15 April
following the Calendar Year.
17.14 Georgian Oil shall not credit, directly or indirectly, Contractor
Parties' Profit Tax payments against Georgian Oil's tax or any other
payments to the Government or the treasury of Georgia required from
Georgian Oil.
17.15 Georgian Oil shall assume, pay and discharge any penalties, interest,
fines or similar levies for late payment of a Contractor Party's Profit
Tax and/or Mineral Usage tax liabilities in respect of any Calendar
Year.
17.16 The State will notify each Contractor Party within one (1) month of the
Effective Date of this Agreement of the tax authority office ("the Tax
Authority") which is to be located in Tbilisi and be responsible for
and administer the implementation of the provisions of this Agreement
including but not limited to the filing of a Contractor Party's Profit
Tax return for each Calendar Year, the issuing of official assessments
and receipts evidencing the payment of each Contractor Party's Profit
Tax and Mineral Usage Tax liabilities, any audit in respect of any
Calendar Year of a Contractor Party's Profit Tax and Mineral Usage Tax
return and any other payment, liability or procedures in respect of any
other Taxes.
17.17 Employees of the Contractor, Contractor Parties, their Affiliates and
Subcontractors, and those employees assigned by Contractor to Operator
who
41
<PAGE> 42
are not citizens of Georgia ("Foreign Employees") shall be liable to
Georgian personal income tax imposed by the State in accordance with
the Tax Code. A Foreign Employee will continue to be subject to the
provisions of any applicable Double Tax Treaty.
17.18 Foreign Employees who perform work in Georgia and their employers that
would otherwise be covered by and subject to social insurance, pension
fund contributions and similar payments under the social security
system of Georgia will be exempt from those payments.
17.19 The only Taxes, duties, fees or other charges to be levied by the State
or by any other Governmental entity on a Foreign Subcontractor in
connection with Petroleum Operations pursuant to this Agreement shall
be a tax to be withheld by any person or other legal entity making
revenue payments to a Foreign Subcontractor in the currency in which
the payment is made (the "Withhold Tax"). The Withhold Tax shall be
calculated in accordance with Georgian Law, provided that at the moment
of concluding the Agreement it was 4 (four) percent.
17.20 VAT shall be imposed as follows:
a) Goods, works and services supplied directly or indirectly to
or by a Contractor Party or its Affiliates, Operator or a
Foreign Subcontractor for the purpose of Petroleum Operations
shall be exempt from VAT, save that the Contractor shall
charge VAT (at the then current rate but not exceeding twenty
(20%) per cent on Petroleum sold locally within Georgia which
is not intended for export.
b) All imports including but not limited to goods, equipment,
works, services, loans and other forms of financing acquired
by a Contractor Party or its Affiliates, Operator, their
Subcontractors or their agents for the purpose of Petroleum
Operations shall be exempt from VAT and from excise duty on
oil products.
c) Import and re-export of goods for personal use by Foreign
Employees and family members will not be subject to VAT
according to current Georgian Law.
d) Exports of Petroleum by each Contractor Party or its agents
shall be exempt from VAT with credit (zero per cent rate).
e) All re-exports by a Contractor Party or its Affiliates,
Subcontractors or their agents of goods, works and services
supplied for the purposes of Petroleum Operations including
but not limited to re-export of goods temporarily imported
into Georgia for the purposes of Petroleum Operations shall be
exempt from VAT with credit (zero per cent rate).
42
<PAGE> 43
ARTICLE 18
ACCOUNTING, FINANCIAL REPORTING AND AUDIT
18.1 Contractor shall maintain books and accounts of Petroleum Operations in
accordance with the Accounting Procedure attached hereto as Annex C.
These shall be maintained in local currency of Georgia and in U.S.$ in
accordance with generally accepted international Petroleum industry
accounting principles. All books and accounts which are made available
to Georgian Oil or to the State Agency in accordance with the
provisions of the Accounting Procedure shall be prepared both in the
Georgian and English languages.
18.2 The Accounting Procedure specifies the procedure to be used to verify
and establish promptly and finally Contractor's Costs and Expenses
under Article 11 of this Agreement.
18.3 Sales revenues, expenditures, financial results, tax liabilities, and
loss carry-forwards of each Contractor Party shall be determined in
accordance with the rules, rights, and obligations set forth in this
Agreement in so far as such sales revenues, expenditures, financial
results, tax liabilities, and loss carry-forwards are related to
Petroleum Operations under this Agreement.
18.4 To the extent that Georgian Oil incurs Costs and Expenses which are
recoverable from Cost Recovery Petroleum in accordance with Article 11,
Georgian Oil shall maintain separate books and accounts. These books
and accounts shall be maintained in local currency of Georgia and in
U.S.$, in the Georgian language and the English language and shall be
in accordance with generally accepted international Petroleum industry
accounting principles. Prior to Georgian Oil commencing to incur Costs
and Expenses an accounting procedure which establishes the method for
accounting for Georgian Oil's participation in the funding of Petroleum
Operations shall be agreed and approved by Coordination Committee. The
Contractor and the State Agency shall have the right to audit the books
and accounts maintained by Georgian Oil.
18.5 On annual basis Contractor shall submit to Georgian Oil and Agency an
internationally recognized audit's report on Costs and Expenses
incurred, that under Article 11 should be compensated by Cost Recovery
Petroleum, the report shall also include profit calculation pursuant to
provisions of Article 17 of this Agreement. Agency and/or Georgian Oil
shall have the right to audit the books and accounts maintained by
Contractor.
43
<PAGE> 44
ARTICLE 19
CURRENCY, PAYMENTS AND EXCHANGE CONTROL
19.1 Contractor and each Contractor Party, and their Affiliates and Operator
shall have the right to open, maintain, and operate Foreign Exchange
bank accounts both in and outside of Georgia and local currency bank
accounts inside Georgia. Such operations performed in Georgia will
comply with Petroleum Law and Current Georgian Legislation.
19.2 Contractor and each Contractor Party, and their Affiliates shall have
the right to transfer all funds received in and converted to Foreign
Exchange in Georgia without payment of Taxes, fees, duties or imposts
to bank accounts outside Georgia in accordance with Petroleum Law and
Current Georgian Legislation.
19.3 Contractor and each Contractor Party, and their Affiliates shall have
the right to hold, receive and retain outside Georgia and freely use
all funds received and derived from Petroleum Operations by them
outside Georgia without any obligation to repatriate or return the
funds to Georgia, including but not limited to all payments received
from export sales of Contractor Parties' share of Petroleum and any
sales proceeds from an assignment of their interest in this Agreement.
19.4 Contractor and each Contractor Party, and their Affiliates, and
Operator have the right to import into Georgia funds required for
Petroleum Operations under this Agreement in Foreign Exchange.
19.5 Contractor and each Contractor Party, and their Affiliates shall have
the right to pay outside of Georgia for goods, works and services of
whatever nature in connection with the conduct of Petroleum Operations
under this Agreement without having first to transfer to Georgia the
funds for such payments.
19.6 Whenever such a need arises Contractor and each Contractor Party and
their Affiliates, and Operator shall be entitled to purchase local
currency with Foreign Exchange and covert local currency into Foreign
Exchange in accordance with provisions stipulated in legislation.
19.7 Contractor and each Contractor Party, and their Affiliates shall have
the right to pay outside Georgia principal and interest on loans used
for funding Petroleum Operations without having to first transfer to
Georgia the funds for such payment.
19.8 Contractor and each Contractor Party and their Affiliates, and Operator
shall have the right to pay, wages, salaries, allowances and benefits
of their foreign personnel working in Georgia in Foreign Exchange
partly or wholly outside Georgia.
44
<PAGE> 45
19.9 Conversions of currency shall be recorded at the rate actually
experienced in that conversion. Expenditures and sales revenues in
currency other than the U.S.$ shall be translated to U.S.$ at the rates
officially published by National Bank of Georgia at the close of
business on the first business day of the current month.
ARTICLE 20
IMPORT AND EXPORT
20.1 Contractor, each Contractor Party and Affiliates and their agents and
Operator shall have the right to import into, export and re-export from
Georgia in accordance with Petroleum Law and the existing Georgian Law
in force on the date this Agreement is signed.
20.2 Contractor, each Contractor Party and Affiliates and their agents shall
have the right to sell any materials or equipment or goods which were
used in Petroleum Operations provided that such items are no longer
needed for Petroleum Operations and the costs of such items have not
been and are not intended to be included as Costs and Expenses
recoverable from Cost Recovery Petroleum. Contractor party and
Affiliates shall be solely liable for and shall indemnify Georgian Oil
and the State Agency from all Taxes, if any, (including but not limited
to VAT) due or which may become due on any such sales.
20.3 Contractor, each Contractor Party, their customers and their carriers
shall have the right to export the share of Petroleum on behalf of
Contractor or each Contractor Party in accordance with Petroleum Law
and the existing Georgian Law in force on the date this Agreement is
signed.
20.4 Foreign Employees and family members of Contractor and its Affiliates,
its agents and Foreign Subcontractors, shall have the right to import
into and re-export from Georgia household goods and personal property
at any time in accordance with Georgian Law.
45
<PAGE> 46
ARTICLE 21
EXPORT OF HYDROCARBONS, TRANSFER OF
OWNERSHIP, AND REGULATIONS FOR DISPOSAL
21.1 The Contractor, Contractor Parties, any purchaser from such parties and
their respective carriers shall, for the duration of this Agreement,
have the right to export from any export point selected by the
Contractor for such purpose, the share of Petroleum to which the
Contractor is entitled under this Agreement provided that access to
such export point is not restricted generally on the grounds of safety
or national security and/or legislative acts of Georgia. Access to
export points shall be given to the above parties on a non
discriminatory basis and at rates no less favourable than those
available to Georgian Oil, or granted to others by the State or
Georgian Oil.
21.2 The transfer of title to each Contractor Party and Georgian Oil of its
share of Petroleum shall be effective upon the lifting of that share by
such Party at the Measurement Point or, at the Parties' option, at some
other point, proved by Coordination Committee.
21.3 The Contractor and Georgian Oil shall each be entitled to designate (at
their own cost) an employee, independent company or consultant who
shall check the liftings of Petroleum from the Measurement Point or at
such other point as may be designated in accordance with Article 21.2.
21.4 If one of the Parties is unable to lift its share of Petroleum in due
time, with the result that Petroleum Operations may be interfered with
or in any way disrupted, then after giving such notice as is practical
in the circumstances any other Party may dispose of it, and
subsequently give back to such Party an equivalent amount of Petroleum
(taking into account any costs incurred).
ARTICLE 22
OWNERSHIP OF ASSETS
22.1 Ownership of any asset, whether fixed or moveable, acquired by or on
behalf of Contractor in connection with Petroleum Operations hereunder
shall vest in the State without consideration if (1) both the costs of
such asset have been recovered by Contractor under this Agreement, and
(2) either the Agreement has come to an end or, if earlier, when the
asset is no longer required for Petroleum Operations by the Contractor.
The Contractor shall enjoy continued free, exclusive and unrestricted
use of all assets at no cost or loss of benefit to the Contractor until
the termination of this Agreement or if earlier until they are no
longer required for Petroleum Operations. The Contractor shall bear the
46
<PAGE> 47
custody and maintenance of such assets and all risks of accidental loss
or damage thereto while they are required for Petroleum Operations,
provided however that all costs necessary to operate, maintain and
repair such assets and to replace or repair any damage or loss shall be
recoverable as Operation Expenses from Cost Recovery Petroleum in
accordance with the provisions of Article 11.
22.2 Whenever Contractor relinquishes any part of the Agreement Area, all
moveable property located within the portion of the Agreement Area so
relinquished may be removed to any part of the Agreement Area that has
been retained for use in Petroleum Operations.
22.3 The provisions of Article 22.1 and 22.2 shall not apply to materials or
other property that are rented or leased to Contractor, its Affiliates
or Operator or which belong to employees of Contractor, its Affiliates
or Operator.
ARTICLE 23
INSURANCE, ENVIRONMENT, HEALTH, SAFETY AND LIABILITY
23.1 Contractor shall obtain and maintain such types and amounts of
insurance for the Petroleum Operations as are reasonable and such that
they comply with Georgian Law and accepted international Petroleum
industry practice and standards.
23.2 The insurance which may be obtained may cover:
a) destruction and damage to any property held for use during
Petroleum Operations and classified as fixed capital and/or
leased or rented property and/or interests in pipelines
operated by the Contractor;
b) destruction of Crude Oil in storage;
c) liability to Third Parties;
d) liability for pollution and expenses for cleaning up in the
course of Petroleum Operations;
e) expenses for wild well control;
f) liability incurred by the Contractor in hiring land drilling
rigs, vessels and aircraft serving the Petroleum Operations;
and
g) losses and expenses incurred during the transportation and
storage in transit of goods shipped from areas outside the
Agreement Area.
47
<PAGE> 48
23.3 In any insurance agreements, the amount for which the Contractor itself
is liable (the "deductible amount") shall be reasonably determined
between the Contractor and the insurer and such deductible amount shall
in the event of any insurance claim be considered as Costs and Expenses
of Petroleum Operations recoverable from Cost Recovery Petroleum.
23.4 It is understood that, in order to meet their insurance obligations,
insurance providers used by Contractor may conclude reinsurance and
co-insurance agreements with any other insurance enterprises and
organisations.
23.5 Notwithstanding the other provisions of this Agreement, the Contractor
shall indemnify and hold harmless the State and Georgian Oil against
all losses, damages and liability arising under any claim, demand,
action or proceeding brought or instituted against the State or
Georgian Oil by any employee of the Contractor or any Subcontractor or
dependent thereof, for personal injuries, industrial illness, death or
damage to personal property sustained in connection with, related to or
arising out of the performance or non-performance of this Agreement
regardless of the fault or negligence in whole or in part of any entity
or individual; provided, however, that such losses, damages and
liabilities are not caused by or do not arise out of the performance or
non-performance of this Agreement by the State and/or Georgian Oil, and
the State and/or Georgian Oil shall indemnify and hold the Contractor
(including for this purpose any Affiliate, the Operating Company and
all Subcontractors) harmless against all such damage, losses and
liabilities.
23.6 The Contractor (including for this purpose any Affiliate, the Operating
Company and all Subcontractors) shall indemnify the State and Georgian
Oil for all loss or damage suffered by the State or Georgian Oil
arising out of the Contractor's Petroleum Operations if such Petroleum
Operations were not in accordance with Good Oilfield Practices or
applicable laws, rules and regulations and, notwithstanding the
foregoing, for any loss or damage to the environment or any cultural or
national monument arising out of conduct of the Petroleum Operations;
provided, however, that the Contractor (including for this purpose any
Affiliate, the Operating Company and all Subcontractors) shall have no
liability hereunder if and to the extent any loss and damage is caused
by or arises out of any breach of this Agreement (and any other
agreements that may be entered into by and between the Contractor, the
State or Georgian Oil in respect of the Petroleum Operations) or breach
of duty by the State or Georgian Oil. Notwithstanding the foregoing,
the Contractor (including for this purpose any Affiliate, the Operating
Company and all Subcontractors) shall not be liable to the State or
Georgian Oil for any punitive or exemplary damages or any other
indirect or consequential damages.
23.7 The Contractor shall not be responsible to the State or Georgian Oil
for, and shall bear no cost, expense or liability of the State or
Georgian Oil for, any claim, damage or loss to the extent such claim,
damage or loss does not arise out of a failure to conduct Petroleum
Operations as provided in Article 23.6. In amplification of the
foregoing, the Contractor shall not be responsible for any
environmental condition or damage existing in the Agreement Area prior
48
<PAGE> 49
to the commencement of Petroleum Operations or caused by a Force
Majeure event during the term of this Agreement. Existing environmental
conditions will be evidenced by an independent Third Party
environmental baseline study of existing environmental conditions to be
commissioned by the Contractor, at its own cost and expense (which
shall be included as Costs and Expenses for the purposes of determining
Cost Recovery Petroleum, subject to prior approval by the Coordination
Committee) and shall be completed prior to the commencement of the
relevant Petroleum Operations in accordance with Good Oilfield
Practices and the environmental laws of Georgia. Such baseline study
shall be submitted to the State Agency and shall be incorporated in the
Environmental Impact Assessment to be prepared by the Contractor in
accordance with the environmental laws of Georgia for the purpose of
obtaining a permit for Petroleum Operations from the State Agency,
which permit and any other permits, authorizations and consents which
are or may be applicable under the laws of Georgia, shall not be
unreasonably withheld. State Agency agrees to provide Contractor with
all authorizations, permits, certificates and other documents necessary
for Petroleum Operations. If in the course of the Petroleum Operations,
the State provides other areas for Contractor's activities, then new
environmental baseline studies shall be included in the Development
Plan that includes these areas. The State and Georgian Oil shall
indemnify the Contractor against any claim, damage or loss arising from
such pre-existing environmental condition or damage, subject however,
to the Contractor having taken reasonable and appropriate precautions
in conducting Petroleum Operations, it being understood that in
pursuing Petroleum Operations the Contractor has assumed the risk of
working in the Agreement Area, and provided, further, that such
indemnification shall not extend to any natural pre-existing condition.
23.8 In conducting Petroleum Operations, the Contractor shall operate
according to Good Oilfield Practices and use best endeavors to minimize
potential disturbances to the environment, including the surface,
subsurface, sea, air, flora, fauna, other natural resources and
property. The order of priority for actions shall be protection of
life, environment and property.
23.9 The Contractor shall take all necessary steps to respond to, and shall
promptly notify the State Agency of, all emergency and other events
(including explosions, leaks and spills), occurring in relation to the
Petroleum Operations which are causing or likely to cause material
environmental damage or material risk to health and safety. Such notice
shall include a summary description of the circumstances and steps
taken and planned by the Contractor to control and remedy the
situation. The Contractor shall provide such additional reports to the
State Agency as are necessary in respect of the effects of such events
and the course of all actions taken to prevent further loss and to
mitigate deleterious effects.
23.10 In the event of emergency situations as set forth in 23.9, above, at
the request of the Contractor, the State, without prejudice and in
addition to any indemnification obligations the State may have
hereunder, shall assist the Contractor, to the extent possible, in any
emergency response, remedial
49
<PAGE> 50
or repair effort by making available any labor, materials and equipment
in reasonable quantities requested by the Contractor which are not
otherwise readily available to the Contractor and by facilitating the
measures taken by Contractor to bring into Georgia personnel, materials
and equipment to be used in any such emergency response or remedial or
repair effort. Contractor shall reimburse the State's reasonable and
necessary costs incurred in such efforts, which reimbursed amounts
shall be considered Costs and Expenses.
23.11 The Contractor shall not be liable to the State, Georgian Oil or Third
Parties for any damages caused by contamination entering the Agreement
Area as a result of State, Georgian Oil or Third Party activities
beyond or within the boundaries of the Agreement Area. The State shall
be legally and financially responsible for any loss, damage and
liability, including remediation of environmental conditions which may
be required for safe conduct of the Petroleum Operations, caused by the
State's or Georgian Oil's activities beyond or within the Agreement
Area.
23.12 The Contractor shall not be liable for any loss or damage, including
but not limited to spillage, explosion, contamination or similar
environmental damage, in respect of any storage facilities, pipelines
or means of transportation which are not under the direct possession
and control of the Contractor or its Affiliates or its Subcontractors
or the Operating Company. In addition to the foregoing, the Contractor
shall not be liable for any damage whatsoever in respect of the State
share of Petroleum, storage or transportation thereof once Georgian Oil
has taken custody of the State share of Petroleum.
23.13 The State shall make best efforts to ensure the safety and security of
the Contractor's property and personnel in Georgia and to protect them
from loss, injury and damage resulting from war (declared or
undeclared), civil conflict, sabotage, blockade, riot, terrorism,
unlawful commercial extortion, or organized crime. Notwithstanding
anything to the contrary contained herein, Contractor acknowledges and
agrees that the obligations undertaken by the State in this Article
23.13 are no greater than the general obligations of the State towards
citizens of Georgia in respect to the perils named above. Furthermore,
Contractor agrees that it shall have no claim for legal or equitable
relief for failure of the State to comply with the provisions of this
Article 23.13, except as may be permitted by law.
23.14 Except as set forth in Article 29 hereof, it is understood and agreed
that the State shall not seek or declare any cancellation or
termination of this Agreement and/or the License as a result of the
occurrence of any emergency event described in this Article 23.
50
<PAGE> 51
ARTICLE 24
PERSONNEL
24.1 Contractor shall be entitled to bring foreign personnel into Georgia in
connection with the performance of Petroleum Operations. The entry into
Georgia of such personnel is hereby authorised, and the State
authorised body shall issue at the Contractor's request the required
documents, such as entry and exit visas, work permits and residence
cards. At Contractor's request, the State shall facilitate all
immigration formalities at the points of exit and entry into Georgia
for the employees and family members of the Contractor, its Affiliates,
Subcontractors, Operator, agents and brokers. The Contractor (or
Operator on its behalf) shall contact the appropriate offices of the
State to secure the necessary documents, and to satisfy the required
formalities.
24.2 The employees working within the scope of Petroleum Operations shall be
placed under the authority of the Contractor, its Affiliates, its
Subcontractors, agents or brokers or the Operator each of which shall
act individually in their capacity as employers. The works, hours,
wages, and all other conditions relating to their employment shall be
determined by the relevant employer of such employees. In relation to
employees who are citizens of Georgia their employment shall be in
accordance with Georgian law. To the extent that any expatriate
personnel are engaged under a Agreement subject to Georgian law, that
Agreement shall comply with the provisions of Georgian law. The
Contractor, its Affiliates, its Subcontractors, agents or brokers
however, shall enjoy full freedom in the selection and assignment of
their employees.
ARTICLE 25
FORCE MAJEURE
25.1 If as a result of Force Majeure, Contractor is rendered unable, wholly
or in part, to carry out its obligations under this Agreement, other
than the obligation to pay any amounts due, then the obligations of
Contractor, so far as and to the extent that the obligations are
affected by such Force Majeure, shall be suspended during the
continuance of any inability so caused, but for no longer period.
Contractor shall notify the Parties of the Force Majeure situation
within seven (7) days of becoming aware of the circumstances relied
upon and shall keep Georgian Oil and the State Agency informed of all
significant developments. Such notice shall give reasonably full
particulars of the said Force Majeure, and also estimate the period of
time which Contractor will probably require to remedy the Force
Majeure. Contractor shall use all reasonable diligence to remove or
overcome the Force Majeure situation as quickly as possible in an
economic manner. The period of any such non-performance or delay,
together with such period as may be necessary for the
51
<PAGE> 52
restoration of any damage done during such delay, shall be added to the
time given in this Agreement for the performance of any obligation
dependent thereon (and the continuation of any right granted) and to
the term of this Agreement.
25.2 For the purposes of this Agreement, "Force Majeure" shall mean a
circumstance which is irresistible or beyond the reasonable control of
Contractor, or any other hindrance of Contractor's performance not due
to its fault or negligence and shall be in accordance with the
provision of the Petroleum Law.
ARTICLE 26
ASSIGNMENTS AND GUARANTEES
26.1 No assignment, mortgage or charge or other encumbrance shall be made by
a Party of its rights obligations and interests arising under this
Agreement other than in accordance with the provisions of this Article
26. Any purported assignment made in breach of the provisions of this
Article 26 shall be null and void.
26.2 Save in the case of any assignment made pursuant to the provisions of
Articles 26.4, 26.5 and 26.6 the following shall apply. Any Party
wishing to assign all or part of its rights and interests hereunder or
in any circumstances where there is deemed to be an assignment, the
Party wishing to make the assignment shall first give written notice to
the other Parties specifying the proposed terms and conditions of the
assignment.
Following receipt of those terms and conditions, for a period of thirty
(30) days each Party shall have the preferential right to match the
terms and conditions of the proposed assignment or deemed assignment.
This right may be exercised by any Party giving written notice of its
intention to match the relevant terms and conditions (the "Acceptance")
and thereafter the relevant Parties shall negotiate all necessary
documentation in good faith. If within a further period of ninety (90)
days from receipt of the Acceptance the relevant parties have not
reached final agreement the Party seeking to assign may within a
further period of thirty (30) days complete an assignment to a Third
Party on the same terms and conditions. For the avoidance of doubt any
assignment to a Third Party shall be subject to the assigning Party and
the Third Party complying with the provisions of this Article 26.
26.3 A Contractor Party may assign all or part of its rights, obligations
and interests arising from this Agreement to a Third Party provided
that the Third Party:
52
<PAGE> 53
a) has the technical and financial ability to perform the
obligations to be assumed by it under the Agreement; and
b) as to the interest assigned to it, accepts and assumes all of
the terms and conditions of the Agreement.
Any such assignment shall be subject to the prior written consent of
the State Agency which consent shall not be unreasonably withheld or
delayed. By way of clarification, and not in limitation of the
foregoing provisions of this Article 26.3, the State shall not be
considered to be acting unreasonably in declining to consent to any
such assignment if the assignment to such proposed assignee is deemed
contrary to State interests, as evidenced by a writing to that effect
signed by the President, the State Minister, State Chancellor, or the
Minister of Foreign Affairs or Defense or there is an act of Parliament
to that effect.
If within thirty (30) Days following notification of an intended
assignment, accompanied by a copy of the proposed deed of assignment
and related documentation with respect to the proposed assignee,
including certified financial statements and other evidence to the
State's reasonable satisfaction of the matters set forth in Article
26.3 and such documentation, which shall include evidence of the
identity of owners of the assignee, provided in the case of a company
the stock of which is registered on a recognized stock exchange, a copy
of the documents identifying the significant owners, as such concept is
defined or used in the applicable laws pursuant to which such company
registered its stock, will satisfy the foregoing requirements, and its
direct and indirect parent companies, including the identity of the
owners of the ultimate parent, subject to the foregoing proviso, as may
be reasonably necessary for the State, and as requested by the State,
to make a determination of the State interests as described above, the
State has not given its written decision concerning such assignment,
then it shall be deemed that the State has declined to give such
consent; provided that thereafter if upon the further written request
of the Contractor for a written decision, the State has not given a
written response of any kind within fifteen (15) Days after such
further request, then the assignment shall be deemed approved and the
State shall execute an assignment, in a form acceptable to the State,
accepting such assignment. This second request from the Contractor
shall cite the provisions of this paragraph and the Contractor shall
obtain confirmation from the State that the request has been received.
In the event of the transfer of rights and obligations under the
Agreement and License to a Third Party, Contractor shall pay all costs
associated with such transfer incurred by the Agency and any tax or
charge due on such transfer under Georgian Legislation.
26.4 A Contractor Party may assign all or part of its rights, obligations
and interests arising from this Agreement to another Contractor Party
or Affiliate, without prior consent of the State or Georgian Oil,
provided that any such Affiliate:
a) has the technical and financial ability to perform the
obligations to be assumed by it under the Agreement; and
53
<PAGE> 54
b) as to the interest assigned to it, accepts and assumes all of
the terms and conditions of the Agreement.
26.5 Each reference in this Agreement to the Contractor shall be treated as
including each assignee to which an assignment has been made pursuant
to this Article 26. Each reference in this Agreement to Georgian Oil
shall be treated as including each assignee to which an assignment has
been made by Georgian Oil pursuant to this Article 26.
26.6 Georgian Oil may assign all or part of its rights, obligations and
interests arising from this Agreement (including all or part of its
right to lift a share of Profit Oil) to a wholly owned Affiliate with
the prior consent of the Contractor and the State Agency provided that
any such Affiliate:
a) has the technical and financial ability to perform the
obligations to be assumed by it under the Agreement; and
b) as to the interest assigned to it, accepts and assumes all of
the terms and conditions of the Agreement.
Georgian Oil shall give prior notice to the Contractor and the State
Agency to any assignment under this Article 26.6.
26.7 The State may assign all or part of its rights, obligations, and
interests arising form this Agreement (including all or part of its
right to lift its share of Profit Oil) to a Third Party, provided, that
any such Third Party accepts and assumes all of the terms and
conditions of this Agreement as to the interest so assigned. The State
shall notify Contractor of such assignment within thirty (30) days of
the effective date of such transfer.
26.8 Subject to the approval of the State Agency in the event of there being
any proposed assignment in accordance with the terms of this Article 26
then to the extent of the interest assigned the assignor shall be
released from all further obligations and liabilities arising under the
Agreement after the effective date of the assignment. The assignee
shall thereafter be liable for the obligations arising from such
interest in the Agreement except to the extent provided in the
Agreement.
ARTICLE 27
AGREEMENT ENFORCEMENT AND STABILISATION, AND
REPRESENTATIONS AND WARRANTIES
27.1 In the course of performing the Petroleum Operations, the Operator and
the Parties shall be subject to all applicable laws, decrees, rules and
regulations.
54
<PAGE> 55
27.2 The State agrees and commits to Contractor, for the duration of this
Agreement, to maintain the stability of the legal, tax, financial,
minings, customs and economic import and export conditions of this
Agreement in accordance with Article 27 of the Petroleum Law.
27.3 The Parties agree to cooperate in every possible way in order to
achieve the objectives of this Agreement. The State and its
subdivisions shall facilitate the exercise of Contractor's activities
by granting it all decrees, permits, resolutions, licenses and access
rights and making available to it all appropriate existing facilities
and services under the control of the State or Georgian Oil so that the
Parties may derive the greatest benefit from Petroleum Operations for
their own benefit and for the benefit of Georgia.
27.4 If at any time after this Agreement has been signed there is a change
in the applicable laws, regulations or other provisions effective
within Georgia which to a material degree adversely affect the economic
position of the Contractor or any Contractor Party hereunder, the terms
and conditions of this Agreement shall be altered so as to restore the
Contractor to the same overall economic position as that which the
Contractor would have been in had this Agreement been given full force
and effect without amendment.
27.5 If the Contractor believes that its economic position has been
adversely affected, under Article 27.4 it may give notice to the State
and to Georgian Oil describing how its position has been so affected
and the Parties shall thereafter promptly meet with a view to reaching
agreement on the remedial action to be taken. If matters have not been
resolved within 90 days or as otherwise agreed the matter may be
referred to arbitration by any Party in accordance with the provisions
of Article 30.
27.6 The State within Georgian Law and its capacities warrants to the
Contractor as follows:
a) The State has taken the appropriate steps necessary to
authorise State Agency for Regulation of Oil and Gas Resources
in Georgia and Georgian Oil to execute this Agreement on
behalf of the State and has the power to do so;
b) The signatory to this Agreement on behalf of the State (in
each of its capacities hereunder) is duly authorised to bind
State Agency for Regulation of Oil and Gas Resources in
Georgia and Georgian Oil;
c) State Agency for Regulation of Oil and Gas Resources in
Georgia and Georgian Oil have been legally vested by the State
with the necessary power to authorise Petroleum Operations in
the Agreement Area and to compensate the Contractor by
allocating to it a share of the Petroleum produced in
accordance with the terms of this Agreement.
d) Upon completion of the matters and procedures set out in
Article 32 there is no other entity or authority whose
approval or authorisation
55
<PAGE> 56
is required to permit the Contractor to enjoy and enforce its
rights hereunder.
27.7 CanArgo Norio Ltd., represents and warrants that:
27.7.1 It possesses the technical expertise and financial resources
to fulfill the obligations of Contractor under this
Agreement;
27.7.2 The execution, delivery and performance by CanArgo Norio Ltd.
of this Agreement are within the corporate powers of CanArgo
Norio Ltd.;
27.7.3 CanArgo Norio Ltd., has obtained all corporate consents,
approvals, authorizations and resolutions in accordance with
its corporate statutes and the applicable laws to empower
CanArgo Norio Ltd., to execute this Agreement, to undertake
all of the obligations of Contractor hereunder.
ARTICLE 28
NOTICES AND CONFIDENTIALITY
28.1 Except as otherwise specifically provided, all notices authorised or
required between the Parties by any of the provisions of this
Agreement, shall be in writing in Georgian and English and delivered in
person or by registered mail or by courier service or by any electronic
means of transmitting written communications which provides
confirmation of complete transmission, and addressed to such Parties as
designated below. The originating notice given under any provision of
this Agreement shall be deemed delivered only when received by the
Party to whom such notice is directed, and the time for such Party to
deliver any notice in response to such originating notice shall run
from the date the originating notice is received. The second or any
responsive notice shall be deemed delivered when received. "Received"
for purposes of this Article with respect to written notice delivered
pursuant to this Agreement shall be actual delivery of the notice to
the address of the Party to be notified specified in accordance with
this Article. Each Party shall have the right to change its address at
any time and/or designate that copies of all such notices be directed
to another person at another address, by giving written notice thereof
to all other Parties. The addresses for service of notices on each of
the parties is as follows:-
56
<PAGE> 57
CanArgo Norio Limited
Po Box 119, Commerse House
Les Banques, St. Peter Port
Guernsey, British Isles
Attention: Chairman
Fax: + 44 1481 729 982
The State Agency for Regulation of Oil and Gas Resources of Georgia
Kazbegi Avenue 45
Tbilisi 380077
Georgia
Attention: Head of Agency
Fax: +995 32 253311
Georgian National Oil Company "Georgian Oil"
Georgia, Tbilisi 380015
Kostava St. N65
Attention: General Director
Fax: + 99532 33 30 32
28.2 Subject to the provisions of the Agreement, the Parties agree that all
information and data acquired or obtained by any Party in respect of
Petroleum Operations shall be considered confidential and shall be kept
confidential and not be disclosed during the term of the Agreement to
any person or entity not a Party to this Agreement, except:
a) To an Affiliate, provided such Affiliate maintains
confidentiality as provided herein;
b) To a governmental agency or other entity when required by the
Agreement;
c) To the extent such data and information is required to be
furnished in compliance with any applicable laws or
regulations, or pursuant to any legal proceedings or because
of any order of any court binding upon a Party;
d) To prospective or actual Contractors, consultants and
attorneys employed by any Party where disclosure of such data
or information is essential to such Contractor's, consultant's
or attorney's work;
e) To a bona fide prospective transferee of a Party's
participating interest (including an entity with whom a Party
or its Affiliates are conducting
57
<PAGE> 58
bona fide negotiations directed toward a merger, consolidation
or the sale of a majority of its or an Affiliate's shares);
f) To a bank or other financial institution to the extent
appropriate to a Party arranging for funding;
g) To the extent that any data or information which, through no
fault of a Party, becomes a part of the public domain.
28.3 Disclosure as pursuant to Article 28.2(d), (e), and (f) shall not be
made unless prior to such disclosure the disclosing Party has obtained
a written undertaking from the recipient party to keep the data and
information strictly confidential for at least three (3) years and not
to use or disclose the data and information except for the express
purpose for which disclosure is to be made.
ARTICLE 29
TERMINATION AND BREACH
29.1 At any time, if in the opinion of Contractor, circumstances do not
warrant continuation of the Petroleum Operations, Contractor may, by
giving written notice to that effect to State Agency for Regulation of
Oil and Gas Resources and Georgian Oil, relinquish its rights and be
relieved of its obligations pursuant to this Agreement except for
Contractor's obligations to complete the Minimum Work Program, except
such rights and obligations as related to the period prior to such
relinquishment. Neither this Agreement nor any of the rights granted
hereunder nor the Operator Licence may be terminated as a result of any
act or omission of Operator save in the case where Operator has carried
out an act or omitted to do something at the specific request of the
Contractor and Operator has previously advised the Contractor prior to
carrying out the act or omitting to do something that to carry out that
act or to omit to do the relevant thing may result in this Agreement
being terminated.
29.2 Without prejudice to the provisions stipulated in Article 29.1 above,
this Agreement may only be terminated by the State in its entirety by
giving ninety (90) days advance written notice thereof to all Parties,
when and only if a material breach of Agreement is alleged to have been
committed by Contractor and, provided that conclusive evidence thereof
has been found by prior arbitration as stipulated in Article 30.
58
<PAGE> 59
ARTICLE 30
DISPUTE RESOLUTION
30.1 The Parties hereby consent to submit to the International Centre for
Settlement of Investment Disputes any dispute in relation to or arising
out of this Agreement for settlement by arbitration pursuant to the
Convention on the Settlement of Investment Disputes between States and
Nationals of Other States.
30.2 The Parties agree that, for the purposes of Article 25(1) of the
Convention, any dispute in relation to or arising out of this Agreement
is a legal dispute arising directly out of any investment, and this
article has force only if all the requirements of Article 30.1 are
followed.
30.3 For the purposes of Article 25(2) of the Convention, it is agreed that,
CanArgo Norio Limited is a national of Great Britain, and shall be
treated as a national of that state for the purposes of the Convention.
30.4 A Party need not exhaust administrative or judicial remedies prior to
commencement of arbitrage proceedings.
30.5 Any arbitrage tribunal constituted pursuant to this Agreement shall
apply the provisions of this Agreement as supplemented and interpreted
by general principles of the laws of Georgia and England as are in
force on the Effective Date. In case these principles are in conflict
with each other, Georgian Law shall prevail.
ARTICLE 31
TEXT
31.1 This Agreement shall be executed in three (3) originals in the Georgian
language and three (3) originals in the English language, which will be
duly certified by a competent authorized body selected by the State
Agency, and each of which shall have equal legal force and effect;
provided however that in case of dispute, conflict, or arbitration the
English version shall (after the Georgian version has been reviewed and
its provisions have been discussed in good faith) be used as the
authentic version to determine the rights and obligations of the
Parties which shall be determined by reference solely to the English
version of this Agreement.
59
<PAGE> 60
ARTICLE 32
APPROVAL AND EFFECTIVE DATE
32.1 This Agreement shall enter into force and effect in its entirety on the
Effective Date. The Effective Date shall be the date on which the
following conditions have been fulfilled:
32.1.1 The State Agency issues the License to CanArgo Norio Ltd;
Annex B. A copy of the letter from Georgian Oil to the State
Agency notifying it of its consent to transfer the Licence to
CanArgo Norio Ltd is attached as Annex G to this Agreement.
32.1.2 Georgian Oil has obtained the consent or approval from the Tax
Inspectorate for Georgian Oil (or its successors or assigns)
to assume, pay and discharge, in the name and on the behalf of
Contractor, Contractor's entire Profit Tax liability and
Mineral Usage Tax liability for each Agreement Year.
32.1.3 The Administrative/Licence Fee set forth in Article 14.5 and
any other outstanding fees or sums then due and owing by
Contractor or the Operating Company to the State, if any, have
been paid by Contractor.
32.1.4 A duly executed copy of the Parent Company Guarantee has been
delivered the State Agency.
32.1.5 The Contractor will notify the State Agency and Georgian Oil
in writing that the Contractor is satisfied that this
Agreement and Licence have been executed and are in full force
and effect in accordance with the requirements of all Georgian
laws, rules, approvals and regulations.
32.2 Notwithstanding any other provision of this Agreement to the contrary,
including, but not limited to Article 29, if after the expiration of one
(1) year from the date of the execution of this Agreement by all
Parties, the Effective Date, as determined by provisions of Article
32.1, has not occurred, then the License and this Agreement shall
terminate and neither shall be of any further force and effect.
By execution hereof, the State Agency for Regulation of Oil and Gas Resources
in Georgia, acting in its capacity as the sovereign representative of Georgia,
pursuant to the Law of Georgia on Oil and Gas, enacted 16 April 1999 and as
successor to Georgian Oil ("Saknavtobi") in such capacity, joins as a Party to
the foregoing Production Sharing Agreement as amended, and consents to the
provisions thereof.
60
<PAGE> 61
Signed and sealed this 12th day of December, 2000 in three (3) versions in
Georgian and English.
For State Agency For Regulation of Oil For CanArgo Norio Ltd.
and Gas Resources in Georgia President
Head of the State Agency
/s/G. Itonishvili /s/D. Robson
-------------------------------- --------------------------------
G. Itonishvili D. Robson
For "National Oil Company
"Georgian Oil"
General Director
/s/G. Makharadze
--------------------------------
G. Makharadze
61
<PAGE> 62
ANNEX A
Map 1 - XIc & Kumisi License Blocks, Georgia
62
<PAGE> 63
ANNEX B
<PAGE> 64
ANNEX C
ACCOUNTING PROCEDURE
SECTION I
GENERAL PROVISIONS
1. PURPOSE
The accounting procedures included in this Accounting Procedure
establish a framework of accounting principles as generally accepted
within the international Petroleum industry. The purpose of this
Accounting Procedure is to establish a fair and equitable method for
accounting for Petroleum Operations under the Agreement.
The purpose of this Accounting Procedure is not to define Costs and
Expenses for the purposes of determining Cost Recovery Petroleum or to
define what costs will be deductible in the calculation of Profit Tax.
Costs and Expenses are defined in Article 11 of the Agreement.
Calculation procedure for the taxable base and Profit Tax is set forth
in Article 17 of the Agreement.
2. DEFINITIONS
For the purpose of this Accounting Procedure the following terms shall
have the following meanings:
"Accounting Procedure" shall mean the accounting principles, practices
and procedures set forth in this Annex C.
"Accepted Accounting Practices" shall mean accounting principles,
practices and procedures generally accepted and recognised in the
international Petroleum industry.
"Cash Accounting Basis" shall mean the basis of accounting which
records the effect of transactions and events on financial conditions
and income when they are settled in cash.
"Material and Equipment" means property, including without limitation
all exploration, appraisal and development facilities together with
supplies and equipment, acquired and held for use in Petroleum
Operations.
"Controllable Material" means all materials, equipment physical assets,
consumables and other stocks and inventory acquired and held for use in
Petroleum Operations. A list of types of such Controllable Material
shall be furnished to Georgian Oil and the State Agency upon request.
64
<PAGE> 65
The words and phrases defined in the Agreement but not defined above
shall have the same meaning in this Accounting Procedure as is given to
them in the Agreement.
3. AUDITS
Georgian Oil and the State Agency shall have the right to inspect and
audit Contractor's books, accounts and records relating to Petroleum
Operations under the Agreement for the purpose of verifying that the
Costs and Expenses charged to the Petroleum Operations Account comply
with the terms and conditions of the Agreement and this Accounting
Procedure. Such books, accounts and records shall be available in
Georgia at all reasonable times for inspection subject to thirty (30)
days notice by duly authorised representatives of Georgian Oil and the
State Agency, including outside independent auditors. Audits shall be
conducted in such a manner as not to interfere unduly with ongoing
operations. All costs associated with the audit will be the sole
responsibility of Georgian Oil. Georgian Oil and the State Agency shall
have a period of twenty-four (24) months after the end of each Calendar
Year in which to audit and verify costs and expenses, volumes and value
of Petroleum and arithmetic calculations. Any exception by Georgian Oil
shall be communicated to the Contractor with each disputed charge
specified, with supporting rationale, within thirty (30) days after the
completion of the particular audit. If the Contractor and Georgian Oil
are unable to agree on any item or adjustment, the issue will be
resolved in accordance with the dispute resolution procedures contained
in Article 30 of the Agreement. All accounts of Petroleum Operations
for any Calendar Year shall conclusively be presumed to be true and
correct twenty-four (24) months following the end of any such Calendar
Year, unless, within the said twenty-four (24) month period Georgian
Oil expresses any exception thereto in writing to the Contractor.
4. CONTRACTOR'S BOOKS
4.1 The Contractor shall maintain in English in U.S.$ and on a Cash
Accounting Basis books and accounts for Petroleum Operations. Such
books and accounts shall be kept in accordance with Accepted Accounting
Practices and the provisions of the Agreement and this Accounting
Procedure ("Petroleum Operations Account"). The documentation required
to support such books and accounts shall be the documentation as
specified in this Accounting Procedure. If no documentation is
specified then the documentation required shall be the documentation
reasonably acceptable and recognised in the international Petroleum
industry.
4.2 All U.S.$ expenditures shall be charged in the amount expended.
Expenditures incurred in currencies other than U.S.$ shall be
translated into U.S.$ as per Article 19.11 of the Agreement. A record
shall be kept of the exchange rates used in translating expenditures
incurred in currencies other than U.S.$. Any gain or loss resulting
from the exchange of currencies required for Petroleum Operations and
any fees or other banking charges
65
<PAGE> 66
levied in connection with such exchange of currencies or any gain or
loss resulting from translation of expenditures and sales revenues in
accordance with the provisions of Article 19.11 shall be included in
Costs and Expenses and recoverable from Cost Recovery Petroleum and
credited or charged to the Petroleum Operations Account.
4.3 Contractor shall maintain books and accounts relating to Petroleum
Operations for four (4) years following the end of the Calendar Year to
which they relate.
5. PRECEDENCE OF DOCUMENTS
In the event of any inconsistency or conflict between the provisions of
this Accounting Procedure and the provisions of the Agreement treating
the same subject differently, the provisions of the Agreement shall
prevail.
6. REVISION OF ACCOUNTING PROCEDURE
This Accounting Procedure may be revised from time to time by mutual
written agreement Georgian Oil and Contractor with the approval of the
State Agency.
7. ARBITRATION PROCEDURES
Any dispute in relation to or arising out of this Accounting Procedure
shall, unless settled by agreement among the Parties be submitted to
arbitration in accordance with Article 30 of the Agreement.
8. OPERATOR
To the extent that Operator is to incur Costs and Expenses on behalf of
Contractor, Contractor will advance Operator funds necessary to settle
such liabilities. Operator shall provide Contractor a projection of
cash expenditures no later than the tenth (10th) day of the month for
funding requirements for the following month. Contractor may then
advance funds to Operator no later than the last business day of the
month preceding the month the funds are being advanced for. Such cash
advances will be deducted from actual expenditures for the month with
any over or short position carried forward to the next month.
66
<PAGE> 67
SECTION II
COSTS, EXPENSES AND EXPENDITURES
DIRECT CHARGES
The Contractor shall charge the Petroleum Operations Account for all
costs and expenses whether directly or indirectly incurred necessary to
conduct Petroleum Operations under this Agreement. For the purposes of
this Accounting Procedure costs and expenses incurred directly or
indirectly by a Contractor Party and its Affiliated Companies prior to
the Effective Date of this Agreement shall be deemed to be incurred on
the Effective Date of this Agreement. Chargeable costs and expenses
shall include, but not be limited to:
2.1 LICENSES, PERMITS
All costs, if any, attributable to the acquisition, maintenance,
renewal or relinquishment of licenses, permits, Agreementual and/or
surface rights acquired for Petroleum Operations and any bonuses paid
in accordance with the Agreement when paid by Contractor if and to the
extent provided by law.
Documentation requirements: Copy of Agreement or payment request
documentation indicating purpose of payment, amount of payment and
recipient of payments.
2.2 SALARIES, WAGES AND RELATED COSTS
2.2.1 Gross salaries and wages in respect of employees of Contractor and its
Affiliates who are in Georgia directly engaged in Petroleum Operations
whether temporarily or permanently assigned.
Documentation requirements: Copy of timesheet indicating project or
area worked during time period.
2.2.2 Gross salaries and wages in respect of employees of Contractor and its
Affiliates outside of Georgia directly engaged in Petroleum Operations
whether temporarily or permanently assigned, and not otherwise covered
in Section 2.7.2.
Documentation Requirements: Copy of timesheet indicating project or
area worked during time period.
2.2.3 Salaries and wages, including everything constituting the employees'
total compensation. To the extent not included in salaries and wages,
the Petroleum Operations Account shall also be charged with the cost to
Contractor and its
67
<PAGE> 68
Affiliates of payroll taxes, holiday, vacation, sickness, disability
benefits, living and housing allowances, travel time, bonuses, and
other similar allowances in accordance with Contractor and its
Affiliates usual practice, as well as costs to Contractor and its
Affiliates for employee benefits, including but not limited to employee
group life insurance, group medical insurance, hospitalisation,
retirement, and other benefit plans of a like nature applicable to
labour costs of Contractor and its Affiliates.
Documentation Requirements: Copy of records indicating Contractor or
its Affiliates payment to or on behalf of employee. These records will
be made available only during the conduct of an audit in accordance
with the provisions of paragraph 3 of Section I of this Accounting
Procedure.
2.2.4 Expenditures or contributions made pursuant to assessments imposed by
the State or any Governmental authority which are applicable to the
Contractor and its Affiliates costs of salaries and wages under
paragraph 2.2 of this section II of this Accounting Procedure including
but not limited to payroll taxes and social insurance contributions.
Documentation Requirements: Copy of records indicating Contractor or
its Affiliates payment to the State or Governmental authority on behalf
of employee.
2.2.5 Expenses ((including related travel costs) which are considered
reasonable in accordance with Contractor's and its Affiliates usual
practice) of those employees whose salaries and wages are chargeable to
the Petroleum Operations Account under paragraphs 2.2.1 and 2.2.2 of
this Section II and for which expenses the employees are reimbursed
under the usual practice of Contractor and its Affiliates.
Documentation Requirements: Copy of expense reimbursement request
documents.
2.2.6 Gross salaries and wages, pensions, benefits and other related costs
(together with attributable office costs) of those employees of the
Contractor and its Affiliates not solely engaged in the conduct of
Petroleum Operations shall be apportioned to the Petroleum Operations
and the Contractor's other activities based on the percentage time
worked on the Petroleum Operations or other activities multiplied by
the total cost of the employee for the time period.
Documentation Requirements: Copy of timesheet indicating project or
area worked during period.
2.3 EMPLOYEE RELOCATION COSTS
2.3.1 Except as provided in Section 2.3.3, Contractor or its Affiliates cost
of employees' relocation to or from the Agreement Area vicinity or
location where the employees will reside or work, whether permanently
or temporarily
68
<PAGE> 69
assigned to the Petroleum Operations. If such employee works on other
activities of the Contractor in addition to Petroleum Operations, such
relocation costs shall be charged to the other activities based on the
percentage time expected to be worked on other activities multiplied by
the employee relocation costs.
Documentation Requirements: Copy of expense payment requests to or on
behalf of employee.
2.3.2 Such relocation costs shall include transportation of employees and
their family, personal and household effects of the employee and their
family, transit expenses, and all other related costs in accordance
with Contractor and its Affiliates usual practice.
Documentation Requirements: Copy of payment requests to or on behalf of
employee.
2.3.3 Relocation costs from the vicinity of the Agreement Area to another
location classified as a foreign location by Contractor shall not be
chargeable to the Petroleum Operations Account unless such foreign
location is the point of origin of the employee.
Documentation Requirements: Copy of payment requests to or on behalf of
employee.
2.4 OFFICES, CAMPS AND MISCELLANEOUS FACILITIES
All costs of maintaining any offices, sub-offices, camps warehouses,
housing, and other facilities of the Contractor and/or Affiliates
directly serving the Petroleum Operations either within Georgia or
elsewhere. If such facilities serve operations in addition to the
Petroleum Operations the costs shall be allocated to the properties
served on an equitable basis approved by the Parties.
Documentation Requirements: Copy of invoice, payment request document
or Agreement indicating purpose of payment, amount of payment,
recipient of payment and date goods and/or services were received.
2.5 MATERIAL AND EQUIPMENT
Cost, net of any discounts taken by Agreement, of Material and
Equipment purchased or furnished by Contractor whether directly or
indirectly. Such costs shall include, but are not limited to, export
brokers' fees, taxes, transportation charges, loading, unloading fees,
export and import duties and licence fees associated with the
procurement of Material and Equipment and in-transit losses, if any,
not covered by insurance. So far as it is reasonably practical and
consistent with efficient and economical operation, such Material
69
<PAGE> 70
and Equipment shall be purchased for, and the cost thereof charged to
the Petroleum Operations Account.
Documentation Requirements: Copy of invoice, payment request document
or Agreement indicating purpose of payment, amount of payment,
recipient of payment and date goods and/or services were received.
2.6 EXCLUSIVELY OWNED EQUIPMENT AND FACILITIES OF CONTRACTOR AND AFFILIATES
Charges for exclusively owned equipment, facilities and utilities of
Contractor and its Affiliates at costs or rates not to exceed the
average cost or rates of non-affiliated Third Parties then prevailing
for Contractor for like equipment, facilities, and utilities for use.
Exclusively owned equipment leased to the Petroleum Operations lost or
damaged beyond repair may be charged at replacement cost plus
transportation costs to deliver like equipment to the location where
the like equipment will be used.
Documentation Requirements: Copy of invoice, payment request document
or Agreement indicating purpose of payment, amount of payment,
recipient of payment and date goods and/or services were received.
Additionally, documentation as to how the average commercial cost or
rates were determined are required.
2.7 SERVICES
2.7.1 The cost of services provided by Third Parties, Contractor and
Affiliates of Contractor other than those services covered by Section
2.7.2. Such charges for services by Contractor and Contractor's
Affiliates shall not exceed those currently prevailing if performed by
Third Parties, considering quality and availability of services.
Documentation Requirements: Copy of invoice, payment request document
or Agreement indicating purpose of payment, amount of payments,
recipient of payment and date services were performed.
2.7.2 The cost of services performed by Contractor and Contractor's
Affiliates technical and professional staffs not located within
Georgia.
Documentation Requirements: Copy of timesheet indicating project or
area worked during period.
The charges for such services shall not exceed those currently
prevailing if performed by Third Parties, considering the quality and
availability of such services.
Examples of such services include, but are not limited to, the
following:
70
<PAGE> 71
Geologic studies and interpretation
Seismic data processing
Well log analysis, correlation and interpretation
Laboratory services
Well site geology
Project engineering
Source rock analysis
Petrophysical analysis
Geochemical analysis
Drilling supervision
Development evaluation
Accounting and professional services
Other data processing
Costs shall include salaries and wages of such technical and
professional personnel, lost time, governmental assessments, employee
benefits, and expenses which are considered reasonable in accordance
with Contractor and its Affiliates usual practice. Costs shall also
include all support costs necessary for such technical and professional
personnel to perform such services, such as, but not limited to, rent,
utilities, administration, support staff, drafting, telephone and other
communications expenses, computer support, supplies, and depreciation.
2.8 INSURANCE
Premiums paid for insurance required by law or the Agreement to be
carried for the benefit of the Petroleum Operations. If the insurance
is for the benefit of operations in addition to the Petroleum
Operations the premiums paid shall be allocated to the operations
covered on an equitable basis.
Documentation Requirements: Copy of invoice, payment request document
or Agreement indicating purpose of payment, amount of payment,
recipient of payment and period of coverage.
2.9 DAMAGES AND LOSSES TO PROPERTY
2.9.1 All costs or expenditures necessary to replace or repair any damages,
losses incurred by fire, flood, storm, theft, accident, or any other
cause. Operator shall maintain written documentation of damages or
losses
Documentation Requirements: Copy of invoice, payment request document
or Agreement indicating purpose of payment, amount of payment,
recipient of payment.
2.9.2 Expenditures incurred in the settlement of all losses, claims, damages,
judgments, and other expenses for the account of Petroleum Operations.
71
<PAGE> 72
Documentation Requirements: Copy of invoice, payment request document
or Agreement indicating purpose of payment, amount of payment,
recipient of payment.
2.10 LITIGATION AND LEGAL EXPENSES
The costs and expenses of litigation and legal services necessary for
the protection of the Petroleum Operations under this Agreement as
follows:
2.10.1 Legal Services necessary or expedient for the protection of the
Petroleum Operations, and all costs and expenses of litigation,
arbitration or other alternative dispute resolution procedure,
including but not limited to lawyers' fees and expenses, court costs,
cost of investigation of procuring evidence, together with all
judgments obtained against the Parties or any of them arising from the
Petroleum Operations, except for disputes arising under Article 30 of
this Agreement.
Documentation Requirements: Copy of invoice, payment request document
or Agreement indicating purpose of payment, amount of payments,
recipient of payment and date services were performed.
2.10.2 If the Parties hereunder shall so agree, actions or claims affecting
the Petroleum Operations hereunder may be handled by the legal staff of
a Contractor Party or its Affiliates; and a charge commensurate with
the similar costs of providing and furnishing such services rendered
may be made, but no such charges shall be made until the service and
the charge has been approved by the Parties.
Documentation Requirements: Copy of timesheet indicating project or
area worked during period.
2.11 TAXES AND DUTIES
All State or Governmental Taxes, duties, assessments and charges, of
every kind and nature (except for the Profit Tax and Mineral Usage Tax
determined in accordance with the provisions of Article 17 of the
Agreement), assessed or levied upon or in connection with the Petroleum
Operations. If Contractor or an Affiliate is subject to income or
withholding tax as a result of services performed for Petroleum
Operations under the Agreement, its charges for such services may be
increased by the amount of such taxes incurred.
Documentation Requirements: Copy of records indicating Contractor's
payment to governmental authority, purpose of payment, amount of
payment and recipient of payment.
72
<PAGE> 73
2.12 FINANCE COSTS
All Finance Costs.
Documentation Requirements: Copy of loan document, amount of principal
and interest paid, any arrangement or other fees and lending
institution.
2.13 SALE AND SALVAGE OF MATERIALS PREVIOUSLY CHARGED TO PETROLEUM
OPERATIONS
Proceeds from the sale or salvage of Material and Equipment previously
charged to Petroleum Operations will be credited to the Petroleum
Operations less any expenses associated with the disposition of the
Material and Equipment. Material and Equipment transferred to
Contractor or an Affiliate will be credited to the Petroleum Operations
at fair market value.
Documentation Requirements: Copy of sales agreement indicating amount
recovered, parties to agreement, date of sale of Material and Equipment
and a description.
2.14 ABANDONMENT AND SITE RESTORATION
Any costs and expenditures in relation to abandonment and site
restoration and any payments in accordance with the funding procedure
described in Article 9.8 of the Agreement and Section VII of this
Accounting Procedure shall be charged to the Petroleum Operations
Account.
Documentation Requirements: Copy of invoice, payment request document
indicating purpose of payment, amount of payment, recipient of payment,
if applicable copy of any schedule indicating funding requirements for
abandonment and site restoration.
2.15 ENERGY EXPENSES
All costs of fuel, electricity, heat, water or other energy used for
Petroleum Operations.
Documentation Requirements: Copy of invoice, payment request document
or Agreement indicating purpose of payment, amount of payments,
recipient of payment.
2.16 COMMUNICATION CHARGES
The costs of acquiring, leasing, installing, operating, repairing and
maintaining communications systems.
73
<PAGE> 74
Documentation Requirements: Copy of invoice, payment request document
or Agreement indicating purpose of payment, amount of payments,
recipient of payment.
2.17 COORDINATION COMMITTEE
All costs and expenditures incurred with respect to the activities of
the Coordination Committee pursuant to Article 6 of the Agreement.
Documentation Requirements: Copy of invoice, payment request document
indicating purpose of payment, amount of payments, recipient of
payments.
2.18 CREDITS
The Contractor will credit to the Petroleum Operations Account the net
proceeds of the following transactions:
2.18.1 The net proceeds of any successful insurance claim in connection with
Petroleum Operations where the claim is with respect to operations or
assets which were insured and where the insurance premiums with respect
thereto have been charged to the Petroleum Operations Account.
2.18.2 The net proceeds of any successful claim in connection with Petroleum
Operations where the costs and expenditures relating to the subject of
the claim have been charged to the Petroleum Operations Account.
2.19 OTHER EXPENDITURES
Any other costs and expenditures incurred by Contractor and its
Affiliates for the necessary and proper conduct of the Petroleum
Operations in accordance with approved Work Program and Budget and not
covered in this Section II or in Section III, of this Accounting
Procedure.
Documentation Requirements: Documentation reasonably acceptable and
recognised in the international Petroleum industry to support those
costs or expenditures.
74
<PAGE> 75
SECTION III
INDIRECT CHARGES
3.1 PURPOSE
Contractor shall charge an administration overhead to the Petroleum
Operations Account for the cost of indirect services and related office
costs of Contractor and its Affiliates not otherwise provided in this
Accounting Procedure. For the purposes of this Accounting Procedure
costs and expenses incurred directly or indirectly by a Contractor
Party and its Affiliated Companies prior to the Effective Date of this
Agreement shall be deemed to be incurred on the Effective Date of this
Agreement. Indirect costs chargeable under this Section III represent
the cost of general administration and support services provided by the
Contractor and its Affiliates outside of Georgia for the indirect
benefit of Petroleum Operations. Such support will include the services
and related office costs of personnel performing administrative, legal,
treasury, tax and employee relations, provision of expertise and other
non-technical functions which can not be specifically identified or
attributed to particular projects. No cost or expenditure included
under Section II of this Accounting Procedure shall be included or
duplicated under this Section III.
3.2 AMOUNT
The charge under Section 3.1 will be charged at rates on total annual
expenditures attributable to Petroleum Operations as follows:
ANNUAL EXPENDITURES
U.S$ 0 to U.S.$10,000,000 of expenditures per Calendar Year = 5%
Excess above U.S.$10,000,000 of expenditures per Calendar Year =3%
3.3 CHANGES
The indirect charges provided for in this Section III may be amended
periodically by mutual agreement between Georgian Oil and Contractor
if, in practice, these charges are found to be insufficient or
excessive.
75
<PAGE> 76
SECTION IV
INVENTORIES
4.1 PERIODIC INVENTORIES, NOTICE AND REPRESENTATION
At reasonable intervals as agreed with Georgian Oil, inventories shall
be taken by Contractor of all Controllable Material, which shall
include materials and physical assets. Written notice of intention to
take inventory shall be given by Contractor to Georgian Oil; at least
thirty (30) days before any inventory is to begin so that Georgian Oil
may be represented when any inventory is taken. Failure of Georgian Oil
to be represented at an inventory shall bind Georgian Oil to accept the
inventory taken by Contractor who shall in that event furnish Georgian
Oil with a copy thereof.
4.2 RECONCILIATION AND ADJUSTMENT OF INVENTORIES
Reconciliation of inventory shall be made by Contractor and Georgian
Oil and a list of overages and shortages shall be jointly determined by
Contractor and Georgian Oil, and the inventory accordingly adjusted by
Contractor.
SECTION V
FINANCIAL REPORTS
5.1 ACCOUNTS OF PETROLEUM OPERATIONS
Contractor shall submit to Georgian Oil and the State Agency by March
15 following each Calendar Year accounts for that Calendar Year of the
Petroleum Operations prepared in accordance with this Accounting
Procedure.
5.2 STATEMENT FOR RECOVERY OF COSTS AND OF COST RECOVERY PETROLEUM
The Contractor shall, render to Georgian Oil and the State Agency as
promptly as practical but not later than forty five (45) days after the
end of the last Calendar Quarter in which the date of commencement of
Commercial Production first occurs, and not later than forty five (45)
days after the end of each succeeding Calendar Quarter a Calendar
Quarter Cost Recovery report and Calendar Quarter Profit Petroleum
division report showing:
(i) Recoverable Costs and Expenses carried forward from the
previous Calendar Quarter, if any;
76
<PAGE> 77
(ii) Recoverable Costs and Expenses incurred during the Calendar
Quarter;
(iii) Total recoverable Costs and Expenses for the Calendar Quarter
(sum of (i) plus (ii));
(iv) Volume and value of Cost Recovery Petroleum taken and
separately disposed of by Contractor for the Calendar Quarter;
(v) Amount of Costs and Expenses actually recovered for the
Calendar Quarter;
(vi) Amount of recoverable Costs and Expenses to be carried forward
into the succeeding Calendar Quarters if any;
(vii) Excess, if any, of the value of Cost Recovery Petroleum taken
and separately disposed of by Contractor over recoverable
Costs and Expenses for the Calendar Quarter;
(viii) The value and volume of Petroleum produced, used in Petroleum
Operations, available for lifting and actually lifted by
Parties during the Calendar Quarter; and
(ix) Profit Petroleum allocated to each Contractor Party and
Georgian Oil during the Calendar Quarter.
5.3 PAYMENTS
If such statement shows an amount due to Georgian Oil, payment of that
amount shall be made in U.S.$ by Contractor to Georgian Oil with the
rendition of such statement.
SECTION VI
CONTROL AND MAJOR ACCOUNTS
6.1 COST RECOVERY CONTROL ACCOUNT
Contractor will establish a cost recovery control account and an
offsetting Agreement account to control therein the amount of cost
remaining to be recovered, if any, and the amount of cost recovered.
77
<PAGE> 78
6.2 MAJOR ACCOUNTS
For the purpose of classifying costs, expenses and expenditures for
cost recovery, costs, expenses and expenditures shall be recorded in
major accounts including but not limited to the following:
(a) Exploration Expenditures
(b) Development Expenditures, other than Operation Expenses
(c) Operation Expenses
Any other necessary sub-accounts shall be used. All Costs and Expenses,
regardless of classification, shall be recovered as per Article 11 of
the Agreement.
SECTION VII
ABANDONMENT AND SITE RESTORATION
The Development Plan shall also include an abandonment and site
restoration program together with a funding procedure for such program.
All funds collected pursuant to the funding procedure shall be
indicated to site restoration and abandonment and will be placed in a
special interest bearing account by Contractor which shall be held in
the joint names of the State and the Contractor or their respective
nominees, or its designee. Contractor's responsibilities for
environmental degradation, site restoration and well abandonment
obligations, and any other actual contingent and potential activity
associated with the environmental status of the Development Area shall
be limited to the obligation to place the necessary funds in the
approved account. All expenditures incurred in abandonment and site
restoration including but not limited to all payments deposited by
Contractor in the special interest bearing account shall be treated as
Costs and Expenses in accordance with Article 11 and Article 9.8 of the
Agreement and chargeable to the Petroleum Operations Account.
78
<PAGE> 79
ANNEX D
MINIMUM WORK PROGRAM
Work Program for the Agreement Area, Norio-Satkhenisi Area Block XIc and Kumisi
Block, includes minimal obligatory seismic program and program for future works
which is divided into two phases. Works planned for first two phases are given
below.
PHASE 1 - prior to Effective Date and during year 1
1. Acquire 173 kilometers of seismic data (acquired prior to
Effective Date)
2. Process acquired seismic data
3. Geological and geophysical evaluation of the Agreement Area
Cost: US$1,400,000
PHASE 2 - year 1
Drill one well to test prospective horizons
Cost: up to US$5,000,000
Works planned for Phases 1 and 2 comprise the minimum Work Program and Budget as
required under Article 10.2 of this Agreement.
79
<PAGE> 80
ANNEX E
PERMIT APPLICATION FEES SCHEDULE
<TABLE>
<CAPTION>
APPLICATION TYPE
FEE U.S.$
----------------
---------
<S>
<C>
Application for Permit to Drill
200.00
Application to Plug and Abandon a Well
100.00
Application to Temporarily Abandon a Well
100.00
Application for Geophysical Permit (by distance, US$200 + US$0.25/km)
200.00
Miscellaneous Required Filings (well completion reports, production reports, etc.)
25.00
Application for Offshore Construction Permit
500.00
Application for Treated Water Discharge Permit
200.00
Application for Waste Disposal Permit
250.00
Application for Injection (Disposal) Well Permit
250.00
Application for Gas Flaring Permit
250.00
Public Hearing Required by Non-Agency Law (e.g. EIA)
100.00
Application for Pipeline Permit (by distance, US$500 + US$0.25/km)
500.00
Application for Onshore Facilities Permit (<0.5 ha - US$100; 0.5 ha - 1 ha
100.00
US$200; 1 ha - 5 ha US$400; >5 ha US$600)
- 600.00
Instituting Eminent Domain Proceedings on behalf of Contractor
1,000.00
Copies per page
1.00
Certification/Authentication per document
2.50
</TABLE>
80
<PAGE> 81
ANNEX F
GUARANTEE DATED 12 DECEMBER 2000 BY
1 CanArgo Energy Corporation having its registered office at 32 Lookerman
Square, Suite L-100, City of Dover, County of Kent, Delaware 19904 USA
(the "Guarantor");
in favour of
2 The State of Georgia represented by the Joint Stock National Oil
Company - Georgian Oil and the State Agency for Regulation of Oil and
Gas Resources in Georgia (the "State").
WHEREAS
A CanArgo Norio Limited (a company in which the Guarantor is interested)
has entered into a Production Sharing Agreement dated 12 December 2000
(the "Agreement") in relation to the Norio-Satkhenisi Area Block XIc
and Kumisi Block.
B The Agreement contains a Minimum Work Program which the Contractor (as
defined in the Agreement) is contracted to perform.
C The Guarantor has agreed to enter into this Agreement in respect of the
obligations of the Contractor to perform the Minimum Work Program under
the Agreement.
NOW THEREFORE IT IS AGREED AS FOLLOWS:
1 DEFINITIONS
Defined terms in this Guarantee shall have the meaning
attributed to them in the Agreement save as where otherwise
specified herein.
2 GUARANTEE
2.1 The Guarantor guarantees to the State the due and punctual
performance and observance by the Contractor (or the Operator
in accordance with the terms of the Agreement) of the Minimum
Work Program. For the avoidance of doubt the provisions of
this guarantee do not extend beyond the obligation to perform
or procure the performance of the Minimum Work Program.
2.2 If the Contractor does not perform any obligation referred to
in clause 2.1 in accordance with the terms of the Agreement
and following a period of
81
<PAGE> 82
thirty (30) days after the State has given written notice to
the Contractor and the Guarantor of such default in accordance
with the terms of the Agreement the default has not been
rectified, the Guarantor shall, subject to clause 2.3, perform
that obligation or procure performance of that obligation,
immediately on demand.
2.3 The State shall not enforce the Guarantee against the
Guarantor unless and until it has demanded payment of the
relevant amount or performance of the relevant obligation from
the Contractor.
3 NO PREJUDICE TO THE CONTRACTOR'S RIGHTS
For the avoidance of doubt, the existence of this Guarantee
does not prejudice the Contractor's rights expressly conferred
under the Agreement or any related document. The Guarantor
shall be entitled to the same pleas and defences against the
State as the Contractor under the Agreement.
4 CHOICE OF LAW
This Guarantee shall be governed by and interpreted in
accordance with English law and the parties hereto hereby
submit to the non-exclusive jurisdiction of the courts in
England.
Signed by David Robson and J F R Hammond /s/J F R Hammond
For CanArgo Energy Corporation /s/David Robson
Signed by the State Agency for
Regulation of Oil and Gas Resources in Georgia /s/Gia Itonishvili
Signed by Joint Stock National
Oil Company - Georgian Oil /s/G. Makharadze
82
</TEXT>
</DOCUMENT>